Part I.

General Principles of Taxation

1. Taxation, Defined it is an inherent power of the state to demand enforced contribution
upon its subjects and objects within its territorial jurisdiction for public purpose to support the
government.

2. Theory and Basis of Taxation the power of taxation proceeds from the theory that the
existence of government is a NECESSITY and the grant of protection and the benefits by the
State to its citizen.

3. Purpose of Taxation

a. Primary to raise or generate revenues
b. Secondary
regulate the conduct of businesses and profession
achieve economic and social stability
protect local industries
c. Compensatory
Reduce inequalities in wealth distribution
Key instrument of social control
Strengthens anemic enterprise
Provides incentive
Check inflation
Tools on international bargains
Promotes science and inventions
Use as implement in the exercise of police power

4. Nature and Extent of the Power to Tax

a. Scope supreme, comprehensive, unlimited and plenary (SCUP)
b. Objects
Businesses
Interests
Transactions
Rights
Acts
Persons
Properties
Privileges

5. Essential Characteristics of Tax

6. Elements of a Valid Tax
a. It must not violate the constitutional, inherent and/or contractual limitations of the power
of taxation
b. It must be uniform and equitable, not unjust, excessive, oppressive, confiscatory or
discriminatory
c. It must be for a public purpose
d. The power imposing it must have jurisdiction over the object of taxation
e. It must be proportionate in character
f. Generally payable in money
g. Levied by the legislature that has jurisdiction over the object of taxation

7. Phases of Taxation

a. Levy/imposition
b. Assessment or collection
c. Payment of the tax

8. Elements of the Tax System

a. Tax Structure refers to the tax rates, tax base, tax subjects and other taxable events
b. Tax Administration system involving assessment, collection and enforcement of taxes,
including the execution of judgment in all tax cases decided by the courts in favor of the
government.
c. Public Tax Consciousness refers to the level of voluntary and honest compliance of tax
obligations by the people

9. Principles of a Sound Tax System

a. Fiscal Adequacy the sources of revenue must be adequate to meet governmental
expenditures and their variation regardless of business conditions.
b. Administrative Feasibility tax laws should be capable of convenient, just and effective
administration.
c. Theoretical Justice taxes levied must be based on the taxpayers ability to pay; it must
not be unduly burdensome, confiscatory or discouraging to business; must be equitable
and uniform

10. Definition of Taxation, Eminent Domain and Police Power

a. Taxation the power to take property for the support of the government and for public
purpose.
b. Eminent Domain the power to take private property for public use upon payment of just
compensation
c. Police Power the power to enact laws to promote the general welfare of the people.

11. Similarities Between Taxation, Eminent Domain and Police Power

a. necessary attributes of sovereignty
b. inherent powers of the government
c. legislative in character
d. ways by which the State interferes with private rights and property
e. exist independently of the Constitution although the condition for their exercise may be
prescribed or limited by the Constitution
f. presuppose an equivalent compensation received by the persons affected by the
exercise of the power
g. exercise of these powers by the LGU may be limited by the national legislature

12. Differences Between Taxation, Eminent Domain and Police Power

Taxation Police Power Eminent Domain
Purpose Revenue and support
of the government
Public use Public use
Persons affected Community of class
of individuals
Community of class
of individuals
Operates on the owner
of the property
Authority that
exercise the power
Government Government Government/private
individuals/corporations
Necessity of
delegation
No delegation is
necessary because it
is inherent
There must be due
delegation before
LGU may exercise it
There must be due
delegation before LGU
or private party may
exercise it
Effect or transfer of
property rights
Money paid as taxes
becomes part of
public funds
No transfer of title, at
most there is restraint
on the injurious of the
property
There is transfer of
right to property
whether it be of
ownership or lesser
right.
Benefits Presumption of
receipt of benefits to
every person
No direct and
immediate benefits
received by the
person affected.
The person affected
receives just
compensation for the
property taken from
him
Limitations The exercise is
constitutionally and
inherently limited or
restricted
Limited to public
interest and the
requirement of due
process
Limited to public
purpose and just
compensation
Amount of
Imposition
No limit Sufficient to cover
cost of regulation
No imposition, the
owner is paid the FMV
of his property
Importance Most important Most superior
Relationship to the
Constitution
Inferior to the non-
impairment clause of
the constitution
Superior to the non-
impairment clause of
the constitution
Superior and may
override the non-
impairment clause of
the Constitution
because the welfare of
the State is superior to
any private contract

13. Classification of taxes

a. Purpose

1. Fiscal/general/revenue levied without a specific or pre-determine purpose
2. Regulatory intended to achieve some social or economic goals

b. Subject Matter

1. Personal (poll/capitation) does not consider the amount of property, occupation or
business of the taxpayer
2. Property tax
3. Excise tax

c. Incidence
1. Direct imposed on the person obliged to pay the same and this burden cannot be
shifted or passed on to another
2. Indirect payment is demanded from a person who is allowed to transfer the burden
of taxation to another

d. Amount

1. Specific fixed amount based on volume, weights or quantity of goods as measured
by tools, instruments or standards. It requires no assessment.
2. Ad Valorem imposition is based on the value of the property subject to tax

e. Rate

1. Proportionate/flat unitary/single rate
2. Progressive/graduated as the tax base grows, the tax rate increases
3. Regressive tax rate increases as the tax base decreases
4. Degressive increase in tax rate is not proportionate to the increase in tax base
5. Mixed tax at certain point is it progressive, then regressive

f. Authority Imposing the Tax

1. National
2. Local

14. Taxes as Distinguished from:

a. License

Tax License
Purpose Revenue Regulation
Source of Power Taxation Police Power
Amount No limit Has limit based on necessity
to carry out the regulation
Subject/object of imposition Persons, properties, business,
rights, interests, privileges,
acts and transactions
Commencement of
business/profession or to
exercise a right/privilege
Revocability Nature of permanence Always revocable
Scope Includes power to license Does not include the power to
tax
When Imposed Post-activity Pre-activity
Basis of Computation Current data Preceding years or quarters
Nature Self-assessing Not self-assessing
Limitation Subject to constitutional,
inherent and contractual
limitations
Not subject
Exemption Does not include exemption
from regulatory fees
Exemption from regulatory
fees not allowed

b. Toll

Tax Toll
Demand for sovereignty Demand of proprietorship
Ones support for the
government
Compensation for use of somebody
elses properties
Imposed only by the
government
Imposed by the government or
private individuals
Based on governmental
needs
Determined by the cost of property or
improvement thereon

c. Penalty

Tax Penalty
Imposed to raise revenue Imposed to regulate conduct
Imposed only by the
government
Imposed by the government or
private individuals
Arises from law May arise from law or from contract

16. Doctrines/Principles In Taxation

a. Doctrine of Sovereign Equality Property or income of a foreign state or government
may not be the subject of taxation by another state.

b. Doctrine of the Most Favored Nation Clause the citizens or subjects of the
contracting nations may enjoy privileges accorded by either party to those of the most
favored nation.

c. Doctrine of Primary Jurisdiction it precludes a court from arrogating unto itself the
authority to resolve a controversy the jurisdiction over which is intially lodged with an
administrative body of special competence.

d. Doctrine of Judicial Non-interference the courts cannot inquire into the wisdom of a
taxing act or the advisability or expediency of a tax measure. The impracticability and
absurd consequences of a tax law should be addressed to the legislature and
administrative authorities and not to the COURTS.

e. The Marshall dictum The power to tax includes the power to destroy because the
taxpayer has no choice except to pay the tax being imposed if he is covered by the
imposition. This describes not the purpose for which the taxing power may be used but
the degree of vigor with which the taxing power may be employed in order to raise
revenue.

f. The Holmes doctrine The power to tax should not be the power to destroy. The
power to destroy is merely a consequence of taxation.

g. Principles of Approval of an administrative interpretation thru reenactment (1)
The legislature approves the interpretation of the tax statutes by administrative agencies
through reenactment. (2) Where a statue is susceptible of the meaning placed upon it by
a ruling of the Government agency charged with its enforcement and the legislature
thereafter reenacts the provisions without substantial change, such action is to some
extent confirmatory that the ruling carries out the legislative purpose.

h. The Prospectivity of Tax Laws doctrine Tax laws are prospective in character and
application:

Exceptions:
a) retroactive application is necessarily implied from the language used
b) involves income tax
c) retroactive application is clearly the intent of Congress

i. The Imprescriptibility of Tax Laws Taxes are imprescriptible unless the law itself
provides for prescription.

j. National taxes are not subject to Legal Compensation

Reasons:
1) Lifeblood doctrine
2) The government and the taxpayer are not creditor and debtor of each other
3) Taxes are not in the nature of contracts between the parties but grew out of duty

k. The Principle of Strictissioni Juris Taxation is the rule and exemption is the
exception. Tax exemptions are strictly construed against the taxpayer and liberally in
favor of the government.

Exceptions:
1) Exemption in favor of the government
2) Exemption in favor of traditional exemptees
3) When the law itself provides
4) Retirement laws
5) Special classes of taxpayers under special circumstances

l. The Doctrine of Estoppel In the performance of its governmental functions, the State
cannot be estopped by the neglects, errors or mistakes of its agents or officers. Thus,
the erroneous application and enforcement of law by public officials do not block the
subsequent correct application of the statutes.

m. The Doctrine of Equitable Recoupment Where the refund of taxes are barred by
prescription which can no longer be claimed by a taxpayer but there is a present tax
being assessed against the said taxpayer, such present tax may be recoup or set-off
against the tax, the refund of which has been barred.

Not applicable in the Philippines: 2 years prescriptive period

n. Taxpayer's Suit- it is a class suit brought by one or more taxpayers on behalf of
themselves and as representation of a class of taxpayers situated within a taxing district
and for the purpose of seeking relief from illegal or unauthorized acts of the government
or its tax officials which acts are injurious to their common interests as taxpayers.

Requisites of Taxpayers Suit:

1. Substantial interest
2. Money must be raised by taxes
3. Claim that money is illegally used through enforcement of unconstitutional laws
4. Direct Injury (Maceda vs Macaraeg & Gonzales vs Marcos)

*Gonzales vs Marcos taxpayer has no personality to assail the constitutionality of
the creating the CCP because money came from private sources, not from tax.

17. Sources of Tax Laws (CLEARSJT)

a. Constitution
b. Statues and PDs
c. EOs and BP
d. Local ordinances
e. Revenue regulations promulgated by the DOF
f. Administrative issuances or BIR Rulings
g. Judicial decisions
h. Treaties or conventions with foreign countries

18. Situs or Subjects of Taxation the place of taxation or the authority that can collect the
taxes because it gave the subject or object of taxation protection.

a. Factors Determinative of the Situs

1. Nature/kind/classification of the tax being imposed
2. Subject matter of the tax
3. Citizenship of the taxpayer
4. Residence of the taxpayer
5. Source of income
6. Place of exercise, business or occupation being taxed
7. Place where the activity that produced the income was held or done

19. Double Taxation

a. Definition Taxing the subject/object within the territorial jurisdiction, by the same
taxing authority or the same period, purposes and involving the same kind of tax.

b. Kinds

1) Direct duplicate taxation This is objectionable and prohibited because it
violates the constitutional provision on uniformity and equality. It happens when
the same subject/object of taxation is taxed twice when it should only be taxed
once.

2) Indirect duplicate taxation No constitutional violation. Such as taxing the
same property by 2 different taxing authorities.

c. International Juridical double taxation, defined In double taxation, there are two
different taxing authorities: one domestic and another foreign.

d. Methods Used In Tax Treaties to avoid Double taxation

1) Exemption Method income or capital which is taxable in the state of source or
situs is exempted in the state of residence.

2) Credit Method although the income or capital which is taxed in the state of
source is still taxable in the state of residence, the tax paid in the former is
credited against the tax levied in the latter.

e. Remedies Against Double Taxation

1. Provision for tax exemption
2. Allowance of tax credit for foreign taxes paid
3. Allowance of deductions for foreign taxes paid
4. Application of principles of reciprocity
5. Enter into treaties and/or agreement with foreign governments
6. Allowance and/or application for tax incentives, and
7. Reduction of Philippine tax rates

20. Forms of Escape from Taxation

1. Do not reduce the revenues of the govt

a. Shifting the process of transferring the tax burden from the statutory
taxpayer to another without violating the law e.g., VAT
b. Capitalization the seller is willing to lower the price of the commodity
provided the taxes will be shouldered by the buyer
c. Transformation the manufacturer absorbs the additional taxes imposed by
the government without passing it to the buyer for fear of loss of his market.
Instead, he increases the quantity of production, thereby turning their units of
production at a lower cost resulting to the transformation of the tax into a gain
through the medium of production.

2. Reduces the revenues of the government

a. Tax Evasion (tax dodging) resorting to acts and devices that illegally
reduces or totally escape the payment of taxes that are due the taxpayers.
They are prohibited and therefore are subject to civil and/or criminal
penalties.
b. Tax Avoidance (tax minimization) - the reduction or totally escaping
payment of taxes through legally permissible means, that are not prohibited
and therefore are not subject to penalties. (CIR vs Benigno Toda)
c. Tax Exemption It is an immunity, privilege or freedom from payment of a
charge or burden to which others are obliged to pay.

21. Tax Evasion and Tax Avoidance

a. Defined see above

b. Differentiate

Tax Evasion Tax Avoidance
Scheme used outside those of lawful
means to escape payment of taxes and
when availed of, usually subjects the
taxpayer to penalties.
Tax saving device within the means
sanctioned by law. Not punishable by law.
Accomplished by breaking the law Accomplished by legal procedures and do
not violate the letter of the law
Connotes fraud, deceit and malice No fraud is involved

c. Factors that Constitutes Tax Evasion

1) Payment of an amount of tax less than what is known by the taxpayer to be
legally due
2) Accompanying state of mind which is evil, in bad faith, deliberate, willful or
intentional, and not merely incidental; and
3) A cause of action or a failure of action which is unlawful.

d. Instances of Tax Evasion

22. Exemptions from Taxation

a. Defined It is an immunity, privilege or freedom from payment of a charge or burden to
which others are obliged to pay.

b. Nature mere personal privilege of the grantee.

c. Characteristics of Tax Exemption Privilege

1) Personal to the grantee; hence non-transferable
2) Mere privilege of the grantee, thus revocable unless founded on a contract
3) Implies a waiver on the part of the government to its right to collect what
otherwise would be due it
4) It must be based upon substantial differences between those exempted from
those covered or subject thereto.

d. How created by the Constitution or statutes

e. Source of Tax Exemptions

1) Contract
2) Public policy granting tax exemptions to rural banks and lotto winnings
3) To foster charitable and benevolent institutions
4) Treaty on grounds of reciprocity
5) To lessen the rigors of international double or multiple taxation

f. Types

1) Creation express and implied
2) Object - personal and impersonal (certain classes of properties) CIR vs CTA,
Ateneo de Manila University
3) Extent total or partial

g. Grounds for Grant of Tax Exemption

1) Contract
2) Public policy granting tax exemptions to rural banks and lotto winnings
3) To foster charitable and benevolent institutions
4) Treaty on grounds of reciprocity
5) To lessen the rigors of international double or multiple taxation

h. Principles Governing Tax Exemptions

i. Construction of Tax Exemption Statutes Tax exemptions are strictly construed
against the taxpayer and liberally in favor of the government.

j. Exceptions to the Strict Construction Rule

1) Exemption in favor of the government
2) Exemption in favor of traditional exemptees
3) When the law itself provides
4) Retirement laws
5) Special classes of taxpayers under special circumstances

k. Extent of Tax Exemptions

1) Tax exemption does not include exemption from license fee or charges
2) Tax exemption does not include exemption from special assessment
3) Tax exemption does not include exemption from payment of a toll
4) Tax exemption does not include exemption from margin fee
5) Exemptions from fixed taxes do not include or cover exemption from income
tax
6) Tax exemption granted to a corporation does not extend to stockholders.
7) Exemption from taxes and assessment does not include exemption from permit
fees.
8) Tax exemption granted to traditional exemptees does not include exemption
from building permit fees on any improvement to be constructed on their
properties
9) A buyer exempted from tax does not mean that the seller or manufacturer is
also exempted
10) A person or entity exempt from national taxes is not exempt from local taxes
and vis--vis
11) Exemption granted to Meralco from local taxes does not extend to real
property taxes.
12) Exemption of GOCCs from RPTs in the use of realty properties owned by the
government does not include the realty tax on improvement

l. The In Lieu of All Taxes clause, defined applies only to national internal revenue
taxes and not to local taxes, unless the exemption clearly provides for exemption from
both taxes.

m. The doctrine of Usage, defined test of exemption on real properties which mandates
that such properties must be ACTUALLY, DIRECTLY or EXCLUSIVELY used for
religious, charitable or educational purposes.

n. Tax Amnesty, defined general pardon or intentional overlooking by the state of its
authority to impose penalties on persons otherwise guilty of tax evasion or violation of
tax law. The purpose is to give the erring taxpayer a chance to reform and become part
of the society with a clean slate.

o. Difference between Tax Exemption and Tax Amnesty

Tax Exemption Tax Amnesty
Immunity from tax Condonation from payment of an existing
tax liability
Grantee does not need to pay anything Grantee pays a portion
Can be availed of by any qualified taxpayer Not always available
Prospective in application Retroactive in application
Tax liability does not attach Tax liability attaches
Immunity from civil liability only Immunity from civil, criminal and
administrative liabilities

23. Construction of Tax Laws

a. When mandatory? if they are intended for the security of citizens or to insure equality
in taxation or certainty as to the nature and amount of each persons tax.

b. When directory? if they are designed merely for the information and direction of the
tax officers or to secure dispatch or methodical and systematic modes of proceedings.

c. The rule on the construction of tax laws The tax statutes will not be construed as
imposing a tax unless it does so clearly, expressly and unambiguously. It is construed
most strongly against the Government and liberally in favor of the citizen because
burdens are not to be imposed beyond what the statutes expressly and clearly import.

AMBIGUITY tax laws will be construed against the government.

d. The Principle of Pari-Materia different statutes referring to the same object should
be construed with reference to each other as that all provisions may be given effect.

Part II. The Bureau of Internal Revenue

a. Composition of the BIR (CA No. 466, July 1, 1939)

1) Commissioner
2) 6 Deputy Commissioners with Assistant Commissioners
3) 19 Revenue Regions
4) 176 Regional District Offices

b. Powers of the BIR (AEGAPIS)

1) Assessment and collection of taxes
2) Enforcement of forfeitures, penalties, fines and judgments in all cases decided
in its favor by the Courts
3) Giving effects to and administering the supervisory and police powers conferred
to it by the NIRC and/or other laws
4) Assignment of internal revenue officers and other employees to other duties
5) Provisions and distribution to proper officials of forms, receipts, certificates,
stamps etc.
6) Issuance of receipts and clearances
7) Submits annual report, pertinent information to Congress and reports to the
Congressional Oversight Committee in matters of taxation

c. The Police Powers of the BIR (MASES)

1) Make arrest and seizure
2) Administer oaths and take testimony
3) Search taxable articles
4) Enforcement of forfeiture
5) Sell and/or destroy forfeited property

d. Powers of the CIR that cannot be delegated (RICAA)

1) Recommend the promulgation of rules and regulations to the Secretary of
Finance
2) Issue rulings of first impression or to reverse, revoke or modify any existing ruling
of the BIR
3) Compromise
4) Abate any tax liability
5) Assign and reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept

e. Two Kinds of Powers of Administrative Agencies

1) Quasi-Legislative (Rule-Making) power to make rules and regulations which
results in delegated legislation that is within the confines of the granting statute
and the doctrine of non-delegability and separability of powers include the
issuance of:
i. Supplementary/detailed legislation
ii. Contingent legislation
iii. Interpretative rule

2) Quasi-judicial (Administrative Adjudicatory) the power to hear and
determine questions of fact to which the legislative policy is to apply and to
decide in accordance with the standards laid down by the law itself in enforcing
and administering the same law.

f. Powers of the Revenue Regional Director

1) Implement tax laws, policies, plans, programs, revenue regulations of the
department or agencies in the regional areas
2) Administer and enforce internal revenue laws, rules and regulations
3) Enforce assessment and collection of the internal revenue taxes, charges and
fees
4) Issue LOA for examination of taxpayers within the region
5) Provide economical, efficient and effective service to the people in the matters of
taxation
6) Coordinate with regional offices or other departments, bureaus and agencies in
the area
7) Exercise control and supervision over its officers and employees; and
8) Perform other functions as may be provided by law or delegated to him by the
CIR

g. Powers of the Revenue District Officers of the BIR

1) Ensure that all laws, revenue regulations affecting internal revenues are faithfully
executed and complied with
2) Aid in the prevention, detection and punishment of frauds or delinquencies in
connection therewith
3) Examine the efficiency of officers and employees under his supervision
4) Report to the Regional Director any neglect, incompetence, delinquencies or
malfeasance of internal revenue officers in his district
5) Examine and collect internal revenue taxes when authorized under a LOA

*CIR vs Phil Health Care Provider


PART III. INCOME TAXATION

1. The General Principles of Income Taxation in the Philippines
a. Resident Citizen (RC) taxable on all income derived from sources within
and without the Phil.
b. Non-Resident Citizen (NRC) taxable only on income derived from sources
within the Phil.
c. Individual Citizen of the Phil. Working and deriving income from abroad as
OCW (Seamen included) taxable only on income from sources within the
Phil.
d. Alien Individual, resident or not of the Phil. taxable only on income derived
from sources within the Phil.
e. Domestic Corp. taxable on all income derived from sources within and
without the Phil.
f. Foreign Corp. whether engaged or not in trade or business in the Phil.
taxable only on income derived from sources within the Phil.

2. Kinds of Income Taxation
a. Graduated income tax on individuals
i. Net income tax
ii. Gross income tax
b. Normal corporate income tax on corporations
c. Final withholding tax on passive investment income paid to residents
d. Final withholding tax on income payments made to non-residents
e. Capital gains tax on sale or exchange of real property classified as a capital
asset
f. Branch profit remittance tax
g. Tax on improperly accumulated earnings of corporations
h. Fringe benefit tax on fringe benefits of supervisory or managerial employees
i. Preferential rates or special rates of income tax on individuals or corporations
j. Minimum corporate income tax
k. Optional corporate income tax

3. Items of Gross Income from Sources within the Philippines (Sec 42, NIRC)
a. Interest
b. Dividends
c. Services
d. Rentals and Royalties
e. Sale of Real Property
f. Sale of Personal Property

4. Rule on Income Within and Without the Philippines (Sec 40, NIRC)
a. The 50% Rule

5. Income Tax Defined a tax on all yearly profits, income, gains, emoluments, and
the like, of persons, arising from property, profession, trades, offices and activities,
whether gross or net, depending on the class of the taxpayer and the kind of income

6. Nature of Income Tax
a. Self-assessing/self-computed
b. National tax
c. Regarded as an excise tax because it is actually a levy upon the right to earn
an income
d. Direct tax
e. General tax
f. Not covered by principle of territoriality

7. Functions of Income Tax
a. Provides large amount of revenue for the support of the government, defray
its expenses and to support governmental activities
b. Offsets the regressive sales, consumption and estate taxes
c. Mitigates the evils arising from the inequalities in the distribution of income
thru the imposition of progressive graduated income tax rates

PART IV: THE PRESENT INCOME TAX SYSTEM IN THE PHILIPPINES

1. The Philippine Income Tax Law

a. Historical Background
US Revenue Act of 1913
Revenue Act of 1916 amended the former, which authorized the
Philippine legislature to enact its own income tax law
Act No. 2833 1
st
Philippine income tax law passed on March 9, 1919,
with several amendments introduced over the years
CA No. 466 (National Internal Revenue Code of June 15, 1939) -
passed by the National Assembly codifying all revenue laws then in force
in the country
PD No. 1158 enacted in 1977 consolidating the NIRC of 1939,
amendatory laws and decrees into a single code known as National
Internal Revenue Code of 1977
PD No. 1994- amended some provisions of 1158
NIRC of 1986
EO Nos. 21, 22, 36, 37, 40 and 72
RA 7496 Simplified Net Income Tax System
RA 9257 Tax Privileges of Senior Citizens
RA 9994 Exemption of Senior Citizens from 12% VAT
RA 8424- The Comprehensive Tax Reform Act of 1997
RA 9337 Reformed eVAT Law
RA 9225 Dual Citizenship Law
RA 9504 Exempting minimum wage earners from income tax
The Philippine Income Tax Law

2. Purpose and Salient Features of the Law

a. Purpose
i. To ease the impact of continuing rise in oil and food prices on the
people
ii. To provide relief and additional money to spend for basic necessities
especially for the minimum wage earners
iii. To simplify the application of the OSD beginning July 1, 2008.

b. Salient Features pages 120-122 (Lim)

3. Basic Features of our Present Income Tax System

a. Progressive and based on the ability to pay principle
b. Global tax system is applicable to taxable corporations whereas the
scheduler tax system is applied to taxable individuals
c. Uses gross compensation tax system for salaried individuals
d. Adopted the most comprehensive tax situs

4. Global vs Schedular Income Tax System, Defined/Compared

a. Global taxpayer is required to report all income earned during a taxable
period in one income tax return, which income shall be taxed under the same
rule of income taxation
b. Schedular one that requires a separate return for each type of income and
the tax is computed on per return or per schedule basis and it provides for
different treatment of different types of income

Global Schedular
Taxes all categories of income except
certain passive income and capital gains;
unitary but progressive rate for the
taxable aggregate income and flat rates
for certain passive income
Income tax treatment varies and made to
depend on the kind or category of
taxable income; different rates
Taxpayer is required to report all income
earned during a taxable period in one
ITR; income shall be taxed under the
same rule
Taxpayer is required to file separate tax
returns for each type of income and the
tax is computed per return or per
schedule basis
Total allowable deductions, personal and Separate returns are filed by the
additional exceptions are deducted from
the gross income
recipient of the income except for
passive income
Based on the aggregate income from all
sources that are not subject to final tax
The income from different sources are
not globalized, they are treated
separately and are subject to different
seats of graduated or flat income tax
rates
Globalized income is subject to a unitary
but progressive and graduated rate of
0% to 32%
Itemized the different incomes and
provides for varied rates of taxes. It has
different rates.
Corporate taxpayers adopt this system Individual taxpayers follow this system
No need to classify taxable income There is need to categorize income from
different sources.

5. Semi-Schedular/Semi-global Tax System, Defined

a. Reduces the range of graduated tax rates applied on the net taxable income
of self-employed and professionals from 5%-60% to 0%-35%, the same set of
tax rates applied on compensation income, but increased the preferential tax
rates on capital gains and passive investment incomes
b. Under this system, the compensation income, business or professional
income, capital gain and passive income not subject to final tax and other
income are added together to arrive at the gross income and after deducting
the sum of allowable deductions is subjected to one set of graduated tax
rates. The computation of the income tax is global. However, passive
investment income subject to final tax and capital gains from the sale or
transfer of shares of stock of a domestic corporation and real properties
remain subject to different sets of tax rates and covered by different tax
returns. The schedular tax system applies to the capital gains and passive
income subject to final tax at preferential tax rates.
c. Our country follows the semi-schedular or semi-global tax system.

6. Difference Between Gross Income Taxation and Net Income Taxation

Gross Income Taxation Net Income Taxation
Income tax is fixed/computed without
allowable deduction
Gross income of taxpayer is reduced by
the allowable deductions
Applies to (a) compensation income
earners, (b) NRANETB (c) special
aliens, and (d) non-resident foreign
corporations
Applies to (a) self-employed taxpayers in
business or exercise of profession, (b)
domestic corporation, (c) resident
corporation and (d) some special
corporation
Final tax is imposed on the gross
amount of specified types of income,
such as interest, royalties, prize,
dividend and capital gains.
Tax is computed on the resulting net
income therefrom
No exemptions Exemptions are granted
Tax base is the gross income Tax base is the net income

7. Advantages and Disadvantages of Net Income Taxation and Gross Taxation

Gross Income Taxation

Advantages Disadvantages
Computation is simple No exemptions and deductions are
allowed
Does away with wastage and supplies; less
manpower
Taxpayers may arrive at gross
income but suffer net loss
Less discretion is allowed tax examiners Susceptible to fraud in the absence
of general audit
Less probability of connivance between
taxpayer and tax examiners
Rule on taxation may not be uniform
and equitable
Substantial reduction in corruption and tax
evasion
What could be taxed may not be
income but mere return of capital
Examination of tax returns can be faster Serve as disincentive to further
production and distribution of
essential commodities necessary for
economic development
Favorable to the authorities because they may
be able to collect more taxes
Taxpayers may lose incentive to
earn more by lessening their
purchasing capacity
If coupled with effective withholding tax
system, government is assured of bigger
revenue
Government may end up collecting
lesser taxes in the absence of audit,
because the taxpayers may cheat on
the sources of their income

Net Income Taxation

Advantages Disadvantages
Fair and just due to grant of deductions Susceptible to corruption because of
the wide discretion in the grant of
deductions
Presence of tax audit minimizes fraud Confusing and complex process of
filing ITR
Provides equitable relief in the form of
deductions, exemptions and tax credits
Costly and difficult to administer

8. Income Defined it is the fruit of capital and labor

9. Capital Defined the fund or tool for the production of wealth

10. Receipt Defined it has reference to all wealth that flows into the taxpayer which
includes return of capital

11. Revenue Defined refers to all funds or income derived by the government whether
from tax or other sources

12. Forms of Income
a. Cash
b. Property
c. Cash and property combined

13. Test on the realization of income
a. Severance Test in order that income may exist, there must be separation
of capital and gain
b. Substantial Alteration Test- there must be an exchange of something
received which is essentially different from that which was parted to the
extent of benefit received (e.g., land to cash)
c. Flow of Wealth Theory taxation is established on a realization, rather than
on an accrual basis
d. Doctrine of Ownership, Command or Control of Income he who
exercises the power to dispose of income shows ownership thereof. The
income tax law applies to those who earn or create the right to receive it and
enjoy the benefit of it when paid
e. Doctrine of Proprietary Interest where shares of stock, options or other
assets are transferred by an employer to an employee to secure better
services, they are plainly compensation which is taxable income
f. Claim of Right Doctrine a claim of gain is conditioned upon the presence
of a claim or right to the alleged gain and the absence of a definite
unconditional obligation to return or repay that which would otherwise
constitute a gain.
g. Doctrine of Actual Receipt of Income -
h. Doctrine of Constructive Receipt of Income the income is credited to the
account of the taxpayer and set apart for him which he can withdraw at any
time without restrictions and/or conditions although not yet actually received
by him physically is already taxable to him
i. Doctrine of Involuntary Conversion of Property if the property is
involuntarily converted into cash and the money is used for buying another
land, the ownership of the other land is a continuity of the ownership of the
first lot. The involuntary disposition of the property and the acquisition of a
like kind do not make the money a realized property.
j. Doctrine of Cash Equivalent payment in the form of services, land or in
kind is considered as realized income. The amount is the cash equivalent of
the thing received in kind.

14. Factors that determine the imposition of Philippine income tax
a. Citizenship
b. Residence
c. Source of income
d. Kind of tax
e. Place where service was rendered

15. Kinds of Income Tax under RA 8424
a. Graduated income tax on individuals
i. Net income tax
ii. Gross income tax
b. Normal corporate income tax on corporations
c. Final withholding tax on passive investment income paid to residents
d. Final withholding tax on income payments made to non-residents
e. Capital gains tax on sale or exchange of real property classified as a capital
asset
f. Branch profit remittance tax
g. Tax on improperly accumulated earnings of corporations
h. Fringe benefit tax on fringe benefits of supervisory or managerial employees
i. Preferential rates or special rates of income tax on individuals or corporations
j. Minimum corporate income tax
k. Optional corporate income tax

16. Imposition of Philippine Income Tax
a. On Net Income
1. Worldwide income of a resident citizen
2. Non-resident citizen on his income earned within the Philippines
3. OCW and seamen on their income earned within the Philippines
4. Resident alien on his income earned within the Philippines
5. NRAETB on his income earned within the Philippines
6. Worldwide income of a domestic corporation
7. Foreign corporation engaged in trade or business on its income
earned within the Philippines
b. On Gross Income
1. Special aliens on his income earned within the Philippines
2. NRANETB on his income earned within the Philippines
3. Non-resident foreign corporation not engaged in trade or business on
its income derived from Philippine sources
c. As a Final Tax
1. Certain passive income
2. Cash and property dividends
3. Capital gains from sale of shares of stock
4. Capital gains from sale of real properties classified as capital assets
located in the Philippines
17. Possible sources of income for tax purposes
a. Labor or service
b. Capital
c. Labor and capital
d. Sale or exchange of property
e. Illegal activities

18. Classification of income as to source
a. Income within the Philippines
b. Income from outside the Philippines
c. Income from sources partly within and without the Philippines
d. Professional income
e. Business income
f. Passive income
g. Capital gains or income from sale or disposition of asset
h. Illegal income; and
i. Income from whatever source

19. Income from whatever source derive defined all income not expressly
excluded or exempted from the class of taxable income, irrespective of the voluntary
or involuntary action of the taxpayer in producing the said income, and regardless of
the source of the income, is taxable

Examples:
income from illegal gambling, theft, embezzlement, trafficking and smuggling
income or gain from expropriation of property
compensation for damages representing loss of profits
bad debts previously written-off but subsequently paid
taxes previously deducted as an expense and subsequently refunded

20. Imputed income defined income in kinds given to income earners as part of their
compensation for services rendered, such as: meals, rice subsidy, living quarters,
etc.

21. Income exempt from tax
a. Income received but enumerated under the term exclusions
b. Considered mere return of capital
c. Exempted under laws, special laws or treaties
d. Gains realized from the sale, exchange or retirement of bonds of more than 5
years
e. Covered by the Employers Convenience Rule
f. Already subject to FWT

22. Methods used by the CIR to determine taxable income
a. Net Worth Method (assets-liabilities=net worth) the taxpayers net worth
at the beginning of taxable year is compared with his net worth at the end of
the year. Money and other assets in excess of liabilities of the taxpayer not
accounted for in his ITR, leads to the inference that that part of his income
has not been reported
b. Net Worth Expenditures Method when during a taxable period, a
taxpayer incurs expenditures the source of which could not be explained,
such amount spent is presumed to be income for the taxable year subject to
income tax.
c. Percentage Method the taxpayers gross receipts during the taxable year
is determined by the tax official and applies gross profits normally enjoyed by
other firms engaged in similar undertaking
d. Bank Deposit Method unexplained increases in bank deposits during the
taxable year raise the presumption that the growth is unreported income
subject to tax
e. Other methods as in the opinion of the CIR may clearly reflect the income
of the taxpayer

PART V: THE PRESENT INCOME TAX SYSTEM IN THE PHILIPPINES

1. Taxable Income Defined refers to gross income less allowable deductions and/or
personal and additional exemptions and health/hospitalization premium allowance

2. Requisites for Income to be Taxable
a. There must be gain or profit, whether in cash or in kind
b. The gain must be realized or received (1) when income is actually or
physically transferred to a person; (2) when it is constructively received by
him
c. The gain must be excluded or exempt by law or treaty from income taxation

3. Taxpayers Subject to Net Income Taxation
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. NRAETB
e. Domestic corporation
f. Resident foreign corporation

4. Net Income Defined gross income less allowable deductions and exemptions

5. Inclusion to Gross Income (Sec 32 A, NIRC)
a. Compensation for services in whatever form paid, including but not limited to
fees, salaries, commissions and similar items
b. Gross income derived from conduct of trade, business or the exercise of
profession
c. Gains derived from dealings in property
d. Interest
e. Rents
f. Royalties
g. Dividends
h. Annuities
i. Prizes and Winnings
j. Pensions; and
k. Partners distributive share from the net income of the general professional
partnership

6. Gross Income Defined all income, gain or profit subject to tax, whether the same
is realized from legal or illegal activities.

7. Gross Compensation Income Defined all remuneration for services rendered by
an employee for his employer unless specifically excluded under the Tax Code

8. What Constitutes Other Benefits

9. Passive Income Subject to Final Tax (Sec 24, B, C, D of the NIRC)
a. Interest, royalties, prizes and other winnings
b. Cash and/or property dividends
c. Capital gains from sale of shares of stock not traded in the stock exchange
d. Capital gains from sale of real property

PART VI: EXCLUSION FROM INCOME TAXATION

1. Exclusion defined
Income or receipts earned or received which are excluded from gross
income.
Not subject to income tax because they are not gain or interest but indemnity
and they are exempted by law or treaty or the Constitution
Not fruit of income or labor or of labor and capital combined, or they are
subject to other kind of internal revenue tax

2. Exclusion vs Allowable Deduction

Exclusion Allowable Deduction
Applicable to all kinds of taxpayers Applicable to persons engaged in
business, trade, profession and
corporate taxpayers
Income or receipts earned or received which
are excluded from gross income
Deductions which the law allows to be
subtracted from gross income to arrive
at the net income
Pertains to computation of gross income Pertains to computation of net income
Things received or earned by the taxpayer
which do not form part of his gross income
These are spent or paid in earning the
gross income

3. Items Excluded from Gross Income

a. Compensation for injuries or sickness
b. Retirement benefits, pensions, gratuities, etc. of employees paid by private
employer under an approved retirement plan or CBA
c. Income exempt under treaty
d. Benefits (13
th
month and other below P30,000)
e. Gift, bequest, devise or descent
f. Proceeds of life insurance policies paid to heirs upon death of insured
g. Amounts received by insured as return of premiums
h. Damages received or recovered by suit on account of injuries/sickness
i. Separation pay received by an official or employee for any cause beyond his
control
j. Prizes and awards to athletes, as approved by the National Sports
Commission
k. GSIS, SSS benefits either from the local or foreign government or other
institutions, whether public or private
l. Gains from sale of bonds, debentures and other certificates of indebtedness,
if the contracts of its issuance so provides for exemption because exemptions
are never presumed
m. Gains from redemption of shares in mutual funds
n. Income and gains subject to FWT
o. Miscellaneous items:
1. Income of foreign governments
2. Financing institutions owned or controlled or enjoying refinancing from
foreign governments
3. International or regional financial institutions established by foreign
governments from their investments in the Philippines
4. Payment of benefits by the US Veterans Administration
5. Maternity benefits advanced by the employer to his employees