Fundamental

Principles of
Taxation
Inherent Powers
of the State
Three (3) Inherent Powers of the State
Power of Taxation

It is the power by which the State raises revenue to defray the

necessary expenses of the government.

Police Power

It is the power of State for promoting public welfare by restraining and

regulating the use of liberty and property

Power of Eminent Domain

It is the power of State to acquire private property for public purpose

upon payment of just compensation.
Similarities among the three (3) Inherent
Powers of the State
They are inherent in the State.
They exist independently of the constitution although
conditions for their exercise may be prescribed by the
constitution.
Ways by which the State interfere with private rights and
property
Legislative in nature and character.

Presuppose an equivalent compensation received, directly or

indirectly, by the persons affected.
Distinctions among the three (3) Inherent
Powers of the State
Distinctions among the three (3) Inherent
Powers of the State
Distinctions among the three (3) Inherent
Powers of the State
Thank You!
Fundamental
Principles of
Taxation
Definition of
Taxation
 TAXATION DEFINED
Taxation is the process or means by
which the sovereign (independent
state), through its law making body
(the legislature), imposes burden upon
subjects within its jurisdiction for the
purpose of raising revenues to carry
out the legitimate objectives of the
government.
 Aspects of Taxation

3. COLLECTION 1. LEVYING
(LEGISLATIVE Function)
(EXECUTIVE Function)

2. ASSESSMENT
(EXECUTIVE Function)
 PURPOSES OF TAXATION

Primary : Revenue/ Fiscal Purpose

The primary purpose of taxation on the part of the
government is to provide funds or property with
which to promote the general welfare and the
protection of its citizens and to enable it to finance
its multifarious activities.
 PURPOSES OF TAXATION

Secondary : Regulatory Purpose

(Sumptuary/Compensatory)
Taxation can be employed as a devise for regulation or control
(implementation of State’s police power) by means of which
certain effects or conditions envisioned by the government may
be achieved such as:
a. Promotion of General Welfare
b. Reduction of Social Inequality
c. Economic Growth
Thank You!
Fundamental
Principles of
Taxation
Theory of
Taxation
 Theory of Taxation

(1) Lifeblood Doctrine

(2) Necessity Theory
 (1)Lifeblood Doctrine

The power of taxation is essential

because the government can neither
exist nor endure without taxation.
“Taxes are the lifeblood of the
government and their prompt and
certain availability is an imperious
need”(Lifeblood Doctrine)
 (1)Lifeblood Doctrine

The government cannot continue to

perform its basic functions of serving
and protecting its people without
means to pay its expenses.
Consequently, the state has the right
to compel all its citizens and property
within its limits to contribute.
 (2)Necessity Theory
Taxation is a power emanating from necessity.
It is a necessary burden to preserve the state’s
sovereignty and a means to give the citizenry
an army to resist an aggression, a navy to
defend its shores from invasion, a corps of civil
servants to serve, public improvements
designed for the enjoyment of the citizenry and
those which come within the state’s territory,
and facilities and protection which a
government is supposed to provide.
Basis of Taxation
 BASIS OF TAXATION

Benefits Received or Reciprocity

Theory
 BASIS OF TAXATION

The basis is the reciprocal duties of protection and support

between the state and its inhabitants. The state collects taxes
from the subjects of taxation in order that it may be able to
perform the functions of the government. The citizens, on the
other hand , pay taxes in order that they may be secured in the
enjoyment of the benefits of organized society .
Thank You!
Fundamental
Principles of
Taxation
 Elements/ Characteristics of Tax

1. It is an enforced contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons, property or
exercise of a right or privilege
5. It is levied by the law making body
of the State
6. It is levied for public purpose
 Nature of the State’s Power to Tax

1. It is inherent in sovereignty.
2. It is legislative in character.
3. Exemption of government entities,
agencies and instrumentalities
4. International Comity
5. Limitation on Territorial Jurisdiction
6. Strongest among the inherent
powers of the State
Thank You!
CONCEPT OF INCOME
INCOME

• Refers to all earnings derived from service rendered

(labor), from capital (business/investment) or both
including gain derived from sale or exchange of
personal or real property classified as either ordinary
or capital asset.
RETURN ON CAPITAL
vs
RETURN OF CAPITAL?
Illustration
Mr. A purchased goods for Php300 and sold them for
Php500 . The consideration can be analyzed as follows:

Selling Price (Total

Consideration 500 Total Return
Received)
Cost (Value of
300 Return of Capital
Inventory Foregone)
Mark-up (Gross
Income) 200 Return on Capital
Classifications of Income
• Compensation Income – gain derived from labor; earned from
employer – employee relationship

• Profession or Business Income – value derived from an

exercise of profession, business or utilization of capital including profit or
gain derived from sale or conversion of assets

• Passive Income – an income in which the taxpayer merely waits for

the amount to come in.

• Capital Gain – income derived from sale of assets not used in trade or
business.
Forms and Valuation of Income
• CASH
bills and coins or check received as compensation or
earnings.
• PROPERTY
denotes the right of ownership over a tangible or
intangible thing ; examples are real estate, stocks, or bonds ;
Property as income is valued at FAIR VALUE
• SERVICE
performance received in payment for the work previously
rendered by one person to another; Service as income is
valued at FAIR VALUE
TAXABLE INCOME

• Synonymous to the term net income, gross income

less statutory deductions

• Amount of income upon which the tax rate prescribed

by law is applied to obtain the amount of income tax
payable.
Characteristics of Taxable Income
• There must be gain or profit (Return on
Capital)

• The gain must be realized or received or it

is a realized benefit

• The law or treaty does not exclude the

gain from taxation
END
 KINDS OF TAXPAYERS
Individuals, Corporations, Estates and Trusts and Partnerships
Who are these taxpayers?

Any person subject to tax.

-means an individual, a trust, estate or

corporation.
Kinds of Taxpayers
1. Individuals

2. Corporations

3. Estates and Trusts

4. Partnerships
INDIVIDUALS
1. Resident Citizen

2. Non Resident Citizen

3. Resident Alien

4. Non-Resident Alien engaged in trade or business

5. Non-Resident Alien not engaged in trade or

business
Corporations
1. Domestic Corporations

2. Foreign Corporations
a. Resident Foreign Corporations
b. Non- Resident Foreign Corporations
Estates and Trusts
-Refers to all the property, rights and obligations of a person
which are not extinguished by his death and those which
have accrued thereto since the opening of the succession.

- An arrangement created by will or an agreement under

which legal title to property is passed to another for
conversation or investment with the income therefrom and
ultimately the corpus (principal) to be distributed in
accordance with the directions of the creator as expressed
in the governing instrument.
Partnerships
1. General Partnership

2. General Professional Partnership

3. Co- ownership

4. Joint Venture and Consortium

INDIVIDUALS
General Classification Rule
- In classifying individual taxpayers based on
residency, one ought to consider the
INTENTION of an individual’s stay within the
Philippines or abroad.

- The taxpayer shall submit documentary proofs

such as visas, work contracts and other
documents indicating such intention.
RESIDENT CITIZEN

 Filipino citizen residing in the Philippines

 Either born as Filipinos or naturalized in
accordance with the law
NON - RESIDENT CITIZEN
 Filipino citizen who establishes to the satisfaction of the CIR the fact of his
physical presence abroad with a definite intention to reside therein.

 Filipino citizen who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis,
or to study.

 Filipino citizen who works and derives income from abroad and whose
employment requires him to be physically present abroad most of the time
during the taxable year.

 Filipino citizen previously considered as a non-resident citizen and who

arrives during the taxable year to reside permanently in the Philippines
(Treated as NRC with respect to his income derived from sources abroad
until his arrival in the PH)
NON-RESIDENT CITIZEN

In the absence of information on taxpayer’s

intent, citizens staying abroad for a period of at
least 183 days are considered non-resident
citizens.
January 1 to July August 1, 2019 to August 1, 2020 to December 2 ,
31, 2019 July 31, 2020 December 1, 2020 - present
2020

Worked as an Flew to Singapore Stayed in the Migrated to work as

auditor in the to work country while doing an Auditor in the US
Philippines freelance projects

1/1/19 8/1/19 1/1/20 8/1/20 12/2/20

to to to to to
7/31/19 12/31/20 7/31/20 7/31/20 12/31/20

RC NRC NRC RC NRC

RESIDENT ALIEN

 An alien actually present in the Philippines

who is not mere transient or sojourner

 If he lives in the Philippines and has no definite

intention as to his stay , he is a resident.
RESIDENT ALIEN

 One who comes to the Philippines for a definite

purpose, which in its nature may be promptly
accomplished is a transient, thus, not a resident
alien.
 DEFINITE INTENTION but such cannot be
promptly accomplished ; if his purpose is of such
nature that an extended stay may be necessary
for its accomplishment, and thus the alien makes
his home temporarily in the Philippines, then he
becomes a resident
RESIDENT ALIEN

-In the absence of information on intention,

aliens who stayed in the Philippines for more
than 1 year as of the end of the taxable year are
considered resident aliens.
-An alien who has acquired residence in the
Philippines retains his status as such until he
abandons the same or actually departs from the
Philippines
NON - RESIDENT ALIEN
(Engaged in Trade or Business)

An individual who is not residing in the

Philippines and is not a resident who intends to
conduct trade, business, or exercise of his
profession and the aggregate period of his stay
in the Philippines is more than 180 days during
any calendar year.
NON - RESIDENT ALIEN
(Not Engaged in Trade or Business)

An individual who is not residing in the

Philippines and is not a resident, not intending
to conduct trade, business or exercise of his
profession and the aggregate period of his stay
in the Philippines does not exceed 180 days.
NON - RESIDENT ALIEN
(Not Engaged in Trade or Business)

Aliens who come to the Philippines for a definite

purpose which in its nature may be promptly
accomplished shall not be considered to be
engaged in trade or business.
CORPORATIONS
CORPORATION

Includes all types of corporations, partnerships

(no matter how created or organized), joint
stock companies, joint accounts associations, or
insurance companies, whether or not registered
with the SEC.
LAW OF INCORPORATION TEST

To determine the residence of a corporation, the

Philippines adopted the Law of Incorporation
test under which a corporation is considered
domestic if it is organized or created in
accordance with or under the laws of the
Philippines and foreign if it is organized or
created in accordance with or under the laws of
a foreign country.
DOMESTIC CORPORATION

A corporation created and organized in the

Philippines or under its laws.
FOREIGN CORPORATION

A corporation created and organized in the laws

of a foreign country.

 Resident Foreign Corporation – foreign

corporation engaged in trade or business within
the Philippines
 Non-Resident Foreign Corporations – foreign
corporations not engaged in trade or business
within the Philippines
GENERAL PARTNERSHIP

A partnership which is not a general professional

partnership. Treated as a corporation.
GENERAL PROFESSIONAL PARTNERSHIP

A partnership formed by persons for the sole

purpose of exercising their common profession.

The partners themselves, not the partnership, shall be liable for

income tax in their separate and individual capacities. Each
partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the
partnership.
CO-OWNERSHIP

There is co-ownership whenever the ownership

of an undivided thing or right belongs to
different persons.

Co-ownerships are not subject to tax as a corporation if the

activities of the co-owners are limited to the preservation of the
property and the collection of the income therefrom, in which
case each co-owner is taxed individually on his distributive share
in the income of the co-ownership.
JOINT VENTURE AND CONSORTIUM
Essential Factors of a Joint Venture or
Consortium:

1. Each party must make a contribution, not necessarily of

capital but by way of services, skill, knowledge, material, or
money.
2. Profits must be shared among the parties
3. There must be a joint proprietary interest and right of mutual
control over the subject matter of the enterprise
4. There is a single business transaction
JOINT VENTURE AND CONSORTIUM
A joint venture or consortium is treated as a
corporation, except those formed for the
purpose of:

1. Undertaking construction projects; or

2. Engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating
consortium agreement under a service contract
with the Government
TAXABILITY OF INCOME
Classification Income Within Income Without Tax Rate

Resident Citizen ✔ ✔

Non – Resident ✔
Citizen ✘
Generally,
progressive tax on
✔
Resident Alien ✘ the net income

Non-Resident Alien
✔
Engaged in Trade or ✘
Business
Non- Resident Alien
✔ Generally, 25% final
Not Engaged in ✘ tax on the gross
Trade or business income
TAXABILITY OF INCOME
Classification Income Within Income Without Tax Rate

Domestic
Corporation ✔ ✔ Generally, 30% ad
valorem tax on net
Resident Foreign ✔ income
Corporation ✘

Non-Resident ✔ Generally, 30% final

Foreign Corporation ✘ tax on the gross
income

Generally, progressive
Estates and Trusts Depends on the decedent/trustor tax on the net income

Partnership Treated as Corporation, unless otherwise exempted

 INTRODUCTION TO REGULAR INCOME TAX

Gross Income & Taxable Income of Individuals and Corporations

General Coverage

The regular income tax applies to all items of income

except those that are subject to final tax, capital gains tax
and special tax regimes.
Net Income Taxation

The regular income tax is an imposition on residual profits

or gains after deductions for expenses and personal
exemptions allowable by law.
Classification of Gross Income
1. Compensation Income – arises from an
employer employee relationship

2. Business Income – selling of goods or

rendering of services for a profit

3. “Other Taxable Income” – income that are

neither compensation or business income
Allowable Deductions

Business expenses are deducted against gross income from

business or profession.

No deduction is allowed against compensation income

since personal expenses of individuals for cost of living are
deemed to be included in the P250,000 blanket exemption
in the income tax table.
PROGRESSIVE TAX TABLE

Taxable Income Per Year Income Tax Rate

P 250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over 250,000
Above P400,000 to P800,000 P30,000 + 25% of the excess over
P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over
P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over
P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over
P8,000,000
Taxable Income
Pure Compensation Income Earner

The taxable compensation income of employees is computed as

follows:

Gross Compensation Income P xxx

Less: Non Taxable Compensation (xxx)
Taxable Compensation Income P xxx

Non Taxable Compensation includes legally mandated salary

deductions of compensation income that are exempted by law,
contracts, or treaty from income taxation.
Taxable Income
Pure Business Income Earner

The taxable net income of businessmen or professionals is

computed as follows:

Gross Income from Business P xxx

Add: Non-Operating Income xxx
Total Gross Income P xxx
Less: Allowable Deductions (xxx)
Taxable Net Income P xxx
Globalization Rule for Mixed Income Earner

The income of mixed income earner from both sources is

simply globalized or totaled.

BUT a negative net income or net loss when deductions

exceeds gross income from business or profession shall not
be offset against taxable compensation income because
deductions are expenses of business or profession and are
properly deductible only against gross income thereto
whereas no expense is deductible against compensation
income.
ILLUSTRATION 1 :
A compensation earner with other income

Compensation Income P 300,000

Non Taxable Compensation 30,000
Other Income 20,000

Taxable income is computed as follows:

Gross Compensation Income P 300,000

Less: Non Taxable Compensation (30,000)
Taxable Compensation Income P 270,000
Add: Other Income 20,000
Taxable Income P 290,000
ILLUSTRATION 2 :
A business income earner with other income

Gross business income P 400,000

Allowable Deductions 250,000
Other Income 20,000

Taxable income is computed as follows:

Gross Business Income P 400,000

Add: Other Income 20,000
Total Gross Income P 420,000
Less: Allowable Deductions (250,000)
Taxable Income P 170,000
ILLUSTRATION 3 :
A mixed income earner with other income
Compensation Income P 300,000
Non Taxable Compensation 30,000
Gross business income 400,000
Allowable Deductions 250,000
Other Income 20,000

Taxable income is computed as follows:

Gross Compensation Income P 300,000

Less: Non Taxable Compensation (30,000)

Taxable Compensation Income P 270,000

Gross Business Income P 400,000

Add: Other Income 20,000

Less: Allowable Deductions (250,000)

Taxable Business Net Income P 170,000

Taxable Income P 440,000

ILLUSTRATION 4 :
A mixed income earner – with net loss on business or profession
Compensation Income P 300,000
Non Taxable Compensation 30,000
Gross business income 200,000
Allowable Deductions 250,000
Other Income 20,000

Taxable income is computed as follows:

Gross Compensation Income P 300,000

Less: Non Taxable Compensation (30,000)

Taxable Compensation Income P 270,000

Gross Business Income P 200,000

Add: Other Income 20,000

Less: Allowable Deductions (250,000)

Taxable Net Income P (30,000)

Taxable Income P 270,000

Determination of Taxable Income of Corporate
Income Taxpayers

The taxable income of corporations is computed in the

same manner as pure business or professional income
earner.
Accounting Method and Accounting Period

The taxable income shall be computed upon the basis of the

taxpayer’s annual accounting period in accordance with the method
of accounting regularly employed in keeping the books of such
taxpayer.

Taxpayers using Shall Compute taxable income using

Cash Basis on a Calendar Year Tax Cash Basis on a Calendar Year

Cash Basis on a Fiscal Year Tax Cash Basis on a Fiscal Year

Accrual Basis on a Calendar Year Tax Accrual Basis on a Calendar Year

Accrual Basis on a Fiscal Year Tax Accrual Basis on a Fiscal Year

Determination of Gross Income from Business or
Profession
Business Selling Goods
Sales P xxx
Less: Cost of Goods Sold (Cost of Sales) (xxx)
Gross Income P xxx

Cost of Sales pertains to the acquisition cost of the goods sold

for merchandising or manufacturing cost of the goods sold in the
case of manufacturing.
Determination of Gross Income from Business or
Profession
Business Selling Services
Revenue or gross receipts P xxx
Less: Cost of Services (xxx)
Gross Income P xxx

Cost of Services pertains to all direct cost of rendering the

services such as cost of labor, materials, and overhead costs.
 Income Tax Reporting Format
For Individuals Engaged in Business or Profession
Net Sales/ Revenues/ Receipts/Fees P xxx
Add: Other Taxable Income from operation not subject to final tax xxx
Total Sales / Revenues/ receipts / fees P xxx
Less: Cost of Sales or Services (xxx)
Gross Income From Business / Profession P xxx
Add: Non Operating Income xxx
Total Gross Income P xxx
Less: Allowable Deductions (xxx)
Net Income/ Net Taxable Income P xxx
Other Taxable Income from Operations
Other taxable income from operations includes revenues or
receipts from incidental or secondary operations aside from the
primary operations.

Examples:
1. A school has tuition fees as primary revenue, but its income
from its bookstore and canteen constitute other operating
revenues.
2. A manufacturing firm has its gross income from sale of
finished goods as its primary revenue, but its income from
scrap sales constitutes other operating revenues.
Non-operating Income
Non operating income includes all other items of gross income
such as:

1. Gains from dealings in properties

2. Income distribution from a general professional partnership,
taxable trust or estate or from an exempt joint venture
3. Casual Active Income- income from an isolated or one time
transactions such as casual carpentry of a person not
engaged in carpentry business
4. Passive Income not subject to final tax – includes passive
income not connected with the business of the taxpayer and
is not subject to final tax such as interest on advances to
employees and dividends from foreign corporations
ILLUSTRATION
An individual taxpayer who is using the accrual basis in his manufacturing business
reported the following results of operations in the preceding year:

Sales, net of returns and discounts P 4,000,000 Sale of Scrap Metals P 200,000
Cost of Sales 1,800,000 Interest Income on Employee 45,000
Advances
Dividend Income, net of final tax 36,000
Gain on Sale of Domestic Stocks 10,000
Business Expenses 1,600,000
directly to a buyer (capital gains)
Gain on Sale of Old Equipment 100,000

Business income of the individual will be presented in the income tax return as follows:
Net Sales P 4,000,000

Add: Other Operating income – Scrap Sales 200,000

Total Sales P 4,200,000

Less: Cost of Sales (1,800,000)
Gross Income from Business P 2,400,000
Add: Non Operating Income
Gain on Sale of Equipment P 100,000
Interest Income on employee advances 45,000 P 145,000
Total Gross Income P 2,545,000
Less: Allowable Deductions (Business Expenses) (1,600,000)
Net Income / Taxable Income P 945,000
 Income Tax Reporting Format
For Corporate Taxpayers

Net Sales/ Revenues/ Receipts/Fees P xxx

Less: Cost of Sales or Services (xxx)
Gross Income from Operations P xxx
Add: Other Taxable Income not subject to final tax xxx
Total Gross Income P xxx
Less: Allowable Deductions (xxx)
Net Income/ Net Taxable Income P xxx
ILLUSTRATION
Assuming the same data in the previous illustration, except that the taxpayer is a
corporation…

Sales, net of returns and discounts P 4,000,000 Sale of Scrap Metals P 200,000
Cost of Sales 1,800,000 Interest Income on Employee 45,000
Advances
Dividend Income, net of final tax 36,000
Gain on Sale of Domestic Stocks 10,000
Business Expenses 1,600,000
directly to a buyer (capital gains)
Gain on Sale of Old Equipment 100,000

Business income of the corporation will be presented in the income tax return as follows:
Net Sales P 4,000,000

Add: Other Operating income – Scrap Sales 200,000

Total Sales P 4,200,000

Less: Cost of Sales (1,800,000)
Gross Income from Business P 2,400,000
Add: Non Operating Income
Gain on Sale of Equipment P 100,000
Interest Income on employee advances 45,000 P 145,000
Total Gross Income P 2,545,000
Less: Allowable Deductions (Business Expenses) (1,600,000)
Net Income / Taxable Income P 945,000
OSD (OPTIONAL STANDARD DEDUCTION)
The individual / corporation can opt to elect OSD or
Optional Standard Deduction of 40% from their gross
income to arrive at their net taxable income .

The 40% will be based from :

INDIVIDUALS : Total revenues/ receipts from operations

CORPORATIONS : Total Gross Income
TYPES OF REGULAR INCOME TAX

1. Individual Income Tax

2. Corporate Income Tax
INDIVIDUAL INCOME TAX
The individual income tax or progressive income tax is
determined by reference to a tax table of progressive
tax rates.
Taxable Income Per Year Income Tax Rate
P 250,000 and below 0%
Above P250,000 to P400,000 20% of the excess over 250,000
Above P400,000 to P800,000 P30,000 + 25% of the excess over
P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over
P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over
P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over
P8,000,000
Scope of the Progressive Tax

The progressive tax covers all individuals including

taxable estates and trusts except Non Resident Alien –
Not Engaged in Trade or Business in the Philippines
which is subject to 25% final tax on gross income.
ILLUSTRATION 1 :
INCOME TAX COMPUTATION (INDIVIDUAL)
An individual with a taxable compensation income of
P1,400,000.
The income tax due shall be computed as follows:
Tax Due
Taxable Compensation Income P 1,400,000
Less: Lower limit of the income bracket where 800,000 P 130,000
the taxable income qualifies
Excess P 600,000
Multiply by : bracket marginal rate 30% P 180,000
Total Income Tax Due P 310,000
ILLUSTRATION 2 :
INCOME TAX COMPUTATION (INDIVIDUAL)
An individual with a taxable compensation income of
P2,200,000.
The income tax due shall be computed as follows:
Tax Due
Taxable Compensation Income P 2,200,000
Less: Lower limit of the income bracket where 2,000,000 P 490,000
the taxable income qualifies
Excess P 200,000
Multiply by : bracket marginal rate 32% P 64,000
Total Income Tax Due P 554,000
Corporate Income Tax

The corporate income tax, commonly referred to as the

regular corporate income tax (RCIT), is a proportional or flat
tax at a rate of 20% or 25% on taxable income. The RCIT
applies to any corporation other than those :

a. Subject to final tax such as non resident foreign

corporations and FCDU interest income not subjected to
final tax
b. Special corporations or those subject to preferential
(i.e. lower) tax rates or special regimes
c. Exempt corporations
Corporate Income Tax

 Effective July 1, 2020, corporate income tax of domestic corporations shall

either be 20% or 25%. The 20% rate applies to domestic corporations with
a net taxable income not exceeding P5 million AND with total assets not
exceeding P100 million. In computing the total assets, the value of the land
where the office, plant and equipment are situated during the taxable year
is to be excluded.
 All other domestic corporations are subject to the 25% corporate income
tax rate.
 Resident foreign corporations are subject to 25% income tax effective July
1, 2020.
ILLUSTRATION 1 :
INCOME TAX COMPUTATION (CORPORATION)
A corporation has a net income of P6, 000,000 in the Philippines
and P800,000 from abroad.

Assuming the corporation is a domestic corporation, the income

tax due shall be computed as follows:

Taxable Income (Philippines and Abroad) P 6,800,000

Multiply by : tax rate 25%
Total Income Tax Due P 1,700,000
ILLUSTRATION 2 :
INCOME TAX COMPUTATION (CORPORATION)
A corporation has a net income of P6, 000,000 in the Philippines
and P800,000 from abroad.

Assuming the corporation is a resident foreign corporation, the

income tax due shall be computed as follows:

Taxable Income (Philippines) P 6,000,000

Multiply by : tax rate 25%
Total Income Tax Due P 1,500,000
The Minimum Corporate Income Tax (MCIT)

Corporate taxpayers are subject to a minimum tax,

computed as 2% of total gross income subject to
regular tax. Even if corporations are losing in business,
they are subject to the minimum tax.
Special Corporations

Special corporations are those enjoying lower tax rates

but not 0%, such as private schools, non-profit
hospitals and PEZA or TIEZA- registered enterprises.
Exempt Corporations

Exempt corporations are those enjoying 0% tax rate

with no tax dues such as government agencies, non
profit organizations with no taxable income,
cooperatives, and those registered with the Board of
Investments (BOI) enjoying Income Tax Holiday or ITH.
REGULAR INCOME TAX

Exclusions from Gross Income

Exclusions from Gross Income

Exclusions from gross income are income which will not be

subject to income tax.

They are not included in gross income subject to regular

tax, capital gains tax or final tax.
Exclusions from Gross Income
Under Sec 32 (B) of the NIRC, the following items shall not be included in gross income and shall be exempt
from taxation:

A. Proceeds of life insurance policy

B. Amount received by the insured as a return of premium
C. Gift, bequest, devise or descent
D. Compensation for injuries or sickness
E. Income exempt under treaty
F. Retirement Benefits, pensions, gratuities, etc.
G. Miscellaneous items :
1. Income in the Philippines of foreign government or foreign government-owned and controlled corporations
2. Income of the government and its political subdivisions
3. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievements
4. Prizes and awards in athletic sports competitions
5. Contributions to GSIS, SSS, Philhealth, PagIbig and Union Dues
6. Contributions to Personal Equity Retirement Account (PERA)
7. PERA Investment income and PERA distributions
8. 13th month pay and other benefits not exceeding P90,000
9. Gains from sale of bonds , debentures, or certificates of indebtedness with maturity of more than 5 years
10. Gains from redemption of shared in mutual fund
A. Proceeds of a Life Insurance Company

The proceeds of life insurance policies paid to the heirs or

beneficiaries upon the death of the insured, whether in a
single sum or otherwise are excluded from Gross Income

However, if such amounts are held by the insurer under an

agreement to pay interest thereon, the interest payments
shall be included as gross income.

Life is regarded as a capital item with infinite value. Hence,

the proceeds of life insurance is a return of capital.
B. Amount received by the insured as a return of
premium

The amount received by the insured as a return of premium

on any insurance contract is a return of capital; hence, it is
excluded from gross income.
ILLUSTRATION :
Life Insurance Contracts
Alberto is insured in a P 1,000,000 life insurance policy with annual premium payments
of P20,000 for 10 years. If Alberto outlives the policy after the 10th year, he will be paid a
P500,000 maturity value.
SCENARIO 1
Alberto died on the 8th year of coverage and his heirs collected the P1,000,000 proceeds.
The entire insurance proceeds of P1,000,000 is NOT TAXABLE.
SCENARIO 2
Upon the death of Alberto, the insurance company negotiated for an extension of the
payment of the proceeds wherein the insurance company shall pay P1,050,0000 on the
extended payment. The P1,000,000 proceeds will not be taxed upon collection but the
P50,000 excess representing interest is a taxable item of gross income.
SCENARIO 3
Alberto outlived the policy and collected the maturity value of P500,000. The total
proceeds shall be analyzed as follows:

Total Proceeds P 500,000

Return of Premium (20,000x10 yrs) 200,000

Return on capital (item of gross income) P 300,000
C. Gifts, Bequests and Devises or Descent

The value of property acquired by gift, bequest, devise or

descent are excluded from gross income;

Provided, however that income from such property as well as

gift, bequest, devise or descent of income from any property, in
cases of transfers of divided interest , shall be included in gross
income.
D. Compensation for injuries and sickness

Amounts received through accident or health insurance or

under Workmen’s Compensation Acts as compensation for
personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on
account of such injuries or sickness.
ILLUSTRATION :
Compensation for Injuries and Sickness
Andrew was hit by a jeepney. He paid P100,000 for hospitalization expenses. He
sued the jeepney driver and was awarded by the court a total indemnity of
P340,000 divided as follows : P200,000 indemnity for his pain, aguish and
sufferings, P40,000 for his lost salaries, and P100,000 as reimbursement for his
hospital bills.

The P200,000 indemnity and the P100,000 reimbursement for hospitalization

expenses are non taxable returns of capital. Note that health is a capital item
with infinite value.
However, the P40,000 reimbursement for lost salary is a recovery of lost profit,
hence an item of gross income.
E. Income Exempt Under Treaty

Income items that are excluded by international agreement

to which the Philippine government is a signatory are
excluded from income tax. It must be recalled that treaty
agreements override provisions of our revenue regulations
in case of conflict under the exemption doctrine of
international comity.
F. Retirement Benefits, Pensions, Gratuities and
other benefits
1.Retirement benefit under RA 7641 and those received by
officials and employees of private firms in accordance with a
reasonable private benefit plan maintained by the employer.

Requisites of exemption :
a. This is the first time availment of retirement benefit
exemption
b. The retiring official or employee has been in the service of
the same employer for at least 10 years
c. The retiring employee is at least 50 years old at the time of
the retirement
d. The employer maintains a reasonable private benefit plan
ILLUSTRATION :
(1) Angel was employed in 1990 when she was 25 years old. In 2010, she availed of the
early retirement program of her employer.
Angel satisfied the 10 year cumulative employment requirement but she is only 45 years
old (25 + (2010 -1990) ) at the time of her retirement. The retirement benefit is taxable.
It is included in gross income as compensation income.

(2) Assume that Angel joined another employer and worked therein for 7 more years
after which she retired from her employment.
Although Angel is 50 years old by then, she is only 7 years under the employ of her
second employer. The second retirement benefit is also taxable as compensation income
since she failed the residency requirement.

(3) Assume instead that Angel was 30 yrs old when she joined her first employer and
worked therein for 20 years after which she retired at 50. She immediately joined
another employer and retired after 10 years of service when she was 60 yrs old.
The first retirement benefit from the first employer is exempt since Angel is 50 years old
and has rendered at least 10 years of service. The second retirement benefit from the
second employer is taxable even if she met the residency and age requirements since
retirement benefit exemption can be availed only once in a lifetime.
F. Retirement Benefits, Pensions, Gratuities and
other benefits
2. Separation or Termination

Requisites of exemption :
1. The separation or termination must be due to job
threatening sickness, deaths or other physical disability; and
2. The same must be due to any cause beyond the control of
the employee or official such as :
1. Redundancy
2. Retrenchment
3. Closure of Employer’s Business
4. Employee Lay off
5. Downsizing of Employer's business
6. Sickness or death of the employee
 ILLUSTRATION :
(1) Yvonne is an employee of Goldfish Corporation which closed its business during the
year. Yvonne’s last paycheck shows the following details:

Unpaid Salary in the last 2 months ------- P30,000

Current Month Salary ------------------------ P15,000
Separation Pay ----------------------------------P100,000
Total Pay ----------------------------------------- P145,000

The current month salary and the 30,000 back wages are subject to income tax. The
P100,000 separation pay is an exclusion from gross income , hence, not taxable.

(2) Mr. Swabe was diagnosed to have a sexually transmitted disease (STD). Due to this,
the employer decided to terminate his services but granted him P1,000,000 separation
pay.
The P1,000,000 separation pay is taxable as STD does not normally render the employee
incapable of working.
F. Retirement Benefits, Pensions, Gratuities and
other benefits
3. Social Security Benefits, Retirement Gratuities and other
Similar Benefits from foreign government agencies and
other institutions, private or public, received by resident or
non-resident citizens or aliens who come to settle
permanently in the Philippines.

4. United States Veterans Administration (USVA) –

administered benefits under the laws of the United States
received by any person residing in the Philippines.
F. Retirement Benefits, Pensions, Gratuities and
other benefits

5. Social Security Systems Benefits (SSS) under RA 8282

6. GSIS Benefits under RA 8291 including retirement

gratuity received by government officials and employees
F. Miscellaneous Items
(1) Income derived on investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from interest on
deposits in banks in the Philippines by :

a. Foreign governments
b. Financing institutions owned, controlled, or enjoying
refinancing from foreign government
c. International or regional financial institutions established by
foreign governments.

These are exempt under the doctrine of international comity.

F. Miscellaneous Items
(2) Income derived by the gov’t and its political subdivisions
from:

a. Any public utility or

b. Exercise of essential government function

The exemption does not extend to government-owned and

controlled corporations (GOCCs). GOCCs are generally
taxable as regular corporations because their operations
are proprietary in nature.
F. Miscellaneous Items
(3) Prizes and Awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic
achievements but only if :

a. The recipient was selected without any action on his part to

enter the contest or proceeding ; and
b. The recipient is not required to render substantial future
services as a condition to receiving the prize or award.

Examples of exempt prizes are Nobel Prize Award, Gawad ng

Sining Award, CNN Hero of the Year and Most Outstanding
Citizen.
F. Miscellaneous Items
(4) Prizes and Awards in Sports Competitions granted to
athletes

a. In local or international competitions and tournaments

b. Whether held in the Philippines or abroad; and
c. Sanctioned by their national sports associations
F. Miscellaneous Items
(5) Contributions for GSIS, SSS, Philhealth, Pag-Ibig and Union
dies for individuals

These pertain to the employee share in the premium

contributions to GSIS, SSS, Philhealth, Pag-Ibig and union dues.
The portion of the salary thus contributed is exempt from
income tax.

Under RMC No. 21-2011, the exclusion pertains only to the

mandatory or compulsory monthly contributions. Voluntary
contributions to Pag-Ibig II, GSIS or SSS in excess of the
mandatory monthly contribution are taxable.
ILLUSTRATION :

An employee has a gross compensation income of P400,000 in 2016. His employer

deducted P5,000 SSS, P4,000 PhilHealth, P3,000 HDMF.

Thus, the gross income subject to regular income tax shall be computed as follows:

Gross Compensation Income P400,000

Less: Exclusions from Gross income

Contribution to SSS P 5,000

Contribution to PhilHealth 4,000

Contribution to HDMF 3,000 P(12,000)

Gross taxable compensation income P 388,000

F. Miscellaneous Items
(6) Contributions to Personal Equity Retirement Account (PERA)

PERA is a contributor’s voluntary retirement account established from qualified

contributions of the contributor and or is employer for the sole purpose of being
invested in qualified PERA investment products.

Each OFW is allowed to contribute up to P200,000 per year to a PERA account. Non –
OFWs are allowed P100,000 contributions per year. Husband and wife can each
contribute up to the maximum allowable contribution.

Contributions to PERA accounts are exclusions in gross income. This is an additional

exclusion and is separate with the exclusion for contributions to SSS or GSIS.
Moreover, PERA contributors are allowed to claim 5% of their PERA contributions as
tax credit against any internal revenue taxes.
F. Miscellaneous Items
(7) PERA Investment Income and PERA Distributions

PERA investment income are exempt from taxes (i.e. final tax, capital gains tax and
regular income tax). The PERA account assets will be distributed back to the
contributor either in lump sum, life pension, or in installment upon reaching the
age of 55 or to his heirs or beneficiaries upon his or her death. PERA distributions
are likewise exclusions in gross income of the contributor or his heirs or
beneficiaries as the case may be.
F. Miscellaneous Items

(8) 13th month pay and other benefits received by officials

and employees of public or private entities not exceeding
P90,000
F. Miscellaneous Items
(9) Gains from sale of bonds, debentures or other certificate
of indebtedness with a maturity of more than 5 years.

The exemption is grounded upon the same assumptions that long-term

indebtedness is diverted to the financing of long-term projects which is viewed as
beneficial to the development of the country.

The term “gain” however does not include “interest”.

F. Miscellaneous Items
(10) Gains realized from redemption of shares in a mutual
fund company by the investor

The term mutual fund company shall mean an open – end and close-end
investment company as defined under the Investment Company Act.

Mutual funds pool the money invested by different investors and invest the
money to earn investment income which shall add up to the net assets of the
fund. A participating investor must purchase participation shares from the fund
at their Net Asset Value (NAV). Upon redemption of his participation shares, the
investor gains or loses by his proportionate share in the increase or decrease in
the Net Asset Value of the fund.
OTHER EXEMPT INCOME UNDER THE NIRC AND
SPECIAL LAWS
(1) Minimum wage and certain benefits of minimum wage earners.
A minimum wage earner is an individual recipient of a minimum wage as
fixed by the Regional Tripartite Productivity Wage and Productivity Board
of the Department of Labor and Employment. (exemption covers holiday,
overtime , night shift differential and hazard pay)
(2) Income of Barangay Micro-Business Enterprises Act (RA 9178)
(3) Income of Cooperatives (RA 9520)
(4) Income of non-stock , non profit entities
(5) Income of qualified employee trust funds
(6) Business or professional income of self-employed and or professionals who
opted to the 8% income tax
The income of self-employed and or professionals who opted to be taxed
to the 8% income tax shall be excluded in gross income subject to regular
tax. The 8% income tax is in lieu of the 3% percentage tax and the
progressive income tax.
EXCLUSIONS VS DEDUCTIONS

Exclusions from gross income are not included in the amount of reportable gross
income in the income tax return.

The amount of deductions is initially included in the amount of gross income but
is separately presented as deduction against gross income in the income tax
return.
REGULAR INCOME TAX

Inclusions in Gross Income

ITEMS OF GROSS INCOME

The term items of gross income or inclusions in gross

income is a broad category pertaining to all items of income
subject to taxation , namely :

1. Gross income subject to final tax

2. Gross income subject to capital gains tax
3. Gross income subject to regular tax
ITEMS OF GROSS INCOME SUBJECT TO REGULAR TAX
Gross income includes, but is not limited to the following items :

1. Compensation for services in whatever form paid

2. Gross income from conduct of trade, business or exercise of profession
3. Gains derived from dealings in properties
4. Interest
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and Winnings
10. Pensions
11. Partner’s distributive share from the net income of general partnership
Gains from Dealings in properties

The gains or losses in dealing ordinary assets are subject to

regular income tax. Dealings in capital assets other than
domestic stocks and real properties are also subject to
regular income tax.
Interest Income

This refers to interest income other than passive interest

income subject to final tax.
A taxable interest income must have been actually paid out
of an agreement to pay interest. It cannot be imputed.
Interest Income

Examples of interest income subject to regular income tax:

1. Interest income from lending activities to individuals and
corporations by banks, finance companies and other lenders
2. Interest income from bonds and promissory notes
3. Interest income from bank deposits abroad
Exempt Interest Income :
1. Interest income earned by landowners in disposing their
lands to their tenants pursuant to the Comprehensive
Agrarian Reform Law
2. Imputed interest income or the opportunity cost of money
Rents

Rent income arises from leasing properties of any kind. It is

a passive income but is not subject to final income tax.
Royalties

Royalties are income derived from the use of the taxpayer’s

property. A royalty payment must relate to the use of a
valuable right.

Royalties earned from sources within the Philippines are

generally subject to final income tax except when they are
active by nature.

Active royalty income and royalties earned from sources

outside the Philippines are subject to regular income tax.
ILLUSTRATION :
Royalties
Mang Damian has the following royalties:

Royalties from mining properties in the Philippines P 550,000

Royalties from books published in the Philippines 200,000
Royalties from books published abroad 300,000
Royalties from franchise exercised abroad 400,000

The royalties from mining properties and from books in the Philippines are subject to final
tax. The royalties from sources abroad aggregating P700,000 are items of gross income
subject to regular income tax.
Dividends

These pertain to dividends declared by foreign corporation.

Take note that dividends declared by domestic corporations are

subject to :
-10% final tax if the recipient is an individual
taxpayer
-Exempt if the recipient is a domestic or a resident
foreign corporation

Cash, property and scrip dividends from foreign corporations are

items of gross income subject to regular income tax.
ILLUSTRATION :
Dividends
Cubao Company, a domestic corporation, received cash dividends from the following:

Domestic Corporations P 400,000

Resident Foreign Corporations 200,000
Non Resident Foreign Corporations 300,000

The P400,000 intercorporate dividends declared by a domestic corporation is exempted from

final tax. Therefore, it is NOT an item of gross income subject to regular income tax.

The P500,000 total dividends from the resident and non-resident foreign corporations are
items of regular income subject to regular income tax.
Annuities

The excess of annuity payments received by the recipient

over premium paid is taxable income in the year of the
receipt.
ILLUSTRATION :
Annuities

Andrew purchased an annuity contract for P100,000 which shall pay him P10,000
annually until he dies.

The receipt of the first 10 annual annuity payments is a return of capital. Any further
receipt from year 11 onwards is an item of gross income subject to regular income tax.
Prizes and Winnings
Prizes and winnings that are exempted from final tax are
not items of gross income subject to regular income tax.

Exempt prizes and winnings:

a. Prizes received without the effort to join a contest
b. Prizes in athletic competitions sanctioned by their
respective national sports association
c. Winnings from PCSO or lotto, not exceeding P20,000 in
amount.
Prizes and Winnings Summary Rules

Earned from sources

Prizes: Philippines Abroad
10,000 and below Regular Tax Regular Tax
More than 10,000 Final Tax Regular Tax
PCSO and lotto, exceeding P20,000 Final Tax N/A
PCSO and lotto, not exceeding P20,000 Exempt N/A
Winnings from other sources Final Tax Regular Tax

The final taxation of prizes and winnings for corporations is not contemplated
in the NIRC. Hence, the taxable prizes and winnings of corporations are subject
to regular income tax.
ILLUSTRATION :
Prizes and Winnings

The City of Baguio held its Panagbenga flower festival. During the festivities, Mr. Erorita,
the proprietor of Mr. Suave Gym, won the P500,000 second prize in the flower float
competition. John Hay corporation won the P600,000 first prize.

The winnings of Mr. Erorita of P500,000 will be subject to 20% final tax. The prize of John
Hay Corporation shall not be subjected to a 20% final tax but to regular income tax, and
included in its gross income.
Pensions

These pertain to pensions and retirement benefits that fail

to meet the exclusion criteria and hence subject to regular
tax.
Partner’s distributable share from the net income of
the general professional partnership

General professional partnerships are not subject to income tax

because they are merely viewed as pass through entities. The
partners are the ones subject to regular tax on their share in net
income of the general professional partnership.

For this purpose, the net income of the general professional shall
include items of income which are exempted from final tax or
capital gains tax to the general professional partnership.
ILLUSTRATION :
Partner’s distributable share from the net income of
the general professional partnership
Zef and Siegfried practice their profession in a general professional partnership and
share profits 60:40 . Their frim reported a distributive net income of P820,000.

Total Distribution to Zef (60% x P 492,000

820,000)
Total Distribution to Siegfried 328,000
(40% x 820,000)
Distributive net income P 820,000

The partners shall include their respective shares in their gross income subject to regular
income tax.

Note that this rule applies to other pass through entities such as
1. Exempt joint ventures
2. Exempt co-ownership
GENERAL CRITERIA FOR ITEMS OF GROSS INCOME
Items of gross income subject to regular income tax are not
limited to the aforementioned NIRC list. Under the NIRC,
the regular income tax has a catch all provision for all
income derived from whatever sources that are:

1. Not subject to final tax, capital gains tax, and special tax
regime
2. Not excluded or exempted by law, treaty or contract
form taxation