Philippine Income Taxation

TAXATION
General Principles and Concepts

Taxation
A power of an Independent state, where its

governmental authority goes through a process
of imposing charges on property, individuals or
transactions as a mean of raising revenue to
support its existence and carry out its legitimate
objectives.
Nature of Taxation Power
 Inherent Power of Sovereignty

 Essentially a legislative function
 For public purpose
 Territorial in operation
 Tax exemption of government
 The strongest among the inherent powers of the
government
 Subject to Constitutional and inherent limitations
Inherent Limitations
 Taxes may be levied only for public purpose

 Being inherently legislative, taxation may not be
delegated
 Tax power is limited to territorial jurisdiction of the
State
 Taxation is subject to international comity
 Government entities are generally tax-exempt
Constitutional Limitations
 Due process of law

 Equal protection of law
 Rule of uniformity and equity
 Non-impairment of contracts
 Origination of appropriation, revenue and tariff bills
 President’s power to veto separate items in revenue
or tariff bills
Constitutional Limitations
 Congress granting tax exemption

 Exemption from taxation of properties actually,
directly and exclusively used for religious, charitable
or educational purposes
 No public money shall be appropriated for religious
purposes
 The power of judicial review
 No imprisonment for nonpayment of poll tax
 Tax collection shall generally be treated as general
funds of the government
Purpose of Taxation
 Revenue Purpose
 Regulatory Purpose
 Compensatory Purpose
Principle of a Sound Tax System
 Fiscal Adequacy
 Equality or Theoretical Justice
 Administrative Feasibility
NATURE OF TAXATION
“From the moment a state is

born, it automatically
possesses the power to collect
taxes from its inhabitants.”
NATURE OF TAXATION
“Agencies performing governmental

functions are exempt from taxation unless
expressly taxed, and those performing
proprietary functions are subject to tax
unless expressly exempted.”
CONSTITUTIONAL LIMITATION
“It requires that the law should be

reasonable and not oppressive and it
requires opportunity to be heard in
proper court of litigation before
judgment is rendered affecting one’s
person or property”
CONSTITUTIONAL LIMITATION
“In entering into contracts, the State

acts in the same manner as a private
individual or corporation and may not
use its sovereignty as justification in
impairing a valid contractual
obligation which it has assumed”
Prospective Application of Tax Laws
A tax bill must only be applicable and

operative after becoming a law.
Imprescriptibility of Taxes
Unless otherwise provided by the tax law

itself, taxes in general are not cancelable.
Double Taxation
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.
Escape from Taxation
This doctrine permits the taxpayer to minimize

payment of tax by lawful means.
Exemption from Taxation
A grant of immunity, expressed or implied, to a

particular person, corporation, or to persons or
corporations of a particular person, corporation,
from a tax upon property or on excise which
persons and corporation generally within the
same taxing district are obliged to pay.
Equitabe recoupment
Tax claim for refund, which is prevented by

prescription, may be allowed to be used as
payment for unsettled tax liabilities if both
taxes arise from the same transaction in which
overpayment is made and underpayment is due.
Set-off taxes
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.
Taxpayer suit
A taxpayer suit can only be allowed if the act

involves direct and illegal disbursement of
public funds derived from taxation.
Compromise
Compromises are generally allowed and

enforceable when subject matter therof is not
prohibited from being comrpomised and the
person entering such compromise is duly
authorized to do so.
Power to Destroy
The taxpayer has no option but to

pay the tax imposed to him.
Situs of Taxation
The place of taxation, or the state or

political unit which has jurisdiction to
impose tax over its inhabitants.
Essential Characteristics of Tax
 Enforced contribution
 Imposed by the legislative body
 Proportionate in character
 Payable in the form of money
 Imposed for the purpose of raising revenue
 Used for pubic purpose
 Enforced on some persons, properties or rights
 Commonly required to be paid in regular intervals
 Imposed by the sovereign state within its jurisdiction
The statute must be enforced as written
When there is ambiguity of tax laws, the rules of statutory
construction may be used to search for the legislative intent
otherwise, when the meaning of the law is clear, the statute
must be enforced as written
Imposition of tax burdens is not
presumed
Tax burden shall neither by imposed nor presumed beyond what
the statutes expressly and clearly state because tax statutes
should be construed strictly against the government.
Doubts should be resolved liberally in
favor of the taxpayer
When the primary consideration is the legislative intent but
doubts exist in the determining such intent, the doubts must
be resolved liberally in favor of taxpayers and strictly against
the taxing authority.
Tax exemption are strictly construed
against the taxpayer
Exemptions are highly disfavored in law and he who claims tax
exemption must be able to justify his claim or right.
Tax laws prevail over civil laws
Whenever there is conflict between the Tax Code and the Civil
Code the former shall prevail over the latter.
TAX ADMINISTRATION
Tax administration is a system of collecting taxes
in accordance with the country’s tax policies.
Assessment
Collection
Tax Administrative Agencies
 Bureau of Internal Revenue (BIR) – assess and collect all

taxes an charges imposed by the NIRC, other tax laws and
regulations.
 Bureau of Customs (BC) – enforce the Tariff and Customs
Code, collects the taxes on imports embodied in the NIRC.
 Land Transportation Office (LTO) – collect registration fees
and motor vehicle tax.
 Duly and lawfully authorized collectors
 Local offices in charge to enforce local taxation
Bureau of Internal Revenue
Commissioner of Internal Revenue
Deputy Commissioner
Revenue Regional Director
Division Chiefs Revenue District Officer
Revenue Examiners
BIR Collection Agents
and Officers
Powers and Duties of the BIR
1. To assess and collect all national internal revenue

taxes, fees and charges;
2. To enforce all forfeitures, penalties and fines
connected with the above;
3. To execute judgment in all cases decided in its favor
by the Court of Tax Appeals and the ordinary courts;
4. To administer, supervise and effect police powers
authorized by the NIRC and other laws
Powers of the
BIR Commissioner
Interpret tax laws
The Commissioner has the exclusive and original power

to interpret provisions of the NIRC and other tax laws
subject to review by the Secretary Finance.
In the executive officials of the government, only the
Commissioner has the power to interpret the provisions
of the Tax Code and other tax laws.
Decide Tax Cases
The Commissioner has the power to decide disputed

assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed
Obtain Information
 TheCommissioner is authorized to
1. examine taxpayer’s records,
2. obtain taxpayer’s financial information,
3. summon the person liable for the tax,
4. take testimony of the person concerned under oath, and
5. conduct regular canvas concerning all persons liable to pay
any internal revenue tax.
Make Assessment
 TheCommissioner is authorized to
1. Examination of returns and determination of tax due and
statements , reports and other documents not submitted.
2. Conduct inventory and surveillance and prescribe
presumptive gross sales and receipts
3. Terminate taxable period
4. Prescribe real property values
5. Inquire into bank deposit accounts
6. Accredit and register tax agents
7. Prescribe additional procedural or documentary
requirements
Compromise, Abate and Refund or Credit
Compromise or Abate
 The Commissioner may compromise or abate the payment of
internal revenue tax.
Refund or Credit
 The Commissioner may credit or refund taxes erroneously or
illegally received or penalties imposed without authority.
Suspend Business Operation
 The Commissioner or his authorized representative is empowered

to suspend the business operations and temporarily close the
business establishment of any person.
 Temporary closure of the establishment shall be for the duration of
not less than five(5) days and shall be lifted only upon compliance
with whatever requirements prescribed by the Commissioner in
the closure order.
Delegate Power
 The Commissioner or his authorized representative is empowered

to suspend the business operations and temporarily close the
business establishment of any person.
 Temporary closure of the establishment shall be for the duration of
not less than five(5) days and shall be lifted only upon compliance
with whatever requirements prescribed by the Commissioner in
the closure order.
TAX REMEDIES
Tax
Remedies
Government Taxpayer
Tax
Dispute Avoidance
Assessment
Assessment
Demand for
Letter of
Levy or Authority
Compromise
Distraint
No Audit
Program
Judicial
Tax Refund
Remedies
Judicial
Remedies
Amendment
of Returns
Assessment
 Determining of the correctness of tax due in accordance

with the prevailing tax laws
 Giving a written notice of the finding to the taxpayer
 Issuing a demand for the payment of tax liability or tax
deficiency within a specific period.
*A tax assessment is a formal letter made by the BIR demanding the
taxpayer to settle his tax liability within the indicative period.
*Assessment is not yet an action for the collection of taxes. It is,
however, an introduction to that purpose.
When to effect tax assessment?
 When a return is filed (simple neglect)

 Within 3 years from the filing of ITR
 No return was filed or a fraudulent return was filed
 Within 10 years from the discovery of the fraud or
omission
Pre-Assessment Notice
 Letter that requests explanation from the taxpayer stating

the reason why he should not be subjected to assessment
notice.
 Notice for Informal Conference (NIC)
 Preliminary Assessment Notice (PAN)
Requisites of a Valid Assessment
1. The tax official and the taxpayer have no agreement made

during the pre-assessment stage
2. It must be in writing
3. It must state the facts, law, rules and regulations or
jurisprudence on which the assessment is made
BIR Sends written NIC Taxpayer
Responds within 15 days from
receipt of NIC
Failure to respond, in default

Serves PAN
Responds within 15 days from
receipt of PAN
Failure to respond, in default
Issues Formal Letter Files protest within 30 days from

of Assessment receipt of assessment
Submits proofs within 60 days

from filing of protest
No supporting documents,
Assessment becomes final
Denies taxpayer's
protest or ignores Appeals to the CTA within 30 days
supporting from receipt of denial or from the
documents within lapse of 180-day period
180 days upon
submission No appeal was made. BIR decision
on Tax Assessment becomes final,
executory and demandable
Collection
Administrative Remedies
Distraint of personal property
Levy of real property
Other administrative collection remedies
Judicial Remedies
Civil action
Criminal action
*Either of these remedies may be pursued simultaneously in the collection
of taxes once assessment becomes final and demandable.
*Distraint and levy shall not be availed of if the amount of tax involved is
not more than P100.
Compromise - A contract whereby the parties, by
reciprocal
concessions, avoid
litigation or put an
end to one already
When to effect compromise commenced.
 A reasonable doubt as to validity of the claim against the taxpayer
exists; or
 The financial position of the taxpayer demonstrates a clear inability
to pay the assessed tax.
The following shall be considered in a tax
compromise agreement:
 The taxpayer must have a tax liability
 There must be an offer by the taxpayer or Commissioner of an
amount to be paid by the taxpayer
 There must be acceptance by the Commissioner or taxpayer, as the
case may be, of the offer in settlement of the original claim.
Amendment of Tax Returns
A tax return once filed cannot anymore be withdrawn but it

can still be modified for as long as:
The amendment is made within three years from the
date of the filing of such return; and
No notice for audit or investigation of such return has
been served to the taxpayer.
Demand for Letter of Authority (LA)
Letter of Authority – authorizes or empowers a particular

Revenue Enforcement Officer to go over, verify and
scrutinize a taxpayer’s books and records.
This must be presented to the taxpayer within 30 days from
its date of issue; otherwise, it becomes null and void.
No Audit Program (NAP)
For a taxpayer to qualify for the NAP, he must satisfy all of

the following:
 Income tax payment for the current taxable year must exceed
income tax payment for the base year by at least 20%
 Ratio of income tax payment to gross sales/receipts for the
current taxable year must be at least equal to that of the base
year.
Tax Credit/Refund
Tax Claim Filing Forfeiture in favor of the

Prescriptive Period Government
1. Tax Credit Within 2 years after Tax credit certificate
the payment of tax or unutilized within five
penalty years from date of
mailing or delivery
2. Tax Refund Within 2 years after Refund check or warrant
the payment of tax or unclaimed or uncashed
penalty within 5 years from date
of mailing or delivery
INCOME TAXATION
Individual
Income Taxation Corporation
Partnership,
Joint Venture,
Estate and Trusts
Final Tax
Capital
Individual Tax
Gain Tax
Normal
Tax
Compensation Income Pxxx
Less: Personal Exemptions xxx
Health/Hospitalization Insurance Paid xxx xxx
Net Taxable Compensation Income xxx
Business Income Pxxx
Less: Business expenses allowed xxx xxx
Net Business Income xxx
Add: Other Income not subject to CGT or FT xxx
Total taxable Income Pxxx
Compensation Income – any remuneration for rendering
personal services obtained from an employer-employee relationship
between payor and recipient.
 Basic Salary or Wage  Pension

 Honoraria  Vacation and Sick Leaves
 Fixed or Variable Allowances  Thirteenth month pay and
other benefits
 Commission
 Fringe Benefits and de minimis
 Fees  Overtime Pay
 Tips and Gratuities  Profit Sharing
 Hazard or Emergency Pay  Awards for special services
 Retirement Pay  Beneficial payments
 Separation Pay  Other forms of compensation
Miss Sam Pintok, reported the following income for
the taxable year 2015:
Salary for the year P750,000

Representation Allowance 18,000
Vacation Leave 30,000
13th Month and other benefits 120,000
Commissions 5,000
Additional Information
-Representation allowance was given during her training in Boracay. Ms.
Pintok was asked to submit a liquidation report.
-Ms Pintok availed her vacation leave credits when she went to Palawan.
How much is Ms. Pintok’s gross compensation income?

Answer: P823,000
Mr. Baba Ya, reported the following income for the
taxable year 2015:

Cost of Living (Living Quarters) 75,000
13th Month and other benefits 40,000
Director Fee 56,000
Hazard Pay 7,500
Overtime Pay 2,500
Retirement Pay (SSS) 50,000
Retirement pay from the employer 75,000
Additional Information:
-Mr. Ya’s living quarters is outside the business premise.
-Mr. Ya retired at the age of 55 and was hired at the age of 50.
-Mr. Ya’s employer pays the former’s insurance premium of P2,800/month.
How much is Mr. Ya’s gross compensation income?
Answer: P429,600
Mr. Susan Rose, reported the following income for
the taxable year 2015:

Tips and gratuities (remitted) 18,000
Separation pay (resigned) 150,000
How much is Mr. Ya’s gross compensation income?

Answer: P710,000
Exclusion from
Gross Income
Exclusion on
Gross Compensation Income
 Statutory Minimum Wage Earners

 Compensation received by MWE (wage, holiday pay,
overtime pay, night shift differential pay and hazard
pay) are tax exempt.
 Basic Pay P67,580
Overtime Pay 4,185
Hazard Pay 6,175
Exclusion on

 However, if an MWE receives additional compensation
in excess of the allowable statutory amount of P82,000,
the same will not enjoy the privilege of being a MWE
and, therefore his/her entire earnings are no longer
exempt from income tax.
Exclusion on

Overtime Pay 41,850
Hazard Pay 61,750
Commissions 53,200
13th month pay & other benefits 83,000
Exclusion on

 MWE’s receiving other income, such as income from the
conduct of trade, business or practice of profession,
except income subject to final tax, in addition to
compensation income are not exempted from income
tax on their entire income earned during the taxable
year.
Exclusion on

 Overtime Pay 4,185
 Hazard Pay 6,175
 Income from business 15,000
Exclusion on
 Di Minimis Benefits
 Privileges of relatively small value given by the employer
to his employees.
 These benefits are exempt from income tax and
withholding tax on compensation income as well as
from fringe benefit tax.
Exclusion on
Mr. Tatum Channing an employee of Malaya Inc. received the
following compensation and benefits during the year:
Total basic salary P250,000
13th month pay 30,000
Monetized vacation leave (13 days) 26,000
Rice subsidy (1 sack) 1,000
How much is taxable compensation income of Mr. Channing?
Answer: P250,000
Exclusion on
Mrs. Angelie Kinto, a public school teacher, received the
following compensation and benefits during the year:
Performance incentive 30,000
Availed vacation leave 10,000
Monetized vacation leave (13 days) 26,000
Rice subsidy (1 sack) 1,000
Actual medical assistance 60,000
How much is taxable compensation income of Mrs. Kinto?
Answer: P258,000
Exclusion on
 Tax exempt contributions

 Mandatory GSIS, SSS, Philhealth, PAG-IBIG contributions
and union dues of individuals are considered tax-
exempt. Contribution for educational plan and memorial
plan are taxable.
 Mrs. Kawawa’s net pay is P13,000 net of the following
contributions:
Withholding tax P1,000
Advances from cooperatives 500
GSIS membership 300
GSIS education plan 200
Exclusion on
 Retirement Benefits, Pensions, Gratuities

 Retirement benefits with a reasonable private benefit
plan
 Separation pay beyond the control of employee
 Social security benefits
 Benefits received under United States Veteran
Administration
 Benefits received as provided by Social Security Act
 Benefits received from GSIS
Ton E. Gonzaga is an employee at ABS Company. She had the
following income for the taxable year.
Net Pay P230,000
Midyear bonus 15,000
Thirteenth month pay 25,000
Performance incentives 40,000
Additional information:
-Net pay is net of the following:
Withholding tax 10,000
SSS Membership (mandatory) 2,000
SSS Memorial Plan 3,000
Advances 7,000
-Net pay includes amount received for leave credits availed of during sickness, P2,000
How much is Gonzaga’s Total Compensation Income?

Answer: P250,000
Anne Cortes is a waitress at Jolly Beans. She had the following
income for the taxable year.
Net Pay P89,280
Midyear bonus 7,440
Tip 5,250
Overtime pay 5,812
Meal allowance 14,400
-Anna is a minimum wage earner, earning P310 in Bohol.
-Company policy regarding tips is that it shall be kept by the employees
-Meal allowance is furnished to benefit the employer
How much is Cortes’ Total Compensation Income?

Answer: P100,342
Kaye M. Chiu is a cashier earning P382 per day in NCR(MWE). She
had the following income for the taxable year.
Net Pay P110,000
Midyear bonus 15,000
Performance bonus 5,000
Fourteenth month pay 15,000
Overtime pay 7,000
Night Differential Pay 4,000
How much is Chiu’s Total Compensation Income?

Answer: P136,000
Mang Juan, 65 is a director at Walang Forever Inc. He had the
following income for the taxable year.
Net pay P750,000
Director Fee 25,000
Retirement Pay 325,000
Total Sick Leave –monetized and availed of 78,000
-Net pay is net of the following:
Withholding tax 50,000
SSS Membership (1,800/month mandatory) 36,000
Philhealth Contribution (1,200/month mandatory) 24,000
-Mr. Juan has 24 days allowable sick leave credits. He got absent for a total of 6 days
and monetized the remaining credits.
-Retirement pay was received from the employer. Retirement plan is duly approved by
the CIR. Mr. Juan has been in service with Walang Forever for 20 years.
How much is Mr. Juan’s Total Compensation Income?

Answer: P915,500
Business Income – gross income derived from
business and profession
 Business – any commercial activity engaged in as a

means of livelihood or profit of an individual or group
of individuals.
 Profession – any endeavor or work requiring

specialized training in the field of learning, art or
science engaged in as a means of livelihood or profit
of an individuals.
Gross Income from Business
and Profession
 Manufacturing, Merchandising and Trading

 Gross sales less sales returns, discounts and allowances, and
cost of goods sold plus any income from investment and
other incidental or outside operations or sources
 Servicing
 Gross receipts less returns, allowances and discounts and cost
of services
 Farming
 Long-term contract
and Profession
 Cost of Sales – all business expenses directly incurred

to produce the merchandise or to bring them to their
present location and use.
and Profession
 Cost of Goods Manufactured and Sold

Assume the following data of Pak Ganern Manufacturing:
Sales 600,000 Purchase discounts 3,000
SRA 10,000 Raw material’s insurance 5,000
Raw materials, beginning 20,000 Freight-in 8,000
Raw materials, purchase 380,00 Direct labor 50,000
Raw materials, ending 30,000 Manufacturing overhead20,000
How much is Pak Ganern’s gross income?
Answer: P140,000
and Profession
 Cost of Goods Sold

Assume the following data of Edi Ikaw Na Merchandising:
Sales 500,000 Inventory, beginning 11,000
Sales returns and allowance 2,000 Purchase discounts 5,000
Sales discount 8,000 Freight out 15,000
Inventory, purchase 400,000 Freight in 19,000
Inventory, ending 30,000 Insurance for
goods in transit 5,000
How much is Edi Ikaw Na’s gross income?
Answer: P90,000
and Profession
 Cost of Services
Assume the following data of Libing Things Funeral Parlor:
Service Revenue 1,100,000 Embalming supplies used 150,000
Service Discount 100,000 Salary of embalmer 300,000
Salary of make up artist 200,000 Salary of Office Clerk 150,000
How much is Libing Things’ gross income?

Answer: P350,000
Cash Method
vs
Accrual Method
Cash vs Accrual Method
Accounting Applicable Business
Reportable
Methods (Type of Business)
Cash Basis Servicing Business Cash received
Accrual Basis Trading and Manufacturing Earned
Business
Special Forms of Business Income
 Rental Income – earnings derived from leasing real

estate as well as personal property. It also includes
other obligations assumed to be paid by the lessee to
the third party in behalf of the lessor such as interest,
taxes, loans, insurance premiums and others.
 Prepaid Rent
 Security Deposit with Restriction
 Security Deposit with Acceleration Clause
Illustration: Mr. Pa Renta leases a portion of its commercial
space to Mr. Umu Upa with the agreement that Mr. Upa should be
responsible to pay the following:
Advanced rental received 250,000

Rental Income 30,000/month
Annual insurance premium 5,000
Annual interest expense 3,000
Real estate tax 2,000
Assumption 1: Advanced rent is a prepaid rental received without restriction as to it use.

Assumption 2: Advanced rental is a security deposit that can only be used for repairs of the
leased property.
Assumption 3: Advanced payment is a security deposit for the faithful compliance of the lessee of
the lease contract. If lessee fails in paying his rent, it will automatically terminate
the contract and the security deposit will be forfeited in favor of the lessor. Mr.
Upa was unable to pay the monthly rent starting November.
 Leasehold Improvements – when the lessee erected

or built permanent improvements on the leased
property of the lessor upon the expiration of the
lease, the value of the improvements should be
reported as income of the lessor using either outright
or spread out method.
 Outright method – income shall be recognized when the
improvement is completed at its fair market value.
 Spread out method – the estimated book value of the
leasehold improvement at the end of the lease is spread
over the term of the lease and is reported as income for
each year of the lease
 Termination of Contract of Lease

 If improvement is destroyed before the expiration of
the lease, the lessor is entitled to deduct as a loss for the
year, when such destruction takes place, the amount
previously reported as income less any salvage value to
the extent that such loss was not compensated for by
insurance
 The lessor receives additional income for the year if the
value of improvement exceeds the amount of income
already reported.
Eric Santo is an employee earning P320 a day in Makati. Under Regional Tripartite Wage and Productivity
Board (RTWPB) Mr Santo is considered a minimum wage earner. The details of his wage for the year are
as follows:
- Gross pay, P85,200 - 13th month pay, P6,400
- Payroll deductions - Christmas bonus, P3,200
o SSS, P3,030 (P252.5/month mandatory)
o PHILHEALTH, P1,200 (P100/month mandatory)
o PAGIBIG, P1,200 (P100/month mandatory)
o SSS Memorial Plan, P1,200
Mr. Santo also has a small manufacturing business. His business had the following data for the year:
Purchase of raw materials 450,000.00 Freight in 30,000.00
Raw materials inventory, end 150,000.00 Direct labor 200,000.00
Factory overhead 100,000.00 Work in process inventory, end 50,000.00
Finished goods inventory, end 75,000.00 Cash Sales 1,000,000.00
Sales on account 250,000.00 Freight out 12,000.00
Sales Return 25,000.00
Required: Compute taxable gross income. Show your solution
Answer: P800,970
Other Income
Passive Income – an income is considered passive if
the taxpayer merely waits for it to be realized.
 Yield from deposit substitutes and trust fund

 Interest income
 Exempt from income tax
Illustration : Mr. Lumen invested P2,000,000 in a 10% 5-year
deposit certificate. How much is the tax on interest income?

 Interest income
 Subject to withholding tax
 Interest income on deposits made in banking institutions – 20%
Illustration: Mr. Edward Bullen placed his money on a savings deposit account
with BPI amounting to P500,000. The interest is P2.5% interest per year. How
much is the tax on the interest income?

 Interest income
 Preterminated long-term deposit
 Four years to less than five years – 5%
 Three years to less than four years – 12%
 Less than three years – 20%

 Interest income
Illustration : Mr. Lumen invested P2,000,000 in a 10% 5-year deposit
certificate. On the start of the 3rd year, the invested was pre-terminated. How
much is the tax on interest income?

 Interest income
 Expanded foreign currency deposit system earned by residents – 7.5% (if with
co-depositor, 50% of 7.5%)

 Interest income
 Subject to normal tax
 Royalty Income
 Derived from natural resources or products – 20%
 Dervied from franchises – 20%
 Derived from books, literary works and musical composition – 10%
 Dividend income
 Pure stock dividends, dividends received from cooperative and
pure liquidating dividends are tax-exempt.
 Cash or property dividends received from a domestic corporation
are subject to final withholding tax
 If received by a residents and citizens (RC, NRC and RA) – 10%
 If received by a NRAETB - 20%
 If received by a NRENETB – 25%
 Prizing and winnings

 Prizes P10,000 or less – subject to normal tax
 Prizes more than P10,000 – 20% final tax
 Winnings – 20% final tax
Illustration: Angelie Ginto won the following prizes/winnings
during the year:
First prize – singing contest P25,000
First prize – raffle contest 15,000
Second prize – quiz bowl 3,000
How much is the total final taxes on interest?
1
The employee reported a net take home pay of
P240,000. The amount is net of P50,000
withholding tax and P15,000 SSS (P10,200
mandatory contribution). The amount is inclusive
of P15,000, covering a 10-day vacation leave
availed and P36,000 13th month pay. His gross
taxable compensation income is
ANSWER: P258,800
2
Mr. Hyuk Jay, a minimum wage earner, received
the following compensation and benefits during
the year:
Overtime pay 15,000
Productivity incentive bonus 20,000
Hazard pay 2,500
Holiday pay 1,500
Rice subsidy (2,000 per month) 24,000
If B has rental income of P100,000 during the taxable
year, how much is his taxable compensation income?
ANSWER: P119,000
3
Bap Soon Company owns and maintains a yacht
and a helicopter which are used by its board of
directors for pleasure and business purposes. The
available data are as follows:
Cost Estimated Life
Yacht P25,000,000 20 years
Helicopter 10,000,000 10 years
Compute fringe benefit tax
ANSWER: 588,235
4
Mr. Jay Song, a minimum wage earner, received
the year:
Overtime pay 15,000
Productivity incentive bonus 20,000
Hazard pay 2,500
Holiday pay 1,500
Rice subsidy (2,000 per month) 24,000
How much is his taxable compensation income?
ANSWER: Zero
5
The following items of income are reported by
Minho, a CPA:
Salary as an accountant P1,000,000
13th month pay and other bonuses 152,000
Audit retainer’s fee 600,000
Gain from sale of car 250,000
The total compensation income would be
ANSWER: P1,070,000
6
Jongsuk reported the following retirement:
First 30 years received at the age of 50 P400,000
Second employment for 10 years received
at the age of 60 500,000
Third employment for 10 years received
at the age of 70 300,000
How much is nontaxable retirement pay of
Jongsuk?
ANSWER: P400,000
7
Eoteokaeh Company allows its Chief Finance
Officer, Mr. Mario Mauro, to incur expenses
subject to reimbursement. Mr. Mauro presents
the following itemized receipts:
Utilities (30% in his personal name) P15,000
Grocery items 5,500
Gasoline of company car 2,800
Transportation of Mr. Perez’ child’s camping trip 4,500
ANSWER: 6,823
8
Suzy reported the following separation pay:
First employment for 20 years at the
age of 40 - resigned P200,000
Second employment for 10 years at the
age of 50 - reduction of expenditure 300,000
Third employment for 10 years at the
age of 60 – retirement 200,000
How much is taxable separation pay?
ANSWER: P200,000
9
During the taxable year, the total purchases of
goods for sale amounted to P500,000.
Transportation expenses are P10,000 for goods
purchased and P5,000 for goods sold. During the
year, the total sales amounted to P550,000. at
the end of the year unsold goods amounted to
P60,000. the cost of goods sold for the period is?
ANSWER: P450,000
10
The following information is available to
determine the cost of sale of X:
Purchases 2,100,000 Purchase discounts 15,000
Purchase returns 45,000 Transportation in 160,000
Freight out 4,000 Inventory, end 320,000
Inventory, beginning 120,000
How much is the cost of sale?
ANSWER: P2,000,000
11
Cheongmal Inc. hired Miss Tina Pa and gave
her the following compensation and fringe
benefits:
Salary P15,000 per month
Three security guards (two of which is assigned in the office) 3,000 per month
One office secretary 8,000 per month
Homeowner’s association dues 1,200 per year
One personal driver 3,000 per month

ANSWER: P34,447
12
Paolo Pascual is a medical practitioner. Paolo was
able to render services to several clients. Cash
revenue was P250,000 and revenue on account
totaled P130,000. Paolo was also able to collect
P50,000 from clients, services is yet to be
rendered. He had the following information
regarding his expenses:
Salary to clinical assistant P18,000 Salary to secretary P12,000
Medical supplies 10,000 General supplies 5,000
The gross income of Mr. Pascual would be.
ANSWER: P272,000
13
The following amounts were received in 2016.
Rent for the year 2015 60,000
Refundable deposit 400,000
In addition to the following receipts, the following
amounts are to be paid by the lessee.
Insurance premium 6,000
Real estate tax 4,000
Rental income to be reported in the return of the
lessor will be
ANSWER: P610,000
14
The following are the data available for Mr. Mario Pera
10-year time deposit(5%) P1,500,000
Deposit in an expanded foreign currency system (8%) 700,000
Savings account with PNB (2.5%) 450,000
After holding the investment for three years, Mr. Pera
pre-terminated his long-term deposit. What is the
amount of final tax on his interest income?
(Mr. Pera is a resident citizen)
ANSWER: P33,450
15
The following are the gross royalty income of a resident
citizen for the period:
Royalty income for musical composition P120,000
Royalty income from franchising 180,000
Royalty income from gold mine 750,000
The total final tax on royalty income is
ANSWER: P198,000
16
Mr. and Mrs. Brad Pitt are joint holders of a deposit in an
expanded foreign currency deposit system. Mr. Pitt is a
non resident citizen where as Mrs. Pitt is a resident
citizen. Total interest income on the deposit amounted
to P25,000.
The final tax on the income of Mr. Pitt is
ANSWER: Zero
17
Mocha Usog, a nonresident alien engaged in trade or
business in the Philippines, received P500,000 cash
dividend from a domestic corporation. The final tax on
the income is
ANSWER: P100,000
18
May June received the following prizes and winnings:
First prize – raffle draw P 5,000
Gambling winnings 25,000
Philippine lotto winnings 500,000
Beauty contest winnings 9,000
How much is the final tax on prizes and winnings?
ANSWER: P100,000
19
Sarah Gee, a taxpayer who is single, received a net pay
of P265,000 for the year. The amount is net of P50,000
withholding tax, P3,000 payment for advances, and
p4,000 SSS contribution (P2,000 mandatory). This is inclusive
of P27,000 13th month pay, P8,000 productivity incentive
bonus and P5,000 Christmas bonus (de minimis).
How much is gross taxable compensation income?
ANSWER: P270,000
20
Mark Whalberg, a resident alien, received P50,000 pure
stock dividend from a domestic corporation. The final
tax on the income is
ANSWER: Zero
21
Mang Jose is a security guard paid at minimum
wage. He had the following information during
the year.
Wages P89,280
Overtime pay 66,960
Hazard pay 8,928
Night-shift differential pay 13,392
13th month pay and other benefits 25,000
How much will Mang Jose report as tax-exempt
income?
ANSWER: P203,560
22
Mr. Sam Pilby, a minimum wage earner received
the year.
Overtime pay 10,000
Actual medical assistance 45,000
In addition, Mr. Pilby earned the following other
income:
Royalty income on literary works, net of final tax P4,500
How much is the taxable income of Mr. Pilby?
ANSWER: P5,000
23
Minhyuk, the sole proprietor of Yukie Trading,
reported the following information during the
year 2016.
Cash collection 2015 sales P150,000 Sales discount 30,000
Cash collection 2016 sales 480,000 Purchase discount 70,000
Sales on account 2016 370,000 Inventory, beg 120,000
Unpaid purchases in 2016 560,000 Inventory, end 30,000
Paid purchases in 2016 60,000 Freight in 120,000
Utilities 48,000 Depreciation 75,000
How much is Minhyuk’s gross taxable income
from business.
ANSWER: P60,000
Other Sources of Income
Bad debt recovery

Kim Shin wrote off receivable from Goblin Bride Inc.
whose account is considered to be worthless in 2016
amounting to P20,000. In 2017, Kim Shin was able to
collect P15,000 from Goblin Bride.
Tax Refund or Credit

2016 2017
Gross income P300,000 P450,000
Deductions 180,000 240,000
Income taxes paid 10,000 5,000
Documentary stamp tax 2,000
Supposing that the taxes paid in 2016 were refunded
in 2017.
Damages Recovery
Song Jongki was involved in a car accident in 2016.
He received P30,000 compensation on physical
injuries and P15,000 compensation for lost income
for being hospitalized for a week.
Annuities
Ahn Min Hyuk received P15,000 as annuity of life
insurance from AXA Life Insurance. P5,000 represent
interest and P10,000 return of premium.
Income from Whatever Sources Defined

Illegally obtained income
Embezzled funds
Income received by error
Exclusion from
Gross Income
Exclusion on Gross Income
 Proceeds of life insurance

 The proceeds of life insurance policies paid to the heirs
or beneficiaries upon the death of the insured are
nontaxable for income tax purposes.
 The exclusion applies regardless of who the beneficiary
is.
 Proceeds received by insured person

 When the insured person outlived the life insurance
policy and subsequently received the life insurance
proceeds, the proceeds received is taxable to the extent
of the excess of premium paid.
 Proceeds of Life Insurance, P1,000,000
Total of premium payments, P450,000
 Gifts, Bequest and Devises

 The value of property acquired by gift, bequest and
devise or descent shall be excluded from gross income,
provided that income from such property shall be
included in gross income.
 Compensation or Damages
 Damages received under a suit or settlement of a claim
on account of personal injuries or sickness are not
taxable.
 Prizes and Awards

 Prizes and awards made primarily in recognition of
religious, charitable, scientific, educational artistic,
literary, or civic achievement are not taxable, provided
that the recipient was/is:
 Selected without any action on his part to enter the
contest or proceeding
 Not required to render substantial future services as a
condition to receive the prize or award
 Prizes and Awards

 Prizes and awards granted to athletes in local and
international sports competitions and tournaments,
whether held in the Philippines or abroad and
sanctioned by their respective national sports
associations accredited by Philippine Olympic Sport
Committee, shall not be included in gross income and
shall be tax exempt.
 Qualified Senior Citizen

 Provided his annual taxable income does not exceed the
poverty level of P60,000 per year, except interest
 Inventors and Inventions
 Granted to the inventor for a 10-year period which starts
from the date of first commercial sale
 Prizes received are income earned on the invention and
are therefor taxable
Fringe Benefits Tax
Fringe Benefits –any good, service, or other benefit
furnished or granted by an employer, in cash or in kind, in addition
to basic salaries, to an individual employee.
 Housing  Expenses for foreign

 Expense Account travel
 Vehicle of any kind  Holiday and vacation
 Household personnel expenses
 Interest on loan at less  Educational assistance
than market value  Life or health insurance
 Membership fees, dues and other non-life
and other expenses insurance premiums
Fringe Benefits Tax –monetary burden imposed on
fringe benefits given to an individual employee other than a rank
and file employee.
The tax base of fringe benefits is based on the grossed-up

monetary value (GMV) of fringe benefits. The GMV of the fringe
benefit shall be determined by dividing the monetary value of the
fringe benefits by 68%.
The fringe benefit tax is 32% of the GMV of benefit.

Fringe Benefits Tax –monetary burden imposed on
fringe benefits given to an individual employee other than a rank
and file employee.
• Rank and file employees – taxable as compensation income

subject to normal tax rate
• Managerial employees – taxable with final fringe benefit tax of

32%
Fringe Benefit Tax
Housing
Illustration
Tomorrow With You purchased a residential property and
transferred the same in the name of its Chairman of the Board as
a fringe benefit. The property has a fair market value of
P3,000,000 and a zonal value of P5,000,000.

Fringe Benefit Tax
Housing
Illustration
Missing 9 Inc. assigned its own property as a residential house of
its Chairman of the Board as a fringe benefit. The property has a
fair market value of P3,000,000 and a zonal value of P5,000,000.

Fringe Benefit Tax
Motor Vehicles
Illustration
Fight For My Way Inc. purchased a car by installment to be given
as fringe benefit of its president. The acquisition cost of the car is
P2,000,000 but since it was acquired by annual installment of
P500,000 within five years. In addition, the company also spent
car registration fee amounting to P50,000.

Fringe Benefit Tax
Motor Vehicles
Illustration
Song Couple owns and maintains a fleet of motor vehicles for the
use of the business and the employees. During the year, the
company secretary used one of the cars owned by Song Couple.
Acquisition cost of the car was P204,000

Fringe Benefit Tax
Aircraft and Yacht
Illustration
Suspicious Partner owns and maintains a yacht and helicopter and
an airplane which are used by its board of directors for pleasure
and business purposes. Some data available are as follows:
Acquisition Cost Estimated Life
Yacht P1,700,000 25 years
Helicopter 900,000 15 years
Airplane 2,000,000 18 years

Fringe Benefit Tax
Expense Account
Illustration
Descendants Corporation allow its CFO, Mr. Song Jongki to incur
expenses subject to reimbursement. Mr. Song presents the ff:
Light and water (80% in the name of the company) P12,000
Grocery items (Mr. Song) 3,000
Gasoline of company car 5,000

Fringe Benefit Tax
Expense Account
Illustration
Goblin Inc. allow its COO, Mr. Yeo Dokhwa to incur expenses
subject to reimbursement. Mr. Yeo presents the ff:
Light and water (30% in the name of Mr. Yeo) P20,000
Grocery items (Mr. Song) 5,000
Clothing 4,000

Fringe Benefit Tax
Household Expenses
Illustration
SBS Broadcasting hired Lee Jong Suk and gave him the following
compensation and fringe benefits:
Two personnel security guards 3,000/month
Two maids 3,500/month
One office secretary 12,000/month
Homeowner’s assoc dues 3,000/year

Fringe Benefit Tax
Household Expenses
Illustration
Running Man Inc. hired Song Ji Hyi and gave her the following
compensation and fringe benefits:
Three security guards (two is stationed at the office) 5,000/month
One maids 5,000/month
Company driver 8 ,000/month

Fringe Benefit Tax
Interest on Loan at Less than Market Rate
Illustration
In 2015, Mr. Jung Il Woo, the owner of Cinderella Inc, lends
P150,000 to Park So Dam. It is stipulated in their agreement that
the amount should be paid in one year without interest

Fringe Benefit Tax
Interest on Loan at Less than Market Rate
Illustration
In 2016, Mr. Nam Joo Hyuk, the owner of Weightlifting Inc., lends
P200,000 to Lee Sung Kyung. It is stipulated in their agreement
that the amount should be paid in one year with annual interest
of 8%

Fringe Benefit Tax
Membership Fees, Dues and Other Expenses
Illustration
Mr. Jo In Suk is the appointed Vice President of Marketing of
Fated To Love You Inc. As his privilege, the corporation paid his
Gwapo Club membership fee amounting to P1,360,000.

Fringe Benefit Tax
Expenses for Foreign Travel
Illustration
Mr. Hee Chul, the VP for Operations of Super Junior Inc. incurred
the following expenses in attending a 5-day business convention:
(Assume $1=P40)
Business class plane tickets $ 650
Hotel accommodation $220/day
Inland travel $150

Fringe Benefit Tax
Expenses for Foreign Travel
Illustration
Mr. Hee Chul, the VP for Operations of Super Junior Inc. incurred
the following expenses in attending a 5-day business convention:
(Assume $1=P40)
First class plane tickets $ 1050
Hotel accommodation $2,250
Inland travel $350

Fringe Benefit Tax
Holiday and Vacation Expenses
Illustration
In 2016, Girls Generation provided for a 3-day free vacation to 10
of its outstanding employees, (6 of which were rank and file).
Total expenses incurred by the company for the vacation
amounted to P500,000

Fringe Benefit Tax
Educational Assistance
Cost of education assistance to the employee which

are borne by the employer
Cost of educational assistance extended by an

employer to the dependents of an employee
Fringe Benefit Tax
Insurance Benefits
Illustration
2ne1 Inc. shows the following insurance premiums intended for its
President, Park Sandara:
Beneficiary Premium Paid
Life insurance 2ne1 Inc. P12,000
Car insurance Ms. Park 4,000
Health insurance Ms. Park and her heirs 5,000
SSS contribution Ms. Park and her heirs 2,400
Group insurance Ms. Park and her heirs 1,800

Philippine Income Taxation

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Philippine Income Taxation

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TAXATION

General Principles and Concepts

A power of an Independent state, where its

 Inherent Power of Sovereignty

 Taxes may be levied only for public purpose

 Due process of law

 Congress granting tax exemption

 Equality or Theoretical Justice

“From the moment a state is

“Agencies performing governmental

“It requires that the law should be

“In entering into contracts, the State

A tax bill must only be applicable and

Unless otherwise provided by the tax law

Act of the sovereign by taxing twice for the same

This doctrine permits the taxpayer to minimize

A grant of immunity, expressed or implied, to a

Tax claim for refund, which is prevented by

Taxes are not subject to set-off or legal

A taxpayer suit can only be allowed if the act

Compromises are generally allowed and

The taxpayer has no option but to

The place of taxation, or the state or

 Bureau of Internal Revenue (BIR) – assess and collect all

Revenue Regional Director

Division Chiefs Revenue District Officer

1. To assess and collect all national internal revenue

The Commissioner has the exclusive and original power

The Commissioner has the power to decide disputed

 The Commissioner or his authorized representative is empowered

 The Commissioner or his authorized representative is empowered

 Determining of the correctness of tax due in accordance

 When a return is filed (simple neglect)

 Letter that requests explanation from the taxpayer stating

1. The tax official and the taxpayer have no agreement made

Failure to respond, in default

Issues Formal Letter Files protest within 30 days from

Submits proofs within 60 days

A tax return once filed cannot anymore be withdrawn but it

Letter of Authority – authorizes or empowers a particular

For a taxpayer to qualify for the NAP, he must satisfy all of

Tax Claim Filing Forfeiture in favor of the

Income Taxation Corporation

 Basic Salary or Wage  Pension

Salary for the year P750,000

How much is Ms. Pintok’s gross compensation income?

Salary for the year P180,000

Salary for the year P560,000

How much is Mr. Ya’s gross compensation income?

 Statutory Minimum Wage Earners

 Statutory Minimum Wage Earners

 Statutory Minimum Wage Earners

 Statutory Minimum Wage Earners

 Statutory Minimum Wage Earners

 Tax exempt contributions

 Retirement Benefits, Pensions, Gratuities

How much is Gonzaga’s Total Compensation Income?

How much is Cortes’ Total Compensation Income?

How much is Chiu’s Total Compensation Income?

How much is Mr. Juan’s Total Compensation Income?

 Business – any commercial activity engaged in as a

 Profession – any endeavor or work requiring

 Manufacturing, Merchandising and Trading

 Cost of Sales – all business expenses directly incurred