INCOME TAXATION (2022)

Chapter 1 – Fundamental Principles of Taxation

Taxation Example: Sin tax – tax on non-
essential goods such as cigarettes
 The process or means by which the and alcohol.
sovereign (independent State),
through its law-making body (the Theory and Basis of Taxation
legislature), imposes burdens upon 1. Theory (Authority)
subjects and objects within its  The power of taxation
jurisdiction for the purpose of proceeds upon the theory
raising revenues to carry out the that the existence of
legitimate objects of government. government is a necessity
 In simple terms, the act of levying a (Necessity Theory)
tax apportions the cost of  “Taxes are the lifeblood
government among those who, in of the government and
some measure are privileged to their prompt and certain
enjoy its benefits and must therefore availability in an
bear its burden. imperious need”
Three (3) Inherent Powers of the (Lifeblood Doctrine)
State
2. Basis of Taxation: Benefits
1. Police Power Received or Reciprocity Theory
- Power to make and  The basis is the reciprocal
implement laws for the duties of protection and
general welfare support between the
State and its inhabitants.
2. Power of Taxation
- Power to enforce Manifestation of the Lifeblood Theory
contributions to raise
a. Rule of “No Estoppel against the
government funds
Government”
b. Collection of taxes cannot be
3. Power of Eminent Domain
enjoined (stopped) by injunction
- Power to take private
c. Taxes could not be the subject of
property for public use
compensation or set-off.
with just compensation
d. Right to select objects (subjects) of
*Inherent power means built-in, taxation
inborn, ingrained* e. A valid tax may result in the
destruction of the taxpayer’s
Purposes of Taxation property
1. Revenue or Fiscal Purpose “The power to tax involves the power to
2. Regulatory Purpose destroy”
Scope of the Power to Tax a. Direct
b. Indirect
a. Comprehensive 4. As to Determination of Amount
b. Unlimited a. Specific
c. Plenary b. Ad valorem – tax of fixed
d. Supreme proportion of the value of the
Essential Elements of Tax property with respect to
which tax is assessed
a. It is an enforced contribution 5. As to Purpose
b. It is generally payable in money a. Primary, Fiscal, or Revenue
c. It is proportionate in character Purpose
d. It is levied on persons, property, or b. Secondary, Regulatory,
the exercise of a right or privilege Special or Sumptuary
(Subjects or objects of Taxation) Purpose
e. It is levied by the law-making body 6. As to Graduation or Rate
of the State a. Proportional – tax based on
f. It is levied for public purpose fixed percentage
Aspects of Tax b. Progressive or graduated –
tax the rate of which
1. Levying increases as the tax base
2. Assessment increase
3. Collection c. Regressive – tax rate of
which decreases as the tax
Nature/Characteristics of the State’s Power
base decreases
to Tax
7. As to Taxing Authority
1. It is inherent in sovereignty a. National – tax imposed
2. It is legislative in character under the National Internal
Revenue Code
Classification of Taxes b. Local – taxes imposed by
1. As to Scope local government units
a. National Elements of Sound Tax System
b. Local
2. As to Subject Matter or Object a. Fiscal Adequacy
a. Personal, poll or - It is necessary that the
capitalization - tax of a fixed sources of revenues must
amount imposed upon an be adequate to meet
individual, whether citizens government expenditures
or not, residing within a b. Theoretical Justice or Equity
specified theory - “ability to pay theory”
b. Property – tax imposed on - The tax burden should be
property, whether real or proportionate to the
personal taxpayer’s ability to pay
c. Excise – does not fall under c. Administrative Feasibility
the classification of a poll or - The tax system should be
property tax as simple as possible, and
should minimize
3. As to who bears the burden gratuitous complexity.
Situs of Taxation Tariff
“place of taxation”  The duties payable on goods
imported or exported

Toll
Double Taxations
 Sum of money for the use of
something generally applied to the  Means taxing twice by the same
consideration, which is paid of the taxing authority, taxing for the same
use of road, bridge or the like of a purpose, in the same year or taxing
public nature period, same subject, same kind of
character
Penalty
Means of Avoiding or Minimizing the
 A sanction imposed as a punishment Burden of Taxation
for violation of law or acts deem
injurious. 1. Shifting – transfer of tax by the
original taxpayer to someone else
Special Assessment 2. Transformation – An escape from
 An enforced proportional taxation
contribution from owners of lands 3. Tax Evasion – the use by the
for special benefits resulting from taxpayer of illegal or fraudulent
public improvements means to defeat or lessen the
payment of tax. Also known as “tax
Revenue dodging”
 Refers to all funds or income derived 4. Tax Avoidance – Exploitation by the
by the government taxpayer of legally permissible
alternative tax rates. It is politely
Subsidy called “tax minimization” and is not
punishable by law.
 A pecuniary aid granted the
5. Exemption – Exemption is allowed
government to an individual or
only if there is a clear provision
private commercial enterprise
therefor.
deemed beneficial to the public
6. Capitalization – Reduction in the
Permit or License Fee selling price of income producing
property
 Charge imposed under the police
power for purposes of regulation
Customs Duties Amnesty

 Taxes imposed on goods exported  It partakes absolute forgiveness or

from or imported into a country waiver of the Government of its right
to collect.
Debt
Application of Tax Laws
 Debt is based on contract, tax is
based on law
  Tax laws are prospective in amount of the tax could not be
operations because the nature and foreseen and understood by taxpayer
Chapter 2 – Income Tax for Individuals
 Aliens who stayed in the Philippine
for an aggregate period of more than
Individual Taxpayers 180 days during the taxable year.
 Natural persons with income derived  Nonresident alien not engaged in
from within the territorial trade or business (NRA-NETB) is
jurisdiction of a taxing authority subject to 25% income tax based on
gross income from all sources within
Classification of Individual Taxpayers the Philippines.
1. Resident Citizens (RC) Types of Income Tax
2. Nonresident Citizens (NRC)
3. Resident Aliens (RA) 1. Basic Income Tax or Regular tax
4. Nonresident Aliens (NRA) - Graduated Rate
 Engaged in Trade 2. Final Withholding Tax on certain
 Not engaged in Trade or passive income
business 3. Capital Gains tax
 Alien individuals
employed by POGOSs
and/or OGLs Graduated Tax Rate

Citizens of the Philippines Amount of Income Tax (2023)

1. Those who are citizens of the

Philippines at the time of the
adaptation of 1987 Philippine <250k Exempt
Constitution
250k -400k 15% of excess of 250k
2. Those born before January 17, 1973
Nonresident Citizen (NRC) of the 400k-800k 22,500 + 20% in
Philippines excess of 400k
800k – 2M 102,500 + 25% in
 A citizen of the Philippines who shall excess of 800k
have stayed outside the Philippines 2M – 8M 402, 500 + 30% in
for 183 days or more by the end of excess of 2M
the. Over 8M 2, 202, 500 + 35% in
excess of 8M
Alien
 A foreign-born person who is not Self-Employed and Professionals (SEP)
qualified to acquire Philippine
citizenship by birth or after birth  Regular income of SEP amounting to
more than 250k in a taxable year but
Resident Aliens with a gross sales not exceeding
3,000,000 shall have the option to
 Individual whose residence is within
avail 8% tax on gross sales
the Philippines and who is not a
citizen thereof. Formula:
 Income – 250,000 x 8% 1. Sales of stock – 15%
Selling price xx
Cost (xx)
Capital gain xx
Rate 15%
Passive Income subject to Final CGT Pxx
Withholding Tax (FWT) 2. Sale of Real Properties – 6%
1. Interest Income Tax Base (SP or FMV, whichever
2. Dividend Income is higher) xx
3. Royalties Rate 6%
4. Prizes CGT Pxx
5. Other winnings Citizens NRA- NRA-
& ETB NETB
Passive Citizens NRA- NRA-
Residents
Income & ETB NETB
Sales of 15% 15% 15%
Residents
shares
Interest 20% 20% 25%
of stock
Dividend 10% 20% 25%
Sale of 6% 6% 6%
Income
real
Royaltie 20% 20% 25%
property
s in
general
Royaltie 10% 10% 25%
s on
books
Prizes 20% 20% 25%
more
than 10k

Final Withholding Tax

 Is a kind of tax which is prescribed
on “certain income” (interest
income, dividends, royalties, prizes
and winnings)
Capital Gains Tax
 Income from sale of capital assets,
specifically from sale of shares of
stock of a closely held corporation
(shares of domestic corporation not
listed in the local stock exchange)
and real properties located in the
Philippines are subject to CGT
 Sale of shares of stock of a closely-
held domestic corporation is subject
to CGT of 15%
 Chapter 3 – Fringe Benefit Tax
6. Membership fees, dues and other
expenses borne by the employer
Fringe Benefit for the employee in social and
 Any goods, service or other athletic clubs and similar
benefits furnished or granted by organizations
an employer in cash or in kind, 7. Expenses for foreign travel
other than the basic 8. Holiday and vacation expenses
compensation, by an employer to 9. Educational assistance to the
an individual employee (except employee or his dependents
rank-and-file employee) 10. Life or health insurance and
other non-life insurance
Tax Treatment of Fringe Benefits premiums or similar amounts in
excess 0f what the law allows
Fringe Benefits Given Subject to FBT
to: Tax Exempt Fringe Benefits
Rank & File NO
Supervisory/ YES 1. Exempted from income tax
Managerial under any special law such as:
 Contributions required
under SSS law
Nature of a Fringe Benefit Tax
 Contributions required
 FBT is a monetary burden under GSIS law
imposed by the sovereignty on  Similar contributions
any good, service, or other under an existing law
benefit furnished or granted by  Premiums for group
an employer, in cash or in kind, insurance of employees
in addition to basic salaries, to 2. If the grant of fringe benefits to
an individual employee, other the employee is required by
than a rank-and-file employee nature
 FBT rate – 35% 3. De minimis benefits
 FBT rate for NRA-NETB – 25% 4. If the grant of benefits is for the
convenience or advantage of the
employer
Items of Fringe Benefits subject to Tax
1. Housing Fringe Benefit Tax Base and Rate
2. Expense Account
3. Vehicle of any kind Classificatio CIT, RA, NRA-NETB
4. Household personnel, such as n of NRAET
maid, driver and others Taxpayers
5. Interest on loan at less than
market rate to the extent of the Monetary Value Pxx Pxx
difference between the market
rate and actual rate granted Divide by GUMV 65% 75%
Grossed-up monetary value xx xx 8. Employee achievement
awards (not exceeding
x FBT Rate 35% 25% 10,000)
Fringe Benefit Tax (FBT) Pxx 9. Gifts given during Christmas
Pxx and major anniversary
celebrations not exceeding
5,000 per employee per
Valuation of Fringe Benefits annum
10. Daily meal allowance for
 If money, the value is the amount overtime work and
granted night/graveyard shift not
 If property and ownership is exceeding 25% of the basic
transferred to the employee, the minimum wage
value is the FMV 11. Benefits received by an
 If property but ownership is not employee by virtue of a
transferred to the employee, the collective bargaining
value is equal to the depreciation agreement (CBA) and
value of the property productivity incentive
schemes not exceeding
De Minimis Benefits
10,000
 Facilities and Privileges such as
The amount of de minimis benefits
entertainment, medical services, or
conforming to the ceiling of de minimis
so called “courtesy” discounts on
benefits shall not be considered in
purchases
determining the 90,000 ceiling of “other
1. Monetized unused vacation
benefits”
leave credits of private
employees not exceeding “10
days” during the year
2. Monetized value of vaction
and sick leave credits paid to
government officials and
employees
3. Medical cash allowance to
dependents of employees not
exceeding 1,500 per semester
or 250,000 per month
4. Rice subsidy of not more
than 2,000 per month or 1
sack
5. Uniforms given to employees
by the employer not
exceeding 6,000 per annum
6. Actual medical assistance
given not exceeding 10,000
7. Laundry allowance not
exceeding 300 per month
 Chapter 4 – Co-ownership, Estates and Trusts
Co-ownership Parties of Trusts
 There is co-ownership whenever the 1. Trustor – person who establish a
ownership of undivided thing or trust
right belongs to different persons. 2. Trustee – One in whom confidence
 Co-owners are taxed individually is reposed as regards property for
 Partnership is different from co- the benefit of another person
ownership. Co-ownership result
from gratuitous transfer while Fiduciary – any person or
partnership is not. corporations that holds in trust an
estate of another person or persons
Income Tax of An Estate 3. Beneficiary – Person for whose
 Refers to the tax on income received benefit trust is created
by the estate during the period of Classification of Trusts
administration or settlement.
 “Estate” is a mass of all property, 1. Ordinary Trust – the income and
rights, and obligations of a deceased corpus pf the trust do not revert to
person which are not extinguished the grantor
by his death, including those which 2. Revocable Trust – a trust where at
have accrued thereto since the any time, the power to revest in the
opening of succession. grantor, title to any part of the
 “Administration or Settlement corpus of the trust is vested
Period” refers to the period when 3. Employee’s Trust – income tax shall
title to the properties left by a not apply to employee’s trust which
decedent is not yet finally forms part of pension, stock bonus
transferred to the
heirs/beneficiaries.
Transfer Tax
 A tax on gratuitous transfer of
property either through gift or
donation
 Not an income tax because there is
no taxable income
Trust
 A right on property, real or personal,
held by one party for the benefit of
another
 Chapter 5 – Income Tax on Corporations

Corporation e) Non-stock corporations

f) Business league, chamber of
 An artificial being created by commerce, or board of trade
operation of law, having the right of g) Civic league
succession and the powers, h) Non-stock non-profit educational
attributes and properties expressly institution
authorized by law or incident to its i) Government educational institution
existence j) Farmers or other mutual typhoon or
The term Corporation shall include: fire insurance company
k) Farmers, fruit growers, or like
1. One Person Corporations (OPC) association organized and operated
2. Partnerships, no matter how created as sales agent for the purpose of
or organized marketing products of its members
3. Joint Stock Companies
4. Joint Accounts (cuentas en Types of Corporations
participations) 1. Domestic Corporations (DC) –
5. Associations Income from both within and
6. Insurance companies outside the Philippines are taxed
The term corporation does not include 2. Resident Foreign Corporations
(RFC) – Engaged trade or business
1. General Professional Partnership in the Philippines. There is branch in
(GPP) – a partnership formed by the PH. Only income within the
persons for the sole purpose of Philippines are taxed
exercising their common profession 3. Nonresident Foreign Corporations
2. Joint Venture or Consortium- (NRFC) – Not engaged in trade or
commercial undertaking formed for business in the Philippines. Only
the purpose of undertaking a income within the Philippines are
constructions project taxed
Tax Exempt Corporations
a) Labor, agricultural or horticultural Types of Income
not organized principally for profits
b) Mutual savings banks not having aa 1. Ordinary or regular income – refers
capital stock represented by shares, to income derived from the regular
and cooperative bank without capital conduct of trade or business income
stock 2. Passive income derived from
c) Fraternal organizations Philippine Sources – certain types of
d) Cemetery Company income derived from sources within
 the Philippines that are subject to Cost of Sales (xxx)
final withholding tax (FWT)
Gross Profit xxx
3. Capital gains- income derived from
the sale of capital assets Other Income xxx
Classifications of Corporations Gross Income xxx
1. Domestic Deductions (xxx)
a) Domestic corporation, in
general, including OPC Taxable Income xxx
b) Government-owned and RCIT Rate xx%
controlled
c) Taxable Partnership Tax Due -RCIT xxx
d) Proprietary Educational
Institutions
e) Non-Profit Hospital
2. Foreign
a) Resident MCIT
b) Non-resident Gross Income xx
Categories of Income MCIT Rate xx%
a) Business Income Tax Due -MCIT xx
b) Passive Income
TAX DUE
Tax Rates on Corporations
COMPARE RCIT OR MCIT
1. Regular Corporate Income Tax WHICHEVER IS HIGHER
(RCIT/NT)
a) 25%
b) 20% for MSMEs (for micro,
Source Tax Tax
medium companies)
of Base Rates
*5M or less taxable income Income
* 100M or less total assets Resident W/in Net RCIT or
excluding LAND Foreign the PH Income MCIT
*two criteria shall be meet Non- W/in Gross 25%
Resident the PH Income FWT
2. Minimum Corporate Income Tax (MCIT)
Foreign
a) 2%
b) 1% (July 1, 2020-June 30, 2023)
SUMMARY OF INCOME TAX RATES ON
MCIT is applicable when:
CORPORATIONS
- Zero net income
- Negative not income Types of RCIT MCIT
- RCIT < MCIT Corporations
DOMESTIC
How to Compute Tax Due under RCIT Domestic in 25% 2%
RCIT General
Domestic with 20% 2%
Net Sales xxx 5M or less
taxable income
 and 100M or and Hospitals
less total assets FOREIGN
EXCLUDING Resident 25% 2%
LAND Foreign Corp.
Proprietary 10% Not Non-Resident 25% Not
Educational Applicable Applicable
Institutions

Chapter 6 – Income Tax on Partnerships

Partnership Cost of Sales (xx)
Gross Profit xx
 Defined as “a contract whereby two
Other Income xx
or more persons bind themselves to
Gross Income xx
contribute money, property, or
Deductions xx
industry to a common fund, with the
Taxable Income xx
intention of dividing the profits
RCIT rate xx%
among themselves.
Tax Due xx
Kinds of Partnership for Tax Purposes: GPPs
Net Receipts xxx
1. General Professional Partnership Cost of Receipts (xxx)
(GPP) Gross Income xxx
- A partnership formed by Allowable Deductions (xxx)
persons for the purpose Net Income for
of exercising their Distributions to Partners xxx
common profession.
- Tax exemption of GPP
pertain only to its Individual Level
ordinary income Share in Net Income xxx
Sample formula: Tax Due (Sec 24 A xxx
Gross Compensation Income xx
Gross Business Income xx
Allowable deductions (xx)
Share in the Net income xx
Partner’s Taxable Net Income xx
2. General Co-Partnership
(Commercial partnership)
- A general partnership
which is not a general
professional partnership

Formula
Net Sales xx
 Chapter 7 – Introduction to Gross Income
Gross Income c. Capital Gains of Tax
d. Special income subject to special
 In its broad sense, all income from rates
whatever source, derived within or
without the Philippines, whether Tax Exempt Income
legal or illegal
a. By constitutional mandate
Income b. By statute (general or special)
c. By International Comity (i.e.,
 Means all wealth which flows into bilateral agreements, treaties)
the taxpayer, other than return of
capital Requisites for Income to be Taxable
Capital a. There must be gain
b. The gain must be realized or
 Constitutes the investment which is received
the source of income c. The gain must not be excluded by
 Capital is wealth while income is law from taxation
service wealth
 Capital is tree while income is the Doctrine of Constructive Receipt
fruit
 It is not the actual receipt but the
right to receive that determines
when to include an amount in the
Classification of Income gross income
1. Income as to source  The right must be unconditional,
a. Compensation Income valid, and enforceable
b. Professional Income Characteristics of Philippine Income Tax
c. Business Income
d. Other Income 1. National tax – imposed and
2. Income as to territorial source collected by the National
a. Income within the Philippines Government
b. Income without the Philippines 2. General tax – Levied without specific
c. Mixed Income (Partly within and or a predetermined purpose
without) 3. Excise tax – imposed on the right or
3. As to taxability privilege of a person to receive or
earn an income
Taxable Income 4. Direct tax – cannot be passed to
a. Ordinary or Regular Income others
b. Certain Passive Income
 5. Progressive Tax -based on one’s
ability to pay

Chapter 8 – Inclusions & Exclusions from the Gross Income

Gross Income (Inclusions) within the same state or taxing
district are obliged to pay.
 Gross income means all income  Tax exemption are not favored and
derived from whatever source, are construed strictly against the
including (but not limited to) the taxpayer
following items:
1. Compensations for services Tax Amnesty
(salaries, fees, wages, etc)
 Is a general pardon or intentional
2. Gross income from the conduct
overlooking by the state of its
of trade or business or the
authority to impose penalties on
exercise of profession
persons otherwise guilty of evasion
3. Gains derived from dealings in
or violation
property
4. Interests Tax condonation
5. Rent
6. Royalties  Or remission when the State desists
7. Dividends or refrains from exacting, inflicting
8. Annuities or enforcing something as well as to
9. Prizes and Winnings restore what has already been taken
10. Pensions
11. Partner’s distributive share from
the net income of the general Items of Income or Proceeds Excluded from
professional partnership the Gross Income

Exclusions from the Gross Income 1. Life Insurance

2. Amount Received by the Insured as
1. It is exempted by the fundamental a Return of Premium
law or by statute 3. Gifts, Bequests, and Devises
2. It does not come within the 4. Compensation for Injuries or
definition of income Sickness
Tax Exemption 5. Income Exempt Under Treaty
6. Retirement Benefit, Pensions,
 Refers to grant of immunity to Gratuities, etc.
particular persons or corporations or 7. Miscellaneous Items
to a person or corporation of a
particular class from a tax which
persons and corporations generally
 Chapter 9 – Dealings in Property
Dealings in Property
 Refer to the disposal of assets
(ordinary assets or capital assets)
either through sale or exchange2