TAXATION

Atty. Prackie Jay T. Acaylar, CPA, MPA, PHD, DFRILL, IIGRE, PD-SML

Module 1

Inherent Powers of the State

There are three (3) inherent powers of Government,

namely: 1) police power; 2) eminent domain; and 3) taxation.
They exist independently of the Constitution as essential
qualities of sovereignty.1

The power of taxation is an integral characteristic of

sovereignty; the Government essentially relies on taxation to
acquire the means to conduct on its operations. Taxes are
essential to its very existence,2 hence, the dictum that "taxes are
the lifeblood of the Government."3 The power of taxation, being
an inherent power of Government, does not need to be explicitly
conferred by the Constitution.4

The following are the fundamental attributes of tax:

1. It is imposed by the State;

2. It is levied by the law-making (legislative) body of the

State.

3. It is an enforced contribution and not dependent on the

will of the person taxed because it is not contract but a positive
act of the Government;

4. It is payable in money;

1
City Government of Quezon City vs. Hon. Judge Ericta , G.R. No. L-
34915, June 24, 1983.
2
Commissioner of Internal Revenue vs. Solidbank Corporation, G.R. No.
148191, November 25, 2003, 416 SCRA 436, 457.
3
Commissioner of Internal Revenue vs. Eastern Telecommunications
Philippines, Inc., G.R. No. 163835, July 7, 2010.
4
Philtread Workers Union (PTWU) vs. Confesor, 336 Phil. 375, 380 (1997);
Union of Filipro Employees vs. Nestlé Philippines, Inc. , G.R. Nos. 88710-
13, December 19, 1990, 192 SCRA 396, 409; YSS Employees Union-
Philippine Transport and General Workers Organization vs. YSS
Laboratories, G.R. No. 155125, December 4, 2009.
 5. It is proportionate in character because taxes must be
based on the taxpayer’s ability to pay;

6. It is levied on person and property. It may also be

imposed on acts, transactions, rights or privileges.

7. It is levied for public purposes;

8. It is paid at regular periods or intervals;

9. It is personal to the taxpayer. A corporation’s tax

delinquency cannot be enforced against its stockholders. The
exceptions to this rule are: a) Stockholder may be liable for the
unpaid taxes of a dissolved corporation if it shows that the
corporate assets have passed into their hands;5 and b) When
stockholders have unpaid subscription to capital of the
corporation, they can be liable to the extent of the their unpaid
subscriptions.6

Requisites of a Valid Tax

Requisites of a valid tax are:

1. The person or property taxed should be within the

jurisdiction of the taxing authority;

2. The assessment and collection require notice and

opportunity for hearing to avoid abuses by tax authorities;

3. It should be for a public purpose;

4. The rule of taxation shall be uniform; and

5. The tax must not encroach on the inherent and

Constitutional limitations on the power of taxation.

Purposes of Taxation

1. Revenue or Fiscal. – The principal purpose of taxation

is to provide funds or property for the Government in order to
advance the general welfare and the protection of its citizens,
and thus, enable it to support its diverse activities;

2. Non-Revenue or Regulatory. – Taxation may also be

utilized for reasons of regulation or control. This is also called
5
Tan Tiong Bio vs. CIR, G.R. No. L-15775, April 23, 1962.
6
Aban, B., “Law of Basic Taxation in the Philippines,” National Bookstore, (2001).
“Sumptuary Purpose” of taxation. This includes the:

a) Imposition of tariffs on imported goods to

protect local industries;

b) Adoption of progressively higher tax

rates to decrease disparities in wealth and
income; and

c) Increase or decrease of taxes to avoid

inflation or ward off recession.

Effect of Incidental Benefit to Private Interest

The purposes of taxation need not be entirely public.

Although private individuals are directly benefited, the tax would
still be valid provided such benefit is only incidental. The test is
on the nature of the purpose for which the tax is expended, not
the immediate result of the expenditure, but on the ultimate
results. The appropriation of public money to construct a road on
a private land is not a public purpose.7

The Constitution has expressly adopted the

generally accepted principles of international law as part of
the law of the land. 8 Under international comity, a State
must accept the generally accepted tenets of international
law, among which are the principles of sovereign equality
among States and of their freedom from suit without their
consent. These tenets limit the power of a Government to
effectively and efficiently levy taxes on a sovereign State
and its instrumentalities. Under international law, property of a
foreign State may not be taxed by another State. The reasons for
this are:

i. Sovereign equality of States;

ii. When one State enters the territory of

another State, there is an implied understanding that
the former does not intend to denigrate its dignity by
placing itself under the jurisdiction of the other State;
and

iii. Immunity from suit of a State.

Non-Delegability of the Taxing Power

7
Pascual vs. Secretary of Public Works, supra.
8
Art. II, Sec. 2, Constitution.
 Along with police power and eminent domain, taxation
is an inherent power of sovereignty.9 It follows that it is also
legislative in character and a legislative prerogative.10 The
legislative taxing power includes the authority: i) to determine
the nature, object, extent, coverage and situs of the tax
imposition; ii) to grant tax exemptions or condonations;11 and iii) to
specify or provide for the administrative and judicial remedies
that either the Government or the taxpayers may avail of in
the proper implementation of the tax measure.

CONSTITUTIONAL LIMITATIONS

Taxation need not be clothed with any constitutional

authority for it to be exercised by a sovereign State.
Constitutional provisions are envisioned to regulate and
delineate the power emanating therefrom. In the
Constitution, these provisions may be classified into:

a) Direct; and

b) Indirect

Thus, the constitutional limitations are the restrictions

imposed by the Constitution. The constitution is not the source of
the taxing power of the State. It simply delineates and defines
this power to strike a balance between the power of the
Government and the freedom of the governed and to safeguard
the latter from possible abuse by the former.12

General or Indirect

The general or indirect constitutional (any other provision

that may also be pertinent, although not specifically relating
to taxation) limitations are:

i. Due process requirement;

ii. Freedom of speech and expression;

iii. Freedom of religion;

9
Luzon Stevedoring Co. vs. Court of Tax Appeals, supra.
10
National Power Corporation vs. Albay, supra.
11
Petro vs. Pililla, 198 SCRA 82.
12
Sababan, F., “Taxation Law Review,” Rex Bookstore, (2008).
 iv. No taking of private property without just
compensation;

v. Non-impairment of obligations of contract;

vi. Law-making process; and

vii. Presidential power to grant reprieves,

commutations and pardons, and remit fines and
forfeitures after conviction by final judgment.

Specific or Direct

The following are specific or direct constitutional

limitations:

i. Uniformity and equitability;13

ii. Progressive system taxation;14

iii. Non-imprisonment for non-payment of poll

tax;15

iv. Origin of revenue of tariff bills;16

v. Veto power of the President;17

vi. Delegated authority of the President to

impose tariff rates, import and export quotas, tonnage
and wharfage dues;18

vii. Tax exemption of charitable institutions,

churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries and all
lands, buildings and improvements actually, directly,
and exclusively used for religious, charitable or
educational purposes;19

13
Art. VI, Sec. 28, par. 1, Constitution.
14
Art. VI, Sec. 28, par. 1, Constitution.
15
Art. III, Sec. 20, Constitution.
16
Art. VI, Sec. 24, Constitution.
17
Art. VI, Sec. 27,par. 2, Constitution.
18
Art. VI, Sec. 28, par. 2, Constitution.
19
Art. VI, Sec. 28, par. 3, Constitution.
 viii. No law granting any tax exemption shall
be passed without the concurrence of a majority of all
the members of the Congress;20

ix. No public money or property shall be used

for religious purposes;21

x. All money collected on any tax levied for a

special purpose shall be treated as a special fund
and paid out for such purpose only; 22

xi. Supreme Court’s power to review judgments

or orders of lower courts;23

xii. Grant of authority to LGUs;24

xiii. Tax exemption granted to non-stock, non-

profit educational institutions.25

Mandatory Character of Constitutional Provision

In respect to the character of constitutional provisions,

the Supreme Court's decision in Marcelino vs. Cruz 26 may be
meaningful. The Court said: "the established rule is that
constitutional provisions are to be considered as mandatory
unless by express provision or by necessary implication, a
different intention is manifest." A directory provision is
commonly envisioned merely for feasibility or convenience
such that to have it enforced strictly may produce more harm
than by disregarding it.

In the case of statutory enactments, those dealing on

the characteristics of levy and compliance are generally
treated as mandatory and those that are envisioned purely for
administrative feasibility as directory.

Aspects of Taxation

20
Art. VI, Sec. 28, par. 4, Constitution.
21
Art. VI, Sec. 29, par. 2, Constitution.
22
Art. VI, Sec. 29, par. 3, Constitution.
23
Art. VIII, Sec. 5, par. 2[b], Constitution.
24
Art. X, Sec. 5, Constitution.
25
Art. XIV, Sec. 4[3], Constitution.
26
G.R. No. L-42428, March 18,1983, 121 SCRA 57.
 The rule on taxation comprises the following aspects
(also referred to as the phases, processes, stages of, or steps
in, taxation), viz.:

1. Levy. — It is the act of imposition by the

legislature such as enactment of the law. The term is
identified to embrace not only the mandate on when and
how the tax is imposed but also, whenever it may be proper,
the grant of tax exemptions, tax amnesties or tax
condonations. The latter (tax exemptions, etc.), like tax
impositions, are themselves subject to the limitations of
taxation.27

2. Assessment and Collection. — It is the act of

administration and implementation of the tax law by the
executive through its administrative agencies. The term
"assessment", which means notice and demand for payment
of a tax liability, should not be confused with "assessment"
relative to RPT, which refers to the listing and valuation of
taxable real property.

3. Payment. — It is the act of compliance by the taxpayer,

including such options, schemes or remedies as may be
legally open or available to him.

Classification of Tax Exemption

1. Express. – Exemption by provisions in the

Constitution, statutes, treaties, franchises or similar
legislative acts. Examples of statutory exemptions are:

(a) Sec. 30, Tax Code;

(b) Sec. 105, TCCP ;

(c) Sec. 234, LGC;

(d) Special laws, such as the Omnibus Investments

Code of 1987;28 Philippine Overseas Shipping Act; 29 Fertilizer
Industry Act;30 Mineral Resources Development Decree of

27
Commissioner vs. Botelbo Shipping Corporation, 20 SCRA 487; 51 Am. Jur.
509.
28
Executive Order 226.
29
Republic Act No. 1407.
30
Republic Act No. 3050.
1974;31 Cottage Industry Act; 32 and exemptions in "Housing
for Low Income Group";33 Executive Order (EO) No. 93; 34
those governed by international agreements; and those
covered by the non-impairment clause of the Constitution.

The Constitution does not prohibit the imposition of tax on

the property of Government agencies because nothing can
prevent Congress from imposing tax on instrumentalities or
agencies of the Government performing governmental
functions.35

Exemption from Real Property Tax of Religious, Charitable

and Educational Institutions

In Lung Center of the Philippines vs. Quezon City,36 as

reiterated in the subsequent case of Angeles University
Foundation vs. City of Angeles,37 the Supreme Court held that
“actual, direct and exclusive use of the property for charitable
institutions” means the direct, and immediate, and actual
application of the property itself to the purposes for which the
charitable institution is organized. “Exclusively” should be
construed as “solely”. It is not the use of the income from the real
property that is determinative of whether the property is used for
tax-exempt purposes.

2. Implied or by Omission. – There is no tax by

silence. Where the law levies a tax, so also must the tax
exemption be explicit in the law. While exemptions are not
presumed, the Government, unless otherwise expressed, is
deemed not subject to a law imposing taxes. 38 But there is no
prohibition against the Government taxing itself.39 There is
no tax exemption solely on the ground of equity, but equity can
be used as a basis for a statutory exemption. At times the law
authorizes the condonation of taxes on equitable
considerations. 40

31
Presidential Decree No. 463.
32
Republic Act No. 3128.
33
Presidential Decree No. 1205.
34
December 17, 1986.
35
MCIAA vs. Marcos, G.R. No. 120082, September 11, 1996.
36
G.R. No. 144104, June 29, 2004.
37
G.R. No. 189999 June 27, 2012.
38
SSS vs. Bacolod City, 115 SCRA 412.
39
Bisaya Land Transportation Co., Inc. vs. Collector of Internal Revenue, G.R.
No. L-11812, May 29, 1959, 105 Phil. 1338.
40
Secs. 276 and 277, Local Government Code.
 3. Contractual. – Contractual tax exemptions are
those concurred to by the taxing authority in agreements
lawfully entered into by them under enabling laws. In entering
into a contract, the Government sheds its cloak of authority
and relinquishes its governmental immunity. Contractual tax
exemptions covering matters that are not basically
Government in nature, such as those contained in
Government bonds or debentures may not be revoked
without impairing the obligations of contracts.41

In the following cases, the tax exemptions are

construed liberally in favor of the grantee, viz.:

i. When the law so provides for such liberal

construction;

ii. Exemptions from certain taxes granted

under special circumstances to special classes of
persons;

iii. Exemptions in favor of the Government, its

political subdivisions or instrumentalities; and

iv. Exemptions to traditional exemptees,

such as those in favor of religious and charitable
institutions.42

In upholding the tax exemption of the National Power

Corporation, the Supreme Court, in Maceda vs. Macaraig, 43
pronounced that strict interpretation does not apply in the
case of exemptions in favor of a Government political
subdivision or instrumentality.44 The Court said:

“The basis for applying the rule of strict construction

to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the
affirmative or levying provisions of tax statutes, is to
minimize differential treatment and foster impartiality,
fairness, and equality of treatment among tax payers.

“The reason for the rule does not apply in the case
of exemptions running to the benefit of the Government
itself or its agencies. In such case the practical effect of an
exemption is merely to reduce the amount of money that

41
Casanovas vs. Hord, 8 Phil. 125.
42
Cooley, supra.
43
Supra.
44
Cooley, supra.
 has to be handled by Government in the course of its
operations. For these reasons, provisions granting
exemptions to Government agencies may be construed
liberally, in favor of non tax liability of such agencies.”

In addition, in the case of Crispin Penid, et al. vs.

Cesar C. Virata,45 the Supreme Court decreedd that tax
statutes proposing rewards should be liberally construed in
favor of awardees.

Tax Amnesty

“Tax amnesty” partakes of an absolute forgiveness or

waiver by the Government of its right to collect what otherwise
would be due it. It is accorded principally to tax evaders who
wish to concede and are willing to reform giving them a chance
to do so and become a part of the new society with a clean
slate.46 Like tax exemption, tax amnesty is never favored nor
presumed in law. It is allowed by statute. The terms of the
amnesty must also be construed against the taxpayer and
liberally in favor of the Government.

Escape from Taxation

Tax avoidance and tax evasion are the two most com-
mon ways used by taxpayers in escaping from taxation.
“Tax avoidance” is the tax saving device within the means
sanctioned by law. It should be used by the taxpayer in good
faith and at arms length. “Tax evasion”, on the other hand, is
a scheme used outside of those lawful means and, when
availed of, it usually subjects the taxpayer to additional
civil or criminal liabilities. To borrow a phrase: "A tax evader
breaks the law, the tax avoider sidesteps it." 47

The four basic forms of escape from taxation are:

i. Shifting. – It is the transfer of the burden of a

tax by the original payer to someone else. It should
be borne in mind that what is shifted is not the
payment of the tax but the burden of the tax;

ii. Evasion. – It is the use by the taxpayer of

illegal or fraudulent means to defeat or lessen the
45
G.R. No. L-44204, March 25, 1983.
46
Republic vs. Intermediate Appellate Court, supra.
47
Gilbert, G., Laforteza, C., and Uriarte, L., “International Tax Evasion and
Avoidance: Transanational Corporation and States,” 66 Philippine Law Journal,
1991-1992.
 payment of a tax. It is also known as “tax dodging”
and is punishable by law. It is a term that implies
fraud through the use of pretenses or forbidden
devices to lessen or defeat taxes.48 For example,
deliberate failure to report a taxable income or
property or deliberate reduction of income that has
been received;

iii. Exemption. – It is the grant of tax immunity

to persons or corporations. It is an immunity or
privilege. It is freedom from a financial burden to
which others are subjected;

iv. Avoidance. – It is the manipulation by the

taxpayer of legally permissible alternative tax rates or
methods to avoid or reduce tax liability. It is called
“tax minimization” and is not punishable by law. In
Delphers Traders Corp. vs. Intermediate Appellate
Court,49 the Supreme Court maintained the estate
planning scheme resorted to by the Pacheco family in
converting their property to shares of stock in a
corporation which they themselves owned and
controlled. By virtue of the deed of exchange, the
Pachecho co-owners saved on inheritance taxes. The
Supreme Court said the records do not indicate
anything wrong and objectionable about this estate
planning scheme resorted to. The legal right of the
taxpayer to decrease the amount of what otherwise
could be his taxes or altogether avoid them by means
which the law permits cannot be doubted.

With the exception of tax evasion, all are legal means of

escape.

Doctrine of Operative Fact

The “doctrine of operative fact” allows taxpayer to rely

upon a ruling issued by the Commissioner from the time the
ruling is promulgated up to its reversal by the Commissioner or
by the court. The reversal is not given retroactive effect. For this
doctrine to apply, there must be a ruling issued by the
Commissioner and relied upon by the taxpayer in good faith.

48
Yutivo vs. Court of Tax Appeals, G.R. No. L-13203, January 28, 1961, 1 SCRA
160.
49
157 SCRA 349.
 MODULE 2

Definition of Terms

Applied Research shall refer to an original investigation

undertaken in order to acquire new knowledge. It is directed
primarily towards a specific practical aim or objective.50

Bank means every banking institution. A bank may either

be a commercial bank, a thrift bank, a development bank, a rural
bank or specialized Government bank.51

Basic Research shall refer to an experimental or

theoretical work undertaken primarily to acquire new knowledge
of the underlying foundations of phenomena and observable
facts without any particular application or use in view.52

Capital Asset shall refer to all real properties held by a

taxpayer, whether or not connected with his trade or business,
and which are not included among the real properties considered
as ordinary assets.53

50
Frascati Manual, “Guidelines for Collecting and Reporting Data on Research
and Experimental Development,” OECD, 2015.
51
Sec. 22 (V), Tax Code.
52
Frascati Manual, supra.
53
Sec. 2(a), Revenue Regulations No. 7-2003.
 Capital Gains Tax is a tax imposed on the gains
supposed to have been realized by the seller from the sale,
exchange, or other disposition of capital assets located in the
Philippines, including pacto de retro sales and other forms of
conditional sale.

Character Building and Youth and Sports

Development (or Athletic) Purposes shall refer to and include
conducting basic and applied research on youth development,
initiating and establishing youth organizations to promote and
develop youth activities, including the establishment of summer
camps or centers for leadership training, conducting a program
on physical fitness and amateur sports centers and conducting
training programs for the development of youth and athletes for
national and international competitions.54

Charitable Activity shall refer to extending relief to the

poor, distressed and underprivileged and shall include fighting
against juvenile delinquency and community deterioration.55

Compensation Income means all remuneration for

services performed by an employer-employee relationship,
unless specifically excluded by the Tax Code. The name by
which the remuneration for services is designated is immaterial.56

Compensation Income Earners shall include individuals

whose source of income is purely derived from an employer-
57
employee relationship.

Control shall mean ownership of stocks in a corporation

after the transfer of property possessing at least 51% of the total
voting power of all classes of stocks entitled to vote; provided,
that the collected and not the individual ownership for all classes
of stocks entitled to vote of the transferor or transferors shall be
58
used in determining the presence of control.

Corporation shall include partnerships, no matter how

created or organized, joint-stock companies, joint accounts
(cuentas en participacion), association, or insurance companies,
but does not include General Professional Partnerships (GPP)
and a joint venture or consortium formed for the purpose of
54
Sec. 1 (h), Revenue Regulations No. 13-98.
55
Sec. 1 (f), Revenue Regulations No. 13-98.
56
Sec. 2(a), Revenue Regulations No. 8-2018..
57
Sec. 2 (b), Revenue Regulations No. 8-2018.
58
Sec. 2 (J), Revenue Regulations No. 5-2021.
undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with
the Government.59

Cultural Activity shall refer to and include undertaking

and/or assisting in research activities on all aspects of history,
social system, customs and traditional developing, enriching and
preserving Filipino arts and culture, developing and promoting
the visual and performing arts and participating in vigorious
implementation of bilingual policy through translation and wider
use of technical, scientific and creative publications,
development of an adaptive technical dictionary and use of
Filipino as the medium of instruction.

Dealer in Securities means a merchant of stocks or

securities, whether an individual, partnership or corporation, with
an established place of business, regularly engaged in the
purchase of securities and the resale thereof to customers; that
is, one who, as a merchant, buys securities and re-sells them to
customers with a view to the gains and profits that may be
derived therefrom.60

De Minimis Benefits shall, in general, be limited to

facilities or privileges, furnished or offered by an employer to his
employees, provided such facilities or privileges are of relatively
small value and are offered or furnished by the employer merely
as a means of promoting the health, goodwill, contentment, or
efficiency of his employees.

Deposit Substitutes shall mean an alternative form of

obtaining funds from the public (the term 'public' means
borrowing from 20 or more individual or corporate lenders at any
one time) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the
borrowers own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These
instruments may include, but need not be limited to bankers'
acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and
between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation
and similar instruments with recourse.61

59
Sec. 22 (B), Tax Code.
60
Sec. 22 (U), Tax Code.
61
Sec. 22 (Y), Tax Code.
 Depreciation is the gradual diminution in the useful value
of tangible property resulting from wear and tear and normal
obsolescence.62 The term is also applied to amortization of the
value of intangible assets, the use of which in the trade or
business is definitely limited in duration.

Domestic when applied to a corporation, means created

or organized in the Philippines or under its laws.63

Education Activity shall refer to and include the granting

of scholarships to deserving students and professional chairs for
the enhancement of professional courses, and instructing or
training of individuals either through formal and informal
methods, viz;

(i) “Formal Method of Intruction” refers to the

institutionalized, chronologicalyy graded and
hierarchically structured educational system at all
levels of education;

(ii) “Non-Formal Method of Instruciton” refers

to any deliberately organized, systematic educational
activity carried on outside the framework of the formal
system to provide selected types of learning to
particular subgroups of the population, particularly
out-of-school youths and adults, for the purpose of
communicating ideas, developing skills, changing
attitudes or modifying behavior or improve their
character and to provide them with tools necessary
for the achievement of a higher standard of living. A
certification from the Technical Education and Skills
Development Authority (TESDA) is required for the
accreditation of the non-formal educational program
which is implemented or carried out by a non-stock,
non-profit corporation, organization or a Non-
Government Organization (NGO).

Employee is an individual performing services under an

employer-employee relationship. It covers all employees,
including officers and employees, whether elected or appointed,
of the Government, or any political subdivision thereof or any
64
agency or instrumentality.

62
Sec. 105, Revenue Regulations No. 2.
63
Sec. 22 (C), Tax Code.
64
Sec. 2 (c), Revenue Regulations No. 8-2018.
 Employer refers to any person for whom an individual
performs or performed any service, of whatever nature, under an
employer-employee relationship. It is not necessary that the
services be continuing at the time the wages are paid in order
65
that the status of employer may exist.

Employer-Employee Relationship exists when a person

for whom services were performed (employer) has the right to
control and direct an individual who performs the services
(employee), not only as to the result of the work to be
accomplished but also as to the details, methods and means by
66
which it is accomplished.

Fiduciary means a guardian, trustee, executor,

administrator, receiver, conservator or any person acting in any
fiduciary capacity for any person.67

Fiscal Year means an accounting period of 12 months

ending on the last day of any month other than December.68

Foreign-Sourced Dividends are dividends received from

Non-Resident Foreign Corporation (NRFC).69

Fringe Benefits means any good, service or other

benefits furnished or granted in cash or in kind other than the
basic compensation, by an employer to an individual employee
(except rank-and-file employee) such as, but not limited to the
following:

i. Housing;

ii. Expense account;

iii. Vehicle of any kind;

iv. Household personnel, such as maid, driver

and others;

65
Sec. 2 (d), Revenue Regulations No. 8-2018.
66
Sec. 2 (e), Revenue Regulations No. 8-2018.
67
Sec. 22 (J), Tax Code.
68
Sec. 22 (Q), Tax Code.
69
Sec. 2 (L), Revenue Regulations No. 5-2021.
 v. Interest on loan at less than market rate to
the extent of the difference between the market rate
and actual rate granted;

vi. Membership fees, dues and other expenses

borne by the employer for the employee in social and
athletic clubs or other similar organizations;

vii. Expenses for foreign travel;

viii. Holiday and vacation expenses;

ix. Education assistance to the employee or his

dependents; and

x. Life or health insurance and other non-life

insurance premiums or similar amounts in excess of
70
what the law allows.

General Professional Partnerships (GPP) are

partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.71

Gross Receipts refers to the total amount of money or its

equivalent representing the contract price, compensation, service
fee, rental or royalty, including the amount charged for materials
supplied with the services, and deposits and advance payments
actually or constructively received during the taxable period for
the services performed or to be performed for another person,
72
except returnable security deposits.

Gross Sales refers to the total sales transaction net of

VAT, if applicable, reported during the period, without any other
deduction. However, gross sales subject to the 8% income tax
rate option shall be net of the following deductions:

i. Sales returns and allowances for which a

proper credit or refund was made during the month or

70
Sec. 2 (f), Revenue Regulations No. 8-2018.
71
Sec. 22 (B), Tax Code.
72
Sec. 2 (g), Revenue Regulations No. 8-2018.
 quarter to the buyer for sales previously recorded as
taxable sales; and

ii. Discount determined and granted at the time

of sale, which are expressly indicated in the invoice,
the amount thereof forming part of the gross sales
duly recorded in the books of accounts. Sales
discount indicated in the invoice at the time of sale,
the grant of which is not dependent upon the
happening of a future event, may be excluded from
the gross sales within the same month/quarter it was
73
given.

Health Purposes shall refer to include the pursuit of any

of the following:

(i) Control, prevention and treatment of

communicable and degenerative diseases, accidents
and other health disabilities;

(ii) Family planning program designed to

indicate knowledge and understanding of population,
human growth and development of family life;

(iii) Environment sanitation, such as, public

sewerage system and sanitary toilets; and

(iv) Nutrition, which aims to reduce the

prevalance of malnutrition and increase the energy
and proteins benefits.74

Levy refers to the seizure of real properties and interest in

or rights to such properties for the satisfaction of taxes due from
the delinquent taxpayer. Real property may be levied upon
before, simultaneously, or after the distraint of personal property
belonging to the delinquent taxpayer; and the remedy by distraint
and levy may be repeated if necessary until the full amount,
including all expenses, is collected.75

Long-Term Deposit or Investment Certificate refers to

certificate of time deposit or investment in the form of savings,

73
Sec. 2 (h), Revenue Regulations No. 8-2018.
74
Sec. 1 (m), Revenue Regulations No. 13-98.
75
Sec. 217, Tax Code.
common or individual trust funds, deposit substitutes, investment
management accounts and other investments with a maturity
period of not less than 5 years, the form of which shall be
prescribed by the BSP and issued by banks only to individuals in
denominations of P10,000.00 and other denominations
prescribed by the BSP.76

Minimum Wage Earner (MWE) refers to a worker in the

private sector who is paid with a Statutory Minimum Wage
(SMW) rates, or to an employee in the public sector with
compensation income of not more than the SMW rates in the
non-agricultural sector where the worker/employee is assigned.
77
Such SMW rates are exempted from income tax.

Mixed Income Earner refers to an individual earning

compensation income from employment, and income from
business, practice of profession and/or other sources aside from
78
employment.

Mutual Fund Company shall mean an open-end and

close-end investment company.79

Net Capital Gains means the excess of the gains from

sales or exchanges of capital assets over the losses from such
sales or exchanges.80

Non-Bank Financial Intermediary means a financial

intermediary authorized by the BSP to perform quasi-banking
activities.81

Non-Government Organization (NGO)82refers to a non-

stock, non-profit domestic corporation or organization organized
and operated exclusively for scientific, research, educational,
character-building and youth and sports development, health,
social welfare, cultural or charitable purposes, or a combination
thereof, no part of the net income of which inures to the benefit of
any private individual.

Non-Profit as used in the definition of Proprietary

76
Sec. 22 (FF), Tax Code.
77
Sec. 2 (i), Revenue Regulations No. 8-2018.
78
Sec. 2 (j), Revenue Regulations No. 8-2018.
79
Sec. 22 (BB), Tax Code.
80
Sec 2(o), Revenue Regulations 6-2008.
81
Sec. 22 (W), Tax Code.
82
Sec. 34 (H)(2)(c), Tax Code.
Educational Institutions and Proprietary Hospitals, means that no
net income or asset accrues to or benefits any member or
specific person, with all the net income or assets devoted to the
institution’s purposes and all its activities conducted not for
profit.83

Non-Resident Alien (NRA) means an individual whose

residence is not within the Philippines and who is not a citizen
thereof.84

Non-Resident Alien Engaged in Trade or Business

(NRAETB) refers to a non-resident alien who shall come to the
Philippines and stay for an aggregate period of more than 180
85
days during any calendar year.

Non-Resident Alien Not Engaged in Trade or Business

(NRANETB) refers to a non-resident alien who shall come to the
Philippines and stay for an aggregate period of 180 days or less
86
during any calendar year.

Non-Resident Citizen (NRC)87 means;

i. A citizen of the Philippines who establishes to

the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to
reside therein;

ii. A citizen of the Philippines who leaves the

Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a
permanent basis;

iii. A citizen of the Philippines who works and

derives income from abroad and whose employment
thereat requires him to be physically present abroad
most of the time during the taxable year;

iv. A citizen who has been previously

considered as NRC and who arrives in the
Philippines at any time during the taxable year to
reside permanently in the Philippines shall likewise
83
Sec. 2 (E), Revenue Regulations No. 5-2021.
84
Sec. 22 (G), Tax Code.
85
Sec. 2 (k), Revenue Regulations No. 8-2018.
86
Sec. 2 (l), Revenue Regulations No. 8-2018.
87
Sec. 22 (E), Tax Code.
 be treated as a NRC for the taxable year in which he
arrives in the Philippines with respect to his income
derived from sources abroad until the date of his
arrival in the Philippines;

v. The taxpayer shall submit proof to the

Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return
to and reside in the Philippines as the case may be.

Non-Resident Foreign Corporation (NRFC) applies to a

foreign corporation not engaged in trade or business within the
Philippines.88

Non-Stock, Non-profit Corporation or Organization 89

shall refer to a corporation or association/organization created or
organized under Philippine laws exclusively for one or more of
the following purposes:

(i) Religious;

(ii) Charitable;

(iii) Scientific;

(iv) Athletic;

(v) Cultural;

(vi) Rehabilitation of veterans; and

(vii) Social welfare

Optional Standard Deduction is the standard deduction

in an amount not exceeding 40% of the gross income of
individuals, other than nonresident aliens, or corporations in lieu
of the deductions enumerated under Tax Code.

Ordinary Asset shall refer to all real properties, namely:

i. Stock in trade of a taxpayer or other real

property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of
the taxable year; or

88
Sec. 22 (I), Tax Code.
89
Revenue Regulations No. 2-93.
 ii. Real property held by the taxpayer primarily
for sale to customers in the ordinary course of his
trade or business; or

iii. Real property used in trade or business (i.e.,

buildings and/or improvements) of a character which
is subject to the allowance for depreciation; or

iv. Real property used in trade or business of

the taxpayer.

Real properties acquired by banks through foreclosure

sales are considered as ordinary assets.90

Ordinary Income includes any gain from the sale or

exchange of property which is not a capital asset or property.
Any gain from the sale or exchange of property which is treated
or considered as “ordinary income” shall be treated as gain from
the sale or exchange of property which is not a capital asset.91

Ordinary Loss includes any loss from the sale or

exchange of property which is not a capital asset. Any loss from
the sale or exchange of property which is treated or considered
as “ordinary loss” shall be treated as loss from the sale or
exchange of property which is not a capital asset.92

Passive Investment Income is an income in which the

taxpayer merely waits for the amount to come in. It consists of
interest, dividends and royalties and rental income.

Professional is a person formally certified by a

professional body belonging to a specific profession by virtue of
having completed a required examination or course of studies
and/or practice, whose competence can usually be measured
against an established set of standards. It includes but is not
limited to doctors, lawyers, engineers, architects, CPAs,
professional entertainers, artists, professional athletes, directors,
producers, insurance agents, insurance adjusters, management
and technical consultants, bookkeeping agents, and other
93
recipients of professional, promotional and talent fees.

90
Sec. 2(b), Revenue Regulations No. 7-2003.
91
Sec. 22 (Z), Tax Code.
92
Sec. 22 (Z), Tax Code.
93
Sec. 2 (n), Revenue Regulations No. 8-2018.
 Professional Income refers to the fees received by a
professional from the practice of his profession, provided that
there is no employer-employee relationship between him and his
clients.

Quasi-Banking Activities means borrowing funds from

20 or more personal or corporate lenders at any one time,
through the issuance, endorsement, or acceptance of debt
instruments of any kind other than deposits for the borrower's
own account, or through the issuance of certificates of
assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of relending or purchasing
receivables and other similar obligations.94

Rank-and-File Employees shall mean all employees who

are holding neither managerial nor supervisory position.95

Real Estate Dealer shall refer to any person engaged in

the business of buying and selling or exchanging real properties
on his own account as a principal and holding himself out as a
full or part-time dealer in real estate.96

Real Estate Developer shall refer to any person engaged

in the business of developing real properties into subdivisions, or
building houses on subdivided lots, or constructing residential or
commercial units, townhouses and other similar units for his own
account and offering them for sale or lease.97

Real Estate Lessor refers to any person engaged in the

business of leasing or renting real properties on his own account
as a principal and holding himself out as a lessor of real
properties being rented out or offered for rent.98

Regional or Area Headquarters (RHQ) shall mean a

branch established in the Philippines by multinational companies
and which headquarters do not earn or derive income from the
Philippines and which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries, or branches in
the Asia-Pacific Region and other foreign markets.99

94
Sec. 22 (X), Tax Code.
95
Sec. 22 (AA), Tax Code.
96
Sec. 2(d), Revenue Regulations No. 7-2003.
97
Sec. 2(e), Revenue Regulations No. 7-2003.
98
Sec. 2(f), Revenue Regulations No. 7-2003.
99
Sec. 22 (DD), Tax Code.
 Regional Operating Headquarters (ROHQ) shall mean a
branch established in the Philippines by multinational companies
which are engaged in any of the following services: general
administration and planning; business planning and coordination;
sourcing and procurement of raw materials and components;
corporate finance advisory services; marketing control and sales
promotion; training and personnel management; logistic services;
research and development services and product development;
technical support and maintenance; data processing and
communications; and business development.100

Rehabilitation of Veterans shall include services

extended to veterans and members of their families because of
financial difficulties and attendant problems; and services
extended to disabled veterans towards productive life.

Religious Purpose shall refer to the promotion,

propagation and accomplishment of any form of religion, creed or
religious belief recognized by the Government.

Reorganization shall mean any of the following instances:

a. A corporation, which is a party to a merger

or consolidation, exchanges property solely for stock
in a corporation, which is a party to the merger or
consolidation; or

b. The acquisition by one corporation, in

exchange solely for all or a part of its voting stock, or
in exchange solely for all or part of the voting stock of
a corporation which is in control of the acquiring
corporation, of stock of another corporation if,
immediately after the acquisition, the acquiring
corporation has control of such other corporation,
whether or not such acquiring corporation had control
immediately before the acquisition; or

c. The acquisition by one corporation, in

exchange solely for all or a part of its voting stock or
in exchange solely for all or part of the voting stock of
a corporation which is in control of the acquiring
corporation, of substantially all of the properties of
another corporation. In determining whether the
exchange is solely for stock, the assumption by the
acquiring corporation of a liability of the others shall
be disregarded; or

100
Sec. 22 (EE), Tax Code.
 d. A recapitalization which shall mean an
arrangement whereby the stock and bonds of a
corporation are readjusted as to amount, income, or
priority or an agreement fo all stockholders and
creditors to change an increase or decrease the
capitalization or debts of the corporation or both; or

e. A reincorporation, which shall mean the

formation of the same corporate business with the
same assets and the same stockholders surviving
under a new charter.101

Resident Alien (RA) means an individual whose

residence is within the Philippines and who is not a citizen
thereof.102

Resident Foreign Corporation (RFC) applies to a foreign

corporation engaged in trade or business within the
Philippines.103

Scientific and Research Purpose shall refer to

undertaking or assisting in pure or basic, applied and scientific
research in the field of agriculture, forestry, fisheries, industry,
engineering, energy development, food and nutrition, medicine,
environment and biological, physical and natural sciences for the
public interest.104

Securities shall refer to shares of stock in a corporation

and rights to subscribe for or to receive such shares. It includes
bonds, debentures, notes or certificates, or other evidence or
indebtedness, issued by any corporation, including those issued
by a Government or political subdivision thereof, with interest
coupons or in registered form.105

Self-Employed is a sole proprietor or an independent

contractor who reports income earned from self-employment.
S/he controls who s/he works for, how the work is done and
when it is done. It includes those hired under a contract of
service or job order, and professionals whose income is derived

101
Sec. 2 (I), Revenue Regulations No. 5-2021.
102
Sec. 22 (F), Tax Code.
103
Sec. 22 (H), Tax Code.
104
Sec. 1(g), Revenue Regulations No. 13-98.
105
Sec. 22 (T), Tax Code.
purely from the practice of profession and not under an
106
employer-employee relationship.

Shareholder shall include holders of a share/s of stock,

warrant/s and/or option/s to purchase shares of stock of a
corporation, as well as a holder of a unit of participation in a
partnership (except GPP) in a joint stock company, a joint
account, a taxable joint venture, a member of an association,
recreation or amusement club and a holder of a mutual fund
certificate, a member in an association, joint-stock company, or
insurance company.107

Shares of Stock shall include shares of stock of a

corporation, warrants and/or options to purchase shares of stock,
as well as units of participation in a partnership (except GPP),
joint stock companies, joint accounts, joint ventures taxable as
corporations, associations and recreation or amusement clubs,
and mutual fund certificates.108

Social Welfare Purposes shall refer to include:

(i) Undertaking and/or assisting in the

amelioration of the living conditions of distressed
citizens particularly those who are handicapped by
reasons of poverty, youth, physical and mental
disability illness, old age, and natural disasters,
including assistance to cultural minorities;

(ii) Pusuing a program for the protection and

development of children and youth, such as providing
sevices for drop-outs, pre-school children of low-
income working mothers, and physically handicapped
children;

(iii) Providing for the rehabilitation of the youth

and disabled adults, released prisoners, drug addicts,
alcoholics, mentally retarded, hansenites and similar
cases; and

(iv) Providing for services to squatter families

and to displaced workers.109

106
Sec. 2 (n), Revenue Regulations No. 8-2018.
107
Sec. 22 (M), Tax Code.
108
Sec. 22 (L), Tax Code.
109
Sec. 1(l), Revenue Regulations No. 13-98.
 Stock Classified as Capital Asset means all stocks and
securities held by taxpayers other than dealers in securities.110

Taxable Income refers to the pertinent items of gross

111
income less deductions authorized for such types of income.

Taxable Year means the calendar year, or the fiscal year

ending during such calendar year, upon the basis of which the
net income is computed.112

Tax Lien is a legal claim on property, real or personal,

established by law as a security in default of the payment of
taxes.113

Unrelated Trade, Business, or Other Activity of

Proprietary Educational Institution and Hospitals means any
trade, business, or other activity, the conduct of which is not
substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function.114

VAT Threshold refers to the ceiling fixed by law to

determine VAT registrable taxpayers. The VAT threshold is
currently set at P3,000,000.00 and the same shall be used to
determine the income tax liability of self-employed individuals
115
and/or professionals.

Withholding Agent means any person required to deduct

and withhold any tax under the provisions of Sec. 57116 of the Tax
Code.117

MODULE 3
110
Sec. 2(a), Revenue Regulations No. 6-2008.
111
Sec. 2 (o), Revenue Regulations No. 8-2018.
112
Sec. 22 (P), Tax Code.
113
Hongkong and Shanghai Bangking Corp. vs. Rafferty, G.R. No. 13188,
November 15, 1918, 39 Phil. 105, 41 Am. Jur. 881.
114
Sec. 2 (K), Revenue Regulations No. 5-2021.
115
Sec. 2 (p), Revenue Regulations No. 8-2018.
116
Withholding of Tax at Source.
117
Sec. 22 (K), Tax Code.
A. Pre-Spanish Colonization

Long before the arrival of the Spaniards, ancient Filipinos

were living in scattered barangays that were ruled by different
chieftains. Although, they were living separately, Filipinos were
related in many ways, like their religion, mode of dressing,
houses system of Government, marriage practices and economic
activities. They were sophisticated and civilized community of
people who enjoyed a distinct culture that differentiates them
from other race.

The social classes were divided into Nobles, Freemen and

Slaves. The nobles were composed of rulers and their families,
who occupied the highest class. They were usually referred as
Gat, Lakan, Raja or Datu. The freemen were the working-class.
The slaves were divided into two (2), namely; Aliping
namamahay and Aliping sagigilid.118 The former were not full-
pledged slave because they had their own respective families
and their own houses. They only helped their masters during
planting and harvesting period. The latter were the real slaves
because they were homeless, forbidden to form their own
families. They were obliged to stay in their master’s dwelling and
they could be used as payment for debt.

The Government during this period was called

“Barangay”.119 It was headed by a ruler called “Datu” or “Raja”.
There was no national Government. The functions of the ruler
were to execute laws, maintained peace and order, provided
protection to his subjects and acted as a judge during trial.

Although primitive, ancient Filipinos commenced the

practice of paying taxes. The object of paying taxes was for the
protection they received from their ruler. The collected tax was
called “buwis”. The chieftain’s family members were enjoying
exemption from paying taxes. Non-payment of taxes was already
punishable during this period.

B. Spanish Occupation

118
Scott, W., “Filipino Class Structure in the Sixteenth Century,” Philippine
Studies, Vol. 28, No. 2, (1980).
119
Patanñe, E., “The Philippines in thc 6th to the 16th Centuries,” Metro Manila:
LSA Press, (1996).
 The Philippines was accidentally discovered by
coincidence by the European powers in their endless exploration
for a route to the Indies where they imported spices.

On March 17, 1521, Ferdinand Magellan,120 a Portuguese

naval captain under the service of Spain, landed in the small
island of Homonhon, Samar in the southern Philippines to look
for food and water. Due to adversities in the unfamiliar and
unnavigated sea, and mutiny by his sailors, Magellan had only
three (3) ships (out of 5) left when he landed in the Philippines.
Magellan befriended the Sultan of Cebu and succeeded in
Christianizing the natives.

Permanent Spanish settlement was established in 1565

when Miguel López de Legazpi, the first royal governor,121 arrived
in Cebu from New Spain (Mexico). He conferred the islands its
present name in honor of King Philip II of Spain. Six (6) years
later while moving north, he defeated a local Muslim ruler, Rajah
Sulayman. Legazpi's conquest of Maynilad, now called Manila,
in 1571 extended the area under Spanish control. He established
the capital at Manila, a location that presented the excellent
harbor of Manila Bay and proximity to the ample food supplies of
the Central Luzon rice lands. Manila continued the center of
Spanish civil, military, religious, and commercial activity in the
islands.

Spain had three (3) objectives in its policy toward the

Philippines, its only colony in Asia, namely: 1) to acquire a share
in the spice trade; 2) to develop contacts with China and Japan
in order to further Christian missionary efforts in Asia; and 3) to
convert the Filipinos to Christianity. Except for Islam, which
predominated Mindanao, the conversion of Filipinos to
Christianity was facilitated by the absence of other organized
religions. The source of revenue enjoyed by the Spanish
Government in the Philippines during the three hundred (300)
years of occupation were: 1) Manila-Acapulco Galleon Trade; 2)
Polo y Sérvicio; 3) Bandala; 4) Encomienda System; and 5)
Tribute.

The Manila-Acapulco Galleon Trade was the main source

of income for the colony during its early years. The Galleon
Trade brought silver from Nueva Castilla and silk from China by

120
Bertrand, J., “Philippine History: The Early Spanish Period, Ethnicity,
Regionalism, and Language,” Amazon Asia-Pacific Holdings Private Limited,
(2016).
121
Rodriguez, E., “The Contribution of the Basque Men to the Philippines,”
Congreso de Estudios Vascos, (2003).
way of Manila.122 The Polo y Sérvicio was the “forced labor” for
forty (40) days of men ranging from 16 to 60 years of age who
were obligated to give personal services to community projects.
One could be exempted from the polo y sérvicio by paying a fee
called “falla”. Bandala was one of the taxes collected from the
native Filipinos.123 It came from the Tagalog word “mandala”,
which is a round stock of rice stalks to be threshed. Encomienda
were large tracks of land given to a person as reward for a
meritorious act. The encomenderos were given full authority to
manage the encomienda by collecting tribute from the
inhabitants. The tribute was the residence tax during the Spanish
times which may be paid in cash or kind, partly or wholly.

The Spanish revenue system in the Philippines had shown

to be tedious, conflicting and inconsistent brought about by the
unawareness and ignorance of the Spanish home Government
on the conditions which existed in the Philippines. During the
Spanish occupation, several inaccurate tax decrees were
regularly issued and their application was not properly tailored to
suit to the character of the people and of their economic life. The
methods and the spirit in which these laws were administered
and implemented during that time was nothing but a
manifestation of Spanish abuse of power.

The Government officials tasked with revenue collection

during the Spanish occupation frequently commuted the payment
of taxes or reduced the amount to be paid in consideration of
payments to themselves. Many times, these collections did not
always find their way into the public treasury. And this was
applied with greater force to the local, than to the central,
Government, although true of both.

It seems that concept of “public office is a public trust” was

not usually understood as official conduct of Spanish officials in
the Philippines. Instead, public money was like holy water,
something to which everybody helped himself. There are
extenuations that a public officer was entitled to certain “caidas”,
or “droppings,” frequently called remunerations of office, which
were not permitted by law but sanctioned by custom. Some of
these abhorring circumstances resulted from from the general
attitude of the Spanish toward the natives. Natives were
considered as a conquered people, a bit higher than a slave, and
122
Yuste Lopez, C., “El Comercio de la Nueva España con Filipinas, 1590-1785,”
Mexico, D.F.: INAH. (1984); Schurtz, W., “The Manila Galleon,” New York: E. P.
Dutton, (1939).
123
Pietschmann, H., “El Comercio de Repartimento de 10s Alcaldes Mayores y
Corregidores en La Region de Puebla-Tlaxcala en el Siglo XVIII,” Stuttgart Franx
Stenier Verlag, (2000).
were compelled to pay tribute or taxes to augment the royal
exchequer and the officers who accomplished the conquest and
the occupation. Many old-fashioned ideas regarding taxation
permeated the system of Government and continued to exist in
the 20th century.

The basis of the revenue system during the Spanish

occupation was the accountability of the native chieftains, also
called the “cabézas de Barangay” (cabéza), for the taxes levied
against the people of their areas. Although Spain recognized the
most expound means for defining how much she would require
the cabéza to deliver to the treasury, Spain never conducted an
audit into how much more any cabéza actually collected from the
natives. The earlier Spanish laws acknowledged certain
revenues as belonging to the cabéza and obliged that he urged
the natives under his control and jurisdiction to render additional
tribute to Spain.124 The cabéza, even if there were no provision of
the tax law for the remuneration of his services, would claim
revenues from the people by virtue of his position as cabéza. In
several instances, these officers went so far as to fix the rates of
the taxes collected which should go to the governors, to the
alcaldes and even to the administrator of the treasury. This illegal
practice was natural at that time and the Government willingly
accepted the practice without reservation.

During emergencies, authorities used the tribute to finance

local defense expenses. Alcaldes and corregidores should have
been theoretically able to liquidate the net sum of the tributes,
which added up to a significant amount. However, this was not
the practice. It was used for personal gain. A practice that
spurred innumerable court cases.125

It should be noted that Government officials were usually

appointed by favor. They had nominal salaries, which were often
small, particularly those connected with the revenue system. The
native Filipinos, for the most part, knew nothing of their rights,
much less, ignorant of the law, giving the revenue officials the
opportunities for extortion and corruption.

Moreover, the Spanish Government in the Philippines had

no compilation of the decrees, royal orders and policies relating
124
Alonso, L., “Financing the Empire: The Nature of the Tax System in the
Philippines, 1565-1804,” Philippine Studies, Vol. 51, No. 1 (2003).
125
Alonso Alvarez, L., “Costs and Benefits of the Empire in the Philippine Islands
Under the Spanish Dominion,” 16th to 18th Century, Cuaderno de Historia, Manila,
Insituto Cervantes, (1998a); Alonso Alvarez, L., “La Eficiencia del Imperio en Las
Filipinas Coloniales,” 1698- 1820, Investigaciùn Econùmica: Revista de la
Facultad de Economia de la Universidad Autonomia de Mèxico, (1998b).
to taxation until in the year 1867. Even during this period, laws
were published, usually by posting in public buildings and in
Spanish, a language foreign to the natives and not understood
by the Filipinos. Tax laws and regulations were scattered and
grouped with other laws making it difficult to verify the facts in
regard to the provisions of the revenue law.

During the 17th and 18th centuries, the Contador de'

Resultas served as the Chief Royal Accountant whose functions
were similar to the present Commissioner. He was the Chief
Arbitrator whose decisions on financial matters were final,
except, when revoked by the Council of Indies. From 1521 to
1821, the Spanish treasury had to subsidize the Philippines126 in
the amount of P250,000.00 per annum due to the poor financial
condition of the country primarily attributed to the poor revenue
collection system. Furthermore, a source of confusion of ideas
was the complex mixture of church funds, on one hand, and the
public funds, on the other, because taxes were simultaneously
collected in the same manner and at the same time as gifts of
the pious to the church.

On December 16, 1501, Pope Alexander VI granted to

Ferdinand and Isabella, and to their successors, the right to
collect and retain the “tithes” and other church dues in all their
possessions as a consequence to the grant of temporal
sovereignty over the lands that may be discovered and
conquered. In return, Spain shouldered all the expenses of the
church in Christianizing the conquered people. The right to
collect tithes and other church dues was also granted by Pope
Alexander VI in 1493.

The budget revenues were entered under six (6) general

headings: 1) The “contribuciones directas”, also called Direct
Tax, which includes the personal taxes and the income tax; 2)
The “contribuciones indirectas”, also called Indirect Tax, or the
Custom Duties; 3) The “rental estancadas” which includes at
various times the Documentary Stamp Taxes (DST) and the sale
of quicksilver, salt, playing cards, corrosive sublimate,
gunpowder, spirituous liquors, tobacco and opium; 4) Lotteries;
5) “Bienes del estado” (Public Domain); and 6) “Ingresos
eventuales” also called Miscellaneous and Indeterminate
Revenues.127

I. Contribuciones Directas – Personal Taxes

126
Alonso, L., supra.
127
Plehn, C., “Taxation in the Philippines. Political Science Quarterly,”
Vol. 16, No. 4 (December, 1901).
 In 1523, Spain passed a law obliging the native to render
tribute in recognition of the Crown’s sovereignty. The collection
of this tribute commenced immediately after the conquest by
Legaspi and continued until 1884. For three (3) centuries, tribute
took effect with little change in form or in the methods of
administration and with no change in its principle.

By its nature, tribute was a personal tax with characteristic

of a uniform poll tax. It was the only direct tax universally
enforced and levied on natives, including mestizos. A similar tax,
known as the “capitación personal de Chinos”, was levied on the
Chinese. Spaniards resident in the Philippines during this period
were exempt from this tax.

Tribute may be paid in money or in kind, or partly in money

and partly in kind. The values of the products received as
payment for tributes were settled in advance by the table of
official values. The tributes that were paid in kind varied from
time to time and from province to province. Commonly, the
principal tribute paid in kind was rice or paddy. Later, tobacco
was required from certain province as a tribute.

The foundation of tax calculation for tribute was the family.

For this purpose, a family included a married man over 20 years
of age and his wife and minor children. Originally, the age limits
for the natives to be covered by tributes were 20 and 25 years of
age for males and females, respectively. Subsequently, this age
bracket was lowered to 18 and 20 years of age for males and
females, respectively.

On the other hand, every unmarried male over 20 and

every unmarried female over 25 years of age living with their
parents paid ½ a tribute. However, the duty to contribute ceased
when the unmarried native reached 60 years of age. This based
on the customary organization of the Filipino family at that time
that until the children marry, the income of their labor belongs to
the parents. The following individuals were exempt from the
tribute, besides the Spaniards:

1. The alcaldes, gobernadores and the

cabezas who collected these taxes. Also embraced in
this exemption were the wives and first-born sons of
the aforementioned officials;

2. Soldiers, both active and are retired,

together with their wives and those sons who resided
under the parental roof;
 3. Members of the civil guards, including
members of the resguardo volante (Revenue
Inspectors) and guardias volantes, the carabineros
de hacienda, (Custom House Guards) and the
resguardos maritimos (Marine Guards) with their
wives and sons;

4. Inspectors of tobacco and storekeepers,

both male and female, under the administration of the
tobacco monopoly, with their wives or husbands and
sons;

5. Government employees receiving a fixed

salary;

6. Paupers and cripples receiving public

generosity; and

7. Those recognized by Spain for their

distinguished services to the Government, or to
agriculture or industry, and others for “just cause.”128

Should the payment of the tribute become unreasonably

onerous, on account of suffering by the people from plague,
failure of crops or severe tempest, such payment may be wholly
or partially suspended. The Spanish laws required that the
natives should pay the tribute in their pueblos. On the basis
thereof, the cabezas were made the actual collectors of the
tribute for the forty (40) or fifty (50) families under their control
and supervision.

Every two (2) years, a padrón de tasas (padrón) or tax list,

was made and functioned as a basis of assessment. This list
served as a census of the tribute-paying natives since it
contained the names, ages and occupations of the heads of
families subject to the tribute. The parish priest was assigned to
evaluate the padrón with the parish records and vouched for its
correctness. The cabézas were charged with all the tribute due
and if the whole amount were not remitted at the end of three (3)
months, the natives would suffer the penalty of imprisonment and
their goods will be confiscated. This severe measure was strictly
enforced with maximum penalty.

On top of the tribute, the native paid other taxes. The tithe,
which were collected by the Government but paid over to the

128
Ibid.
church, were paid by all residents of the Philippines even by
those who were exempt from the tribute. Tithe was never a
source of revenue to the Government because it was considered
only 1/10 of the fruits of the soil or of any profits or income.
Those who paid the tribute were declared exempt. And for these
taxpayers, the tithe was commuted and added to the tribute at a
uniform rate.

From 1635 to the middle of the 19th century, there was an

increase in the tribute. Apparently, the increase was the result for
the conquest of Jolo known as the donativo de Zamboanga.
Spanish mestizos were exempt from the tribute, including the
sons of Spaniards by native women and of the natives by the
Spanish women.

In order to protect the coasts of the archipelago from the

Moros’ invasion, the province of Bulacan enacted in 1781 a
special tax to equip 2 boats known as “vintas”. The tax was later
called vintas. Like the province of Bulacan, Pampanga also
approved the payment of the vintas. This tribute was blocked in
1829 and was replaced by a tax called “cabotage” or tax on the
coasting trade. However, vintas was revived later and was finally
suppressed in 1851.

Although tribute used to be a tax from natives who were

subjugated and living in organized society under the Spanish
administration, it did not prevent the Spanish to collect taxes
from the “Infidels” or those who were not subjugated to be
organized into municipalities but could be obliged to recognize
Spanish authority. The Spanish laws required that all “Indians”,
or natives who might be conquered, must be persuaded to pay a
moderate tribute in recognition of Spanish sovereignty. This was
the origin of the tribute, and it was also the ground upon which
the infidels were required to pay a tribute, which later known as
the “recognition of vassalage”.

The tribute imposed on infidels was collected with no

regularity and composed of several exceptions. The purpose of
this tribute was to bring the infidels closer to the church. This
gave the natives some benefits like remission of all taxes and
allowed them to be baptized or converted to Christianity. They
exemption from tribute will be for a period of ten (10) years.

In 1884, the tribute was replaced with the “cédula

personal” (cédula) or “personal identity paper”, equivalent to the
present “community tax certificate”, which every resident of the
Philippines, including the Spaniards and other foreigners, were
required to obtain. The only 2 exceptions in cédula were: i) the
Chinese, who paid another poll tax which they called the
“remontados é infieles”, were not subject to the local
administration; and ii) the natives and colonists of Jolo, Balabac
and Palawan.

In 19th century, the cédula served as an identification card

that had to be brought at all times. A person who could not
present his or her cédula to a gùardia civil could then be
incarcerated for being “indocumentado.” The cédula had to be
exhibited on the following occasions:

i. When taking up commission or entering any

public employment under the royal or insular
authority;

ii. When entering any provincial or municipal

office;

iii. When entering into contract, public or

private;

iv. When entering into business transaction or

appearing before the gobernadorcillos or minister of
justice in the pueblos;

v. Filing a case before any court of any

authority or officer;

vi. When paying tuition in any institution of

learning;

vii. When hired for employment;

viii. Upon payment of direct taxes;

ix. When filing any claims or exercising any

civil right not previously mentioned;

x. When establishing identity;

xi. When realizing any kind of credits, making

bills of exchange, depositing money in saving banks,
confirming pledges with the montes de piedad, or
pawn shops, and when making a bid in public
auction;
 xii. When becoming a director, administrator,
member, voter, shareholder, or employee of any
class of association or industrial undertaking;

xiii. When travelling beyond the boundaries of

puéblo of residence; and

xiv. When entering into domestic service.

The cédulas were issued based on padrón prepared by

the cabézas. The information in padrón were filled out by the
heads of the households. The padrón was made in triplicate: one
copy for the cabéza, one for the gobernadorcillo and one for the
administracion de haciénda publica or the Treasury Department.
The head of the institutions like the monasteries, convents,
prisons, who had persons entitled to “cédula gratis” under their
charge were required to prepare special padrón. However, any
person not included in the padrón may be allowed to purchase a
cédula. The captains, or the “patronés”, of all boats were obliged
to submit a similar padrón for the persons living on the boats.
The cabéza was held accountable for the collection of the taxes
on all persons within his jurisdiction.

The cédulas were prepared with stubs and bore serial

numbers. One cédula is separate and distinct from the other, and
every cédula issued could be drawn, traced and accounted for.
The cédula stated the following information, namely, the
prescriptive period for its validity which was annually, the number
of the class, the rate at which it was issued, the name of the
issuing province or puéblo, the name of the person to whom it
was issued, the personal information of the taxpayer like the
name of the province of which he was a native, his age, conjugal
condition, profession and address, with appropriate references to
the padrón in which he was enrolled or connected. To cover the
cost of the collection, an allowance of 6%, of which 3% went to
the cabéza, 1% to the governor of the province, 1% to the
administrator of the hacienda publica and 1% to the
gobernadorcillo, was allowed.

II. Income Tax

On June 14, 1878, the Spanish tax law provided for tax on
all income except those from agriculture. Agriculture was
excluded from coverage of income tax to nurture the agriculture
sector. Income tax was the only tax at that time as a direct tax. It
was imposed under the guise of two (2) taxes, namely: i) it was
based on the annual rental value of urban real estate, called the
“contribucion dirécta sobré la propriédad urbana”, also commonly
known as the “urbana tax”; and ii) it was based on salaries,
dividends and profits, called the “contribucion dirécta sobré la
industria, el comércio, las profésionés y las artés”, or simply the
“industrial tax.”

The flat rate of the income tax was 5% of the net income.
Those who earned meager income were exempt from income
tax, while those who earned above the lowest income bracket
were partly exempted. The urbana tax was originally levied at a
flat rate of 5% upon the net rental value of all houses and
building. Included in the coverage of urbana tax were bamboo
and nipa, the materials for common native houses, when rented
or used for commercial or industrial purposes. Exempted from
urbana tax were buildings:

i. Owned and occupied by religious

communities;

ii. Served as residences for the parish priests;

iii. Used as hospital;

iv. Used as houses of benevolence or schools,

when allowed by the owner for such use of free of
rent;

v. Houses inhabited by foreign consuls, when

owned by the Government and granted similar
franchise to the representative of Spain; and

vi. Public buildings owned and used by the

State.

Temporary exemption was granted to houses made of

bamboo and nipa when occupied by the owners. Partial
exemption was granted to bamboo and nipa that were used to
house materials salvaged from ruins caused by fortuitous event,
and those in process of construction or of complete
reconstruction and for 1 year thereafter.

The urbana tax was assessed upon all proprietors. The

only exception were the natives who paid tribute but subject to
qualification that their urbana tax would not exceed P4 per
annum. If the urbana tax reached or exceeded P4 per annum,
they will be exempted from the tribute. If it exceeded P12, the
exemption will be extended to their legitimate children living
under the patria potestas. If it reached P25, they and their sons
were exempted from personal services.
 In 1889, several amendments were introduced in urbana
tax. First, all buildings, of whatever materials on which the annual
tax would be less than P1, were exempted. Second, the
allowance for repair and maintenance was lowered to 25%. The
administration and implementation of urbana tax were similar to
those of the general property tax. The tax is payable quarterly,
and the penalty for delinquency is 10%. The cost of collection
was added in case of forced collection, which was in the form of
distraint of personal or real property.

The operation of income tax is clearly most important

because if the tax was shifted from rent, wages, interests, or
profits upon which it was levied, it will increase the price of
commodities. Consumer does not pay the tax. The tax was
universal and influences every type of economic activity except
agriculture industry since it was the stated policy of the Spanish
Government to nurture and support agricultural business. So, the
only place where labor and capital can go in order to evade
income taxation was agriculture business.

All branches of industrial and commercial activity being

alike were subject to the tax and essentially at the same rates.
The object for exempting agriculture from taxation was because
friars, who were large landholders, had dominant voice in the
Government. Philippines has the great natural advantage for the
production of crops as hemps, tobacco, copra, coconut oil,
sugar, indigo and chocolate. Moreover, natives were
unresponsive and reluctant to labor in agriculture after their
immediate necessities were satisfied, thus, incapacitating
agricultural undertaking. Thus, the policy of Spain in favoring
agriculture in the Philippines was not without justification.

C. Malolos Congress

History had barely written about the Malolos' economic

ideas and taxation. This circumstance had inappropriately led to
the conclusion that the economic agenda of the Malolos was
minimal. And what renders the condition difficult is the absence
of internal evidence that would propose the basis of Malolos'
economic and taxation policies.

Corpuz129 notes that this last poll tax was “similar to the
terms of the old cédula personal.” Strictly speaking, the system
was not progressive, since the used of intervals (e.g., P1,001.00-

129
Corpuz, O., “An Economic History of the Philippines,” Quezon City: University
of the Philippines Press, (1997).
P5,000.00, and so on) meant that contributions as a proportion of
wealth would suddenly rise at the end and fall within intervals.
For example, people with wealth levels of P20,000.00,
P10,000.00, P2,000.00 would all have been required to pay an
equivalent of 0.25% of their assets. Beyond the highest category
(P25,000.00 and above), the marginal rate would in fact be
declining with wealth.130

Hence, people with a larger stake in terms of property

would benefit more from the public good. Those with the most to
benefit from the revolution's victory were its wealthiest
supporters. The imposition of a poll tax even upon those without
property could be justified on the basis of the observation that
not only property but also person is protected by the State. In the
end, it was not clear whether the rationale for the war
contribution based on wealth was entirely due to a quid pro quo
view of taxation.131

For the Malolos, larger taxes or contributions were

expected of the affluent and wealthy simply because a larger
fiscal amount was required to make the value of their marginal
sacrifice equivalent with that of the poor, since their marginal
utility of wealth was lower. This basic concept of taxation is the
foundation of the principle of “ability of pay” and was the primarily
liberal inspiration of the men of Malolos.

D. American Occupation

In the early American regime from the period 1898 to

1901, Philippines was governed by American military governors.
In 1898, General Otis implemented the Spanish tariff laws
involving imports and exports. In 1902, the first Civil Government
was established under William H. Taft. However, it was only
during the term of second civil governor Luke E. Wright that the
BIR was created through the passage of Reorganization Act No.
1189 dated July 2, 1904. On August 1, 1904, the BIR was
officially established and made operational under the Secretary
of Finance, Henry Ide, author of the Internal Revenue Law of
1904, with John S. Hord as the first Collector or Commissioner.

On March 8, 1902, the U.S. Congress passed an Act that

provisionally provided revenue for the Philippines. The wealth of
the Philippines was essentially agricultural. The first income tax
law in the Philippines was the U.S. Revenue Act of 1913,

130
Corpuz, O., “Roots of the Filipino Nations,” 2 volumes. Quezon City: Aklahi,
(1989)
131
De Dios, E., supra.
approved on October 3, 1913, but made to apply to income
earned from March 1, 1913. The said Act, which provided for the
administration and implementation by the internal revenue
officers, was revised by U.S. Act in 1916 and by U.S. War
Revenue Act of 1917. The latter Act authorized the Philippine
legislature to amend, alter, modify or repeal the Federal Tax Law
then in force in the Philippines. Under this authority, the
Philippine legislature, on March 9, 1919, enacted Act No. 2833,
the 1st income tax law passed by a Philippine legislative body. It
was designed after the U.S. Act of 1916. On June 15, 1919,
Commonwealth Act No. 466 was approved with Title II thereof as
the income tax law.

Self-assessment system for individuals and corporations

was introduced as early as 1934 when the first Philippine Tax
Code was decreed by the parliament. The National Internal
Revenue Code (NIRC) took effect on July 1, 1939, but the
provisions of the income tax law were made to apply to income
earned from January 1, 1939.

The cédula was imposed by the American on January 1,

1940, when Commonwealth Act No. 465 took effect, authorizing
the imposition of a base residence tax of 50 centavos and an
additional tax of P1 based on factors such as income and real
estate holdings. The payment of this tax would merit the issue of
a residence certificate. Corporations were also subject to the
residence tax.

E. Japanese Occupation

The second Philippine Republic, or known as Japanese-

sponsored Philippine Republic, was a puppet State established
on October 14, 1943 during the Japanese occupation. President
Manuel L. Quezon declared Manila, the capital city, an "open
city" with Jorge B. Vargas as mayor. The Japanese occupied the
city on January 2, 1942 and established it as the capital. Japan
fully captured the Philippines on May 6, 1942 after the Battle of
Corregidor.

General Masaharu Homma dissolved the Commonwealth

of the Philippines and established the Philippine Executive
Commission, a caretaker Government, with Vargas as its 1 st
chairman in January 1942. The KALIBAPI – Kapisanan sa
Paglilingkod sa Bagong Pilipinas – was formed through
Proclamation No. 109 of the Philippine Executive Commission
and passed on December 8, 1942, banning all existing political
parties and creating the new governing alliance. Its first director-
general was Benigno Aquino, Sr.
 Article III, Sec. 12 of the 1943 Philippine Constitution,
which took effect during the Japanese occupation, provides that
the “rule of taxation shall be uniform. The National Assembly
may, by law, authorize the President, subject to such limitations
and restrictions as it may impose, to fix, within specified limits,
tariff rates, import or export quotas, and tonnage and wharfage
duties.” Cemeteries, churches and parsonages or convents
appurtenant thereto, and all lands, buildings and improvements
used exclusively for religious, charitable or educational purposes,
shall be exempt from taxation. The Japanese also imposed a
special “war tax” on all Jews. Wealthy Jews who owned real
estate and big business concerns were forced to surrender 50%
of their holdings. At the outbreak of World War II, under the
Japanese regime (1942-1945), the BIR was combined with the
Customs Office and was headed by a Director of Customs and
Internal Revenue.

F. Post War Era

On July 4, 1946, when the Philippines gained its

independence from the U.S., the BIR was eventually re-
established separately. The Withholding Tax System was
introduced and implemented in 1951.

G. Marcos Administration

Income taxation during the time of President Ferdinand

Marcos followed the Malolos taxation principle of “ability-to-pay”.
All citizens, whether residing in the country or not, with gross
annual income of at least P1,800.00 were subject to the income
tax. RCs were taxed at a progressive rates based on their
taxable net income derived from sources within the Philippines
and abroad. The rate structure ranged from 3%, for taxable
income less than P2,000.00, to 70%, for taxable income over
P500,000.00.132 Appendix D presents the 1968 individual income
tax rate schedule.

Prior to 1968, a slightly simpler structure of twenty-three

(23) graduated rates ranging from 3% to 60% prevailed. From
1950 to 1959, the rate on the first income bracket was 5%. NRCs
were taxed at the same rate on their taxable net income derived
from Philippine sources and at a simpler and lower rate structure
on adjusted gross income from abroad. The rates on foreign
income from RCs are as follows:

132
Manasan, R., “Public Finance in the Philippines: A Review of the Literature,”
Philippine Institute for Development Studies, (March 1981).
 Not over $6,000.00 - 1%

Over $6,000 but not over $20,000.00 - 2%

Over $20,000.00 - 3%

RAs were taxed on the basis of their taxable net income

obtained from both Philippines and foreign sources at the same
rate structure applicable to RCs. NRAs were classified into two
(2) for income tax purposes, namely: i) those who are engaged in
trade or business; and ii) those who were not. The former were
taxed based on their Philippine-source net income at the same
rates applicable to RCs and RAs. The latter were taxed at a flat
rate of 30% of gross income derived from sources within the
Philippines. Net taxable income comprises all items of income
net of allowable deductions and exemptions. Among others,
allowable deductions include the following: i) medical expenses
not exceeding P500.00 each for the taxpayer, his spouse and
each dependent up to a maximum of P2,000.00 in total; ii) basic
tuition fees of taxpayer’s high school-aged dependents up to
P250.00 for each and P1,000.00 in total; iii) expenses incurred in
the operation of business or in the practice of profession; iv)
interest payment; v) losses sustained during the taxable years;
vi) allowance for depreciation of property; vii) charitable
contributions up to a maximum of 6% of net income; and viii)
10% of the gross income of a working wife but not exceeding
P500.00.

In addition to these deductions, single individuals are

allowed P3,000.00 (P1,800.00 prior to 1980) as exemptions
while married individuals or heads of family were allowed to
P6,000.00 or P4,500.00 (P3,000.00 before 1980) exemptions,
respectively, plus P2,000.00 for each dependent. The total
number for dependents for which exemptions may be claimed
was limited to four. These exemptions represented the minimum
sum needed for subsistence.

Except for some changes in the income tax rates and tax
base, the concept of income taxation during the Marcos regime
was being followed, much less copied, by the modern income
taxation policy-makers and experts. The BIR also during this
period has a "new direction" in tax administration. The most
notable programs implemented were the "Blue Master Program"
and the "Voluntary Tax Compliance Program". The first program
was adopted to control the abuses of both the taxpayers and BIR
personnel, while the second program was intended to encourage
professionals in the private and Government sectors to report
their true income and to pay the correct amount of taxes.

The BIR provided each taxpayer with a permanent Tax

Account Number (TAN) in 1970. The TAN not only simplified the
identification of taxpayers but also resulted to faster verification
of tax records. Similarly, the payment of taxes through banks,
pursuant to EO No. 206, as well as the implementation of the
package audit investigation by industry was considered to be
important measures which contributed significantly to the
improved collection performance of the BIR.

The proclamation of Martial Law on September 21, 1972

marked the advent of the New Society and ushered in a new
approach in the developmental efforts of the Government.
Several tax amnesty decrees issued by the President were
promulgated to enable erring taxpayers to start anew. On June 3,
1977, President Marcos promulgated the PD No. 1158 which
consolidated the internal revenue laws and PDs into a single Tax
Code. The Code was known as the “NIRC of 1977”.

Under the NIRC of 1977, individual incomes were taxed at

different rates depending on income type. It followed two (2) tax
schedules: i) for the compensation income category (salaries and
wages) under modified gross income scheme of nine (9) steps
from 0% to 35%; and ii) the other schedule was for business and
professional income on a net basis of five (5) steps from 5% to
60% and passive income at a flat rate of 15%. Appendix E shows
the NIRC of 1977.

H. Cory Aquino Administration

After the EDSA Revolution in 1986, an improved push

towards an effective tax administration was pursued by the BIR.
"Operation: Walang Lagay" was launched to promote the
efficient and honest collection of income taxes.

The fiscal statistics immediately before the Cory Aquino

administration indicated that the tax program of the Government
was diminishing. As such, the Cory Aquino administration had no
choice but to reform the tax system in order to maintain
macroeconomic stability and restore economic growth. The fiscal
deficit, whether measured in terms of the national Government
budget deficit, was large and unsustainable because the
Philippine economy in 1986 was in disarray. Aside from the
political uncertainty arising from the assassination of the late
Senator Benigno Aquino, Jr. and the resultant mass unrest and
protests, the subversion of market-oriented “rules of the game”
by cronyism, artificial monopolies, excessive Government
regulation, growing Government corporation and widespread
graft and corruption had led local and foreign business to lose
their confidence and interest in investing in the Philippines.133

To bring the economy into the course of recuperation and

sustainable growth, the Cory Aquino administration assumed not
only political improvements to reinstate democratic institution but
also wide-ranging economic reforms that would revive the
country. These economic reforms were to have innate and
lasting effect on the system. It instituted reforms to make tax
structures more equitable and progressive, revenue-productive,
and conducive to efficient resource allocation. These reforms
were part of the “1986 Tax Reform Package” or “1986 TRP”. To
ensure equal treatment between wage and non-wage incomes, a
partial return to the global system was made, with both types of
incomes taxed at 0% to 35%, but with a ceiling on deductions on
business incomes. Passive incomes continued to be taxed at an
increased 20% flat rate.

These reforms were mandated by EO No. 37 on July 31,

1986. It was only in May 1992 that President Cory Aquino signed
into law Republic Act No. 7496 providing for a Simplified Net
Income Tax System (SNITS) for the self-employed and those
practicing their profession. Aside from introducing a simpler and
reduced income tax schedule, the law allowed only direct cost as
deductions. Thus, advertising, transportation and entertainment
expenses, which were the most subject to abuse, had been
disallowed. The maximum deduction for those whose costs were
difficult to determine or itemize had been increased to 40%.
Appendix F shows the rates of tax on taxable income of
individuals under SNITS.

The 1986 TRP was designed to address the main flaw of

the NIRC of 1977 such as its unresponsiveness to changes
income aggregates, low tax yield, heavy dependence on indirect
taxes, and a complicated administration structure. It was aimed
at obtaining a simpler, fairer and more efficient tax system. The
specific objectives of the 1986 TRP were to: i) improve the
elasticity of the tax system to increase in economic activity; ii)
promote equity by ensuring that similarly situated individuals and
firms bear the same tax burden; iii) promote growth by
withdrawing or modifying taxes that impair incentives to produce;

133
Soriano, C., “Philippine Structural Adjustment Measures,” Philippine
Institute for Development Studies, (1992).
and iv) improve tax administration by simplifying the tax system
and promoting tax compliance.134

The "Tax Administration Program" of the BIR contained

several tax reform and enhancement measures, which included
the use of the Taxpayer Identification Number (TIN) and the
adoption of the New Payment Control System.

I. Ramos Administration

In order to attain the BIR's vision of transformation, a

comprehensive and integrated program known as the “ACT”, or
“Action-Centered Transformation Program”, was implemented. It
was undertaken to realign and direct the entire organization
towards the fulfillment of its vision and mission. Thus, a five-year
Tax Computerization Project (TCP) was undertaken in 1994
which involved the establishment of a modern and computerized
Integrated Tax System and Internal Administration System.

In 1997, the national Government was in budget balance,

with primary surpluses, as percent of GDP averaging 3.5%. This
favorable fiscal position was aided partly by one-time proceeds
from the privatization of State enterprises, such as Petron and
the Philippine National Bank, and sale of real properties. In this
year, the Government enacted Republic Act No. 8424 creating
the 1997 Comprehensive Tax Reform Program (CTRP) or the
“NIRC of 1997”. Appendix G shows the 1997 rates of tax on
individual income tax.

On January 1, 1999, the top marginal income tax rate of

34% was lowered to 33%, and was later reduced to 32% on
January 1, 2000. The following were the specific objectives of the
NIRC of 1997:

i. Make the tax system broad-based with

reasonable tax rates;

ii. Minimize tax avoidance;

iii. Encourage payment by increasing the

exemption levels and lowering the tax rate; and

iv. Rationalize the grant of tax incentives in

1994.

134
Diokno, B., “Reforming the Philippine Tax System: Lessons from Two
Tax Reform Programs,” University of the Philippines, School of
Economics, (2005).
J. Estrada Administration

With the advent of President Estrada's administration,

priority reform measures were undertaken to enhance voluntary
compliance and improve the BIR's productivity. One of the most
significant reform measures was the implementation of the
Economic Recovery Assistance Payment (ERAP) Program,
which granted immunity from audit and investigation to taxpayers
who paid 20% more than the tax paid in 1997 for income tax.

In order to encourage and educate consumers/taxpayers

to demand sales invoices and receipts, the raffle promo
"Humingi ng Resibo, Manalo ng Libo-Libo" was institutionalized
in 1999. During this period, measures that would enhance
taxpayer compliance and deter tax violations were prioritized.

Memoranda of Agreements (MOA) were also forged with

the LGUs and several private sector and professional
organizations to help the BIR implement tax campaign initiatives.
On September 1, 2000, the Large Taxpayers Service (LTS) and
the Excise Taxpayers Service (ETS) were established under EO
No. 175 to reinforce the tax administration and enforcement
capabilities of the BIR. In line with the passage of the Electronic
Commerce Act of 2000 on June 14, 2000, BIR implemented a full
Integrated Tax System (ITS) Rollout Acceleration Program to
facilitate the full utilization of tax computerization in the BIR's
operations.

The main contribution of President Estrada to income

taxation was the reduction of top marginal tax rate for personal
income tax to 32% on January 1, 2000. Appendix H shows the
rates of tax on taxable income of individuals under Republic Act
No. 8424.

K. Arroyo Administration

Following the momentous events of EDSA II in January

2001, the BIR’s thrust was to transform the agency to make it
taxpayer-focused. This was undertaken through the
implementation of change initiatives that were directed to: i)
reform the tax system to make it simpler; ii) re-engineer the tax
processes to make them more efficient and transparent; iii)
restructure the BIR to give it administrative flexibility; and iv)
redesign the human resource policies to be more responsive to
taxpayers' needs.

Measures to enhance the BIR's revenue-generating

capability were also implemented, the most notable of which
were the implementation of the Voluntary Assessment Program
and Compromise Settlement Program. A technology-based
system that promotes the paperless filing of tax returns and
payment of taxes was also adopted through the Electronic Filing
and Payment System or eFPS. To enhance the collection
performance, BIR adopted the use of new systems such as the
Reconciliation of Listings for Enforcement, or RELIEF, to detect
under-declarations of taxable income. Special operations against
high profile tax evaders were conducted by filing tax cases under
the Run After Tax Evaders (RATE) Program.

BIR started several key undertakings, which included

insertion of new payment gateways such as the Efficient Service
Machines and the G-Cash and SMART Money facilities and
implementation of the Benchmarking Method. Information
sharing between the BIR and the LGUs was also intensified
through the LGU Revenue Assurance System, which aimed to
uncover fraud and non-payment of taxes. To enhance BIR’s
audit capabilities, the use of Computer-Assisted Audit Tools and
Techniques (CAATTs) was also introduced under President
Arroyo's term.

L. P-Noy Aquino Administration

The P-Noy Aquino administration made no major changes

in the income tax. As a matter of fact, the P-Noy Aquino
administration used the NIRC of 1997 income tax rates. Although
there were several bills proposed in the Senate and House of
Representatives with respect to the amendment of the NIRC of
1997 nevertheless, these Bills remained to be House Bills or
Senate Bills, and, therefore, were not passed into law. During
this period, the BIR focused on the filing of tax evasion cases
under the RATE Program.

M. Duterte Administration

President Duterte’s main contribution to taxation was when

he signed into law the Republic Act No. 10963, or otherwise
known as the Tax Reform for Acceleration and Inclusion (TRAIN)
Law, on December 19, 2017. The TRAIN Law is the initial
package of the comprehensive tax reform. It is the first of four
packages of tax reforms to the NIRC of 1997. This first package
introduced changes in personal income tax (PIT), estate tax,
donor's tax, VAT, DST and the excise tax of tobacco products,
petroleum products, mineral products, automobiles, sweetened
beverages, and cosmetic procedures.
 The prominent features of the TRAIN Law are lower PIT
and higher consumption tax. Individual taxpayers with taxable
income not exceeding P250,000.00 annually are exempted from
income tax. The exemption for MWEs is retained in the revised
tax system. Tax rates for individual taxpayers still follow the
progressive tax system with the maximum rate of 35%, and
minimum rates of 20% (taxable years 2018 to 2022) and 15%
(taxable year 2023 onwards).

On the other hand, consumption taxes, in the form of

higher excise tax on tobacco products, petroleum products,
automobiles, tobacco, and additional excise tax on sweetened
beverages and non-essential, invasive cosmetic procedures
were introduced. It also expanded the VAT base by repealing
exemption provisions in numerous special laws.

In the first quarter of 2018, both positive and negative

outcomes have been observed. The economy saw an increase in
tax revenues and Government expenditure, and an incremental
growth in GDP. But unprecedented inflation has been the cause
for much uproar and objections.

The TRAIN Law has simplified the previous system to

make it more straightforward and intuitive. It created a more
"just" taxation scheme on the basis of financial capability to pay
and improved the efficiency by which tax is collected.

On March 26, 2021, President Duterte signed into law the

Republic Act No. 11534 or the Corporate Recovery and Tax
Incentives for Enterprises (CREATE) Law. The CREATE law
resulted in a retroactive application of the following: i) a reduction
of corporate income tax (CIT) to 20% for DC with a net taxable
income not exceeding P5 million and with total assets not
exceeding P100 million or 25% for all other DC and RFC
beginning July 1, 2020; ii) a reduction to 1% tax of the taxable
income of the proprietary educational institutions and hospitals
beginning July 1, 2020 until June 30, 2023; iii) a reduction to
25% income tax on the gross income of NRFC beginning July 1,
2020; iv) a reduction of Minimum Corporate Income Tax (MCIT)
to 1% for both DC and RFC starting July 1, 2020 until June 30,
2023; v) a reduction in percentage tax to 1% from July 1, 2020 to
June 30, 2023; vi) VAT exemption for medicines for cancer,
mental illness, tuberculosis, and kidney diseases beginning
January 1, 2021; vii) reduction of VAT exemption threshold for
socialized and low cost housing to P2,500,000.00 and
P4,200,000.00 for house and lot; and viii) VAT free importation
and sale of COVID-19 medicines, Personal Protective Equipment
(PPE) from January 1, 2021 to December 31, 2023.
 MODULE 4

Income Tax

“Income Tax” has been defined as a tax on all yearly

profits arising from property, professions, trades or offices, or as
a tax on a person's income, emoluments, profts and the like.135
Income tax is a direct tax on actual, real or presumed income
(gross or net) of taxpayers during the taxable year.

Income Tax Law

The Philippines income tax law is embodied in Title II136 of

the Tax Code. The latest major amendments to the income tax
law were introduced by:

i) Republic Act No. 8424 which took effect on January 1,

1998;

ii) Repubic Act No. 9337, November 1, 2005;

iii) Repubic Act No. 9504, July 6, 2008;

iv) Republic Act No. 10963, January 1, 2018; and

v) Republic Act No. 11534, March 26, 2021;

There are other sources of tax laws such as the

Constitution, tax treaties, and general and special laws as well as
decisions of the Supreme Court and the Court of Tax Appeals
(CTA).

The Tax Code is a special law which prevails over the

New Civil Code, which is a general law.137 It is categorized as
135
Fisher vs. Trinidad, G.R. No. L-17518, October 30, 192243 Phil. 981.
136
Tax on Income.
137
Guagua Electric Company vs. Collector, G.R. No. L-23611, April 24, 1967, 19
SCRA 796; Republic vs. Gancayco, 115 SCRA 380.
civil in nature, not a political law, thus, applied even during the
enemy occupation. It is not a penal law although penalties are
provided for violations of the Tax Code. The Tax Code sanctions
the collection of taxes through the summary remedies of distraint
and levy as well as the filing of civil and criminal actions against
taxpayers.

Regulations and ruling promulgated implementing the Tax

Code have the force and influence of law. Administrative
regulations should be provided with the same force and influence
as rules of court to preserve the regularity and consistency of
administrative proceedings. In case of conflict and difference
between a statute and an administrative order, the former must
prevail. Regulations applying doubtful statutory provisions have
strong convincing weight and influence, but they are not
conclusive upon the courts.

2. Schedular Tax System. – Here, there are various tax

treatments for various types of income so that a distinct tax
return is required to be filed for each type of income and the tax
is calculated on a per return or per schedule basis. Thus, a
schedular income tax system is one in which separate taxes are
levied on different categories of income.138 This system was
implemented by virtue of Batas Pambansa (BP) Blg. 135.139

Under this system, there are numerous ways of imposing

final income tax on specific incomes subject to final withholding
tax.

Thus:

a. The tax base is the consideration or FMV at the time of

sale, whichever is higher.

Example:

Sale of real property classified as capital asset P600,000.00

Fair market value of real property P500,000.00
Income tax due: P600,000 x 6% P 36,000.00

b. Tax base is net capital gain (i.e., gross selling price or

FMV, whichever is higher, less cost or adjusted basis).

Example:
138
Burns, L. and Krever, R., “Tax Law Design and Drafting,” International
Monetary Fund, Vol. 2, (1998).
139
An Act Amending Certain Provisions of the National Internal Revenue Code of
1977, as Amended, and for Other Purposes.
Sale of unlisted shares of stocks of XYZ Corp. P 9,000.00
Fair market value of shares of stocks 10,000.00
Cost 5,000.00
Income tax due:
Fair market value P10,000.00
Less: Cost 5,000.00
Gain P 5,000.00
Multiplied by:140 x 15%
Capital gains tax P 750.00

c. Tax base is gross income (without any deduction)

Example:

Gross interest income on bank peso deposit P 2,000.00

Mulitiplied by:141 x 20%
Final withholding tax P 400.00

Gross dividend income from DC received

by RC P70,000.00
Multiplied by:142 x 10%
Final withholding tax P 7,000.00

3. Semi-Schedular or Semi-Global Tax System. – Here,

the tax system is either:

i) Global (e.g. taxpayer with compensation

income not subject to final withholding tax or
business or professional income or mixed income –
compensation and business or professional income);
or

ii) Schedular (e.g. taxpayer with compensation,

capital gains, passive income, or other income
subject to final withholding tax); or

iii) Both global and schedular may be utilized

depending on the character of the income realized by
the taxpayer during the year.

Types of Philippine Income Tax

There are several types of income tax under the Tax

140
Sec. 24 (C), Tax Code.
141
Sec. 24 (B)(1), Tax Code.
142
Sec. 24 (B)(2), Tax Code.
Code, namely:

1. Graduated income tax on individuals;

2. Normal CIT on corporations;

3. MCIT on corporations;

4. Special income tax on certain corporations;

5. Capital gains tax (CGT) on sale or exchange of unlisted

shares of stock of DC classified as a capital asset;

6. CGT on sale or exchange of real property located in the

Philippines classified as a capital asset;

7. Final withholding tax on certain passive investment

incomes;

8. Final withholding tax on income payments made to non-

residents;

9. Fringe benefit tax (FBT);

10. Branch profit remittance tax (BPRT); and

11. Improperly accumulated earnings tax (IAET).

Income, Gain or Profit Not Exempt from Tax

The income, gain or profit may be exempt from income tax

under Tax Code, Constitution, tax treaty, or a special law. The
exemption must be expressly provided in the statute, and in case
of doubt as to whether the income, gain or profit is taxable or
exempt, it is safer to tax it because exemption from tax is
generally construed strictly against the taxpayer claiming it.

Provisions of Tax Code Prevail Over Accounting Principles

All Income Tax Returns (ITRs) mandated to be filed shall

be prepared in compliance with the provisions of the Tax Code
and the rules and regulations applying it. In case of difference
between the provision of the Tax Code and the rules and
regulations applying it, on one hand, and the Generally Accepted
Accounting Principles (GAAP) and the Generally Accepted
Auditing Standards (GAAS), on the other, the provisions of the
Tax Code and the rules and regulations implementing it shall
prevail.
 MODULE 5

Definition of Gross Income

“Gross income” refers to all income derived from whatever

source, including, but not limited to, the following items:

1. Compensation for services in whatever form

paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;

2. Gross income derived from the conduct of

trade or business or the exercise of a profession;

3. Gains derived from dealings in property;

4. Interests;

5. Rents;

6. Royalties;

7. Dividends;

8. Annuities;

9. Prizes and winnings;

10. Pensions; and

11. Partner’s distributive share from the net

income of the GPP.

It should be emphasized that the concept of “income from

whatever source derived” is a legislative policy to include all
income not explicitly exempted within the class of taxable income
under our laws.143

Treatment of Return of Capital

Income tax is levied only on income. Hence, the amount

representing return of capital should be deducted from proceeds
from sales and should not be subject to income tax.

143
Commissioner of Internal Revenue vs. British Overseas Airways Corp., G.R.
Nos. L-65773-74, April 30, 1987.
 MODULE 6

Kinds of Income Taxpayers

1. Individuals. – They are: a) Citizen; and b) Alien;

2. Non-Individuals. – These are: a) Corporation; b)

General Professional Partnership (GPP); and c) Estate and
Trusts.

Persons Subject to the Individual Income Tax

For income tax purposes, individual taxpayers are

classified into:

a. Citizen

(1) Resident Citizen (RC). – A citizen of the Philippines

who has a permanent home or place of abode in the Philippines
to which he/she intends to return whenever he/she is absent for
business or pleasure.

(2) Non-Resident Citizen (NRC). – A citizen of the

Philippines who:

(a) Establishes the fact of his/her physical

presence abroad with the definite intention to
reside therein;

(b) Leaves the country to reside abroad,

either as an immigrant or for employment on a
permanent basis;

(c) Works and derives income from abroad

and whose employment thereat requires him to be
physically present abroad most of the time during
the taxable year; or, who has been considered
NRC previously and who arrives in the Philippines
at anytime during the taxable year to reside
permanently in the Philippines shall be treated as
 NRC for the taxable year in which he arrives in the
Philippines with respect to his income abroad until
the date of his arrival in the Philippines.

b. Alien

(1) Resident Alien (RA). – An individual who is not a

citizen of the Philippines but whose residence is within the
Philippines;

(2) Non-Resident Alien (NRA). – An individual who is not a

citizen of the Philippines and whose residence is not within the
Philippines. An NRA is deemed engaged in trade or business in
the Philippines if he/she has stayed in the Philippines for an
aggregate period of more than one hundred eighty (180) days
during any calendar year.

Income Subject to Tax

The incomes of individuals are classified into different

categories, to wit:

a. Compensation Income. – Consists of

income arising from employer-employee
relationship such as salaries, wages, emoluments
and honoraria, commissions, taxable bonuses and
fringe benefits, taxable allowances (such as
transportation, representation, entertainment, and
the like),144 non-monetary compensation, director’s
fees and the like, taxable pensions and retirement
pay, amounts drawn as salaries by partners of a
partnership and other incomes of a similar nature
unless explicitly exempted by the Tax Code.

Included in this definition are those income

of similar nature like the proceeds from property
sharing, Cost of Living Allowance (COLA),
Personnel Economic Relief Allowance (PERA),
housing allowance, overtime pay, emergency pay,
hazard pay, rice and clothing allowance, medical
allowance and grocery allowance. The test in
determining whether it falls under compensation
144
Representation and Transportation Allowances (RATA) granted to
Government officials and employees under the General Appropriations Act are
deemed as reimbursement for expenses incurred in the performance of the
duties of the recipient-Government officials and employees and thus are not
considered as additional compensation taxable under the regular individual
income tax and subject to withholding tax (BIR Ruling No. 062-91).
 income is when it is derived from an employer-
employee relationship. Thus, the designation or
the name given to the remuneration upon which it
is paid and the manner of payment is immaterial.
However, not all compensation income is included
in the term gross compensation income. For
instance, compensation for services rendered by
an independent contractor does not fall under the
category of gross compensation income. Also, the
income derived by partner from the GPP does not
form part of the gross compensation income.

The requisites for taxability of compensation

income are:

i. Personal services actually

rendered;

ii. Payment is for such services

rendered; and

iii. Payment is reasonable.

b. Business Income and Income from

Profession. – Consist of business and/or trade
income, fees from the exercise of profession,
gains from sale or exchange of assets,
commissions, rental income, and other incomes
not covered by compensation income;

c. Passive Income and Other Sources of

Income. – Consist of interest from foreign and
Philippine currency bank deposits, royalties, prizes
and other winnings, and dividends. The other
sources of income include capital gains from sales
of shares of stock, sales of real property,
informer’s rewards, etc.145

Income

“Income” means an amount of money coming to a person

or corporation within a specific time, whether as payment for
services, interest or profit from investment. Unless otherwise
145
Revenue Regulations No. 7-2011 provides that unutilized/excess campaign
funds or campaign contributions net of an election candidate’s campaign
expenditures, shall be considered as subject to income tax, and as such, must be
included in the candidate’s taxable income as stated in his/ her income tax return
filed for the subject taxable year.
specified, “income” means cash or its equivalent.146 It is a flow of
service rendered by capital by the payment of money from it or
any other benefit rendered by a fund of capital in relation to such
fund through a period of time.147 It covers gain derived from
capital, from labor, or from both combined, provided it includes
profit gained through a sale or conversion of capital assets.148 It
also includes earnings, lawfully or unlawfully acquired, without
consensual recognition, express or implied, of an obligation to
repay and without restriction as to their disposition. 149 Thus,
income from illegal drug and gambling activities are taxable. The
following transactions shall be considered as income:

1. Increases in Inventory is Considered Income. –

Increase in inventory is considered income. A mere increase in
the value of property is not income but merely an increase of
capital. The Tax Code uses “income” in its natural and obvious
sense, as importing something distinct from principal or
capital;150

2. Transfer of Appreciated Property to Employee for

Services Rendered is Income. – When an employer transferred
its appreciated property to an employee for services rendered, it
should report the appreciation as a taxable gain. The employer
realized the appreciated value in the form of future or past
services beacuse it could deduct the appreciated value as an
expense;151

3. Sale of Goodwill is Income. – Goodwill, created by an

incorporator in the course of the business of a corporation and
apapraised to pay the unpaid price of shares subscribed by said
incorporator, is a profit subject to income tax;152

4. Just Compensation for Expropriated Property is

Income. – The acquisition by the Government of private
properties through the exercise of the power of eminent domain
is embraced within the meaning of the term “sale” or “disposition
of property” and is thus taxable.153

146
Conwi, et al. vs. Court of Tax Appeals and Commissioner, supra; Alexander
Howden & Co. vs. Collector, CTA Case No. 22848, November 24, 1961.
147
Madrigal vs. Rafferty, 38 Phil. 414.
148
Fisher vs. Trinidad, supra.
149
James vs. U.S., 366 U.S. 213.
150
Fisher vs. Trinidad, supra.
151
International Freighting Corporation vs. Commissioner, 135 F. 2d 310 [2d Circ.
1943].
152
Anderson vs. Posadas, 66 Phil. 205.
153
Gutierrez vs. CTA and Collector, G.R. No. L-9738, May 31, 1957.
 Distinctions Between Capital and Income

The essential differences between capital and income are

as follows:

1. Capital (e.g., savings bank deposit) is a fund, while

income (e.g., interest on savings bank deposit) is a flow;

2. A fund of property (e.g., building for lease) is called

capital, while a flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a
fund of capital (e.g., rental income) in relation to such fund
through a period of time is called income;

3. Capital (e.g., shares of stock) is wealth, while income

(e.g., dividend income) is the service of wealth;

4. Capital is the tree, while the income is the fruit;154

5. Return of capital (e.g., payment of loan principal by the

debtor) is not subject to income tax on the part of the creditor,
while receipt of income (e.g., interest income on loan by the
lender) is subject to tax.

Kinds of Income

1. Compensation income;

2. Business/Professional Income; and

3. Passive Income.

1. Compensation Income

"Compensation" means all remuneration for services

performed by an employee for his employer under an employer-
employee relationship, unless specifically excluded by the Tax
Code or special law. Under Republic Act No. 9504, 155 SMW
received on or after July 6, 2008 is exempt from income tax. It
includes all remuneration for services performed by an employee
for his employer, including the cash value of all remuneration
paid in any medium other than cash, except that such term shall

154
Madrigal vs. Rafferty, supra; Waring vs. City of Savannah [1878], 69 Ga., 93.
155
An Act Amending Sections 22, 24, 34, 35, 51, and 79 of Republic Act No.
8424, as Amended, Otherwise Known as the National Internal Revenue Code of
1997.
not include remuneration paid:

i. For agricultural labor paid entirely in products

of the farm where the labor is performed; or

ii. For domestic service in private home; or

iii. For casual labor not in the course of the

employer's trade or business; or

iv. For services by a citizen or resident of the

Philippines for a foreign Government or an
international organization.

There are various types of taxable compensation income,

such as salaries, wages, bonus, remuneration, honorarium,
benefits and allowances including Representation and
Transportation Allowance (RATA), PERA, longevity pay,
subsistence allowance, and hazard pay.156

Forms of Compensation Income

Compensation income is measured:

i. Cash or in Money. – Amount of money

received;

ii. Property or in Kind. – FMV of the property;

iii. Promissory Notes or other Evidence of

Indebtedness. – Face Value of the promissory notes;

iv. Premiums Paid by the Employer on the Life

Insurance Policy of the Employee Whose Family or
his Estate is the Beneficiary. – Amount of the
premium paid;

v. Income Tax Paid by Employer in

Consideration of the Employee’s Services Rendered.
– Amount of such tax paid;

156
BIR Ruling Nos. 120-96, November 8, 1996 and 062-2000, November 20,
2000 exempt benefits and allowances such as longevity pay, susbsistence
allowance, and hazard pay granted to uniformed policemen and jail guards under
Republic Act No. 6975 (DILG Act of 1990). However, if the recipient is an AFP
personnel, all remunerations (monetary and non-monetary) are taxable, except
allowances for quarters, clothing and subsistence which are exempt from income
tax pursuant to Revenue Memorandum Circulars No. 15-87 (BIR Ruling No. 143-
96, December 24, 1996)
 The benefits provided to the employee for the sole benefit
of the employer are excluded from employee’s gross income.
Lodging quarters furnished to an employee by or on behalf of the
employer shall be excluded from employee’s gross income if the
living quarter is situated within the business premises of the
employer and the employee is obliged to accept such lodging
facility as a condition of his employment.

2. Business Income

“Business income” refers to sale of goods, properties or

services. It comes from the conduct of trade or business or the
exercise of a profession, or gain derived from dealings in
property. An individual who carries on a trade or business as a
proprietor or who renders services as an independent contractor
or exercises his profession is treated as self-employed and
derives self-employment income.

Professional Income

“Professional income” refers to the fees received by a

professional from the practice of his profession; provided that
there is no employer-employee relationship between the
professional and his clients.

This includes:

i. Income derived by self-employed from trade

or business;

ii. Income derived by the individuals from the

practice of profession;

ii. Income of farmers from the sale of livelihood

and farm products, livestock, etc.

3. Passive Income

a. Interest Income. – It is the amount of compensation paid

for the use of money or forbearance from such use. In general,
interests are included in the gross income of the
creditor/depositor unless exempt from tax or subject to final tax
at preferential rate.

b. Dividend Income. – “Dividends” means any distribution

made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders in money or in other
property. “Dividend income” is the corporate profit set aside,
declared and ordered to be paid to the stockholders on demand
or at a fixed time.

Income Tax Rates on Certain Passive Income

The following passive income of individual shall be subject

to the final income tax rates:

i. Interests from any currency bank deposit and yield or

any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements – 20%;

ii. Interest income received by an individual taxpayer

(except a non-resident individual) from a depository bank under
the expanded foreign currency deposit system – 15%;

iii. Proceeds of pre-terminated long-term deposit or

investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts
and other investments evidenced by certificates in such form as
prescribed by the BSP – the final tax shall be based on the
remaining maturity of the investment:

4 years but less than 5 years – 5%

3 years but less than 4 years – 12%

Less than 3 years – 20%

iv. Royalties – 20%;

v. Royalties on books and other literary works and musical

compositions – 10%;

vi. Prizes (except prizes amounting to P10,000.00 or less)

– 20%;

vii. Winnings (except Philippine Charity Sweepstakes and

Lotto winnings amounting to P10,000.00 or less) – 20%;

viii. Cash and Property Dividends – 10%;

ix. Capital Gains from Sale of Shares of Stock not Traded

in the Stock Exchange – 15%;

x. Capital Gains from Sale of Real Property Located in the

Philippines – 6%.
Meaning of Taxable Income

“Taxable income” refers to the pertinent items of gross

income less the deductions authorized for such types of income.
It does not include items which do not add to the taxpayer's
net worth such as amounts merely entrusted to him. 157

Determination of Taxable Income

a. Citizen

1) Resident Citizen (RC). – On incomes derived from

sources within and without the Philippines, as follows:

a) On Compensation Income. – On modified

gross income basis i.e., gross compensation
income less deductions;

b) On Income from Profession, Business

and/or Trade – On net income basis i.e., gross
income from profession, business and/or trade
less the itemized deductions or Optional Standard
Deduction (OSD); and

c) On Passive Income – On gross amount

thereof;

2) Non-Resident Citizen (NRC). – Taxed similarly as RC

on incomes from sources within the Philippines.

b. Alien

1) Resident Alien (RA). – Taxed similarly as RC on

incomes received from sources within the Philippines;

2) Non-Resident Alien (NRA):

a) Engaged in Trade or Business in the

Philippines (ETB). – Taxed similarly as RC on
incomes from sources within the Philippines.

b) Not Engaged in Trade or Business in the

Philippines (NETB). – Taxed on gross income from
sources within the Philippines.

c) Employed by Regional or Area

157
Commissioner vs. Tours Specialist, Inc. supra.
 Headquarters (RHQ) and Regional Operating
Headquarters (ROHQ) of Multinational
Corporations, Offshore Banking Units (OBU), or
Service Contractors or Subcontractors Engaged in
Petroleum Operations in the Philippines – Taxed
on gross income derived from such employment.

Senior Citizens

“Senior Citizen” refers to any Filipino citizen who is a

resident of the Philippines, and who is 60 years old or above. It
may apply to senior citizens with "dual citizenship" status
provided they prove their Filipino citizenship and have at least six
(6) months residency in the Philippines. Senior citizens are
exempted from income tax if their returnable income is in the
nature of compensation income and qualifies as MWE under
Republic Act No. 9504.158

Individual Citizen and Individual Resident Alien

a. Purely Compensation Income Earner. – Individuals

earning purely compensation income shall be taxed based on the
schedules provided by the Tax Code, as shown below:

Effective January 1, 2018 until December 31, 2022:

Effective January 1, 2023 and onwards:

158
An Act Amending Secs. 22, 24, 34, 35, 51, and 79 of Republic Act No. 8424,
as amended Otherwise Known as the National Internal Revenue of 1997.
 Taxable income for compensation earners is the gross
compensation income less non-taxable income/benefits such as
but not limited to the 13th month pay and other benefits,159 de
minimis benefits, and employee’s share in the SSS, GSIS, PHIC
or Philhealth, Pag-ibig contributions and union dues.160

Husband and wife shall compute their individual income

tax separately based on their respective taxable income. If any
income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same
shall be divided equally between the spouses, for the purpose of
determining their respective taxable income.

MWE shall be exempt from the payment of income tax

based on their SMW rates. The holiday pay, overtime pay, night
shift differential pay and hazard pay received by such earner are
likewise exempt.

Fringe Benefits

“Fringe benefits” refers to any good, service or other

benefit furnished or granted, in cash or in kind, by an employer to
an individual employee (except rank-and-file employees) such
as, but not limited to, the following:

1. Housing;

2. Expense account;

3. Vehicle of any kind;

4. Household personnel, such as maid, driver and others;

159
Subject to limitations that the total exclusion under this item shall not exceed
P90,0000.00.
160
Sec. 3 (B), Revenue Regulations No. 8-2018.
 5. Interest on loan at less than market rate to the extent of
the difference between the market rate and actual rate granted;

6. Membership fees, dues and other expenses borne by

the employer for the employee in social and athletic clubs or
other similar organizations;

7. Expenses for foreign travel;

8. Holiday and vacation expenses;

9. Educational assistance to the employee or his

dependents; and

10. Life or health insurance and other non-life insurance

premiums or similar amounts in excess of what the law allows.

Fringe Benefits Tax (FBT)

The tax on fringe benefits at the rate of thirty-five percent

(35%) shall be imposed on the grossed-up monetary value of
fringe benefits furnished or granted to an employee (except rank-
and-file employees) by the employer, whether an individual or a
corporation (unless the fringe benefit is required by the nature of,
or necessary to the trade, business or profession of the
employer, or when the fringe benefit is for the convenience of or
advantage of the employer). The fringe benefit tax (FBT) is
payable by the employer, which shall be paid in the same
manner as provided for under Sec. 57161 (A)162 of the Tax Code.

The grossed-up monetary value of the fringe benefit shall

be determined by dividing the actual monetary value of the fringe
benefit by sixty-five percent (65%), effective January 1, 2018 and
onwards. Provided, that the grossed-up value of the benefit shall
be determined by dividing the actual monetary value of the fringe
benefit by the difference between 100% and the applicable tax
rates.163

Optional Standard Deduction (OSD)

Unless the taxpayer signifies in his return his intention to

elect the OSD, he shall be considered as having availed himself
of the itemized deductions. Such election when made in the
return shall be irrevocable for the taxable year for which the
161
Withholding Tax at Source.
162
Withholding of Final Tax on Certain Incomes.
163
Sec. 7, Revenue Regulations No. 8-2018.
return is made. A GPP and the partners comprising such
partnership may avail of the OSD only once, either by the GPP
or the partners comprising the partnership.

Itemized Deductions versus Optional Standard Deduction

Itemized deductions are the allowable deductions as

enumerated under Sec. 34 of the Tax Code. OSD is the standard
deduction in an amount not exceeding 40% of the gross income
of individuals, other than NRAs, or corporations in lieu of the
deductions enumerated under Subsections A-J of Sec. 34 of the
Tax Code.

Unless the taxpayer, who is taxable under the graduated

income tax rate, indicates in the ITR the intention to choose the
OSD, it shall be thought as having availed of the itemized
deductions. Such election of the option, when made in the return,
shall be irrevocable for the taxable year for which the return is
made. The election to claim either the itemized deductions or the
OSD for the taxable year must be signified by checking the
appropriate box in the ITR filed for the first quarter or the initial
quarter of the taxable year after the commencement of a new
business/practice of profession. Once the election is made, it
must be consistently applied to all the succeeding quarterly
returns and in the final ITR for the taxable year.164

The OSD allowed to individual taxpayers, except NRAs,

shall be 40% of gross sales/receipts during the taxable year. An
individual who is allowed to and claimed for the OSD shall not be
obliged to present with the tax return such financial statements
otherwise required under the Tax Code.

164
Sec. 8, Revenue Regulations No. 8-2018.
 MODULE 7

Meaning of Corporation

A “corporation” is an artificial being created by operation of

law, having the right of succession and the powers, attributes,
and properties expressly authorized by law or incident to its
existence.165 It includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations, or
insurance companies. However, the definition does not include
GPPs and a joint venture or consortium formed for the purpose
of undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with
the Government.

Kinds of Corporation

1. Domestic Corporations (DC). – Corporations that are

created or organized in the Philippines or under its laws;

2. Foreign Corporations (FC). – Corporations that are not

domestic corporations. Two (2) kinds of FCs are:

165
Sec. 2, Act No. 1459.
 i. Resident Foreign Corporations (RFC). –
These are FCs engaged in trade or business within
the Philippines. The term "resident" is used to
describe a corporation established under the laws of
a foreign country which does business in the
Philippines, and it is not being used in its ordinary
meaning that the FC acquires residence or domicile
in the Philippines. It cannot acquire "residence" in its
common meaning because it is created under the
laws of a foreign country. A good example of RFC is
the Philippine branch of an FC. The Philippine branch
is owned wholly by the foreign head office (i.e.,
NRFC) and does not have nor issue Philippine
shares of stocks. The Philippine branch of an FC is
merely an extension of the FC in the Philippines.
There is only one single entity to speak of. Only the
income of the Philippine branch from sources within
the Philippines is subject to Philippine income tax.
The income of the Philippine branch as well as that of
the foreign head office from sources outside the
Philippines are exempt from the Philippine income
tax. Corollarily, the gross income from sources within
the Philippines of the foreign head office is subject to
the final income tax. While its income from sources
outside the Philippines shall be exempt from
Philippine income tax.

ii. Non-Resident Foreign Corporations (NRFC).

– These are FCs not engaged in trade or business
within the Philippines but deriving income from
sources within the Philippines. Thus, the term "non-
resident" means "not engaged in trade or business in
the Philippines."

Tax Rate for Corporation

Under Republic Act No. 11534 or CREATE, which took

effect on April 11, 2021, a Corporate Income Tax (CIT) shall be:

Type of Corporation Rate Effectivity

Date

1. DC

a. DC, in general 25% July 1, 2021

 b. For corporations with net
taxable income not exceeding
P5,000,000.00 and total assets 20% July 1, 2021
not exceeding
P100,000,000.00, excluding the
land on which the particular
business entity’s office, plant
and equipment are situtated

c. Proprietary Educational 1% July 1, 2021

Institutions and Hospitals to
June 30,
2023
10%
July 1, 2023
2. FC (on taxable income [e.g., net
or gross income, as applicable]
derived from all sources within the
Philippines)

3. RFC 25% July 1, 2020

4. OBUs (Note: OBUs shall now be 25% Upon the

taxed as RFC upon the effectivity of effectivity of
the CREATE) the CREATE

5. ROHQ 25% January 1,

2022
6. NRFC 25% January 1,
2022

DC shall account separately in their Annual Financial

Statements the cost of the land on which the particular business
entity’s office, plant and equipment are situated, and shall not
lump the same in one account title nor consolidate its cost with
other fixed asset accounts.

Minimum Corporate Income Tax (MCIT)

The MCIT is a new concept introduced by Repubic Act No.

8424 to the Philippine taxation system. It came about as a result
of the perceived inadequacy of the self-assessment system in
capturing the true income of corporations. It was devised as a
relatively simple and effective revenue-raising instrument
compared to the normal income tax which is more difficult to
control and enforce. It is a means to ensure that everyone will
make some minimum contribution to the support of the public
sector.166 It is not an additional tax. It is compared with the
regular income tax, which is due from a corporation. If the regular
income is higher than the MCIT, then the corporation does not
pay the MCIT but the amount of the regular income tax.

Corporations Covered by Minimum Corporate Income Tax

The MCIT covers DCs and RFCs which are subject to the
regular income tax. The term “regular income tax” refers to the
regular income tax rates under the Tax Code. Thus, corporations
which are subject to a special corporate tax or to preferential
rates under special laws do not fall within the coverage of the
MCIT. For corporations whose operations or activities are partly
covered by the regular income tax and partly covered by the
preferential rate under special law, the MCIT shall apply the
regular income tax rate on its operations not covered by the tax
incentives. Newly established corporations or firms which are on
their first three (3) years of operations are not covered by the
MCIT. A corporation starts to be covered by the MCIT on the
fourth year following the year of the commencement of its
business operations. The period of reckoning which is the start of
its business operations is the year when the corporation was
registered with the BIR. This rule will apply regardless of whether
the corporation is using the calendar year or fiscal year as its
taxable year. The MCIT is paid on an annual basis and quarterly
basis. MCIT is governed by RR No. 12-2007.

Accounting Treatment of the Excess MCIT Paid

Any amount paid as excess MCIT shall be reflected in the

corporation's books as an asset under account title "deferred
charges-minimum corporate income tax". This asset account
shall be carried forward and may be credited against the normal
CIT due for a period not exceeding three (3) taxable year
immediately succeeding the taxable year/s in which the same
has been paid. Any amount of the excess MCIT due for the
three-year reglementary period shall lose its creditability. Such
amount shall be removed and deducted from "deferred charges-
minimum corporate income tax" account by a debit entry to
"retained earnings" account since this tax is not allowable as
deduction from gross income it being an income tax.

Determination of Reasonable Needs of the Business

An accumulation of earnings or profits is arbitrary if it is not

essential for the purpose of the business, bearing in mind all the

166
CREBA vs. Romulo,supra.
circumstances of the case. To ascertain the "reasonable needs"
of the business in order to substantiate an accumulation of
earnings, it refers to the immediate needs of the business,
including reasonably anticipated and expected needs. The
corporation should be able to demonstrate an immediate need or
the direct connection of anticipated needs to such accumulation
of profits. Otherwise, such accumulation would be deemed to be
not for the reasonable needs of the business, and the IAET
would apply.

The following constitute accumulation of earning for the

reasonable needs of the business:

i. Allowance for the increase in the

accumulation of earnings up to 100% of the paid-up
capital of the corporation as of Balance Sheet date,
inclusive of accumulations taken from other years;

ii. Earnings earmarked for definite corporate

expansion projects or programs requiring
considerable capital expenditure as ratified by the
Board of directors or equivalent body;

iii. Earnings earmarked for building, plants or

equipment acquisition as ratified by the Board of
Directors or equivalent body;

iv. Earnings earmarked for compliance with

any loan covenant or pre-existing obligation created
under a legitimate business agreement;

v. Earnings required by law or applicable

regulations to be retained by the corporation or in
respect of which there is legal prohibition against its
distribution;

vi. In the case of subsidiaries of FCs in the

Philippines, all undistributed earnings intended or
reserved for investments within the Philippines as can
be proven by corporate records and/or relevant
documentary evidence.

IAET shall not apply to the following corporations:

i. Banks and other non-bank financial

intermediaries;

ii. Insurance companies;

 iii. Publicly-held corporations;

iv. Taxable partnerships;

v. GPPs;

vi. Non-taxable joint ventures; and

vii. Enterprises duly registered with the special

economic zone and bases conversion development
authority.

Subsidiary and Branch of a Foreign Corporation, Compared

1. Retained Earnings Before 1998. – Accumulated

retained earnings as of December 31, 1997 of a subsidiary are
not subject to final withholding tax when a citizen, RA, or when
an NRAETB in the Philippines, receives the dividend even in
1998 or subsequent years. Accumulated branch profits as of
December 31, 1997 are subject to the BPRT if remitted in 1998.
There is no provision analogous to dividends that only branch
profits earned on or after 1998 shall be subject to the tax.

2. Legal Personality and Attribution of Income. – A

subsidiary is an entity separate and distinct from its stockholders.
It can transact with its foreign parent company, provided that the
transaction are at arm's length. Interest paid by the subsidiary on
a loan granted by the foreign parent company is deductible from
the subsidiary's gross income, while the interest income paid to
the foreign parent company shall be subject to the final
withholding tax.

The Philippine branch is merely an extension of the foreign

head office. Because of the single entity concept, the
transactions and income of the Philippine branch may be
attributed to the foreign head office. Interest paid by the
Philippine branch on a loan extended by the foreign head office
is not deductible from the branch's gross income. Thus, the
interest income of the foreign head office is not subject to
Philippine withholding tax.

3. Allocation of Overhead Expenses. – The overhead

expenses of a regional office of an FC maybe apportioned to the
different subsidiaries and affiliates in the Asia-Pacific Region.
The overhead expenses of a foreign head office maybe
distributed to its branches located worldwide including the
Philippine branch.
 4. Creation of Permanent Establishment. – A subsidary is
not treated as a permanent establishment of the foreign parent
company, provided that the transactions between them are at
arms length. An “arm’s length price” is the price independent or
unrelated parties would have agreed upon under similar
circumstances. A Philippine branch is a permanent
establishment; hence, treated as an RFC subject to Philippine
income tax on net income from sources within the Philippines.

5. Basis of Income Taxation. – A subsidiary is taxable on

worlwide income. A branch is taxable on its income from sources
within the Philippines. There are exempt branches and special
branches subject to preferential tax rates.

6. Entitlement to Income Tax Holiday. – A subsidiary is

entitled to income tax holiday under the the Board of Investment
(BOI) and Build-Operate-Transfer (BOT) laws. A branch is not
entitled to income tax holiday under the BOI and BOT laws. It is
entitled to income tax holiday under the PEZA law and Bases
Conversion and Development Authority (BCDA) law.

7. Stockholder's Extent of Liability. – The stockholder of a

subsidiary is liable only to the extent of his subscriptions in such
corporation. The foreign head office is liable for the liabilities of
the Philippine branch. Hence, the assets of the head office may
still be reached by creditors of the Philippine branch. No shares
of stock are issued by the Philippine branch to its head office.

8. Cash or Security Deposit with Securities and Exchange

Commission (SEC). – There is no deposit required to be made
by a subsidiary of an FC. The Philippine branch of an FC is
required to put up a deposit.
 MODULE 8

Deductions from Gross Income

As a general rule, deductions are strictly construed against

the taxpayer claiming them and it is incumbent upon the taxpayer
to establish a clear right to tax exemption. Tax exemptions are
looked upon with disfavor.167 If the exemption is not expressly
stated in the law, the taxpayer must at least be within the purview
of the exemption by clear legislative intent. 168 However, if there is
an express mention by clear legislative intent, the rule on strict
construction will not apply.169 Exemption claimed merely on the
ground that another person situated in the same circumstances
has not been required to pay or has not paid similar taxes is
unjustifiable and should be ignored.170

Types of Deductions

The three (3) types of deductions from gross income are:

A. Itemized Deductions. – Available to all kinds of

taxpayers engaged in trade or business or practice of profession;

B. OSD. – Available only to individual taxpayers deriving

business, professional or other incomes as well as to
corporations subject to the regular CIT; and

C. Special Deductions. – Available to insurance

companies.

Limitation on the Deductibility of Interest Expense

Taxpayer’s otherwise allowable deduction for interest

expense shall be reduced by the interest income that was
subjected to final tax for as long as the interest is not expressly
disallowed by law to be deducted from the taxpayer’s gross
income. This is called the “Tax Arbitrage Rule.” The exception to
this limitation is the interest incurred or paid on unpaid business-
related taxes shall be fully deductible.171

167
Western Minolco Corporation vs. Commissioner, 124 SCRA 121.
168
Commissioner of Customs vs. Philippine Acetylene Co., 39 SCRA 70.
169
Commissioner vs. Arnoldus Carpentry Shop, G.R. No. L-71122, March 25,
1988.
170
Bank of the Philippine Islands vs. Trinidad, 45 Phil 384.
171
Sec. 4 (c), Revenue Regulations No. 13-2000.
 “Tax arbitrage” refers to a strategy or practice where
individuals or corporations profit from the ways different kinds of
capital gains, income, and financial transactions are treated for
tax purposes.

Losses

Losses are generally classified into:

i) Those incurred in a trade or business for

profit;

ii) Those incurred in any transaction entered

into for profit, although not connected with the trade
or business; and

iii) Casualty losses that arise from fire, storm,

shipwreck, or other casualty, or from theft or robbery,
even though not connected with the trade or business
of the taxpayer.

The following conditions for the deductibility of losses are:

i. The loss must be that of the taxpayer;

ii. Actually sustained and charged off within the

taxable year;

iii. Evidenced by a closed and completed

transaction;

iv. Not claimed as a deduction for estate tax

purposes;

v. In the case of an individual, the loss must be

connected with his profession, trade or business, or
incurred in any transaction entered into for profit
though not connected with his trade or business;

vi. In the case of casualty loss, declaration of

loss is filed within 45 days from the occurence of the
casualty loss;

vii. Loss does not arise from a sham sale;

viii. Loss is not compensated by insurance or

otherwise.
 Net Opertaing Loss Carry Over (NOLCO)

The net operating loss of the business or enterprise for

any taxable year immediately preceding the current taxable year
which had not been previously offset as deduction from gross
income shall be carried over as a deduction from gross income
for the next three (3) consecutive taxable years immediately
following the year of such loss.

However, any net loss incurred in a taxable year during

which the taxpayer was exempt from income tax shall not be
permitted as a deduction. Further, a Net Operating Loss Carry
Over (NOLCO) shall be allowed only if there has been no
substantial change in the ownership of the business or enterprise
in that:

i. Not less than seventy-five percent (75%) in

nominal value of outstanding issued shares if the
business is in the name of a corporation is held by or
on behalf of the same persons; or

ii. Not less than seventy-five percent (75%) of

the paid up capital of the corporation if the business
is in the name of a corporation, is held by or on behalf
of the same persons.

“Net operating loss” shall mean the excess of allowable

deduction over gross income of the business in a taxable year.

General Principles and Policies on NOLCO

In general, NOLCO shall be allowed as a deduction from

the gross income of the same taxpayer who incurred and
accumulated the net operating losses irrespective of the change
in its ownership. This rule shall also apply in the case of a
merger where the taxpayer is the surviving entity.

The NOLCO of the taxpayer shall not be transferred or

assigned to another person, such as the transfer or assignment
thereof through a merger, consolidation or any form of business
combination of such taxpayer with another person.

An individual who claims the OSD shall not simultaneously

claim deduction of the NOLCO. The three-year reglementary
period shall continue to run despite the fact that the aforesaid
individual availed of the OSD during the said period.
 Moreover, the three-year reglementary period on the
carry-over of NOLCO shall continue to run nothwithstanding the
fact that the corporation paid its income tax under the MCIT
computation. NOLCO shall be availed of on a "first-in, first-out"
basis.

The following shall not be entitled to claim deduction of

NOLCO.

i. OBU of a foreign banking corporation, and

FCDU of a domestic or foreign banking corporation,
duly authorized as such by the BSP;

ii. An enterprise registered with the BOI;

iii. An enterprise registered with PEZA;

iv. An enterprise registered under BCDA;

v. FC engaged in international shipping or air

carriage business in the Philippines; and

vi. Any person, natural or juridical, enjoying

exemption from income tax.

Bad Debts

“Bad debts”172 shall refer to those debts resulting from the

worthlessness or uncollectibility, in whole or in part, of amounts
due the taxpayer by others arising from money lent or from
uncollectible amounts of income from goods sold or services
rendered. The requisites for deductibility of bad debts are:

i. There must be an existing indebtedness due

to the taxpayer which must be valid and legally
demandable;

ii. The same must be connected with the

taxpayer's trade, business or practice of profession;

iii. The same must not be sustained in a

transaction entered into between related parties;

iv. The same must be actually charged-off the

books of accounts of the taxpayer as of the end of the
taxable year; and

172
Sec. 2, Revenue Regulations No. 5-99, March 10, 1999.
 v. The same must be actually ascertained to be
worthless and uncollectible as of the end of the
taxable year.

The only exceptions are:

i. In the case of banks, the BSP, thru its

Monetary Bank, shall ascertain the worthlessness
and uncollectability of the bad debts and it shall
sanction the writing-off of the said indebtedness from
the banks books of accounts at the end of the taxable
year;

ii. In no case may a receivable from an

insurance or surety company be written-off from the
taxpayer's books and claimed as bad debts deduction
unless such company has been pronounced closed
due to insolvency or for any such similar reason by
the Insurance Commissioner.

Tax Benefit Rule

The collection of bad debts previously sanctioned as

deduction in the preceding year or years shall be included as
part of the taxpayer's gross income in the year of such recovery
to the degree of the income tax benefit of said deduction. Under
the "Tax Benefit Rule” or “Equitable Doctrine of Tax Benefit," the
collection of amounts deducted in previous years from gross
income become taxable income unless to the extent thereof, the
deduction did not give rise to any tax benefit to the taxpayer.

Depreciation

The following conditions must exist for deductibility of

depreciation:

i. The allowance for depreciation must be

reasonable;

ii. It must be for property arising out of its use

in the trade or business;

iii. It must be charged-off during the taxable

year from the taxpayer's books of accounts; and

iv. A statement on the allowance must be

attached to the return.
 The necessity for a depreciation allowance arises from the
fact that certain property used in the business slowly move
towards a point where its usefulness is exhausted. In the case of
tangible property, it pertains to that which is subject to wear and
tear, to decay or deterioration from natural causes, as where
machinery or other property must be substituted by a new
invention, or due to the inadequacy of the property to the growing
needs of the business. Property held in repair may be the subject
of a depreciation allowance. The deduction of an allowance for
depreciation is restricted to property used in the taxpayer's trade
or business. The determination of the length of the useful life of
property used in business is commonly formulated by the
taxpayer himself. The policy is not to disturb depreciation
deductions unless there is a strong and persuasive basis for a
change.

Itemized Deductions versus Optional Standard Deductions

Itemized deductions are the allowable deductions as

enumerated in the Tax Code. OSD is the standard deduction in
an amount not exceeding forty percent (40%) of the gross
income of individuals, other than NRAs, or corporations in lieu of
the deductions enumerated in the Tax Code.

The selection to claim either the itemized deductions or

the OSD for the taxable year must be indicated by checking the
correct box in the ITR filed for the first quarter or the initial
quarter of the taxable year after the start of a new
business/practice of profession. Once the selection is made, it
must be consistently applied to all the succeeding quarterly
returns and in the final ITR for the taxable year.

Tests Used to Determine the Entitlement of Tax Exemption

1. Organizational Test. – The corporation or association’s

constructive documents must show that its primary purpose/s of
incorporation fall under Sec. 30 of the Tax Code, which is the
provision on the tax exempt corporation;

2. Operational Test. – The regular activities of the

corporation or association be exclusively devoted to the
accomplishment of the purposes specified in Sec. 30 of the Tax
Code. A corporation fails to meet this test if the corporation has
no activities conducted in furtherance of the purpose for which it
was organized, or if a substantial part of its operations
constitutes “activities conducted for profit”.
 MODULE 9

Meaning of Estate and Trusts

An “estate” is created by operation of law, when an

individual dies, bequeathing properties to his compulsory or other
heirs. The taxable estate entity is an estate under administration
or judicial settlement. In other words, if it is not under judicial
testamentary or intestate proceedings, it is not taxable entity. As
to the latter, the income is taxable directly to the heir or
beneficiary. The status of an estate is dependent on the status of
the decedent immediately prior to his death.

A “trust” is a legal arrangement whereby the owner of

property (trustor) transfers ownership to a person (trustee) who is
to hold and control the property according to the owner’s
instructions, for the benefit of a designated person(s)
(beneficiary). Legal title to the trust property is conferred in the
trustee, while equitable title belongs to the beneficiary. The
income of the trust is, generally, to be accumulated. However, a
fiduciary may, at his pleasure, either allocate or accumulate the
income.

The taxable income of estates and trusts shall include:

1. Income accumulated in trust for the benefit of unborn or

unascertained person or persons with contingent interests, and
income accumulated or held for future distribution under the
terms of the will or trust;

2. Income which is to be distributed currently by the

fiduciary to the beneficiaries, and income collected by a guardian
of an infant which is to be held or distributed as the court may
direct;

3. Income received by estates of deceased persons during

the period of administration or settlement of the estate; and

4. Income which, in the discretion of the fiduciary, may be

either distributed to the beneficiaries or accumulated.173

173
Sec. 60(A), Tax Code.
 It shall not apply to employee's trust which forms part of a
pension, stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees: i) if contributions are
made to the trust by such employer, or employees, or both for
the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with
such plan; and ii) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or income
to be (within the taxable year or thereafter) used for, or diverted
to, purposes other than for the exclusive benefit of his
employees. Any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed
by such employee or distributee.174

Revocable Trusts

The income of the trust shall either be taxable to the

fiduciary, if the trust instrument is irrevocable, or taxable to the
grantor, if the trust instrument is revocable.

Where at any time the power to revest in the grantor title to

any part of the corpus of the trust is vested: i) in the grantor
either alone or in conjunction with any person not having a
substantial adverse interest in the disposition of such part of the
corpus or the income therefrom; or ii) in any person not having a
substantial adverse interest in the disposition of such part of the
corpus or the income therefrom, the income of such part of the
trust shall be included in computing the taxable income of the
grantor.175

Income for Benefit of Grantor

Where any part of the income of a trust: i) is, or in the

discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may
be held or accumulated for future distribution to the grantor; or ii)
may, or in the discretion of the grantor or of any person not
having a substantial adverse interest in the disposition of such
part of the income, be distributed to the grantor; or iii) is, or in the
discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may
be applied to the payment of premiums upon policies of

174
Sec. 60(B), Tax Code.
175
Sec. 63, Tax Code.
insurance on the life of the grantor, such part of the income of
the trust shall be included in computing the taxable income of the
grantor.176

The term “in the discretion of the grantor'” means in the

discretion of the grantor, either alone or in conjunction with any
person not having a substantial adverse interest in the
disposition of the part of the income in question.177

The taxable income of the estate or trust shall be

computed in the same manner and on the same basis as in the
case of an individual, except that:

i. There shall be allowed as a deduction in

computing the taxable income of the estate or trust
the amount of the income of the estate or trust for the
taxable year which is to be distributed currently by the
fiduciary to the beneficiaries, and the amount of the
income collected by a guardian of an infant which is
to be held or distributed as the court may direct, but
the amount so allowed as a deduction shall be
included in computing the taxable income of the
beneficiaries, whether distributed to them or not. Any
amount allowed as a deduction shall not be allowed
as a deduction in the same or any succeeding
taxable year;

ii. In the case of income received by estates of

deceased persons during the period of administration
or settlement of the estate, and in the case of income
which, in the discretion of the fiduciary, may be either
distributed to the beneficiary or accumulated, there
shall be allowed as an additional deduction in
computing the taxable income of the estate or trust
the amount of the income of the estate or trust for its
taxable year, which is properly paid or credited during
such year to any legatee, heir or beneficiary but the
amount so allowed as a deduction shall be included
in computing the taxable income of the legatee, heir
or beneficiary;

iii. In the case of a trust administered in a

foreign country, the aforesaid deductions shall not be
allowed. Provided, the amount of any income
included in the return of said trust shall not be
176
Sec. 64(A), Tax Code.
177
Sec. 64(B), Tax Code.
 included in computing the income of the
beneficiaries.178

MODULE 10

Importance of Identifying the Nature of the Asset

The character of the asset sold or exchange governs the

kind of income tax applicable on the transaction as well as the
tax rate on the proper tax base. The character of the asset is vital
in lessening the tax liability of the taxpayer in a legal manner
upon its sale or disposition.

It is imperative to know that where the gain from sale of

property is small or when the sale results in a loss, it is best that
the character of the property sold is an ordinary asset, because
the cost or adjusted basis of the asset is deducted from the gross
selling price and only the gain shall be subject to income tax.
When there is a loss from sale of ordinary asset, such loss is
carried forward and may be deducted from the gross income of
the taxpayer for the next three (3) succeeding taxable years. If
the gain from the sale or transfer of property is huge, it is best to
transfer the property as a capital asset, because the preferential
rates are applied on the gross selling price or FMV, whichever is
higher. It is also important to determine the nature of the asset
sold in order to deduct and withhold the correct withholding
taxes.

Sale or Exchange

In order to have tax consequences, the sale or exchange

of property must be consummated and not just perfected. There
is a sale or exchange of property when there is an operative and
actual transfer of ownership of the property to another as would
divest the transferor of the benefits accruing from the ownership
of the property for a valuable consideration.

The terms “sale” or “exchange” are to be considered in the

178
Sec. 61, Tax Code.
light of their ordinary meaning from a consideration of the
substance of the transaction. Thus, forced sales, such as
foreclosure sales and tax sales, have been held to be included
within the meaning of the law. A distribution in complete
liquidation has been held to be an “exchange” for the purposes of
determining gain or loss.179 A sale or exchange will ordinarily be
held to occur on the date the transfer of title over the asset is
effected or when ownership is terminated in the hands of the
transferor. What is generally taken into account is not the
perfection of the contract but the consummation thereof.180

Capital Assets versus Ordinary Assets

If the property sold is classified as an ordinary asset,

income tax due is the CIT computed at twenty percent (20%) or
twenty-five percent (25%), as the case may be, of its net taxable
income (in the case of corporations), or the graduated income
tax rates applied on the net taxable income (in the case of
individuals other than an NRANETB).

In general, if the real property located in the Philippines is

classified as a capital assets, the income tax due from the sale or
exchange thereof is the capital gains tax (CGT) computed at six
percent (6%) of the actual consideration or the FMV of the real
property at the time of sale, whichever is higher.

The term “capital assets” means property held by the

taxpayer, whether or not connected with his trade or business. It
does not include:

i. Stock in trade of the taxpayer or other

property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of
the taxable year; or

ii. Property held by the taxpayer primarily for

sale to customers in the ordinary course of his trade
or business; or

iii. Property used in trade or business, of a

character which is subject to the allowance for
depreciation; or

iv. Real property used in trade or business of

the taxpayer.

179
Helvering vs. Chester N. Weaver Co., 305 U.S. 293.
180
U.S. Industrial Alcohol Co. vs. Helvering, 137 F. [2d] 511.
 The statutory definition of capital assets is negative in
nature. Thus, if the property or asset is not among the
exceptions, it is a capital asset; conversely, assets falling within
the exceptions are ordinary assets.181

Thus, when a manufacturer of cement sells a vacant

industrial lot, the seller of real property is certainly not a dealer of
real property. In this case, the real property sold will be treated
as a capital asset because it is not being used in its business of
manufacturing cement nor does it form part of the company's
stock in trade primarily for sale in the course of its trade or
business. Accordingly, it shall be subject to CGT.

On the other hand, if the seller of real property is a

subdivision developer and it sells one of the subdivision lots to
another, it will be considered as a real estate dealer and the lot
sold will be treated as an ordinary asset. The ordinary gain from
the sale of the subdivision lot will be added to its operating and
other taxable income to arrive at its gross income. After
deducting allowable deductions from gross income, the resulting
net taxable income will be subject to the normal CIT.

Where the real property is located outside the Philippines,

the regular CIT shall apply, even though such property is
classified as a capital asset. The CGT applies only when such
real property is situated within the Philippines.

Sale of Capital Asset versus Ordinary Asset

1. Seller of Real Property. – The seller of real property

may be: i) an individual or a corporation; ii) engaged in business
as a real estate dealer or engaged in business other than real
estates; and iii) it may be engaged in trade or business or not
engaged in trade or business;

2. Nature of Asset Sold. – The characteristic of the real

property sold will depend on whether or not it is forming part of
the stock in trade principally for sale in the course of trade or
business of the seller, or it is being used in its trade or business.
Only one condition of the two is enough to make the real
property an ordinary asset. If both conditions above are not
present, the real property is a capital asset;

3. Type of Capital Asset Sold. – The asset may be used in

trade or business of the taxpayer, yet it is classified as a capital
181
Marcario Lim Gaw, Jr. vs. CIR, G.R. No. 222837, July 23, 2018.
asset, or it is a capital asset being used as the principal
residence of a natural person;

4. Tax Base and Tax Rate as well as Gain or Loss from

Sale. – The tax base in the sale of real property classified as
capital asset is the gross selling price or FMV, whichever is
higher. The law presumes that the seller makes a gain from the
sale of the real property. Whether or not the seller makes profit
from the sale of real property is of no moment. In fact, he has to
pay the tax, even if he incurs an actual loss from the sale thereof.

On the other hand, the tax base in the sale of real property
classified as ordinary asset is the gain and if he incurs a loss
from the sale thereof, such loss may be deducted from his gross
income during the taxable year. The ordinary gain shall be added
to the operating income, and the net taxable income shall be
subject to: i) the regular CIT, or the gross income will be subject
to MCIT, if it is higher than the normal CIT due for the taxable
year, in the case of a corporation; or ii) the graduated income tax
rates in the case of an individual;

5. Person Liable to Income Tax. – The person liable to pay

the income tax on the gain from the sale of real property
classified as ordinary asset and the CGT in the case of capital
asset is the individual or corporation;

6. Obligation of Buyer of Asset. – In the case of sale of

capital asset, the seller is responsible for the filing of the CGT
return and the payment of CGT. The buyer has no obligation to
withhold and deduct any creditable tax, since the CGT is a final
tax. However, in the case of sale of an ordinary asset, the buyer
is constituted as a withholding agent of the Government. He is
required to deduct the proper expanded withholding tax from the
consideration, to file the withholding tax return and to pay the tax
to the BIR within the prescribed period.

7. Cost or Adjusted Basis Upon Subsequent Sale. – In the

case of sale of capital asset, the cost or adjusted basis of the
real property sold becomes immaterial, because the tax base is
the gross selling price or the FMV, whichever is higher. However,
in the case of sale of ordinary asset, the cost or adjusted basis
must be duly supported with receipts and other documentary
evidence in order to be deductible from gross selling price.

Significance of Status of Taxpayer as Dealer of Real

Property

Considering that the system of income tax applicable on

the transaction will depend on whether or not the taxpayer-seller
is a dealer of real property and whether or not the real property
he sells or exchanges is an ordinary asset or a capital asset, it is
significant to know the seller's tax status as well as the nature of
the real property sold. It is similarly significant to understand the
status of the seller of real property because the rate of expanded
withholding tax applicable on sale of ordinary assets by a real
estate dealer is subject to the graduated tax rates while sale of
real property by a non-dealer of real property is set at fixed rate,
irrespective of the amount of gross selling price.

A "real estate dealer" includes any person engaged in the

business of buying, developing, selling, exchanging real
properties as principal and maintaining himself out as a full or
part-time dealer in real estate. All real properties acquired by the
real estate dealer shall be regarded as as ordinary assets.

“Real estate developer” shall refer to any person engaged

in the business of developing real properties into subdivisions, or
building houses on subdivided lots, or constructing residential or
commercial units, townhouses and other similar units for his own
account and offering them for sale or lease. 182 All real properties
acquired by the real estate developer, whether developed or
underdeveloped as of the time of acquisition, and all real
properties which are held by the real estate developer principally
for sale or for lease to customers in the regular course of his
trade or business, or which would correctly be included in the
inventory of the taxpayer if on hand at the close of the taxable
year, and all real properties used in the trade or business,
whether in the form of land, building, or other improvements,
shall be regarded as as ordinary assets.

“Real estate lessor” shall refer to any person engaged in

the business of leasing or renting real properties on his own
account as a principal and holding himself out as a lessor of real
properties being rented out or offered for rent. All real properties
of the real estate lessor, whether land and/or improvements,
which are for lease/rent or being presented and offered for
lease/rent, or otherwise for use or being used in the trade or
business, shall likewise be regarded as as ordinary assets.

“Taxpayers who are considered engaged in the real estate

business” shall refer collectively to real estate dealers, real
estate developers and/or real estate lessors. A taxpayer whose
main reason of engaging in business, or whose Articles of
Incorporation states that its principal purpose is to engage in the

182
Sec. 2(e), Revenue Regulations No. 7-2003.
real estate business shall be deemed to be engaged in the real
estate business. Thus, taxpayers not engaged in the real estate
business refer to persons other than real estate dealers, real
estate developers and/or real estate lessors.

Capital Gains Tax

“Capital Gains Tax” (CGT) is a tax imposed on the gains

supposed to have been realized by the seller from the sale,
exchange, or other disposition of capital assets located in the
Philippines, including pacto de retro sales and other forms of
conditional sale.

Real estate dealers or real estate developers are

considered habitually engaged in the real estate business when
they are registered with the Housing and Land Use Regulatory
Board (HLURB) or Housing and Urban Development
Coordinating Council (HUDCC). If the taxpayer is not registered
with the HLURB or HUDCC as a real estate dealer or developer,
he/it may be engaged in the real estate business through the
establishment of substantial relevant evidence. Real properties
obtained by banks through foreclosure sales are regarded as
their ordinary assets. However, banks shall not be considered as
habitually engaged in the real estate business for purposes of
determining the applicable rate of withholding tax imposed.