PHILIPPINE TAX SYSTEM (2) Doctrine of Symbiotic

Relationship/Reciprocity Theory The state

collects taxes from the subjects of taxation in
The Three (3) Inherent Powers of the State
order that it may be able to perform the functions
1.Police Power. of government. The citizens, on the other hand,
pay taxes in order that they may be secured in the
Regulatory and enforcement power of the state enjoyment of the benefits of organized society
2. Power of taxation. (3) PARTNERSHIP THEORY
Revenue raising power. Government’s power emanates from its
3. Power of Eminent Domain. partnership in the production of the income, by
providing the protection, resources, incentives
Acquisition of private property and proper climate for such production
(4) NECESSITY THEORY
Taxation-the power by which the sovereign, Power to tax emanates from necessity to give the
through its law-making body, raises revenue to citizenry an army to resist aggression, a navy to
defray the necessary expenses of the government defend the shores from invasion and a corps of
(51 Am Jur. 34) civil servants to serve, public enjoyment for the
enjoyment of citizenry.

PURPOSES AND OBJECTIVES

PRINCIPLES OF SOUND TAX SYSTEM
1. Revenue-raising to support the existence of the
state FISCAL ADEQUACY- sources of tax revenue
should coincide with, and approximate the needs
2. Promotion of general welfare
of government expenditures.
Illustration: Sugar Adjustment Act was imposed
THEORETICAL JUSTICE- tax system should
to strengthen the economic sugar industry.
be fair to the average taxpayer and based upon his
1. Regulation (sin taxes) ability to pay

2. Reduction of social inequality through a ADMINISTRATIVE FEASIBILITY- the tax

progressive tax system system should be capable of being properly and
efficiently administered by the government and
3. Encourage economic growth enforced the least inconvenience to the taxpayer.
4. Protection of the local industries through
imposition of Tarrif rates.
INHERENT LIMITATIONS

• It must be for public purpose

THEORIES OF TAXATION
• inherently legislative
(1) Life Blood Theory • territorial
• subject to international comity
In CIR v. Algue, the Supreme Court of the
Philippines held that without the reveue raised
from taxation, the government will not survive,
resulting in the detriment to the society,
ESSENTIAL ELEMENTS OF TAX Non-Delegation of Power to tax
a) It is an enforced contribution. Exceptions:
b) It is generally payable in money. 1. Bureau of Customs
c) It is proportionate in character. 2. Local Government Units (LGU)
d) It is levied on persons, property or rights. 3. Others that may be authorize by
e) It is levied by the law-making body of the state. the Constitution
f) It is levied for public purpose.
DOUBLE TAXATION
CONSTITUTIONAL LIMITATIONS DIRECT DOUBLE TAXATION
Same property is taxed twice by the same taxing
authority during the same taxing period with the
• No person shall be imprisoned for non- same kind or character of tax
payment of a poll tax (one levied on
persons or residents within the territory INDIRECT DOUBLE TAXATION
without regard to their property,
Absence of any of the elements of direct double
business, occupation.
taxation will render the tax legal.
• the rule of taxation shall be uniform and
equitable. The congress shall evolve a
progressive system of taxation.
• Charitable institutions, churches, MEANS OF AVOIDING OR MINIMIZING
THE BURDEN OF TAXATION
parsonages or convents appurtenant
thereto, mosques, and non-profit 1. Shifting – the transfer of the burden of tax by
cemeteries and all lands, buildings and the original payer to someone else
improvements directly and exclusively
used for religious, charitable or 2. Transformation – the producer pays the tax and
educational purposes shall be exempt endeavor to recoup himself by improving his
from taxation process of production
• All revenues and assets of non-stock, 3. Evasion – the use of illegal means to defeat or
non-profit educational institutions used lessen tax
actually, directly and exclusively for
educational purposes shall be exempt 4. Tax Avoidance – the exploitation of legally
from taxes and duties. upon dissolution permissible alternative tax rates of assessing
or cessation of the corporate existence of taxable income to reduce tax liability
such institutions, their assets shall be
5. Exemption – the grant of immunity to
disposed of in the manner provided by
particular persons of a particular class.
law.
• Proprietary educational institutions,
including those cooperatively-owned,
may likewise be entitled to exemptions
subject to limitations provided by law
including restrictions on dividends and
provisions on reinvestment
Amnesty 4. As to determination of fixed amount:
It is the general or intentional overlooking by the ● Specific- excise tax of fixed amount by number,
State of its authority to impose penalties on standard of weight, or measurement
persons otherwise guilty of evasion or violation
● Ad valorem – excise tax of fixed proportion of
of revenue or tax law. It partakes of an absolute
the value of the property
forgiveness or waiver of the government of its
right to collect. Amnesty involves immunity from 5. As to purpose:
all criminal, civil and administrative liabilities
from non-payment of taxes. ● Primary, Fiscal, or Revenue Purpose

6. Capitalization – the reduction in the selling ● Secondary, Regulatory, Special, or Sumptuary

price of income producing property by an amount Purpose
equal to the capitalized value
7. Avoidance – the tax saving device within the
means sanctioned by the law.

Classifications of taxes
1. As to scope:
● National- imposed by the national government
● Local – imposed by the local government

2. As to subject matter or object:

● Personal, poll, or capitation – tax of a fixed
amount imposed upon individuals residing within
a specified territory.
6. As to graduation or rate:
● Property – tax imposed on property in
proportion to its value ● Proportional – tax based on fixed percentages
of amount
● Excise – tax on certain rights and privileges (sin
products or imported goods ● Progressive – tax the rate of which increases as
the tax base or bracket increases
● Regressive - tax the rate of which decreases as
3. As to who bears the burden: the tax base or bracket increases
● Direct – taxpayer cannot shift to another
● Indirect – indemnify himself at the expense of 7. As to taxing authority:
another
● National – imposed under National Internal
Revenue Code, collected by Bureau of Internal
Revenue
● Local – imposed by LGU’s
 National Taxes Required to File Income Tax Returns
NIRC provides for the following taxes: 1. Individual
2. Resident citizens receiving income from
a) Income tax
sources within or outside the Philippines
b) estate and donor's tax • Employees deriving purely
compensation income from two or more
c) documentary stamp tax employers, concurrently or successively
d) percentage tax at any time during the taxable year
• Employees deriving purely
e) value added tax compensation income regardless of the
f) excise taxes amount, whether from a single or
several employers during the calendar
year, the income tax of which has not
been withheld correctly (i.e. tax due is
PHILIPPINE TAX SYSTEM not equal to the tax withheld) resulting
to collectible or refundable return
• Self-employed individuals receiving
INCOME TAXATION income from the conduct of trade or
business and/or practice of profession
INCOME means all such gains or profits from
• Individuals deriving mixed income, i.e.,
whatever source.
compensation income and income from
SOURCES OF INCOME the conduct of trade or business and/or
practice of profession
• PROPERTY • Individuals deriving other non-business,
• LABOR non-professional related income in
• SALE/EXCHANGE OF CAPITAL addition to compensation income not
ASSET AND ACTIVITY otherwise subject to a final tax
• Individuals receiving purely
compensation income from a single
GROSS INCOME- all income less exclusions employer, although the income of which
has been correctly withheld, but whose
NET OR TAXABLE INCOME- gross income
spouse is not entitled to substituted
less allowable deductions
filing
TAXABLE COMPENSATION INCOME-
gross compensation income less personal and
additional exemptions 3. Non-resident citizens receiving income
from sources within the Philippines
INCOME TAX DUE- taxable or net income
4. Aliens, whether resident or not,
multiplied by income tax rate
receiving income from sources within
INCOME TAX PAYABLE- income tax due the Philippines
less creditable withholding tax 5. Non-Individuals
• Corporations including
partnerships, no matter how
created or organized.
 • Domestic corporations receiving FILIPINO CITIZEN
income from sources within and
1. Born with father and/or mother as Filipino
outside the Philippines
citizens
• Foreign corporations receiving
income from sources within the 2. Born before Jan. 17,1973 of Filipino mother
Philippines who elects Philippine citizenship upon reaching
• Estates and trusts engaged in the age of maturity
trade or business
3. Acquired Philippine citizenship after birth
(naturalized) in accordance with Philippine
Laws

PERSONS NOT REQUIRED TO FILE

INCOME TAX RETURN NON-RESIDENT FILIPINO CITIZEN
1. An individual earning purely compensation 1. Establishes to the satisfaction of the
income whose taxable income does no exceed Commissioner of Internal Revenue, the
250,000. fact of his physical presence abroad with
a definite intention to reside therein
2. An individual whose income tax has been
correctly withheld by his employer
2. Leaves the Philippines during the
3. An individual whose sole income has been taxable year to reside abroad:
subjected to final withholding tax
● As an immigrant
4. Minimum wage earners, the Certificate of
● For employment on a permanent basis
Withholding filed by the respective employers,
duly stamped “Received” by the Bureau. ● For work and derives income that requires him
to be physically abroad most of the time during
the taxable year

RA 9504 and RR 10-2008 3. A citizen of the Philippines who shall

have stayed outside the Philippines for
Individual taxpayers may no longer file income one hundred eighty-three days (183) or
tax return provided he has (all the requirements more by the end of the year.
must be satisfied):
A non-resident citizen who arrives in the
1. Receiving purely compensation income, Philippines at any time during the taxable year to
regardless of amount (Substituted Filing) reside permanently in the Philippines shall be
2. The amount of income tax withheld by the considered a non-resident citizen for the taxable
employer is correct (Tax due = Tax withheld) year in which he arrives in the Philippines with
respect to income derived from sources abroad
3. Only one employer during taxable year until the date of his arrival in the Philippines.
4. If married, the employee’s spouse also
complies with all the three aforementioned
conditions, or otherwise receives no income.
SOURCES OF INCOME FOR INDIVIDUAL For Self-employed and Professionals
TAXPAYER

GROSS INCOME means all income derived

from whatever source, including but not limited
RULES ON INDIVIDUAL TAXPAYER to the following:

• OFWs are classified as NRC for tax • Compensation income for services in
purposes. whatever form paid including but not
• A FC who was previously a NRC and limited to fees, salaries, wages,
who arrives and resides permanently in commissions, and similar items.
the Philippines at any time during the • Gross income derived from the conduct
taxable year shall likewise be treated as of trade or business or the exercise of
NRC for the same taxable year with profession
respect to his income derived from • Gains derived from dealings in property
sources abroad until the date of his • Interest
arrival to the Philippines. • Rents
• A FC taxpayer not classified as NRC is • Royalties
considered a RC for tax purposes. • Dividends
• A NRA NETB is subject to 25% income • Annuities
tax based on gross profit from all • Prizes and winnings
sources within the Philippines. “trade or • Pensions
business” includes performance of the • Partners Distributive share from the net
functions of a public service or income of the general professional
performance of personal service in the partnership
Philippines

Exclusions from gross income

INCOME TAX RATES
1. Proceeds from life insurance (except
TAX REFORM FOR ACCELERATION revocable)
AND INCLUSION(TRAIN)
2. Amounts received as return of premiums
For Compensation Income Earner
3. Gifts, bequest and devises
4. compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pension, gratuities
Miscellaneous items f. Prizes (except prizes amounting to P 10,000
or less) – 20%;
1. Income received by a foreign governments
from their investment in the Philippines g. Winnings (except Philippine Charity
Sweepstakes and Lotto winnings amounting to P
2. income derived by the government of the
10,000 or less) – 20%;
Philippines or any of its political subdivision
from any public utility or from the exercise of h. Cash and Property Dividends – 10%;
any essential government function
i. Capital Gains from Sale of Shares of Stock not
3. prizes and awards received in recognition of Traded in the Stock Exchange – 15%;
j. Capital Gains from Sale of Real Property
located in the Philippines – 6%.
PASSIVE INCOME
The following passive income shall be subject to
the final Income Tax rates: EXEMPTIONS AND EXCLUSIONS
a. Interests from any currency bank deposit and 1. Remuneration received as an incident of
yield or any other monetary benefit from deposit employment (RA 7641; those with approved
substitutes and from trust funds and similar reasonable private retirement plan; Social
arrangements – 20%; Security Act of 1954, as amended; GSIS Act of
1937, as amended; and etc.
b. Interest income received by an individual
taxpayer (except a non-resident individual) from 2. Remuneration paid for agricultural labor;
a depository bank under the expanded foreign
3. Remuneration for domestic services;
currency deposit system – 15%;
4. Remuneration for casual labor not in the
c. Proceeds of pre-terminated long-term
course of an employer's trade or business;
deposit or investment in the form of savings,
common or individual trust funds, deposit 5. Compensation for services by a citizen or a
substitutes, investment management accounts resident of the Philippines for a foreign
and other investments evidenced by certificates government or international organization;
in such form as prescribed by the Bangko
Sentral ng Pilipinas – the final tax shall be based 1. Damages (Actual, moral, exemplary and
on the remaining maturity of the investment: nominal);

• Four (4) years but less than five (5) 2. Life insurance;
years – 5% 3. Amounts received by the insured as a return
• Three (3) years but less than four (4) of premium; an amount not exceeding 40% of
years – 12%; and the gross sales/receipts for individuals and gross
• Less than three (3) years – 20% income for corporations; or
d. Royalties (except royalties on books and 4. Compensation for injuries or sickness;
other literary works and musical compositions) –
20% 5. Income exempt under treaty

e. Royalties on books and other literary works

and musical compositions – 10%;
1. 13th Month pay and other benefits 6. - Depreciation
2. GSIS, SSS, Medicare and other contributions 7. - Depletion of Oil and Gas Wells and Mines
(employee's share only)
8. - Charitable Contributions and Other
3. Compensation income of minimum wage Contributions- Research and Development
earners (MWEs) who work in the private sector 9. - Pension Trusts
and being paid the Statutory Minimum Wage
(SMW), as fixed by the Regional Tripartite * Not allowed to non-resident alien individual
Wage and Productivity Board * A General Professional Partnership (GPP) may
(RTWPB)/National Wages Productivity avail of the OSD only once, either by the GPP or
Commission (NWPC), applicable to the place the partners comprising the partnership
where he/she is assigned;
4. Compensation income of employees in the
public sector with compensation income of not MINIMUM WAGE EARNER
more the SMW in the non-agricultural sector as • A worker in the private sector paid the
fixed by the RTWPB? NWPC applicable to the statutory minimum wage, or to an
place where he/she is assigned. employee in the public sector with
compensation income of not more than
the statutory minimum wage in the
1. Fringe benefits given to employees other than nonagricultural sector where he/she is
assigned.
rank and file and subjected to Fringe Benefit Tax
• No withholding tax shall be required on
(FBT);
the Statutory Minimum Wage (SMW) of
2. Personnel Economic Relief Allowance the Minimum Wage earner in the
(PERA) given to government employees; and private/public sectors as defined in RR
Representation and transportation allowance 2-98, as amended by RR 11-2018,
(RATA granted to public officers and employees including:
under the General Appropriations Act.

1. Holiday pay
Allowable deductions 2. Overtime pay

a) *Optional Standard Deduction - an amount 3. Night shift differential

not exceeding 40% of the gross sales/receipts for 4. Hazard pay of Minimum Wage earners in the
individuals and gross income for corporations; private/public sectors as defined by these
or Regulations.
b) Itemized Deductions which include the
following:
COMPENSATION INCOME
1. – Expenses
is income arising out of an employer employee
2. - Interest relationship. It encompassed all remuneration for
services performed by an employee for his
3. - Taxes employer whether paid in cash or in kind (RR2-
4. - Losses 98). This includes:

5. - Bad Debts
 • salaries, honoraria, and wages,
emoluments,
(2) Living quarters or meals.
• Taxable bonuses, allowances (such as
and transportation, entertainment, (3) Facilities and privileges of relatively small
representation and the like), fees value. – xxx The following shall be considered
including director's fees, if the director as “de minimis” benefits not subject to income
is, at the same time, an employee of the tax as well as withholding tax on compensation
employer/corporation; income of both managerial, and rank and file
• taxable bonuses and fringe benefits employees:
except those which are subject to the
fringe benefits tax under Sec. 33 of the a. Monetized unused vacation leave
credits of private employees not
Code;
exceeding ten (10) days during the
• taxable pensions and retirement pay; year;
• and other income of a similar nature b. Monetized value of vacation and
constitute compensation income. sick leave credits paid to
government officials and
KINDS OF COMPENSATION employees;
c. Medical cash allowance to
1. Regular dependents of employees, not
• Basic Salary exceeding ₱1,500 per employee per
semester of ₱250 per month; 22 /
• Fixed allowances 47
2. Supplementary d. Rice subsidy of ₱2,000 or one sack
of 50kg. rice per month amounting
• Commission to not more than ₱2,000;
• Overtime pay e. Uniform and clothing allowance
not exceeding ₱6,000 per annum;
• Fees, including directors fees
• Profit sharing
• Monetized vacation leave in excess of
ten (10) days Income Tax Rates
• Sick leave • For Purely Self-Employed Individuals
• Fringe benefits received by rank and file and/or Professionals Whose Gross
employees Sales/Receipts and Other Non-Operating
• Hazard pay
Income Do Not Exceed the VAT
• Taxable 13th month pay and other
Threshold of P3,000,000, the tax shall
benefits
be, at the taxpayer’s option
For Individuals Earning Both Compensation
COMPENSATION INCOME Income and Income from Business and/or
Practice of Profession, their income taxes shall
(1) Compensation paid in kind. Compensation
may be paid in money or in some medium other be:
than money, as for example, stocks, bonds or • For Income from Compensation: Based
other forms of property. on Graduated Income Tax Rates;
If services are paid for in a medium other than money, the
fair market value of the thing taken in payment is the For Income from Business and/or Practice of
amount to be included as compensation subject to Profession:
withholding.

(Ex. If a corporation own stock as remuneration for

services rendered by the employee)
 • If the total Gross Sales/Receipts Do Not
Exceed VAT Threshold of P3,000,000,
the Individual Taxpayer May Opt to
Avail:
8% Income Tax on Gross Sales/Receipts and
Other Non- Operating Income in Lieu of the
Graduated Income Tax Rates and the Percentage
Tax; Or
Income Tax Based on Graduated Income Tax
Rates

• If the total Gross Sales/Receipts Exceed

VAT Threshold of P3,000,000

Computation of tax due on Purely

Income Tax Based on Graduated Income Tax
compensation
Rates

Computation of tax due on Mixed income

earner
 Withholding Tax Table • If the payee has none, the payment
constitutes compensation for personal
services.
• If the payee has proprietary interest, the
payment constitutes royalty income.

OTHER INCOME

• COLA of minimum wage earners is

exempt from income tax.
• any income or gain derived by an
employee from the exercise or stock
option is considered as additional
compensation subject to income tax and
consequently, to withholding tax on
compensation.
• Advance rentals representing option
money for the property as well as
ADVANCES AND REIMBURSEMENTS security deposits are non-taxable.
FOR TRAVELING AND
ENTERTAINMENT EXPENSES NOT
SUBJECT TO WITHHOLDING GAIN ON SALE OF ASSETS
Any amount paid specifically for travelling, Under tax code, the following are ordinary
representation and other bona fide ordinary and assets:
necessary expenses incurred or reasonably
expected to be incurred by the employee in the 1. Stock in trade of the taxpayer or other
performance of his duties provided: property of a kind

1. It is for ordinary and necessary travelling and 2. Property used in trade or business subject to
representation or entertainment expenses paid or depreciation
incurred by the employee in the pursuit of the 3. Real property held by the taxpayer primarily
trade, business or profession; and for sale to customers in the ordinary course of
2. The employee is required to account/liquidate business
for the foregoing expenses in accordance with 4. Real property used in trade of the taxpayer
the specific requirements of substantiation for
each category of expenses pursuant to Sec. 34 of
the Tax Code.
CAPITAL GAINS TAX
Subject to CAPITAL GAINS TAX (CGT)
SERVICE FEES AND ROYALTIES, pertain to sale of:
DISTINGUISHED
• Shares of stock of a domestic
• taxpayer must inquire on whether the corporation sold directly to a buyer
payee has proprietary interest, in the
property that gave rise to the income.
Prior to 2018 – 5% to 100,000; 10% to Excess Aug 15,
2018 – 15% of capital gain Nov 15, and

• Sale of real properties located in the April 15

Philippines CGT = 6% of the higher of
GSP (gross selling price) and FMV (fair
market value) FINAL WITHHOLDING TAX
is a kind of tax, which is prescribed on “certain
income” derived from the Philippine sources.
LEASEHOLD IMPROVEMENT
Passive income is an income earned from
allowing others to use one’s right, or game of
chance or investment, which the taxpayers
• Buildings erected or improvements merely waits for the income to come in.
made by the lessee on the leased
premises are taxable only if the same DEPOSIT SUBSTITUTES as an alternative
were made pursuant to an agreement form of obtaining funds from the public other
with the lessor and the buildings erected than deposits.
or improvements made are not subject to
removal by the lessee
• the lessor does not realize taxable gain FILING OF INCOME TAX RETURNS
from leasehold improvements turned
FINAL WITHHOLDING TAX ON PASSIVE
over by the lessee at the end of the lease
INCOME
where leasehold improvements are
considered fully depreciated and where Prior to 2018 - January to November – 10th day
the condition of said property is such of the month December – January 15 2018 – not
that necessary renovations and later than the last day of the month
extraordinary repairs have to be
undertaken to restore the same to useful CAPITAL GAINS TAX
condition. a. Share of Stock Ordinary Return – 30
• the lessee may claim depreciation of days after each transaction Final
the improvements as deduction from the Consolidated
lessee's gross income over the Return – on or before April 15 of the
remaining term of the lease or the life of following year
the improvements, whichever is shorter b. Real Property – 30 days following each
sale or other disposition

FILING OF INCOME TAX RETURNS

ORDINARY INCOME TAX

➔ For Purely Compensation Income Earners On

or before April 15 of the succeeding year

➔ For Business Income Earners The individual

taxpayer is required to file a quarterly tax return
May 15,