1.

) Lifeblood Doctrine
The existence of government is a necessity, it cannot exist nor endure without the means to pay its expenses; and
for those means, the government has the right to compel all its citizens and property within its limits to contribute
in the form of taxes. It is the indispensable and inevitable price for civilized society; without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it.

2.) Inherent Powers of the State

Taxation as distinguished from eminent domain and police power:

1. As to concept
Taxation refers to the power of imposing enforced proportional contribution from persons and property by the
sovereign to accumulate revenue in order to support its existence and carry out its legitimate objectives.

While in Eminent domain refers to the power of the state to tae private property for public use upon payment
of just compensation ascertained by law. It is sometimes called expropriation. To exercise the power of eminent
domain, the Constitution provides for the following conditions. First, the taking of property should be for public
use; second there must be a just compensation for the property, and the third, there must be observance of due
process in the taking.

While Police power is the power of the state make and implement laws in relation to persons or property to
promote public health, public morals, public safety and the general welfare of the people.

2. As to scope
Police Power is broader in application because it is general power to make and implement laws on taxation is
the power to raise money for the use and support of the government and eminent domain is merely the power to
take private property for public use upon payment of just compensation.

3. As to Authority
The power of eminent domain may be granted by the law to public service or public utility companies while the
power of taxation and police power are both to be exercised only by the government or its political subdivisions.

4. As to Purpose
In Taxation, the property is generally in the form of money which is taken for the support of the government
while in police power, the property is taken or destroyed to promote general welfare. On the other hand, in
Eminent Domain, the private property is taken for public use.

5. As to Necessity of Delegation
The exercise of the power of eminent domain and police power can be expressly delegated to the local
government units by the law making.
On the other hand, Congress cannot delegate the power of taxation.

6. As to Person Affected
In Eminent Domain, its power operates on the particular private property of an individual.
However, Taxation and Police Power operate on the community or class of individual.

7. As to Benefits
In Taxation, an individual receives a benefit in the form of protection afforded by the government.
For Eminent Domain, the benefit received by the individual concerned is the market value of the specific
property taken from him.
Through Police Power, an individual receives indirect benefits through a healthy economic standard of
society.
8. As to Amount of Imposition
Taxation has generally no limit on the amount of tax which may be imposed.
In Eminent Domain, there is no imposition because the owner of the private property taken is paid at its market
value.
The amount imposed under Police Power should only be sufficient to cover the cost of the regulation, issuance
of the license and the necessary expenses of police surveillance.

9. As to Importance
Taxation is an indispensable function of existence of the government. Without it, there shall be no revenue to
effect and permanently exercise the Eminent Domain and Police Power.

10. As to Relationship to the Constitution

The power to tax is subject to certain constitutional constraints and inherent limitations. It is INFERIOR to
the “Non-impairment Clause” in the sense that taxation should not violate the impairment clause of obligations
and contracts.
Police Power is relatively free from constitutional limitations. It is SUPERIOR to Non-impairment clause in
the sense that it may override the said clause.
Eminent Domain is generally SUPERIOR to may override the Constitutional impairment provision because
the welfare of the state is superior to any private contract.
As an exception, eminent domain is inferior to the impairment provision because the government cannot
expropriate a property that has previously bound itself to be purchased from the other contracting parties.
Police Power and Eminent Domain ca defeat the constitutional rights of a person because these inherent powers
subordinate the constitutional provisions except those directly affecting them.

11. As to Property Taken

In taxation, there is no specific property being taken by the government for it is generally payable in the form
of money.
In Eminent Domain, there is a specific private property being taken by the government.
In Police Power, there is a restriction in the use of property.

12. As to Limitation
Police power is limited by the demand for public interest and requirement of due process, Eminent Domain
is bounded by public purpose and just compensation.
Taxation is under constraints of the inherent limitations and constitutional restrictions.

3.) Income Tax Systems

a) Global Tax System – Under the global tax system, the total allowable deductions as well as personal and
additional exemptions, in the case of qualified individuals, of the total allowable deductions only, in the case of
corporations, are deducted from the gross income to arrive at the net taxable income subject to the graduated
income tax rate, in the case of corporations.

b) Schedular Tax System – Different types of incomes are subject to different sets of graduated or flat income tax
rates. The applicable tax rate will depend on the classification of the taxable income and the basis could be gross
income.

c) Semi-Schedular or Semi-Global Tax System – The compensation income, business or professional income,
capital gain and passive income not subject to the final withholding income tax, and other income are added
together to arrive at the gross income, and after deducting the sum of allowable deductions from business or
professional income, capital gain and passive income and other income not subject to final tax, in the case of
corporations, as well as personal and additional exemptions, in the case of individual taxpayers, the taxable
income is subjected to one set of graduated tax rates or normal corporate income tax rate. With respect to the
incomes not subject to final withholding tax, the computation of income tax is “global”.
4.) Double Taxation
Double Taxation means an act of the sovereign by taxing twice for the same purpose in the same year upon the
same property or activity of the same person, when it should be taxed once, for the same purpose and with the
same kind of character of tax.

A. Strict sense
It is prohibited because it comprises imposition of the same tax on the same property for the same purpose
by the same state during the same taxing period.
This kind of double taxation violates the constitutional provision of uniformity and equal protection, as well
as the principle that tax must not be excessive, unreasonable and inequitable. Therefore, such taxation should,
whenever and wherever possible, be avoided to prevent injustice or unfairness.

B. Broad Sense
It extends to all cases in which there is a burden of two or more pecuniary impositions. It is usually allowed
as long as there is no violation of the equal protection and uniformity clauses of the constitution.

C. Constitutionality of double Taxation

The Supreme Court held that there is no constitutional prohibition against double taxation in the Philippines
therefore; it is not valid defense against the validity of tax measure. This decision, however, springs valid
constitutional defense against oppression and inequality in the implementation of tax power. Therefore, to avoid
injustice and unfairness, doubts as to whether double taxation has been imposed should be resolved in favor of
the taxpayer.

D. Modes of eliminating double taxation

1. Application of the Principle of Reciprocity
2. Application of Tax Credit ( Input tax against output tax in Value Added Tax)
3. Applications of Tax Exemptions
4. Application of Allowance for Deductions such as vanishing deduction in Estate Tax
5. Tax benefit agreement with foreign countries

5.) Tax Exemption

Tax exemption is the privilege of not being imposed a financial burden to which others may be subject. It is
strictly construed against the taxpayer and liberally construed in favor of the government.

A. meaning of exemption of taxation

- denotes a grant of immunity, expressed or implied, to a particular person, corporation, or to persons or
corporations of a particular class, from a tax upon property or an exercise which persons and corporation generally
within the same taxing district are obliged to pay.
It is an immunity or privilege, it is freedom from financial charged or burden to which others are subjected.

B. Nature of tax exemption

1. An exemption from taxation is a mere personal privilege of the grantee. Thus, an exemption granted to a
corporation does not apply to its stockholders, the former being considered a legal entity with a personality
separate and distinct from the latter. Being personal in nature, a tax exemption cannot be assigned or transferred
by the person to whom it is granted without the consent of the legislature.

The legislative consent to the transfer may be given either in the original act granting the exemption or in a
subsequent law.

1. It is generally revocable by the government unless the exemption is founded on a contract which is protected
from impairment, but the contract, such as, for example a valid cause of consideration. A legislative franchise in
the nature of contract. An exemption provided for in a franchise, however maybe repealed or amended pursuant
to the constitution.
Incidentally, a franchise is a particular right or privilege granted by law to a person or corporation, such as
the franchise for the operation of street railways, electric light, and power and telephone lines.

2. It implies a waiver on the part of the Government of its right to collect what otherwise would be due to it, and,
in this sense, is prejudicial thereto. Hence, it exist only by virtue of an express grant and must be strictly construed.

3. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.
Where, however, no valid distinction exist, the exemption may be challenged as violative of the equal protection
guarantee or the uniformity rule.

C. Kinds of tax exemption

1. Express
- When certain persons, property, or transactions are, by express provision, exempted from all or certain taxes,
either or in part. This exemption may be made by provisions of the Constitution, statutes, treaties, ordinances,
franchises, or contracts.

2. Implied
This occurs when tax is levied on certain classes of persons, properties, or transactions, without mentioning
other classes. Every tax statute, in a very real sense, makes exemptions since all those not mentioned are deemed
exempted. The omission may be either accidental or intentional.

3. Contractual
Contractual tax exemptions are those lawfully entered into the government in contracts under existing laws.
These exemptions must not be confused with the tax exemptions granted under franchises, which are not contracts
within the context of the non-impairment clause of the Constitution.

D. Rationale grounds for exemption

1. Tax exemption may be based on contract in which case the public represented by the government is supposed
to receive a full equivalent therefor. Ordinarily, the provisions of a contract of exemption from taxation are
contained in the charter of the corporation (law under which is organized) to which the exemption is granted.
2. It may be based on some ground of public policy.(supra), such as, for example to encourage new and necessary
industries, or to poster charitable and other benevolent institutions; or such as, at least makes the public at large
interested in encouraging or favoring the class or interest in whose behalf the exemption is made. In this case, the
government need not receive any consideration in return for tax exemption.
3. It may be created in a treaty on grounds of reciprocity, or to
4. lessen the rigors of international double or multiple taxation which occurs where there are many taxing
jurisdictions, as in the taxation of income and intangible personal property.
5. States that taxes are not subject to set-off or legal compensation because the government and the taxpayer are
not mutual creditor and debtor of each other.
6. A person cannot refuse to pay tax on the basis that the government owes him an amount equal to or greater
than the tax being collected. The collection of tax cannot await the results of a lawsuit against the government.
7. An exception to this rule is where both claims of the government and the taxpayer against each other have
already become due, demandable and fully liquidated.

E. Revocation of tax exemption

a. Forfeiture of Refund - A refund check or warrant issued in accordance with the pertinent provisions of this
Code, which shall remain unclaimed or uncashed within 5 (five) years from the date the said warrant or check
was mailed or delivered, shall be forfeited in favor of the Government and the amount thereof shall revert to the
general fund.

b. A tax credit Certificate issued in accordance with the pertinent provisions of the Tax Code, which shall remain
unutilized after five 5 years from the date of issuance, shall unless revalidated, be considered invalid, and shall
not be allowed as payment for internal revenue tax liabilities of the taxpayer and the amount covered y the
certificate shall revert to the general fund.

6.) Tax vs Debt

Tax
It is based on law;
It cannot be assigned to just any third person due to its being personal in nature and has penalty for imprisonment
for non-payment;
It is generally payable in money;

Debt
It is based on contract between parties;
It can be assigned to any third person as long as both parties permit it; nonpayment of the debt requires no
imprisonment and there is no criminal liability therefor, unless there is employment of deceit;
It is payable in terms of money and/or property;

7.) Direct vs Indirect Tax

Direct Tax is one the burden of which is shouldered by the person to whom the tax is directly imposed. An
example is income tax, which is paid by the person himself who derives the income while Indirect Tax, on the
other hand, is one the burden of which may be shouldered by a person other than him to whom the tax is imposed.
An example is the value-added tax (VAT), wherein the seller shifts the burden of paying the tax to the consumer.

8.) Revenue Generating Activity of the Government

FINANCING OF NATIONAL GOVERNMENT EXPENDITURES
1. What are the major sources of funds to finance the national budget?
The national budget is financed form the following fund sources: 1) revenues from both tax and
non-tax sources; 2) borrowings from both domestic and foreign sources; and, 3) withdrawals from
available cash balances

2. What are revenues and their major classifications?

Revenues refer to all cash inflows of the national government treasury which are collected to
support government expenditures but do not increase the liability of the NG. Revenues consist of
tax and non-tax collections.

3. What is a tax? What agencies are authorized to collect taxes?

A tax is a compulsory contribution mandated by law and exacted by the government for a public
purpose. The major tax collecting agencies of the national government are the Bureau of Internal
Revenue and the Bureau of Customs.

4. What are the major classes of tax revenues?

The major classes of tax revenue are: a) taxes on income and profits; b) taxes on property; c) taxes
on domestic goods and services; d) taxes on international trade and transactions; and e) other
sources.

Taxes on income and profits are imposed on all taxable income earned or received by a taxpayer,
whether as an individual, as a partnership, or as a corporation, during a particular period of time,
usually lasting one year.

Taxes on domestic goods and services are imposed on the use or sale of locally manufactured goods
as well as local services availed of within the domestic territory.
 Taxes on international trade and transactions include import and customs duties, and other
international trade-related collections of the government.

Taxes on property are imposed on the ownership of wealth or immovable property levied at regular
intervals and on the transfer of real or personal property.

Other taxes primarily include collections from the motor vehicles tax, immigration tax and
forest charges.

5. What are non-tax revenues?

Non-tax revenues refer to all other impositions or collections of the government in exchange for
services rendered, assets conveyed, penalties imposed, etc.

6. What are the desirable features of a tax system?

A tax system should be revenue-productive; simple and easy to administer, equitable, and
progressive.

7. What are the government's current efforts to improve tax collections?

The national government has continuously expended an all-out effort to strengthen its revenue-
generating capability through legislative and administrative reforms.

Recently, the government came up with a comprehensive measure to overhaul the tax system to
bring in badly needed revenues for the government.

Called the Comprehensive Tax Reform Program (CTRP), the new tax measure has three principal
components, namely, a) income tax reform; b) excise tax reform; and, c) fiscal incentives reform.
The CTRP aims to widen the tax base, simplify the tax structure to minimize leakages, undeclared
revenues, overstated deductions and corruption to make the system more elastic and easier to
administer.

8. What is the privatization program?

The privatization program was launched by the government in 1987 pursuant to Proclamation No.
50 to sell non-performing assets (NPAs) of government financial institutions and government-
owned and controlled corporations transferred to the national government. This program enables
the NG to divest itself of assets that would be more productive in the hands of the private sector.

9. What are borrowings?

Borrowings refer to funds obtained from repayable sources, such as loans secured by the
government from financial institutions and other sources, both domestic and foreign, to finance
various government projects and activities.

10. What are domestic borrowings?

What are foreign borrowings? Domestic borrowings are funds obtained from sources within the
country. Domestic borrowings of the national government are usually made through the auction
of treasury bills, notes and bonds to the public. Foreign borrowings, on the other hand, are funds
obtained from sources outside the country, such as Asian Development Bank (ADB), International
Bank for Reconstruction Development (IBRD), Overseas Economic Cooperation Fund (OECF),
etc. Foreign borrowings can be obtained through loans secured from foreign financial institutions
or through the flotation of government securities in the international market.

11. Why does the government borrow?

The government borrows from any of the following reasons:
 to finance national government deficits;
to obtain foreign exchange;
to secure financing at more favorable terms than the opportunity cost of revenues; •
to take advantage of benefits attached to the funds, e.g. technology; and,
to balance the timing of resources with the project gestation and repayment of benefit

12. What are constructive cash receipts?

Constructive cash receipts are foreign loan proceeds in the form of goods and services for which
no cash is remitted to the national treasury. Such goods or services have been paid directly by
the lender to the supplier.

13. What are net borrowings?

Net borrowings refer to gross borrowing less debt amortization.

14. What liabilities are included under public debt?

Public debt includes obligations incurred by the government and all its branches, agencies
and instrumentalities, including those of government monetary institutions. It consists of all
claims against the government which may be payable in goods and services, but usually in cash,
to foreign governments or individuals or to persons natural or juridical. Obligations maybe: 1)
purely financial, i.e., loans or advances extended to the Philippine government, its branches,
agencies and instrumentalities; 2) services rendered or goods delivered to the government for which
certificates, notes or other evidence of indebtedness have been issued to the creditor; and 3) for
external debt such as claims of foreign entities, securities held in trust, nonbonded debts and
obligations of the Philippine government to the International Monetary Fund (IMF).

15. What is debt service?

Debt service refers to the sum of debt amortization and interest payments on foreign and domestic
borrowings of the national government or the public sector. Under the current system of budgeting,
only interest payments are treated as part of the expenditure program because it represents a real
expense item, i.e. the cost of borrowed funds, which should form part and parcel of cost of the
items financed by the loan Debt principal is treated as an off-budget item because it is merely a
return of borrowed funds; hence it is reflected as a financial account.

9.) Fringe Benefit Tax

This tax is imposed to the employee but payable by the employer under the withholding tax system.
-Rank and file employees are exempt from Fringe Benefit Tax (FBT)
-Only supervisory or managerial employee are liable to pay FBT, except if:
-The FB is required by the nature of the employment;
-Necessary to the trade, business or profession of the employer;
-FB is for the convenience and advantage of the employer;

A) Special treatment of fringe benefits

Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%)
effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby
imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank
and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe
benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the
fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the
employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The
grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the
fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January
 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe
benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed
at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall
be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred
percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25

B) Definition
means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual
employee (except rank and file employees as defined herein) such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market
rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows
C) Taxable and non-taxable fringe benefits
Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
(3) Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner

Fringe Benefits Taxable such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate
and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;
 (7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts
in excess of what the law allows

10.) De Minimis Benefits

De minimis benefits are priviliges granted by the employer to the employees which are of relatively small value
for the purpose of promoting the health, goodwill, contentment and efficiency of the employees. They include the
following:
a. Monetized unused vacation leave credits

11.) Allowable Deductions

1) Itemized deductions
It is a means of claiming deductible expenses wherein the specific types of expenses are listed down and
substantiated by receipts and other evidences.

There is, likewise, no limit to the amount that may be claimed. Itemized deduction may be availed by the following
taxpayers:
1. resident citizens;
2. non resident citizens;
3. resident aliens;
4. non-resident aliens engaged in trade or business in the Philippines;
5. partnerships and corporations; and
6. estates and trusts.

However, a non-resident alien not engaged in trade or business in the Philippines may not claim the itemized
deduction.

2) Optional standard deduction

It is a means of claiming deductible expenses wherein ten percent (10%) of the gross income may be deducted.
There is no limit to the amount that may be claimed. Furthermore, there is no need to substantiate the expenses
by way of receipts and other evidences. Optional standard deduction may be availed by the following taxpayers:
1. resident citizens;
2. non resident citizens;
3. resident aliens; and
4. estates and trusts.

However, the following taxpayers may not avail of the optional standard deduction:
1. Non-resident aliens, regardless whether or not they are engaged in trade or business in the Philippines; and
2. Partnerships and Corporations

12.) Resident Citizen v Non-resident Citizen

a) Individual Tax payers
• Citizens
a. Resident Citizen – Taxable on his worldwide income.
b. Non-resident Citizen – Taxable only on his income from sources within the Philippines and exempt on his
income from sources outside the Philippines.

• Aliens
a. Resident Aliens – An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for income tax purposes.
b. Non-resident Alien – Further classified into engaged or not engaged in trade or business in the Philippines.
➢ Engaged in Trade or Business - If his aggregate stay in the Philippines is more than 180 days during any
calendar year, he shall be deemed a non-resident alien doing business in the Philippines, Sec. 22 (G) of the 1997
Tax Code notwithstanding.
➢ Not Engaged in Trade or Business - - If his aggregate stay in the Philippines does not exceed 180 days during
any calendar year, he shall be deemed a non-resident alien not doing business in the Philippines.
• Special Class of Individual Employees
a. Minimum Wage Earner - (A) Requirement of Withholding. - Every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no
withholding of a tax shall be required where the total compensation income of an individual does not exceed the
statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher. (Sec. 79, NIRC)

b) Corporations

• Domestic Corporation – When applied to corporation means created or organized in the Philippines or under its
laws. (Sec. 22 [C])

• Foreign Corporations
a. Resident Foreign Corporation – is one engaged in Trade or business in the Philippines.
b. Non-Resident Foreign Corporation – is a foreign corporation not engaged in Trade or Business in the
Philippines.
c) Partnerships – Except for a general professional partnership and an unincorporated joint venture or consortium
engaged in construction or energy related projects, which in reality are also partnerships, the Tax Code considers
any other type of partnership as a corporation subject to income tax.
d) General Professional Partnership – A partnership formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from engaging in any trade or business.
e) Estates and Trusts – Taxable estates and trusts are taxed in the same manner and on the same basis as in the
case of an individual, except that the amount of income for the year which is to be distributed currently by the
fiduciary to the beneficiaries, and the mount of the income collected by a guardian of an infant which is to be held
or distributed as the court may direct, shall be allowed as deduction in computing taxable income of the estate or
trust, but the amount so allowed as deduction shall included in computing the taxable income of the beneficiaries,
whether distributed to them or not.
f) Co-ownership – There is co-ownership when the undivided ownership of an undivided thing or right belongs
to different persons. For tax purposes, the individual co-owners report their share of the income from the property
owned in common by them in their individual tax returns of the year, and the co-ownership is not considered as
a separate taxable entity.

13.) Exclusions from Gross Income

1) Rationale for the exclusions
Exclusion refers to income received or earned but is not taxable as income because it is exempted by law or by
treaty. Such tax-free income is not to be included in the income tax return unless information regarding it is
specifically called for.

2) Taxpayers who may avail of the exclusions

3) Exclusions distinguished from deductions and tax credit

Deduction is an amount allowed by law to be subtracted from gross income to arrive at taxable income. Exclusion
refers to income received or earned but is not taxable as income because exempted by law or by treaty. Such tax-
free income is not to be included in the income tax return unless information regarding it is specifically called for.
[Section 61, Revenue Regulation 2]

Tax credit refers to the taxpayer’s right to deduct from the income tax due the amount of tax he has paid to a
foreign country subject to limitations.

4) Under the Constitution

a) Income derived by the government or its political subdivisions from the exercise of any essential governmental
function.

Income derived from any public utility or from the exercise of any essential governmental function accruing to
the Government or to any political subdivision thereof shall be excluded from the computation of Gross Income.

5) Under the Tax Code

a) Proceeds of life insurance policies

Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured:
• If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be
included in the Gross Income;
• Insured must die to avail of total exemption. If he survives, there/s only partial exemption to the extent that the
proceeds constitute return of capital (total amount of premiums paid)

b) Return of premium paid

Amount Received by Insured as Return of Premium under life insurance, endowment, or annuity contracts,
received either during the term or at the maturity of the terms or upon surrender of the contract.

c) Amounts received under life insurance, endowment or annuity contracts

Amount Received by Insured as Return of Premium under life insurance, endowment, or annuity contracts,
received either during the term or at the maturity of the terms or upon surrender of the contract.

d) Value of property acquired by gift, bequest, devise or descent

• But, income from such property shall be included in Gross Income;

• Must be characterized by disinterested generosity and pure liberality;
• Difficult to establish gift situations if there is an Employer-Employee relationship (A bonus/assistance as
recognition of service rendered is not exempt);
• If given under a) constraining force of any moral or legal duty or b) from the incentive of an anticipated benefit
of an economic nature or c) where it is a return for services rendered, proceeds cannot qualify as a gift;
• Most critical consideration is the giver’s intention or motive.
• Can be a gift if given on account of filial relationship.

e) Amount received through accident or health insurance

Compensation for Injuries or Sickness:

• Received through Accident/Health Insurance or Workmen’s Compensation Act, as compensation for personal
injuries/sickness plus amount of damages received on account of such injuries/sickness;

• Damages will be exempt only if they arise together with personal injury; however, if damages only amount to
return of capital, it is exempt (Ex. Damages from car accident exempt only if claim includes compensation for
personal injury. If no personal injury, damages for car wreckage will only be exempt to the extent of the amount
of the actual damage.)

• Must be physical injury, not injury to rights.

f) Income exempt under tax treaty

Income Exempt under Treaty shall be exempt to the extent required by any treaty.

g) Retirement benefits, pensions, gratuities, etc.

h) Winnings, prizes, and awards, including those in sports competition

Prizes and awards in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievement
1. Made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic
achievement.
2. The recipient was selected without any action on his part to enter the contest or proceeding.
3. The recipient is not required to render substantial future services as a condition to receiving the prize or award.

Prizes and awards in sports competitions

1. Prizes and awards must be granted to athletes in local and international sports competitions and tournaments.
2. Sports competition or tournament held either in the Philippines or abroad.
3. Sports competition or tournament must be sanctioned by their natural sports associations.

6) Under a Tax Treaty

7) Under Special Laws

a) 13th month pay & other benefits (i.e. productivity incentives & Christmas bonus), provided that total exclusion
shall not be more than P30,000.00;

b) GSIS, SSS, Medicare, PAG-IBIG contributions & union dues of individuals;

c) Gains form the sale of bonds, debentures or other certificates of indebtedness with a maturity of more than 5
years;

d) Gains from redemption of shares in mutual fund.

14.) Tax Benefit Rule

Taxes allowed as deductions, when refunded or credited shall be included as part of gross income in the year of
receipt to the extent of the income tax benefit of said deduction (Sec. 34 C [1], NIRC).

Q: In 2006, Sally, a fruit market operator received an assessment for customs duties for her imported
market equipment in the amount of P75,000. Believing that the amount is excessive, she paid the same
under protest. Because of the assurances from her retained CPA that she stands a good chance of being
able to secure a refund of P50,000 she did not deduct the same anymore from her income tax return.
She deducted only the P25,000 which she believed was due from her. She received the refund amount
ing to P50,000 in 2008. What should have been the proper tax treatment of the payment of P75,000 in 2006?

A: Sally should have deducted the total P75,000 customs duties in 2006. When she received the refund
of P50,000 in 2008, she should have included the amount as part of her income. Under the tax benefit
rule, taxes allowed as deductions, when refunded or credited shall be included as part of gross income
in the year of receipt to the extent of the income tax benefit of said deduction.
15.) Passive Income
Passive income refers to income derived from any activity on which the taxpayer has no active
participation or involvement.

1) Passive income subject to tax

(a) Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds
and similar arrangement and royalties.

Under this provision, there are two passive incomes mentioned: (1) Bank interest; and (2) royalties.

With respect to bank interest, to be considered passive, it must be derived from sources within the Philippines. It
will be considered derived from sources within the Philippines if the bank from which the interest is earned is
located in the Philippines.

Unlike the final income tax of individuals, a domestic corporation is not exempt from final income tax for long-
term deposits.

As regards royalties, the lower rate of ten percent (10%) which is applicable to individual taxpayers, does not
apply to domestic corporations, all royalties derived by domestic corporation from sources within the Philippines
are subject to a final income tax rate of twenty percent (20%)

(b) Capital gains from the sale of shares of stock not traded in the Stock exchange

The rules on individuals are also applicable to domestic corporations. The capital gains from the sale of shares of
stock not traded in the stock exchange shall be subject to final income tax provided the elements are present: (1)
the shares are shares in a domestic corporation; (2) classified as capital assets; and (3) the shares are not listed
and traded in the local stock exchange.

(c) Income derived under the expanded foreign currency deposit system

The rules on domestic corporations are applicable to resident foreign corporations. The only difference is that
under Section 28 (A) (7)(b), the income earner is a resident foreign corporation depository bank under the
expanded foreign currency deposit system.

(d) Intercorporate dividends

Under this provision, the resident foreign corporation is a stockholder of a domestic corporation. The income
received by the former from the latter in the form of dividends shall be exempt from income tax.

(e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings.

A final income tax of six percent (6%) based on the gross selling price or fair market value, whichever is higher,
shall be imposed on capital gains presumed to have been realized from the sale, exchange or other disposition of
real property located in the Philippines, classified as capital asset. (Section 24 (D) (1). Based on the foregoing,
the following elements must be present for final income tax to apply: (1) the property sold is real property; (2)
located in the Philippines; and (3) classified as a capital asset.

(2) Passive income not subject to tax

Capital gains presumed to have been realized from the sale or disposition of the principal residence by natural
persons shall be exempt from final income tax, provided, the following elements are present; (1) the property sold
or otherwise disposed of is the principal residence of the taxpayer; (2) the proceeds of which is fully utilized in
acquiring or constructing a new principal residence; (3) the acquisition or construction of the new residence is
within eighteen (18) months from the date of sale or disposition; (4) the historical cost or adjusted basis of the
real property sold or disposed shall be carried over to the new principal residence built or acquired; (5)the taxpayer
should inform the BIR of his intention to avail of the exemption within 30 days from the sale or disposition; and
(6) the tax exemption can only be availed of once every ten years.

16.) Minimum Corporate Income Tax (MCIT)

(a) Imposition of MCIT
A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year
immediately following the year in which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(b) Carry forward of excess minimum tax

Any excess of the MCIT over the net income tax shall be carried forward and credited against the net income tax
for the three (3) immediately succeeding taxable years.

(c) Relief from the MCIT under certain conditions

The Secretary of Finance is authorized to suspend the imposition of the minimum corporate income tax of 2% on
any corporation which suffers losses on account of:
1. prolonged labor dispute
2. force majeure
3. legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the
necessary rules and regulation that shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case

(d) Corporations exempt from the MCIT

The following domestic corporations are exempt from the imposition of the MCIT:
1. Proprietary educational institutions;
2. Non-profit hospitals;
3. Depository banks under the expanded foreign currency deposit system (foreign Currency Deposit Units); and
4. Domestic corporation enjoying special tax privileges under the Bases Conversion Development Act and
Republic Acts 7916 and 7227 otherwise known as the PEZA law.

The following resident foreign corporations are likewise exempt from the imposition of the MCIT:
1. International air and shipping carriers;
2. Offshore Banking Units (OBU’s);
3. Regional operating headquarters of resident foreign corporations; and
4. Resident foreign corporations enjoying special tax privileges under the Bases Conversion Development Act
and Republic Acts 7916 and 7227 otherwise known as the PEZA law.

All non resident foreign corporations are not subject to MCIT.

(e) Applicability of the MCIT where a corporation is governed both under the regular tax system and a special
income tax system.
 17.) Improperly Accumulated Earnings Tax
IAET is a surtax imposed on corporations formed or availed for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of another corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.

General Rule: 10% of the improperly accumulated taxable income of domestic and closely-held corporations

Exceptions:
(a) Publicly-held corporations;
(b) Banks and other non-bank financial intermediaries; and
(c) Insurance companies.

18.) Section 30, NIRC

SECTION 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this
Title in respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital
stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a
fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation
organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the
members of such society, order, or association, or non-stock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong
to or inure to the benefit of any member, organizer, officer or any specific person;

(F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net
income of which inures to the benefit of any private stockholder or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;

(H) A non-stock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless
of the disposition made of such income, shall be subject to tax imposed under this Code.

19.) Corporation Tax Returns

Are corporations required to file quarterly income tax returns?

Yes, corporations and taxable partnerships are required to file the following income tax returns:
a) 1st, 2nd and 3rd quarter returns – the return shall be filed and the tax paid within 60 days from the close of
the first three quarters; and
b) Final Adjustment Return – the return shall be filed and the tax paid on or before the fifteenth (15th) day of
the fourth (4th) month following the close of the taxable year.

Whats is the manner of reporting income and expenses in the corporate income tax returns?

The quarterly returns of the taxable year shall report the quarterly income and expenses on a cumulative basis,
that is, the income and expenses of the first (1st) quarter are forwarded or added to the income and expenses of
the second (2nd) quarter, and the income and expenses of the first (1st) and second (2nd) quarters are also forwarded
or added to the income and expenses of the third (3rd) quarter.

The final adjustment return shall report the income and expenses for the entire taxable year.

Any income tax actually paid in the prior quarter/s may be claimed as a tax credit in the quarterly and annual
returns.

20.) Corporation Accounting Periods

Corporations, including taxable partnerships, may elect to adopt either the calendar year or the fiscal year as its
accounting period.

When the corporation adopts the calendar year as its taxable year, the returns must be filed and the tax paid as
follows:

1. 1st Quarter Return – on or before May 30;

2. 2nd Quarter Return – on or before August 29;
3. 3rd Quarter Return – on or before November 29; and
4. Final Adjustment Return – on or before April 15 of the succeeding calendar year.

The deadline will vary if the corporation adopts the fiscal year as its taxable year. To illustrate, if the corporation
adopts a fiscal year beginning July 1 and ending June 30 (12 month accounting period), the returns must be filed
and the tax paid as follows:

1. 1st Quarter Return – on or before November 29;;

2. 2nd Quarter Return – on or before March 1;;
3. 3rd Quarter Return – on or before May 30; and
4. Final Adjustment Return – on or before October 15.