CHAPTER 1: BASIC PRINCIPLES OF TAXATION INHERENT POWERS OF THE STATE

TAXATION - is an act, process, or means by which the 1. POWER OF TAXATION – the power to demand enforced
sovereign (independent state) through its lawmaking body contribution for public purpose(s).
(legislative branch of the government) makes demand for 2. POWER OF EMINENT DOMAIN – power to take private
revenue in order to support its existence and carry out its property for public use upon paying the owner a just
legitimate objectives. compensation to be ascertained according to law.
3. POLICE POWER – power to enact such laws in relation to
● Taxation as a power of state is inherent in
persons and property to promote public health, public
sovereignty (co-exists with the birth of sovereignty) morals, public property and the general welfare of the
● Sovereignty is the power to exercise jurisdiction people.
SIMILARITIES AMONG THE INHERENT POWERS
within your territory. 1. They are inherent powers of the state
● Scope of Taxation: Plenary, Comprehensive, 2. They constitute the three ways by which the state
interferes with the private rights and property
Supreme
3. They are legislative in nature and character
● Taxes are the lifeblood of the government. 4. They presuppose an equivalent contribution
5. They all underlie and exist independently of the
⮚ LIFEBLOOD DOCTRINE: Taxes are essential constitution
and indespensible to the continued 6. They are all necessary attributes of sovereignty
subsistence of the goverment. A 7. The provisions in the constitution are just limitations on the
government cannot continue to exist and exercise of these powers
operate without financial means. Without DISTINCTIONS AMONG THE INHERENT POWERS
taxes, the government would be paralyzed Distinctions Taxation Eminent Police Power
for the lack of motive power to activate or Domain
operate it.
Concept power to power to take power to
⮚ MARSHALL DOCTINE: “The power to tax is enforce private make and
contribution to property for implement
the power to destroy” taxation power can
raise public use laws for the
be used as an instrument of police power. It governmental with just general
can be used to discourage or prohibit funds compensation welfare
undesirable activities or occupation.
PURPOSES OF TAXATION Scope plenary, merely a broader in
1. REVENUE PURPOSE – taxes imposed primarily to raise comprehensiv power to take application,
e and supreme private general power
revenue to finance various activities of the government in the
property for to make and
promotion of the general welfare and protection of the public use implement
public. laws
2. REGULATORY PURPOSE – taxation power could also be
exercised to regulate inflation, achieve economic and social Authority exercised only may be exercised only
stability, and to serve as a key instrument for social control. by government granted to by
3. COMPENSATORY PURPOSE – taxes may be used to make or its political public service government
up for the benefits received. subdivisions or public or its political
NATURE OF TAXATION utility subdivisions
companies
The power of taxation has the following natural qualities:
1. INHERENT POWER OF SOVEREIGNTY – it exist co-extensive Purpose money is taken private property is
with sovereignty. The government can exercise the power to support the property is taken or
even without any provisions in the constitution mentioning it. government taken for destroyed to
2. ESSENTIALLY A LEGISLATIVE FUNCTION – the lawmaking public promote
body of the government and its political subdivisions purpose general
exercises the power of taxation. welfare
3. FOR PUBLIC PURPOSE – taxes are public money, and it is
appropriation to be valid must be for the common good of Necessity of power to make can be can be
Delegation tax laws expressly expressly
the people, such that no individual or particular entity shall
cannot be delegated to delegated to
primarily be enriched or benefited from its use (solutio delegated the local the
indebiti) government government
4. THE STRONGEST OF ALL THE INHERENT POWERS OF THE units by the units by the
STATE – without money, the government cannot dispense law-making lawmaking
and exercise any of its powers and/or functions for its people. body body
In the absence of the limitations provided by the constitution,
the power of taxation is unlimited, complete and supreme. Person operates on a operates on operates on a
5. SUBJECT TO INTERNATIONAL COMITY - as a matter of Affected community or the particular community or
class of private class of
international courtesy, property of a foreign state may not be
individuals property of an individuals
taxed by another state based on the principle of sovereign individual
equality among states under international law.
6. GENERALLY PAYABLE IN MONEY – taxes are contributions Benefits continuous market value healthy
payable in money. protection and of the economic
7. TERRITORIAL IN SCOPE – as a rule, tax laws do not operate organized property standard of
beyond a country’s jurisdictional limits unless there exists a society expropriated society
privity of relationship between the taxing state and the object
of the tax. Amount of generally no no imposition cost of
Imposition limit regulation,
 actually, directly, and exclusively used for religious,
license and
other charitable, or educational purposes, shall be exempt from
necessary taxation. (SEC. 28 (3), ART. VI)
expenses 9. PRESIDENT’S POWER TO VETO SEPARATE ITEMS IN
REVENUE OR TARIFF BILL
Importance inseparable for common protection, a. Pocket Veto – total item
the existence necessities safety and b. Veto – part/partial
of the nation – and interest welfare of ● 30 days - if the President doesn't sign the bill, it
it supports of society society
becomes a law.
police power transcend
● General Rule: Everything is taxable.
and eminent individual
domain rights in ● Note: Your right begins at exemption.
property 10. MAJORITY OF ALL THE MEMBERS OF THE CONGRESS
GRANTING TAX EXEMPTION
Relationship subject to superior to relatively free 11. THE CONGRESS MAY NOT DEPRIVE THE SUPREME COURT
to constitutional and may from OF THE JURISDICTION IN ALL CASES INVOLVING THE
Constitution and inherent override constitutional LEGALITY OF ANY TAX, IMPOST, OR ASSESSMENT, OR TOLL,
limitations; constitutional limitations; OR ANY PENALTY IMPOSED IN RELATION TO TAX
inferior to impairment superior to 12. TAX COLLECTION SHOULD GENERALLY BE TREATED AS
non- provisions non-
GENERAL FUND OF THE GOVERNMENT
impairment because the impairment
clause welfare of the clause B. INHERENT LIMITATIONS – are restrictions to the power to
state is tax attached to its nature.
superior to 1. TAX MUST BE FOR PUBLIC PURPOSE – use for the general
any private public
contract 2. NON-DELEGATION OF THE POWER TO TAX – power of
taxation is purely legislative in function
Limitation constraints by bounded by limited by the 3. EXEMPTION OF GOVERNMENT AGENCIES OR
constitutional public demand for INSTRUMENTALITIES FROM TAXATION – government is
and inherent purpose and public interest
exempt from taxes provided not doing proprietary functions
limitations just and due
compensation process 4. INTERNATIONAL COMITY – the property of foreign
government may not be taxed by another
5. TERRITORIAL JURISDICTION – has authority within its
LIMITATIONS ON THE POWER OF TAXATION boundaries, except if there is privity in relationships
A. CONSTITUTIONAL LIMITATIONS – are those provided for in BASIC PRINCIPLES OF A SOUND TAX SYSTEM
the constitution or implied from its provisions. 1. FISCAL ADEQUACY – source of government funds must be
1. DUE PROCESS AND EQUAL PROTECTION OF LAW - no able to provide sufficient revenues to meet the objectives of
person shall be deprived of life, liberty, or property without government.
due process of law, nor shall any person be denied the equal 2. ADMINISTRATIVE FEASIBILITY – tax laws should easily be
protection of laws. implemented to assure the smooth flow into the treasury of
Due Process - any deprivation of life, liberty, or property by the fiscally adequate amounts.
the government is with due process provided: 3. THEORETICAL JUSTICE – tax imposed must be
a. Deprivation is done after compliance with the reasonable proportionate to taxpayer’s ability to pay
methods of procedures prescribed by law. OBJECTS OF TAXATION
b. Deprivation is done under the authority of a valid law (not - Refer to the subject to which taxes are imposed.
contrary to constitution) or of the constitution itself. 1. PERSONS
2. EQUAL PROTECTION OF LAW – all persons subject to A) Natural Person – refers to individual taxpayers
legislation shall be treated alike under like circumstances and B) Juridical Person – includes, corporations, partnerships, and
conditions both in the privileges conferred and liabilities any associations
imposed. 2. PROPERTIES
3. UNIFORMITY AND EQUITY - the rule of taxation shall be A) Real Properties – immovable properties, such as land, or
uniform and equitable. The congress shall evolve a house and lot
progressive system of taxation. B) Personal Properties – includes movable properties such as
a. Uniformity in Taxation – all taxable articles or properties of car and other personal belongings (tangible and intangible)
the same class shall be taxed at the same rate. 3. EXCISE OBJECTS
b. Equity in Taxation – implies that the amount of tax must A) Transaction – act of conducting activities related to any
be just in the light of the taxpayer’s ability to pay. business or profession
4. NON-IMPRISONMENT FOR NON-PAYMENT OF A POLL TAX B) Privilege – a benefit derived through gratuitous transfer by
- no person shall be imprisoned for debt or non-payment of a fact of death or donation
poll tax. (Sec 10, Art. III) C) Right – a power, faculty or demand inherent in one person
5. NON-IMPAIRMENT OF THE OBLIGATION OF CONTRACT - and incidental to another
no law impairing the obligation of the contracts shall be D) Interest – an advantage accruing from anything
passed”. (Sec. 10, Art. III) CERTAIN DOCTRINES IN TAXATION
6. NON- INFRINGEMENT OF RELIGIOUS FREEDOM - the free 1. PROSPECTIVITY OF TAX LAWS – application covers present
exercise and enjoyment of religious profession and worship, and future , a tax bill must only be applicable and operative
without discrimination or preference, shall forever be after becoming a law (ex post facto is prohibited by law)
allowed. 2. IMPRESCRIPTIBILITY OF TAXES – unless otherwise provided
7. PUBLIC MONEY SHALL BE USED FOR PUBLIC PURPOSE by the law itself, taxes in general are not cancellable
8. PROPERTIES CONSTITUTIONALLY EXEMPT FROM 3. DOUBLE TAXATION – same taxpayer is taxed twice by the
TAXATION - charitable institutions, churches and parsonages same tax jurisdiction for the same thing.
or convents appurtenant thereto, mosques, non-profit Primary: Same object
cemeteries, and all lands, buildings, and improvements
Secondary: Same type of tax, same purpose, same taxing 3. Transformation – absorbs the payment of tax to reduce
jurisdiction, same tax period, same taxing authority prices and to maintain market share, recover by improving
A) DIRECT DOUBLE TAXATION - all the elements of double the process of production
taxation exists for both impositions. 4. Exemption – grant of immunity, expressed or implied, to a
B) INDIRECT DOUBLE TAXATION – at least one of the particular person, corporation, or to persons, corporations of
secondary elements of double taxation is not common for a particular class, from a tax upon property or an excise which
both impositions. persons and corporations generally within the same taxing
C) INDIRECT DUPLICATE TAXATION – occurs when taxes on district are obliged to pay
the property are not imposed by the same taxing authority. CLASSIFICATIONS OF TAX EXEMPTIONS
This kind of imposition is legal. 1. Expressed Exemption – these are statutory laws in nature
4. ESCAPE FROM TAXATION as provided by constitution, statute, treaties, ordinances,
A) TAX EVASION – or tax dodging, taxpayer uses unlawful franchises or similar legislative acts
means 2. Implied Exemption – either intentional or accidental
B) TAX AVOIDANCE – or tax minimization, reducing or totally 3. Contractual – lawfully entered into by the government in
escaping payment of taxes through legal means contracts under existing laws
5. EXEMPTION FROM TAXATION – denotes a grant of Exemptions shall be governed by the following principles:
immunity, expressed or implied, to a particular person, 1. They are not presumed
corporation, or to persons or corporations of a particular 2. When granted, they are strictly construed against the
class, from a tax upon property or an excise which persons taxpayer
and corporation generally within the same taxing district are 3. They are highly disfavoured and may almost be said “to be
obliged to pay. directly contrary to the intention of tax laws”
6. EQUITABLE RECOUPMENT – this doctrine of law states that THE LAW ALLOWS THE FOLLOWING PERSONS TO DO
a tax claim for refund, which is prevented by prescription, COMPROMISE IN BEHALF OF THE GOVERNMENT
may be allowed to be used as payment for unsettled tax 1. Only the BIR Commissioner is expressly authorized by the
liabilities if both taxes arise from the same transaction in tax code to enter into compromise for both civil and criminal
which overpayment is made and underpayment is due. This liabilities subject to certain conditions.
doctrine is not applicable to cases where the taxes involved 2. The collector of customs is given the power to compromise
are totally unrelated. with respect to customs duties limited to cases where
7. SET-OFF OF TAXES – this doctrine states that taxes are not legitimate authority is specifically granted, such as in the
subject to set-off or legal compensation because the remission of duties.
government and the taxpayer are not mutual creditor and 3. The customs commissioner, subject to approval by the
debtor of each other. secretary of finance, has the power to compromise cases
Exceptions to this rule are the following: involving the imposition of fines, surcharges and forfeitures,
and
● Where both the claims of the government and the
4. The local government code has no provision regarding
taxpayer against each other have already become compromise; however, tax liability (not criminal liability) is
due, demandable and fully liquidated . not prohibited from being compromised. Even so, there is no
● specific authority given to any public official to execute the
compromise so as to render it effective
● When there is an actual compromise between the SITUS OF TAXATION
taxpayer and the tax officer. ● refers to the place, of taxation, or the state or
8. TAXPAYER SUIT – effected through court proceedings and political unit which has jurisdiction to impose tax
could only be allowed if the act involves a direct and illegal over its inhabitants. Protection is the basic
disbursement of public funds derived from taxation. consideration that justifies tax situs.
9. COMPROMISE – this doctrine provides that compromises
FACTORS THAT DETERMINE SITUS OF TAXATION
are generally allowed and enforceable when the subject
1. NATURE, KIND OR CLASSIFICATION OF THE TAX BEING
matter thereof is not prohibited from being compromised and
IMPOSED – what is the tax being imposed
the person entering such compromise is duly authorized to do
2. SUBJECT MATTER OF THE TAX (PERSON, PROPERTY,
so.
RIGHTS OR ACTIVITY) - what is being taxed
HOW TO COUNTERACT DOUBLE TAXATION
1. Tax Exemptions ● Person – magbabayad kung saan nakatira
2. Reciprocity Clause/Tax Treaty
3. Tax Credit ● Real or Tangible Personal Property – magbabayad
4. Allowance for Deductions Such as Vanishing Deduction in kung saan located
Estate Tax
● Intangible Personal Property – situs is the domicile
There is no double taxation in the ff. cases:
1. By taxing corporate income and stockholders’ dividends (personal dwelling place) of the owner unless he has
from the same corporation acquired situs elsewhere
2. A tax imposed by the state and the local government upon 3. SOURCE OF THE INCOME BEING TAXED – taxpayer’s
the same occupation, calling or activity residence or citizenship or magbabayad sa place where
3. Real estate tax and income tax collected on the same real income is earned
estate property leased for earning purposes 4. PLACE OF THE EXCISE, PRIVILEGE, BUSINESS OR
4. Taxes are imposed on the taxpayers’ final product and the OCCUPATION BEING TAXED – place where business is being
storage of raw materials used in the production of the final operated, occupation being practiced, and transaction
product completed.
FORMS OF TAX AVOIDANCE
● Gratuitous Transfer of Property – taxed sa location
1. Tax Option – may use lower tax rates
2. Shifting – transfer burden to another of property or sa taxpayer’s residence/ citizenship
5. CITIZENSHIP OF THE TAXPAYER - nationality
6. RESIDENCE OF THE TAXPAYER – place where the taxpayer Transfer Tax Estate Tax
lives
GENERAL RULES OF TAX SITUS Donor’s Tax
NATURE OF TAX SOURCE
Income Tax Final Withholding Tax
Income Tax Within Outside
Creditable
Resident Citizen Yes Yes Withholding Tax

Non-Resident Citizen Yes No Annual Income Tax

Resident Alien Yes No CLASSIFICATION OF TAXES

1. AS TO PURPOSE
Resident Alien Yes No A. GENERAL, REVENUE OR FISCAL – to raise revenue with no
particular purpose but is simply raised for whatever need may
Transfer Tax arise (income tax, value-added tax)
B. SPECIAL OR REGULATORY – imposed for a special purpose
Resident Citizen Yes Yes
regardless of whether revenue is raised or not to achieve
Non-Resident Citizen Yes Yes some economic end goal.
2. AS TO OBJECT OR SUBJECT MATTER
Resident Alien Yes Yes A. PERSONAL, POLL, OR CAPITATION – taxes fixed in amount
and imposed on persons residing within a specified territory
Non-Resident Alien Yes No regardless of the amount of their property or their
occupation or business (community tax)
Business Tax Yes No B. PROPERTY – taxes imposed on real or personal property
NATURE OF TAXES based on its proportionate value or in accordance with some
TAXES – are enforced proportional contributions from other reasonable method of apportionment (real estate tax)
persons and property levied by the lawmaking body of the C. EXCISE – taxes imposed upon the performance of a right or
Sate by virtue of its sovereignty for the support of the act, the enjoyment of a privilege or the engagement in an
government and all public needs. occupation (estate tax, donor’s tax, income tax, value-added
tax)
● Taxes are obligations created by law 3. AS TO DETERMINATION OF AMOUNT
A. AD VALOREM – taxes are fixed amounts in proportion to
● Taxes are generally personal to the taxpayer the value of the property with respect to which the tax is
ESSENTIAL CHARACTERISTICS OF TAXES assessed (tax imposed on an item based on its assessed value
1. ENFORCED CONTRIBUTION – imposition not voluntary nor e.g. real estate tax, certain customs duties, excise taxes on
dependent upon the will of the taxpayer. cigarettes, gasoline, and others)
2. LEVIED BY THE LEGISLATIVE BODY – congress (legislative B. SPECIFIC – fixed amount imposed and based on some
body) makes tax laws. standard of weight or measurement, head or number, length
3. PROPORTIONATE IN CHARACTER – “ability to pay or volume (tax on distilled spirits, fermented liquor, cigars,
principle” is the basic rule in collecting taxes. wines, fireworks)
4. GENERALLY PAYABLE IN MONEY – taxes are paid in the 4. AS TO WHO BEARS THE BURDEN
form of cash. If property is taken to satisfy tax liability, the A. DIRECT – non-transferable, tax demanded from persons
property is sold through public auction to satisfy the tax who are intended or bound by law to pay (community tax,
obligation. income tax, estate tax, donor’s tax)
5. IMPOSED FOR THE PURPOSE OF RAISING REVENUE – taxes B. INDIRECT – transferrable, tax that can be shift to another
are primary source of government funds to finance its (customs duties, value-added tax, some percentages on
expenditures and projects. taxes)
6. USED FOR PUBLIC PURPOSE – money is taken from the 5. AS TO SCOPE OR AUTHORITY COLLECTING THE TAX
public so it can be returned to them in the form of public A. NATIONAL – taxes imposed by the national government
benefits.
● Estate and Donor’s Tax
7. ENFORCED ON SOME PERSONS, PROPERTIES OR RIGHTS
8. COMMONLY REQUIRED TO PAID AT REGULAR INTERVALS ● Customs Duties
– the dates for paying taxes are fixed by the law to comply
with the principle of administrative feasibility. ● Income Tax
9. IMPOSED BY THE SOVEREIGN STATE WITHIN ITS
JURISDICTION – the enforcement of tax is subject to ● Documentary
territorial jurisdiction and international comity.
SUMMARY OF TAXES ● Vat Stamp Taxes

INCOME ● Excise Tax

OBJECT DESCRIPTION
CLASSIFICATION B. LOCAL OR MUNICIPAL – taxes collected by the municipal
government
Person Personal Tax Community Tax
● Community Tax
Property Property Tax Real Property Tax
● Municipal License Tax
Rights Business Taxes VAT
● Professional Tax
Other Percentage
● Real Estate Tax
Excise 6. AS TO RATE OR GRADUATION
A. PROPORTIONAL OR FLAT RATE – tax based on a fixed 2. Regulations and Rulings
percentage of the amount of the property, income or other 3. Decisions of various courts that hear tax cases
basis to be taxed (percentage taxes, real estate taxes) INTERNAL REVENUE LAW – it includes all laws legislated
B. PROGRESSIVE OR GRADUATED RATE – tax rate increases pertaining to the national government taxes, which is
as the tax base increases (income tax, donor’s tax, estate tax) embodied in the NIRC.
C. REGRESSIVE – tax rate decreases as the tax base increases REVENUE LAW – a law passed for the purpose of authorizing
(value-added tax) the levy and collection of taxes in some form to raise
D. DIGRESSIVE – fixed rate is imposed on a certain amount revenue.
but diminishes gradually on sums below it 3 BRANCHES OF THE NATIONAL GOVERNMENT
E. MIXED TAX – system that uses all or a combination of the 1. EXECUTIVE - administrative body including President
different taxes based on rates and his administration
OTHER CHARGES/FEES ● President is the Chief Executive
1. PENALTY – sanction imposed as a punishment for ● They execute tax laws
violations of law or acts deemed injurious.
2. LEGISLATIVE – lawmaking body including the
2. REVENUE – refers to all funds or income derived by the
Congress which creates statutory laws like RA 8424
government whether from tax or from other sources
(government services, income from public enterprises, and The National Internal Revenue Code (NIRC) of 1997
foreign loans) revenue is amount collected, tax is amount ● Senate (upper chamber) and House of
imposed
Representatives (lower chamber)
3. DEBT – is an obligation to pay or render service for a
definite future period of time based on contract ● Congress makes tax laws
Debt Tax 3. JUDICIAL – the Supreme Court of the Philippines
Basis: Contract Basis: Law ● Chief Justice

Assignable Not Assignable ● Interprets tax laws

May be paid in kind Generally payable in money INTERNAL REVENUE TAXES – taxes imposed by the legislative
body other than custom duties on imports.
Can be imprisoned for 1. INCOME TAX
Cannot be imprisoned
2. TRANSFER TAXES (ESTATE & DONOR’S TAX)
for non-payment non-payment 3. BUSINESS TAXES (VAT, PERCENTAGE & EXCISE TAX)
4. DOCUMENTARY STAMP TAX (DST)
● Is non-payment of tax equivalent to non-payment 5. SUCH OTHER TAXES AS MAY BE IMPOSED & COLLECTED BY
of debt? THE BIR
- Tax arises from law and is a demand of INTERPRETATION & APPLICATION OF TAX LAWS
sovereignty, while debt arises from private 1. Tax statute must be enforced as written
contracts. Non-payment of tax 2. Imposition of tax burdens is not presumed
compromises public interest while non- 3. Doubts should be resolved liberally in favor of the taxpayer
payment of debt compromises private 4. Tax exemption are strictly construed against the taxpayer
interest. Non-payment of tax is similar to a 5. Tax laws are applied prospectively 6. Tax laws prevail over
crime. The constitutional guarantee on non- civil laws
imprisonment of debt does not extend to THE BUREAU OF INTERNAL REVENUE
non-payment of tax except poll tax - functions under the supervision and control of Department
(community tax). of Finance (DOF)
4. TOLL – is a compensation for the use of somebody else’s - created by Commonwealth Act 466, approved by the
property determined by the cost of the improvement National Assembly on June 15, 1939
(demand of ownership, tax is demand of public) - effective July 1, 1939
5. PERMIT OR LICENSE FEE – a charge imposed under police Income – the amount of money coming to a person or
power for purposes of regulation, failure to pay makes an act corporation within a specified time, whether as payment for
or business illegal services, interest or profit from investment.
6. CUSTOM DUTIES – are imposition on imported goods Income Tax – is a tax on all yearly profits arising from
brought into the country to protect local industry property, profession, trade, or business.
7. SUBSIDY – is a monetary aid directly granted or given by
the government to an individual or private commercial ● Generally regarded as an excise (privilege) tax
enterprises deemed beneficial to the public CHAPTER 2: TAXATION ON INDIVIDUALS
8. TARIFF – is a schedule or list of rates, duties or taxes CLASSIFICATIONS OF TAXPAYERS
imposed on imported goods 1. CITIZEN
9. MARGIN FEE – is a tax on foreign exchange designed to
curb the excessive demands upon our international reserve ● Those who are citizens of the Philippines at the time
10. SPECIAL ASSESSMENT – enforced proportional of the adoption of the Feb. 2, 1987 Constitution
contribution from owners of lands for special benefits
● Those whose fathers and mothers are citizens of the
resulting from public improvements
NATURE OF TAX LAWS Philippines
● Tax laws are generally civil in nature, neither political ● Those born before Jan. 17, 1973, the date of the
nor penal in nature. adoption of the 1973 Constitution, of Filipino
TAX LAW – is a body of laws which codifies all national tax mothers, who elect Philippine citizenship upon
laws including income, estate, gift, excise, stamp and other reaching the age of majority
taxes.
● Those who are naturalized in accordance with law
3 ELEMENTS:
1. The Code A. RESIDENT CITIZEN
 include base salary, wages, incentives and/or
● A Filipino citizen who permanently resides in the
commission.
Philippines B. COMPENSATION INCOME EARNERS – individuals whose
B. NON-RESIDENT CITIZEN source of income is purely derived from an employee-
● A Filipino citizen who establishes to the satisfaction employer relationship.
C. EMPLOYEE – individual performing services under an
of the Commissioner the fact of his physical
employee-employer relationship.
presence abroad with a definite intention to reside
D. RANK AND FILE EMPLOYEE – neither a managerial nor
therein supervisory employee
● Leaves the Philippines during the taxable year to E. EMPLOYER – person for whom an individual performs or
performed any service of whatever nature, under an
reside abroad as: (1) immigrant or (2) for
employee-employer relationship.
employment on a permanent basis.
F. EMPLOYEE-EMPLOYER RELATIONSHIP – when a person for
● Whose employment requires him to be physically whom services were performed (employer) has the right to
present abroad most of the time (183 days) during control and direct an individual performing the service
(employee)
the taxable year
G. FRINGE BENEFITS - Any goods, services, or other benefits
● A citizen previously considered as non-resident who furnished or granted in cash or in kind other than the basic
arrives in the Philippines during the taxable year to compensation (sahod) to the employee by the employer
reside permanently shall likewise be treated as non- ● Housing.
resident with respect to his income derived from
abroad until the date of his arrival. ● Expense account.
2. ALIEN – foreign individual
● Vehicles of any kind.
A. RESIDENT ALIEN
● An individual whose residence is within the ● Household personnel (e.g. maid, driver).
Philippines and who is not a citizen thereof. ● Interest on a loan at less than the market rate
● Not a mere transient or sojourner (presence in the (currently set at 12%) to the extent of the difference
Philippines is not temporary) between the market rate and the actual rate
granted.
● Can be considered resident or not depending on his
intention with regard to the length and nature of his ● Membership fees, dues, and other expenses borne
stay. by the employer for the employee in social and
B. NON-RESIDENT ALIEN athletic clubs and similar organisations.
● An individual whose residence is not within the ● Expenses for foreign travel.
Philippines and is not a citizen thereof.
● Holiday and vacation expenses.
B1. NON-RESIDENT ALIEN ENGAGED IN TRADE AND
BUSINESS (NRAETB) ● Educational assistance to the employee and
● non-resident alien who shall come to the Philippines dependants.
and stay for an aggregate period of more than 180 ● Premiums for life insurance, health and other non-
days during any calendar year.
life insurance, and similar amounts in excess of what
B2. NON-RESIDENT ALIEN NOT ENGAGED IN TRADE AND
the law allows.
BUSINESS (NRANETB)
H. MINIMUM WAGE EARNER (MWE) – private sector worker
● non-resident alien who shall come to the Philippines who is paid a statutory minimum wage (lowest wage
and stay for an aggregate period of 180 days or less permitted by law) or public sector worker with compensation
during any calendar year. income not more than the statutory minimum wage rates
INDIVIDUAL SOURCE OF INCOME (averaged 346.33 PHP/day from 1989 until 2023 – P610)
● MWE exempt from tax covering holiday pay,
Income Tax Within Outside
overtime, night shift differential and hazard pay.
I. MARGINAL INCOME EARNER – an individual whose
Resident Citizen ✔ ✔
business does not realize gross sales or receipts exceeding
P100,000 in any 12-month period (GSOR < 100,000)
Non-Resident Citizen ✔ J. MIXED INCOME EARNER – individual earning both from
compensation income from employment and income from
Resident Alien ✔ business or practice of profession.
K. OVERSEAS CONTRACT/FILIPINO WORKER – Filipino
citizens employed in foreign countries who are physically
Resident Alien ✔ present abroad as a consequence of their employment
thereat.
DEFINITION OF TERMS L. SELF-EMPLOYED – a sole proprietor/ independent
A. COMPENSATION INCOME -all renumeration for services contractor who reports income earned from self-employment
performed by an employee for his employer under an M. PROFESSIONAL – a person formally certified by a
employee-employer relationship professional body of belonging to a specific profession by
● cash or non-cash rewards paid to employees in virtue of having completed a required course of studies or
practice, and whose competence can usually be measured
exchange for the services they provide. It may against an established set of standards.
N. GROSS RECEIPTS – The total amounts the organization
● MWE exempt from payment of income tax based on
received from all sources during its annual accounting period,
without subtracting any costs or expenses (revenues from their statutory minimum wage rates (also holiday
services, not sale of goods) pay, overtime pay, night shift differential pay and
O. GROSS SALES – total sales transactions net of VAT, without hazard pay)
any deduction. 2. BUSINESS INCOME – arises from self-employment or
P. TAXABLE INCOME – the pertinent items of gross income practice of profession, not include income as an employee.
specified in the code less deductions (your adjusted gross ● Gross sales and receipts and other non-operating
income less any deductions)
Q. VAT THRESHOLD – ceiling fixed by law to determine VAT income (GSRONOI) do not exceed P 3.0 M VAT
registrable taxpayers, currently set at 3M (P 3, 000,000) and is Threshold have the option to avail of:
used to determine the income tax liability of self-employed ● 8% tax of GSRONOI in excess of P 250,000
individuals.
R. REGIONAL OR AREA HEADQUARTERS (RHQs) – a branch - P250,000 deduction not applicable for mixed income
established in the Philippines by multinational companies earners since it is already incorporated in the first tier of the
which do not earn or derive income from the Philippines graduated income tax rates applicable to compensation
(hindi kumikita, for administrative branch lang) income.
S. REGIONAL OPERATING HEADQUARTERS (ROHQs) – Proforma:
opposite of RHQs, is allowed to derive income in the country Gross Sales
by performing services to its affiliates, branches, and Add: Gross Receipts
subsidiaries around the world. Total Gross Sales/Receipts
T. DEPOSITS – funds in foreign currencies which are accepted Less: Amount Allowed as Deduction (250,000)
and held by and offshore banking unit or foreign currency Taxable Income
deposit unit in the regular course of the business, with the Tax Due: 8% x Taxable Income
obligation to return an equivalent amount to the owner, with ● The graduated tax rates
or without interest.
U. DEPOSIT SUBSTITUTES - alternative form of obtaining Proforma:
funds from the public other than deposits, through the Gross Sales/Receipts
issuance, endorsement, or acceptance of debt instruments Less: Cost of Sales
for the borrower's own account, for the purpose of relending Gross Income
or purchasing of receivables and other obligations, or Less: Operating Expenses
financing their own needs or the needs of their agent or Taxable Income
dealer (promissory notes, repurchase agreements) Tax Due: Basic Amount + (Additional Rate on Excess x Excess)
V. FOREIGN CURRENCY DEPOSIT SYSTEM – conduct of 3. MIXED INCOME – income from both compensation and
banking transactions whereby any person may deposit self-employment
foreign currencies forming part of the Philippine International a. On Compensation Income
reserves. ● At graduated rates plus
W. FOREIGN CURRENCY DEPOSIT UNIT – unit of a local bank
b. On Business Income/Practice of Profession
(thrift/commercial bank organized under Ph laws) or a local
branch (branch of a foreign bank doing business in the b.1: If GSRONOI do not exceed VAT Threshold
Philippines) authorized by BSP to engage foreign currency ✔ Either at graduated rates or
denominated transactions.
X. OFFSHORE BANKING SYSTEM - conduct of banking ✔ 8% of GSRONOI in lieu of graduated rates and
transactions in foreign currencies involving the receipt of percentage tax, at the option of the taxpayer.
funds from external sources and the utilization of such funds b.2: If GSRONOI exceed VAT Threshold or failed to signify
as provided in this Decree (bank is not inside the Philippines) intention to be taxed at 8%
Y. OFFSHORE BANKING UNIT - a branch, subsidiary or affiliate
of a foreign banking corporation which is duly authorized by ● At graduated rates
the Central Bank of the Philippines to transact offshore PROFORMA: SIGNIFIED INTENTION TO BE TAXED 8% ON
banking business in the Philippines. BUSINESS INCOME – add separate tax due to get total tax
SOURCES OF INCOME due
● Not a place but the property, activity, or service that Total Compensation Income
Less: Non-Taxable Benefits (90,000)
produced the income. Taxable Compensation Income
Income derived from labor – place where the labor is Tax Due on Compensation: On Basic Amount
performed Add: On Excess (TCI – BA) rate
Income derived from use of capital – place where the capital Tax Due on Compensation Income
is employed Add Tax Due on Business Income:
Profits from the sale or exchange of capital assets – place Gross Sales
where the sale or transaction occurs Add: Non-Operating Income
CATEGORIES OF INCOME AND INCOME TAX RATES Taxable Business Income
1. COMPENSATION INCOME Multiplied by 8% Income Tax Rate
● Taxed based on the graduated rates under Sec. 24 Tax Due on Business Income
Tax Due on Compensation + Tax Due on Business Income =
(A) of the Tax Code
Total Income Tax Due
Proforma: PROFORMA: FAILED TO SIGNIFY INTENTION – add both
Total Compensation Income P xxx income before computing tax due
Less: Mandatory Contributions/Non-Taxable Benefits xxx Total Compensation Income
Net Taxable Income P xxx Less: Non-Taxable Benefits (90,000 max)
Taxable Compensation Income
Add: Taxable Income from Business Under TRAIN
Gross Sales law:
Less: Cost of Sales
More than 20% exempt
Gross Income
10k
Less: Operating Expenses
Net Income from Operation 10k or less exempt
Add: Non-Operating Income
Total Taxable Income Under
Tax Due: Basic Amount CREATE law:
Add: On Excess (TBI – BA) rate
More than 20%
Taxable Compensation Income + Taxable Business Income =
10k
Total Income Tax Due
4. PASSIVE INCOME – income aside from business or 10k or less exempt
employment
Cash/
● Subject to a separate and final tax
Property
Dividends 10% 20% FT 25%
● Kinds of Passive Income: Interests,
Royalties, Prizes, Winnings, Dividends Capital Gain
- Final tax imposed on income or gain shall no longer be
Sale of
included as taxable income subject to the graduated rates.
shares of
- imposed without deduction and is withheld at sources
stock not
INCOME RC NRC RA NRAETB NRANETB
traded in 15%
TAXABLE 20% - 35% (2018-2022) FT 25% stock
INCOME exchange
15% - 35% (2023 onwards)
Sale of Real 6%
PASSIVE INCOME Property

In general: Share in the

Interests, distributable
Royalties, net income
Prizes, 20% FT 25% after tax of a 10% 20%
Winnings partnership
(except GPP)
Interest
Income from Share in the
depository 15% Exemp 15% 0% -- net income
bank (FDCU) t after tax of
an 10% 20%
Income from association
long term
deposit (at 5. CAPITAL GAINS FROM SALE OF SHARES OF STOCK, NOT
least 5 years Exempt TRADED THROUGH THE LOCAL STOCK EXCHANGE – 15%
maturity) 6. CAPITAL GAIN FROM SALE OF PROPERTY – 6%
The rules below are applicable to all individual taxpayers.
Deposit pre terminated before 5th year
REQUISITES:
4 years – 1) The real property must be a capital asset; and
less than 5 2) It must be located in the Philippines.
years 5% FORMULA:
Tax Base PXXX
Rate 6%
3 years - less 12% Final Tax PXXX
than 4 years OPTIONS OF THE SELLER IN CASE OF SALE TO GOVERNMENT:
1. Pay 6% CGT; or
Less than 3 20% 2. Pay Basic Tax.
years REQUISITES FOR EXEMPTION:
Royalties on
1. The property sold must be the principal residence of the
books,
seller;
literary 2. Proceeds is fully utilized in acquiring or constructing a new
works, and principal residence;
10% 3. Utilization must be made within 18 calendar months from
musical
composition the date of sale or disposition;
4. Notify the BIR Commissioner within 30 days from the date
Prizes of sale or disposition of the intention to avail the exemption;
amounting 5. The said exemption can only be availed once every 10
to P10,000 Graduate income tax subject
years.
or less 7. FRINGE BENEFITS – other benefits granted to employee in
addition to basic salaries
PCSO Winnings
● Taxed at 35% final tax
Proforma:
Monetary Value of the Fringe Benefit
Divide by 65%
Grossed-up Monetary Value
Multiply by 35%
Fringe Benefit Tax
TAXABLE INCOME AND TAX DUE
A. INCOME TAX RATES EFFECTIVE JAN. 1, 2018 UNTIL
DEC. 31, 2022:
Range of Taxable Income Tax Due = a + (b x c)

Basic Additional Of excess

Amount Rate over (c)
Over Not over
(a) (b)

- 250,000 Exempted

250,000 400,000 0 20% 250,000

400,000 800,000 30,000 25% 400,000

800,000 2,000,000 130,000 30% 800,000

2,000,000 8,000,000 490,000 32% 2,000,000

8,000,000 - 2,410,000 35% 8,000,000

B. INCOME TAX RATES EFFECTIVE JAN. 1, 2023

ONWARDS:
Range of Taxable Income Tax Due = a + (b x c)

Basic Additional Of excess

Amount Rate over (c)
Over Not over
(a) (b)

- 250,000 Exempted

250,000 400,000 0 15% 250,000

400,000 800,000 22,500 20% 400,000

800,000 2,000,000 102,500 25% 800,000

2,000,000 8,000,000 402,500 30% 2,000,000

8,000,000 - 2,202,500 35% 8,000,000

INDIVIDUALS EXEMPT FROM INCOME TAX

1. NON-RESIDENT CITIZEN
2. OVERSEAS CONTRACT WORKER, INCLUDING
OVERSEAS SEAMAN
3. BARANGGAY MICRO BUSINESS ENTERPRISES –
incentive is exemption from income tax on income
arising from the registered BMBEs operations.
4. EXPANDED SENIOR CITIZEN ACT OF 2010 – senior
citizen na minimum wage earners
5. PERSONAL EQUITY AND RETIREMENT ACCOUNT ACT
OF 2008 (R.A 9505)