Reviewer Notes Week 3 3.
Effects:
Income Taxation
Atty. Jules Valdez ○ Promotion of general welfare
○ Reduction of social inequality
TAXATION
○ Economic growth
Taxation – the process by which the
sovereign, through its law-making body,
imposes burdens for the purpose of raising Theories of Taxation
revenues to carry out legitimate objects of
the government. 1. Necessity Theory – to preserve
the State’s sovereignty; a means to
Taxes – enforced contributions levied by provide protection and facilities.
the law-making body of the State for the
support of the government and all public 2. Lifeblood Theory – taxes are the
needs. lifeblood of the government,
allowing it to perform its basic
functions of serving and protecting
3 Inherent Powers of the State the people.
1. Police Power – the power of
promoting public welfare and Basis of Taxation – the government may
regulating the use of liberty and perform its functions while citizens enjoy
property. the benefits.
2. Power of Taxation – the power
which raises revenue for the Manifestations of the Lifeblood
expenses of the government. Theory
1. Rule of “No Estoppel against the
3. Power of Eminent Domain – the
Government.”
power to acquire private property for
public purpose upon payment of just
2. Collection of taxes cannot be
compensation.
stopped by injunction.
Purposes of Taxation ○ Exception: The Court of
Tax Appeals (CTA) may
1. Primary (Revenue or Fiscal grant injunction to restrain
Purpose): collection of internal revenue
tax, fee, or charge.
○ To provide funds or property
with which to promote 3. Taxes cannot be the subject of
general welfare and compensation or set-off.
protection of citizens.
○ Tax is compulsory, not a
2. Secondary (Regulatory bargain.
Purpose):
4. Right of the government to select
○ Used as a device for objects (subjects) of taxation:
regulation or control. a) Subject or object to be taxed
b) Purpose of the tax (must be for
public purpose) 2. Assessment – determination of the
c) Amount or rate of the tax correct amount.
d) Kind of tax
e) Apportionment of the tax 3. Collection – enforcement of
f) Situs (place) of taxation payment.
g) Manner, means, and agencies of
collection NATURE / CHARACTERISTICS OF
THE STATE’S POWER OF TAX
5. A valid tax may result in the
destruction of the taxpayer’s a) It is inherent in sovereignty – can
property. enforce contributions even in the absence of
law.
○ Lawful tax cannot be b) It is legislative in character – cannot
defeated. be exercised by the executive or judicial
branches.
○ May bring about insolvency c) Exemption of government entities,
of the taxpayer. agencies, and instrumentalities
○ Forfeiture of property may ● Agencies performing
occur through police power. governmental functions → tax
exempt unless expressly taxed.
Scope of Taxation
● Agencies performing proprietary
The power of taxation is the most functions → subject to tax unless
absolute of all powers of the government. expressly exempted.
● Comprehensive – covers all ● GOCCs performing proprietary
persons, businesses, professions. functions are subject to tax, except
the following which are granted tax
● Unlimited – absence of limitations. exemptions:
• Government Service Insurance
● Plenary – complete. System (GSIS)
• Social Security System (SSS)
● Supreme – highest in rank. • Philippine Health Insurance
Corporation (PHIC)
• Philippine Charity Sweepstakes
Office (PCSO)
Essential Elements of a Tax
• Local Water Districts (RA 10026)
a) It is an enforced contribution. d) International Comity
b) It is generally payable in money. e) Limitation of territorial
c) It is proportionate in character. jurisdiction
d) It is levied on persons, property, or f) Strongest among all the
rights. inherent powers of the State
e) It is levied by the law-making body of the
State.
CLASSIFICATION OF TAXES
f) It is levied for public purpose.
1. As to scope
Aspects of Taxation
1. Levying – imposition of tax.
○ National – imposed by the 6. As to graduation or rate
national government
○ Proportional – based on
○ Local – imposed by the local fixed percentage of the
government amount
2. As to subject matter or object ○ Progressive – rate increases
as the tax base or bracket
○ Personal, poll, or capitation increases
– fixed amount imposed
upon individuals residing in ○ Regressive – rate decreases
a territory as the tax base or bracket
increases
○ Property – imposed on
property in proportion to its 7. As to taxing authority
value
○ National – imposed under
○ Excise – imposed on certain the National Internal
rights and privileges (e.g., sin Revenue Code, collected by
products, imported goods) the BIR
3. As to who bears the burden ○ Local – imposed by LGUs
○ Direct – taxpayer himself
pays and cannot shift the ELEMENTS OF A SOUND TAX
burden SYSTEM
○ Indirect – burden can be a) Fiscal Adequacy – sources of revenue
passed to another (e.g., VAT) must be adequate.
b) Theoretical Justice or Equity – tax
4. As to determination of fixed burden should be proportionate.
amount c) Administrative Feasibility – law
must be capable of effective and efficient
○ Specific – tax of fixed enforcement.
amount based on number,
weight, or measurement
LIMITATIONS ON THE STATE’S
○ Ad valorem – tax based on a POWER TO TAX
fixed proportion of the
property’s value 1. Inherent Limitations
5. As to purpose 2. Constitutional Limitations
○ Primary, Fiscal, or Revenue ○ Progressive system –
Purpose – to raise funds emphasis on direct taxes
○ Secondary, Regulatory, ○ Regressive system – reliance
Special, or Sumptuary on indirect taxes
Purpose – for regulation or
control ○ Regressive tax rates – rates
decrease as the tax base or
bracket increases ● Customs Duties – taxes imposed
on goods exported from or imported
into a country.
FACTORS IN DETERMINING THE
SITUS OF TAXATION ● Tariff – the system of imposing
duties on importation or exportation
a) Subject matter (person, property, or of goods.
activity)
b) Nature of tax
c) Citizenship of the taxpayer
d) Residence of the taxpayer DOUBLE TAXATION
e) Source of income
f) Place of excise, business, or occupation Direct Double Taxation – occurs when
being taxed the same subject is taxed twice:
1. By the same taxing authority,
OTHER TAX-RELATED TERMS jurisdiction, or district
● Toll – a sum of money paid for the 2. For the same purpose
use of something, such as a road,
bridge, or other public facility. 3. In the same year or taxing period
● Penalty – a sanction imposed as 4. On the same subject or object
punishment for violation of law or
acts deemed injurious. 5. With the same kind or character of
tax
● Special Assessment – an enforced
proportional contribution from MEANS OF AVOIDING THE BURDEN
landowners for special benefits OF TAXATION
resulting from public improvements.
1. Shifting – transfer of the burden of
Characteristics of Special tax by the original payer to another.
Assessment:
a) Levied only on land 2. Transformation – producer pays
b) Not a personal liability of the person the tax but recoups by improving
assessed production process.
c) Based wholly on benefits (not necessary)
d) Exceptional both as to time and place 3. Evasion – use of illegal means to
defeat or reduce tax.
● Revenue – all funds or income
derived by the government. 4. Tax Avoidance – use of legally
permissible alternatives to minimize
● Subsidy – pecuniary aid directly tax liability.
granted by the government to an
individual or enterprise deemed 5. Exemption – grant of immunity to
beneficial to the public. particular persons or classes.
● Permit or License – a charge 6. Capitalization – reduction in the
imposed under the police power for selling price of income-producing
purposes of regulation. property equal to the capitalized
value of tax. ● Allowable deductions
● References in tax choicE
7. Avoidance – use of tax-saving
devices within the means sanctioned
by law. CITIZENSHIP & TAXATION
A. Citizens of the Philippines
SOURCES OF TAX LAWS
1. Born with father and/or mother as
1. Constitution Filipino citizens.
2. National Internal Revenue Code
(NIRC) 2. Born before January 17, 1973 of a
3. Tariff and Customs Code Filipino mother who elects
4. Local Government Code (Book II) Philippine citizenship upon reaching
5. Local Tax Ordinances / City or the age of maturity.
Municipal Tax Codes
6. Tax Treaties and International 3. Acquired Philippine citizenship
Agreements after birth (naturalization) in
7. Special Laws accordance with Philippine laws.
8. Decisions of the Supreme Court and
the Court of Tax Appeals
9. Revenue rules, regulations, and B. Nonresident Citizens of the
administrative rulings/opinions Philippines
1. Establishes abroad (to the
INDIVIDUAL TAXPAYERS satisfaction of the Commissioner of
Internal Revenue) the fact of
Definition: Natural persons with income physical presence with definite
derived from within the territorial intent to reside therein.
jurisdiction of the taxing authority.
2. Leaves the Philippines during the
Classifications: taxable year to reside abroad:
1. Resident Citizens (RC) – engaged ○ As an immigrant
in trade/business.
2. Non-resident Citizens (NRC). ○ For employment on a
3. Resident Aliens (RA). permanent basis
4. Non-resident Aliens (NRA):
○ For work requiring him to
○ NRA engaged in trade or stay abroad most of the
business (NRA-ETB) taxable year
○ NRA not engaged in trade or 3. Stayed 183 days or more outside
business (NRA-NETB) the Philippines within a year.
Importance of Classification: A Filipino citizen not classified as a
nonresident citizen = Resident Citizen
● Situs of income for tax purposes.
● Manner of computing tax
● Treatment of certain passive C. Aliens
incomes
● Alien → Foreign-born person not 2. Type of Income
qualified for Philippine citizenship
(by birth or naturalization). a) Ordinary/Regular Income →
Graduated Rate
● Resident Alien (Sec. 22[F]) →
Residence within the Philippines, ● Compensation income, business
but not a citizen. income, profession practice.
● Nonresident Alien (Sec. 22[G])
→ Residence not in the Philippines, b) Passive Income → Final Withholding
and not a citizen. Tax
○ NRA-NETB (Not Engaged ● Interest income, dividend income,
in Trade/Business) → royalties, prizes, winnings.
Subject to 25% tax on
gross income from
Philippine sources. c) Capital Gains → Capital Gains Tax
(CGT)
D. Income Taxation (Sec. 22[S]) ● Sale of shares of stock (domestic
corp.)
● "Trade or business" → Includes ● Sale of real property in the
public service functions or personal Philippines
services performed in the
Philippines.
3. TRAIN Law 2023 (Income Tax
Table)
E. Applicable Taxes & Tax Rates
Annual Income (PHP) Tax
1. Classification of Taxpayer Rate/Formula
Taxpayer Tax Source 250,000 and below 0% (Exempt)
Base of
Income Above 250,000 - 400,000 15% of the excess
over 250,000
RC (Resident Net Within &
Citizen) Income Without Above PHP 400,000 to 22,500 + 20% of the
PH PHP 800,000 excess over 400,000
NRC Net Within Above PHP 800,000 to PHP 102,500 +25%
(Nonresident Income PH PHP 2,000,000 of the excess
Citizen) / RA over PHP 800,000
(Resident Alien) /
NRA-ETB
(Nonresident Above PHP 2,000,000 to PHP 402,500 +30%
Alien Engaged in PHP 8,000,000 of the excess
Trade/Business) over PHP
2,000,000
NRA-NETB Gross Within
(Nonresident Income PH
Alien Not Above PHP 8,000,000 PHP 2,202,500 +
Engaged in 35% of the excess
Trade/Business) over 8,000,000
F. Self-Employed & Professionals (RA ○ 2018 → Flat 15%.
10963, TRAIN Law)
➢ Sale of real property in the PH:
● Self-Employed → Sole
proprietor/independent contractor ○ CGT = 6% of higher of
reporting self-employment income. Gross Selling Price (GSP) or
Fair Market Value (FMV).
● Professional → Certified
individual in a specific profession. ➢ Stock Transaction Tax:
● Option: If net income > ₱250,000 ○ Before 2018 → ½ of 1% of
but gross sales ≤ ₱3M → 8% tax in GSP
lieu of graduated rates.
○ 2018 → 6/10 of 1% of GSP
G. Other Key Definitions ➢ Basic Tax (not CGT):
● Final Withholding Tax → ○ Sale of foreign shares
Prescribed tax on specific income
(Philippine-sourced). ○ Sale of real properties abroad
● Deposit Substitutes ○ Sale of personal assets other
(RR-14-2012) → Alternative form than domestic shares
of obtaining funds from the public
(not bank deposits). I. Principal Residence (Tax
Exemption)
Ordinary Assets: Requisites for exemption on sale:
1. Stock-in-trade or similar property. 1. Proceeds used for new residence
within 18 months.
2. Property used in business subject to
depreciation. 2. Cost basis of old carried over to new.
3. Real property held for sale in 3. BIR notified within 30 days of sale.
ordinary business course.
4. Exemption only once every 10
4. Real property used in years.
trade/business.
J. Computation Formats
Gain from sale of ordinary assets =
Ordinary Income (not CGT). ● Pure Compensation Income Earner
H. Capital Gains Tax (CGT)
● Pure Business Income Earner
➢ Sale of shares of stock
● Mixed Income Earner
(domestic corp.):
○ Before 2018 → 5% (first
₱100k) + 10% (excess). K. Benefits for Senior Citizens &
PWDs
● 20% discount + VAT exemption on
specified goods/services.
● ₱500 monthly social pension
(indigent SCs).
● Death benefit assistance.
● 5% discount on utilities.
● Income tax exemption if annual
income ≤ ₱250,000.
Minimum Wage Earner (MWE) under
RA 9504 → worker in private sector
receiving statutory minimum wage, fixed by
the Regional Tripartite Wage and
Productivity Board.
