WHAT TAXATION IS

Taxation refers to the act of collecting taxes. This power is vested in the government, whether
local or nation. Taxes are compulsory payments associated with income, consumption, or
holding of property that individuals and corporation are required to make each year to
governments.

THE NEED FOR TAXATION

The government serves to promote the general welfare and protection of its citizens. As such,
various functions related to the following are formed: education, defense, social welfare, food
production, protection of the environment, and others. To maintain activities that are deemed
important, funds need to be provided on a regular basis; in effect, it becomes necessary for the
government to collect taxes.

When people do not pay taxes, the viability of the government is placed in jeopardy. The
provision of services will not be sustained. Even if people decide to remove a government that
imposed taxes, they will not be able to find one that will not need funds to operate.

It is important that people should share in the burden of running the government, and this can be
achieved through the regular payments of taxes.

REQUISITES OF A VALID TAXATION

Although the government has the power to tax its citizens, there are certain requisites that must
be present before taxation is deemed valid.

The requisites consist of the following:

1. The tax should be for a public purpose;
2. The rule of taxation shall be uniform;
3. The person or property taxed shall be within the jurisdiction of the government levying
the tax;
4. The assessment and collection of certain kinds of taxes must provide guarantees against
injustice to individuals.

A tax is said to be for public purpose if the funds is generated through it is used to support the
government, like when it is used to pay for the construction of public buildings. Financing
research in agriculture is also a valid reason for collecting taxes.

Taxation is valid when all taxable articles or kinds of property belonging to the same class or
category are tax at the same rate. Two adjoining lots located in a residential area, for instance,
must be levied with tax with the same percentage over the value of the lots. If uniformity of
application is implemented, taxation is said to be valid.

When the state collects taxes on persons, properties, or transactions where it has jurisdiction,
taxation is valid. A property owned by a person living in another place may be levied a tax by the

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government of the place where the property is located.

Taxation is valid if sufficient notice and opportunity for hearing is provided to individual subject
of taxation.

OBJECTIVE OF TAXATION
Taxation serves to achieve any or all of the following objectives:
1. To raise funds
2. To redistribute wealth
3. To regulate consumption
4. To protect local industries

The chief means for raising funds to support the government is through taxes.

Some individuals amass great wealth during their lifetimes. Taxation is one of way of
redistributing this wealth to the people. Taxes relating to estate and inheritance are examples of
means used.

The consumption of some goods sometimes reaches levels that become harmful to the society. To
limit the sale of these goods, taxes are imposed. If, for instance, foreign travel depletes the
nations dollar reserves, the government may impose taxes at rates enough to discourage the said
activity.

Imported goods sometimes enter our local markets to the detriment of local producers. If
imported goods are sold locally at lower prices, the government may impose taxes that will raise
its selling price. When this happens, imported goods will be less attractive to domestic
consumers.

CLASSES OF TAXES
Taxes may be classified according to the following:
1. Subject
2. Purpose
3. Authority imposing tax
4. Determination of the amount
5. Who bears the burden
6. Graduation rate

According to Subject
Taxes may be classified according to subject as personal, property, or excise.

Personal Tax is imposed on individuals residing within a specified territory, regardless of

property or occupation. An example is the community tax levied by the barangay to its residents.

Property Tax is one levied on property. The amount paid is in proportion to its value, or some
reasonable means of apportionment.

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Excise tax is one laid upon goods consumed, sold, or manufactured within a nation. An example
is the tax levied on alcohol or cigarettes.

According to Purpose
Taxes may be classified as either revenue or regulatory.

A Revenue Tax is imposed to collect revenues for the general purpose of the government.
Examples are income tax and sales tax.

A Regulatory Tax is imposed for a special purpose like the protection of local industries from
foreign competition.

According to Authority Imposing Tax

Taxes may also be classified according to authority imposing the tax, which consist of the
national and local governments.

A National Tax is one imposed by the national government. Examples are income taxes and
custom duties.

A Local Tax is one levied by the municipal, provincial, or barangay governments. An example is
the real property tax.

According to Determination of Amount

As to determination of amount, a tax may be classified as either a specific or ad valorem.

A Specific Tax is one assessed on the basis of tax per unit. When assessment is based on a
percentage of the value of the item, the tax is regarded as Ad Valorem.

According to Who Bears the Burden

As to who bears the burden, a tax may be classified as either direct or indirect.

A tax is direct when the person on whom the tax is imposed absorbs the burden. An example is
income tax.

A tax is indirect when the amount is paid by the person other than the one on whom it is legally
imposed. An example is the value added tax VAT paid by the seller but passed on to the buyer as
part of the selling price.

According to Graduation Rate

In terms of graduation rate, a tax may either be proportional, progressive, or regressive.

A tax is proportional if it is based on fixed percentage of the amount of the property, income, or
other factors. Examples are sales tax and real property tax.

A tax is progressive when the rate increases at the tax base increases. An example is the income
tax.

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A tax is regressive if the effective rate decrease as the tax base increases.

REQUISITES FOR AN IDEAL TAX SYSTEM

A nation that is imposing taxes on its citizens must be able to adapt one that is considered
good. An ideal tax system must be:
1. Adequate,
2. Equitable
3. Economically efficient, and
4. Simple

NATURE OF THE POWER OF TAXATION

LEGISLATIVE- this power can only be exercised by the law making body (Congress) not the
executive or the judicial branch of the government, except when delegated by the national
legislative body to a local legislative body or to the executive branch, subject to limitations as
may be provided by law;

INHERENT IN SOVEREIGNTY- the power exists as an incident or attribute of sovereignty,

as it is essential to the existence of every government. The power can therefore be exercised even
without the constitution or any law expressly conferring such power.

SCOPE OF THE POWER OF TAXATION

It is comprehensive, unlimited, supreme and plenary, but subject to constitutional and inherent
limitations.

FUNDAMENTAL PRINCIPLES IN TAXATION

Taxation is the inherent power of the sovereign, exercised through the legislature, to impose
burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to
carry out the legitimate objects of government.

It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign,
through its law-making body, raises income to defray the necessary expenses of government. It is
a method of apportioning the cost of government among those who, in some measure, are
privileged to enjoy its benefits and must therefore bear its burdens.

Taxes are the enforced proportional contributions from persons and property levied by the law-
making body of the State by virtue of its sovereignty for the support of the government and all
public needs.

ESSENTIAL ELEMENTS OF A TAX

1. It is an enforced contribution.
2. It is generally payable in money.
3. It is proportionate in character.
4. It is levied on persons, property, or the exercise of a right or privilege.
5. It is levied by the State which has jurisdiction over the subject or object of taxation.

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6. It is levied by the law-making body of the State.
7. It is levied for public purpose or purposes.

THEORY AND BASIS OF TAXATION

The power of taxation proceeds upon the theory that the existence of government is a necessity;
that it cannot continue without means to pay its expenses; and that for these means, it has a right
to compel all its citizens and property within its limits to contribute.

The basis of taxation is found in the reciprocal duties of protection and support between the State
and its inhabitants. In return for his contribution, the taxpayer received benefits and protection
from the government. This is the so-called benefits received principle.

LIFE BLOOD OR NECESSITY THEORY

The life blood theory constitutes the theory of taxation, which provides that the existence of
government is a necessity; that government cannot continue without means to pay its expenses;
and that for these means it has a right to compel its citizens and property within its limits to
contribute.

The Supreme Court said that taxes are the lifeblood of the government and should be collected
without unnecessary hindrance. They are what we pay for a civilized society. Without taxes, the
government would be paralyzed for lack of motive power to activate and operate it. The
government, for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values.

BENEFIT-RECEIVED PRINCIPLE
This principle serves as the basis of taxation and is founded on the reciprocal duties of protection
and support between the State and its inhabitants. Also called symbiotic relation between the
State and its citizens.

In return for his contribution, the taxpayer receives the general advantages and protection which
the government affords the taxpayer and his property. One is compensation or consideration for
the other; protection for support and support for protection.

However, it does not mean that only those who are able to and do pay taxes can enjoy the
privileges and protection given to a citizen by the government.

In fact, from the contribution received, the government renders no special or commensurate
benefit to any particular property or person. The only benefit to which the taxpayer is entitled is
that derived from the enjoyment of the privileges of living in an organized society established
and safeguarded by the devotion of taxes to public purpose. The government promises nothing
to the person taxed beyond what may be anticipated from an administration of the laws for the
general good.

Taxes are essential to the existence of the government. The obligation to pay taxes rests not upon
the privileges enjoyed by or the protection afforded to the citizen by the government, but upon
the necessity of money for the support of the State. For this reason, no one is allowed to object to

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or resist payment of taxes solely because no personal benefit to him can be pointed out as arising
from the tax. [Lorenzo v. Posadas]

SITUS OF TAXATION
Literally, situs of taxation means place of taxation. It is the State or political unit which has
jurisdiction to impose a particular tax.

The determination of the situs of taxation depends on various factors including the:
1. Nature of the tax;
2. Subject matter thereof (i.e. person, property, act or activity;
3. Possible protection and benefit that may accrue both to the government and the taxpayer;
4. Residence or citizenship of the taxpayer; and
5. Source of the income.

SITUS OF TAX ON PERSONS (POLL TAX)

Poll tax may be properly levied upon persons who are inhabitants or residents of the State,
whether or not they are citizens.

SITUS OF TAX ON REAL PROPERTY

Situs is where the property is located pursuant to the principle of lex rei sitae. This applies
whether or not the owner is a resident of the place where the property is located.

This is so because the taxing authority has control over the property which is of a fixed and
stationary character.

The place where the real property is located gives protection to the real property; hence, the
owner must support the government of that place.

Lex Rei Sitae

This is a principle followed in fixing the situs of taxation of a property. This means that the
property is taxable in the State where it has its actual situs, specifically in the place where it is
located, even though the owner resides in another jurisdiction.

Lex rei sitae is a Latin phrase which means the law where the property is situated. This is a
legal doctrine of property law and international private law. The law governing the transfer of
title to property is dependent upon and varies with, the lex rei sitae.

FORMS OF ESCAPE FROM TAXATION

1. Shifting
2. Capitalization
3. Transformation
4. Avoidance
5. Exemption
6. Evasion

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SHIFTING- process by which tax burden is transferred from statutory taxpayer to another
without violating the law.

KINDS OF SHIFTING
FORWARD SHIFTING- when burden of tax is transferred from a factor of production
through the factors of distribution until it finally settles on the ultimate purchaser or
consumer.
BACKWARD SHIFTING when the burden is transferred from consumer to the
producer or manufacturer.
ONWARD SHIFTING - when tax is shifted to two or more times either forward or
backward.

CAPITALIZATION- is the reduction in the price of the taxed object equal to the capitalized
value of the future taxes which the purchaser expects to be called upon to pay.

TRANSFORMATION- the manufacturer or producer upon whom the tax has been imposed,
fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to
recoup himself by improving his process of production thereby turning out his units at a lower
cost.

TAX AVOIDANCE- exploitation by the taxpayer of legally permissible methods of in order to

avoid or reduce tax liability. This is also known as tax minimization.

TAX EXEMPTION- grant of immunity or freedom from a financial charge or obligation or

burden to which others are subjected.

TAX EVASION- is the practice by the taxpayer through illegal or fraudulent means to defeat or
lessen the amount for tax. This is also known as tax dodging.

TAX DISTINCTION FROM OTHER TERMS

Tax distinguished from Toll

- A tax is demand of sovereignty, while toll is demand for proprietorship.
- A tax is paid for the use of the governments property, while a toll is paid for the
use of anothers property.
- A tax may be imposed by the government only, while a toll is enforced by the
government or a private individual or entity.

Tax distinguished from Penalty

- A tax is intended to raise revenue, while penalty is designed to regulate conduct.
- A tax may be imposed by the government only while a penalty may be imposed
by the government or a private individual.

Tax distinguished from Debt

- A tax is based on law, while a debt is based on contract.
- A tax may not be assignable, while a debt is assignable.

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 - A tax is generally payable in cash, while debt is payable in cash or in kind.
- A person may be imprisoned for a non-payment of taxes, but any person may not
be imprisoned for non-payment of debt.

Tax distinguished from other Terms

- Revenue. This refers funds or income derived by the government whether from
tax or any other source in another sense.
- Internal Revenue. It refers to taxes imposed by the legislature other than duties on
imports and exports.
- Customs Duties. These are taxes imposed on goods exported into a country.

ENTITIES EXEMPTED FROM TAXATION

Religious Institutions
Charitable Institutions
Non-Profit, Non-Stock Educational Institutions
Non-profit Cemeteries
Government Institutions
Foreign Diplomats

CLASSIFICATION OF TAXPAYERS
1. Individual Taxpayers
Resident Citizens
Non-Resident Citizen
Resident Aliens
Non-Resident Aliens
2. Corporate Taxpayer
Domestic Corporation
Foreign Corporation
Resident Corporation
Non-Resident Corporation
3. General Professional Partnership
CPA
Lawyer
4. Estates and Trust

DOUBLE TAXATION
Double taxation means taxing the same property twice when it should have been taxed only
once. This characterizes two taxes that are of the same kind or character, and were imposed on
the same subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing. Because of this specific nature of double taxation, it is
otherwise described as a direct duplicate taxation or sometimes referred to as obnoxious
double taxation.

Double taxation is a taxation principle referring to income taxes that are paid twice on the same
source of earned income.

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Double taxation occurs because corporations are considered separate legal entities from their
shareholders. As such, corporations pay taxes on their annual earnings, just as individuals do.
When corporations pay out dividends to shareholders, those dividend payments incur income-tax
liabilities for the shareholders who receive them, even though the earnings that provided the cash
to pay the dividends were already taxed at the corporate level.

WHAT ARE THE DIFFERENT TAX TYPES IN THE PHILIPPINES?

Paying taxes is something inevitable wherever you live. Almost all transactions require the
payment of taxes. In the Philippines, taxes are grouped into two basic types: National and Local.

NATIONAL TAXES are the ones paid to the government through the Bureau of Internal
Revenue (BIR). Our national taxation system is based on the National Internal Revenue Code of
1997 or the Republic Act No. 8424 also known as the Tax Reform Act of 1997, as amended.
Import and export tariffs levied by the Bureau of Customs are also considered national taxes and
duties but will not be discussed in this article.

LOCAL TAXES, on the other hand, are based on Republic Act 7160, otherwise known as the
Local Government Code of 1991, as amended. These taxes and fees are imposed by the local
government units in every province, city, municipality, and barangay, which are given the power
to levy such taxes by the code.

KINDS OF NATIONAL TAXES

Capital Gains Tax is tax imposed on the proceeds from sale, exchange, or other disposition of
capital assets located in the Philippines. Examples of sold assets that are subject to capital gains
tax include properties, stocks, pieces of jewelry, and other high-value goods.

Documentary Stamp Tax is imposed on documents, instruments, loan agreements, and papers
that are used as evidence of acceptance, assignment, sale or transfer of obligation, rights, or
property. Documentary stamps are usually found on deeds of sale and bank promissory notes,
among others.

Donors Tax is levied on a donation or gift for the gratuitous transfer of property between two or
more persons who are both still living at the time of transfer. Even relief goods sent for donation
are charged this type of tax.

Estate Tax is required to be paid before an estate is transferred to the rightful beneficiary or heir
of a deceased person. This is based on a graduated schedule of tax rate.

Excise tax is tax on goods produced for sale and subsequently sold within the country. It is
considered an indirect tax which means the manufacturer is supposed to recover it by adding the
amount to the selling price. Sin tax on tobacco and alcohol is an example of excise tax.

Income tax is imposed on all compensation and income received or earned from practice of
profession, conduct of trade in business, and from properties.

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Percentage Tax is a business tax imposed on businesses not covered by Value Added Tax and
where gross annual receipts for sale of good and services do not exceed Php750,000.

Value Added Tax OR VAT is another kind of indirect tax that is passed on to the end consumer. It
is a form of consumption tax making it the most common tax type because all final sales are
almost always charged this tax.

Withholding Tax on Compensation is tax deducted from salaries of employees and it is the
companys responsibility to remit the same to the government. Other kinds of withholding tax
are Expanded Withholding Tax, Final Withholding Tax, and Withholding Tax on Government
Money Payments.

KINDS OF LOCAL TAXES

Basic Real Property Tax is tax on real properties classed as follows: agricultural, commercial,
industrial, residential, timberland, and mineral.

Franchise Tax is imposed by LGUs on business franchises at a rate not more than 50% of 1% of
the gross annual receipts of the previous taxable year.

Business of Printing and Publication Tax is collected from any business that does printing or
publication of printed materials such as books, cards, pamphlets, posters, or tarpaulins.

Professional Tax is collected from doctors, lawyers, engineers, and other professionals engaged
in the exercise or practice of professions that require government examination or acquisition of
license to practice.

Amusement Tax is tax on all forms of entertainment such as movies, concerts, and plays. This
tax is usually already included in the ticket price.

Community Tax, more commonly called Cedula, is required from individuals from a base fee of
Php5.00 and additional Php1.00 for every Php1,000 income.

Annual Fixed Tax for Delivery Trucks and Vans amounting to Php500 is collected by the LGU
from trucks and vans which deliver goods such as beer, soda, and/or cigarettes.

Barangay Tax Is subjected on sari-sari stores and retailers whose annual gross sales do not
exceed Php50,000 and is accrued on the first day of January of each year.

Barangay Clearance is paid as a legal permission for particular individuals, hosts, or companies
to conduct an event or start a business in a barangay.

FEATURES OF PHILIPPINE INCOME TAXATION

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1. Income tax is a direct tax because the tax burden is borne by the income recipient upon
whom the tax is imposed.
2. Income tax is a progressive tax since the tax base increases as the tax rate increases. (ability
to pay principle)
3. The Philippines has adopted the most comprehensive system of imposing income tax by
adopting the citizenship principle, resident principle and the source principle.
4. Renders citizens, regardless of residence, and resident aliens subject to income tax liability
on their income from all sources and of the generally accepted and internationally recognized
income taxable base that can subject non-resident aliens and foreign corporations to income
tax on their income from Philippine sources.
5. The Philippines follows the semi-schedular or semi-global system of income taxation. Under
which, all compensation and other income not subject to final tax 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 corporation, as well as personal and additional exemptions, in the case of
individual taxpayers, the taxable income(gross income less allowable deductions and
exemptions) is subjected to one set of graduated tax rates (if an individual) or normal
corporate income tax rate (if a corporation).
6. The Philippine income tax law is a law of American origin. Hence the decisions of the US
courts have force and persuasive effect in the Philippines.

Situs of taxation literally means place of taxation.

The situs of taxation is determined by a number of factors
1. Subject matter- or what is being taxed. He may be a person or it may be a property,
an act or activity;
2. Nature of tax- or which tax to impose. It may be an income tax, an import duty or a
real property tax;
3. Citizenship of the taxpayer
4. Residence of the taxpayer.

General Rule: The taxing power cannot go beyond the territorial limits of the taxing authority.
Basically, the state where the subject to be taxed has a situs may rightfully levy and collect the
tax; and the situs is necessarily in the state which has jurisdiction or which exercises dominion
over the subject in question.
Resident citizens and domestic corporation are taxable on all income derived from
sources within or without the Philippines.
A non-resident citizen is taxable on all income derived from sources within the
Philippines.
An alien whether a resident or not of the Philippines and a foreign corporation, whether
engaged or not in trade or business in the Philippines are also taxable only from
sources within the Philippines.

The taxable situs will depend upon the nature of income as follows:
Interests- Interest income is treated as income from within the Philippines if the debtor or
lender whether an individual or corporation is a resident of the Philippines.
Dividends

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 Dividends received from a domestic corporation are treated as income from
sources within the Philippines.
Dividends received from a foreign corporation are treated as income from sources
within the Philippines, unless 50% of the gross income of the foreign corporation
for the three-year period preceding the declaration of such dividends was derived
from sources within the Philippines; but only in an amount which bears the same
ratio to such dividends as the gross income of the corporation for such period
derived from sources within the Philippines bears to its gross income from all
sources.
Services- Services performed in the Philippines shall be treated as income from sources
within the Philippines
Rentals and Royalties- Gain or income from property or interest located or used in the
Philippines is treated as income from sources within the Philippines.
Sale of Real Property- Gain from sale of real property located within the Philippines is
considered as income within the Philippines.
Sale of Personal Property- Gain, profit or income from sale of shares of stocks of a
domestic corporation is treated as derived entirely from sources within the Philippines,
regardless of where the said shares are sold Gains from sale of other personal property
can be considered income from within or without or partly within or partly without
depending on the rules provided in Sec. 42 E of the Tax Code.

The source of an income is the property, activity or service that produced the income. It is the
physical source where the income came from.

CONCEPT AND ITEMS OF INCOME

1) What is income?
Income means all wealth, which flows into the taxpayer other than as a mere return of capital.

INCOME DISTINGUISHED FROM OTHER CONCEPT

Differentiated from Capital, capital is a fund while income is a flow from the use of such fund.
Capital is wealth, while income is the service or the return from the use of such wealth. Property
or fund is the tree, while income is the fruit. Labor is a tree and income is the fruit.

TAXABILITY OF INCOME
For income tax purposes, taxability income has the following requisites:
a. there must be an income, gain or profit
b. the income, gain or profit must have been received OR realized during the taxable year
c. the income gain or profit is not exempt from income tax

2) What is Taxable Income?

Taxable income means the pertinent items of gross income specified in the Tax Code as
amended, less the deductions and/or personal and additional exemptions, if any, authorized for
such types of income, by the Tax Code or other special laws.

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3) What is Gross Income?
Gross income means all income derived from whatever source.

4) What comprises gross income?

Gross income includes, but is not limited to the following:
Compensation for services, in whatever form paid, including but not limited to fees,
salaries, wages, commissions and similar item
Gross income derived from the conduct of trade or business or the exercise of profession
Gains derived from dealings in property
Interest
Rents
Royalties
Dividends
Annuities
Prizes and winnings
Pensions
Partner's distributive share from the net income of the general professional partnerships

5) What are some of the exclusions from gross income?

Life insurance
Amount received by insured as return of premium
Gifts, bequests and devises
Compensation for injuries or sickness
Income exempt under treaty
Retirement benefits, pensions, gratuities, etc.
Miscellaneous items
income derived by foreign government
income derived by the government or its political subdivision
prizes and awards in sport competition
prizes and awards which met the conditions set in the Tax Code
13th month pay and other benefits
GSIS, SSS, Medicare and other contributions
gain from the sale of bonds, debentures or other certificate of indebtedness
gain from redemption of shares in mutual fund

6) What are the allowable deductions from gross income?

Except for taxpayers earning compensation income arising from personal services rendered
under an employer-employee relationships where the only deduction provided that the gross
family income does not exceed P250,000 per family is the premium payment on health and/or
hospitalization insurance, a taxpayer may opt to avail any of the following allowable deductions
from gross income:

a) Optional Standard Deduction - an amount not exceeding 40% of the net sales for individuals
and gross income for corporations; or

b) Itemized Deductions which include the following:

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 Expenses
Interest
Taxes
Losses
Bad Debts
Depreciation
Depletion of Oil and Gas Wells and Mines
Charitable Contributions and Other Contributions
Research and Development
Pension Trusts

INCOME TAX is a tax on a person's income, emoluments, profits arising from property,
practice of profession, conduct of trade or business or on the pertinent items of gross income
specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal
and additional exemptions, if any, authorized for such types of income, by the Tax Code, as
amended, or other special laws.

CLASSIFICATION OF INCOME TAX

TAXABLE INCOME - this is the pertinent item of gross income specified in the tax
code less deduction of personal and/or additional exemptions.

PASSIVE INCOME - refers to income such as interest on banks, deposits, dividends,

royalties, prizes and other winnings.

NET INCOME - refers to gross income less allowable deductions.

CLASSIFICATION OF INDIVIDUAL TAXPAYERS

DEFINITION OF TAXPAYER it means any person subject to tax as imposed by the National
Internal Revenue Code.

1. SINGLE it refers to the individual who is single or unmarried. May also be a

widow/widower or legally separated, judicially annulled.

2. HEAD OF THE FAMILY- it refers to an unmarried or legally separated with one or

both parents, or with one or more brothers, sisters or with one or more legitimate,
recognized natural or legally adopted child/children with and dependent upon him with
chief support, where such brothers, or sisters or children are not more than 21 years of
age are unmarried, not gainfully employed or regardless of age, are incapable of self-
support because of mental of mental or physical effect. The term also includes a
benefactor of a senior citizen.

3. MARRIED it refers to a person who is legally and lawfully married with or without
children, natural or legally adopted child/children solemnized by religious or state
authority

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TAX RATE
A. For Individuals Earning Purely Compensation Income and Individuals Engaged in Business and Practice
of Profession
Amount of Net Taxable
Rate
Income
Over But Not Over
P10,000 5%
P10,000 P30,000 P500 + 10% of the Excess over P10,000
P30,000 P70,000 P2,500 + 15% of the Excess over P30,000
P70,000 P140,000 P8,500 + 20% of the Excess over P70,000
P140,000 P250,000 P22,500 + 25% of the Excess over P140,000
P250,000 P500,000 P50,000 + 30% of the Excess over P250,000
P125,000 + 32% of the Excess over P500,000 in 2000 and
P500,000
onward

Personal Exemptions:

For single individual or married individual judicially decreed as legally separated with no
qualified dependents .P 50,000.00
For head of family .P 50,000.00
For each married individual *P 50,000.00

Note: In case of married individuals where only one of the spouses is deriving gross income,
only such spouse will be allowed to claim the personal exemption.

Additional Exemptions:

For each qualified dependent, an P25,000 additional exemption can be claimed

but only up to 4 qualified dependents

The additional exemption can be claimed by the following:

The husband who is deemed the head of the family unless he explicitly waives his
right in favor of his wife
The spouse who has custody of the child or children in case of legally separated
spouses. Provided, that the total amount of additional exemptions that may be
claimed by both shall not exceed the maximum additional exemptions allowed by
the Tax Code.
The individuals considered as Head of the Family supporting a qualified
dependent

INCOME TAXATION READING MATERIALS Page 15

The maximum amount of P 2,400 premium payments on health and/or hospitalization insurance
can be claimed if:
Family gross income yearly should not be more than P 250,000
For married individuals, the spouse claiming the additional exemptions for the qualified
dependents shall be entitled to this deduction

How is Income Tax payable of individuals (resident citizens and non-resident citizens)
computed?

Gross Income P ___________

Less: Allowable Deductions (Itemized or Optional) ___________
Net Income P ___________
Less: Personal & Additional Exemptions ___________
Net Taxable Income P ___________
Multiply by Tax Rate (5 to 32%) ___________
Income Tax Due: Tax withheld (per BIR From 2316/2304) P ___________
Income tax payable P____________

Pay the balance as you file the tax return, computed as follows:
Income Tax Due P ___________
Less: Withholding Tax ___________
Net Income Tax Due P ___________

SAMPLE COMPUTATION OF INCOME TAX

Mr. Bob, married with 2 qualified dependent children who received the following income for the
year.
Basic Monthly Salary : ( P45,000 X 12 months) 540,000.00
SSS/Philhealth for the year: 11,400.00
Overtime Pay for the year 5,000.00
13th month Pay for the year : 45,000.00
Compute the annual tax of Mr. Bob.

SOLUTION:
Total Gross Income 602,000.00
(Basic pay + Overtime + 13th month pay + Other Benefits)
Less: SSS /Philhealth/Pag-Ibig 11,400.00
Non Taxable Income* 57,000.00 68,400.00
Net Income 533,600.00

INCOME TAXATION READING MATERIALS Page 16

Less: Personal Exemption 50,000.00
Additional exemption (2 X 25,000) 50,000.00 100,000.00
Net Taxable Income 433,600.00
Multiply by Tax Rate**
TAX COMPUTATION**
For the first 250,000 tax is 50,000.00
Plus 30% of excess over 250,000
( 433,600 - 250,000= 183,600) X 30% 55,080.00
Total Tax due of Mr. Bob 105,080.00

*IMPLEMENTATION OF HIGHER CAP (P82,000) FOR TAX-EXEMPT

BONUSES AND OTHER BENEFITS

There is a new cap for the exemption of bonuses and other benefits, from the former amount of
P30,000. Under Republic Act (RA) No.10653, signed into law in 2015, gross benefits received
by officials and employees of public and private entities up to a maximum amount of Eighty Two
Thousand Pesos (P82,000) are excluded from the computation of the gross income of the
recipients of such benefits, and thus, such amounts are exempt from income tax. To implement
RA 10653, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 3-2015.

WITHHOLDING TAX ON COMPENSATION AND WAGES

HOW TO COMPUTE WITHHOLDING TAX ON COMPENSATION AND WAGES IN

THE PHILIPPINES?

If you have seen a Monthly Remittance Return of Income Taxes Withheld on Compensation or
BIR Form No. 1601-C, you will only see totals of compensation and tax withheld on
compensation of the taxpayers employees. You will not have an idea on the computation of the
tax withheld on compensation for each of those employees.

REQUIREMENT OF WITHHOLDING
According to Section 79 of the National Internal Revenue Code (Republic Act No. 8424), as
further amended by RA 9504, except in the case of a minimum wage earner as defined in Sec.
22(HH) of this code, 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. This means that employees
and workers who earn minimum wages are not subject to withholding tax. The summary of the
current regional minimum wage rates can be viewed at the Department of Labor and
Employment (DOLE) official website.

COMPUTING TAX WITHHELD ON COMPENSATION

Use of withholding tax table-In general, every employer making payment of compensation
shall deduct and withhold from such compensation a tax determined in accordance with the
prescribed Revised Withholding Tax Tables (Annex C) which shall be used starting January 1,
2009. Below are the four withholding tax tables prescribed in these regulations:

INCOME TAXATION READING MATERIALS Page 17

 a. Monthly tax table to be used by employers using the monthly payroll period
b. Semi-monthly tax table to be used by employers using the semi-monthly payroll
period
c. Weekly tax table to be used by employers using the weekly payroll period
d. Daily tax table to be used by employers using the daily payroll period.

SAMPLE COMPUTATIONS USING THE WITHHOLDING TAX TABLES

The following are sample computations of Withholding tax on compensation using the
withholding tax tables:

Example 1: Single with no dependent receiving monthly compensation

Juan Santos, single with no dependent, receives P18,000 (net of SSS/GSIS,PHIC,HDMF

employee share only) as monthly regular compensation and P 7,000 as supplementary
compensation for January 2016 or a total of P25,000. How much is the withholding tax for
January 2016 for Juan?

Computation:
By using the monthly withholding tax table, the withholding tax for January 2014 is computed
by referring to Table A line 2 S (single) of column 6 (fix compensation level taking into account
only the regular compensation income of P18,000 which shows a tax of P1,875 on P15,833 plus
25% of the excess of P 2,167 (P18,000-15,833) plus P7,000 supplementary compensation.

Computation:

Regular Compensation: 18,000

Less: Compensation Level-(line A-2 column 6) 15,833

Excess 2,167

Add: Supplementary Compensation 7,000

Total Excess 9,167

TAX COMPUTATION

INCOME TAXATION READING MATERIALS Page 18

 Tax on P15,833 1,875.00

Tax on Total Excess (P9,167 x 25%) 2,291.75

Withholding tax for January 2016 4,166.75

Example 2: Married with qualified dependent children receiving semi-monthly

compensation

Jose Cruz, married with three (4) qualified dependent children receives P14,000 (net of
SSS/GSIS,PHIC,HDMF employee share only) as regular semi-monthly compensation. His wife
is also employed but he did not waive his right in favor of the wife to claim for the additional
exemptions.

Computation:
Using the semi-monthly withholding tax tables, the withholding tax due is computed by referring
to Table B line 4 ME4 of column 6 which shows a tax of P937.5 on P12,083 plus 25% of the
excess (P 14,000 12,083 = P1,917).

Total Taxable Compensation: 14,000

Less: Compensation Level-(line B-4 column 6) 12,083

Excess 1,917

TAX COMPUTATION

Tax on P12,083 937.50

Tax on Total Excess (1,917 x 25%) 479.25

SemiWithholding Tax of Jose Cruz 1,416.75

Example #3
In the row indicating your status, look for the highest amount that does not exceed your taxable
income.

INCOME TAXATION READING MATERIALS Page 19

Let's use Employee A, with status "ME1/S1," as example. The highest amount that does not
exceed Employee A's taxable income of P24,006.20 is P17,917 (ME1/S1 row, Column 6).
The heading of Column 6 reads "1,875.00 + 25% over."
This means Employee A's tax is P1,875 plus 25% of the difference of his taxable income
(P24,006.20) and the amount in the table (P17,917).
Here's the computation:
Tax = 1,875 + [(24,006.20-17,917) X .25]
1,875 + (6,089.2 x .25)
1,875 + 1,522.3
P3,397.30

Legend: Z-Zero exemption S-Single

ME-Married Employee 1;2;3;4- Number of qualified dependent children S/ME = P50,000 Each
Working employee
Qualified Dependent Child = P25,000 each but not exceeding four (4) children

USE TABLE A FOR SINGLE/MARRIED EMPLOYEES WITH NO QUALIFIED

DEPENDENT
1. Married Employee (Husband or Wife) whose spouse is unemployed.
2. Married Employee (Husband or Wife) whose spouse is a non-resident citizen receiving

INCOME TAXATION READING MATERIALS Page 20

 income from foreign sources
3. Married Employee (Husband or Wife) whose spouse is engaged in business
4. Single with dependent father/mother/brother/sister/senior citizen
5. Single
6. Zero Exemption for employees with multiple employers for their 2 nd, 3rd..employers
(main employer claims personal & additional exemption
7. Zero Exemption for those who failed to file Application for Registration

USE TABLE B FOR THE FOLLOWING SINGLE/MARRIED EMPLOYEES WITH

QUALIFIED DEPENDENT
1. Employed husband and husband claims exemptions of children
2. Employed wife whose husband is also employed or engaged in business; husband waived
claim for dependent children in favor of the employed wife
3. Single with qualified dependent children

CORPORATE INCOME TAXATION

A Corporation is defined as an artificial being created by operation of law, having rights of

succession and the power, attributes and properties expressly authorized by law or incident to its
existences.

As an artificial being, a corporation has a juridical personality separate and distinct from that of
each shareholder or member. (See Art. 44, Civil Code). It exists only in contemplation of law.

Under the Philippine's National Internal Revenue Code of 1997 (the "Tax Code"), the term
Corporation shall include partnerships, no matter how created or organized, joint-stock
companies, joint accounts, association, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract with the
Government. 'General professional partnerships' are partnerships 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.

CLASSIFICATION OF CORPORATION
1. Stock Corporation- is a corporation having a capital stock divided into shares and which
is authorized by law to distribute to the holders thereof dividends or shares of the surplus
profits of the corporation.
2. Non Stock Corporation - is a species of non-profit corporation in which the members
hold no shares of stock.

Under the Tax Code, there are three (3) types of taxable corporations - a domestic corporation, a
resident foreign corporation and a non-resident foreign corporation. Any corporation, domestic
or foreign, not otherwise exempt is liable to tax.

INCOME TAXATION READING MATERIALS Page 21

 1. Domestic Corporation is one created or organized in the Philippines or under its law.
A domestic corporation is taxable on all income derived from sources within and without
the Philippines.
2. Foreign Corporation - is a corporation which is not domestic and it is organized,
authorized, or existing under the laws of any foreign country and may be a resident or
non- resident corporation.
Resident Foreign those which are engaged in trade or business within the
Philippines.
Non Resident Foreign- those which are not engaged in trade or business within the
Philippines but deriving income from the Philippines.
Note, however, that a foreign corporation who wishes to engage in trade or business in the
Philippines should first secure a license from the Philippine Securities and Exchange
Commission.
A foreign corporation, whether resident or non-resident, is taxed only on income derived from
sources within the Philippines.

RATES OF TAX ON DOMESTIC CORPORATION

1. In General except as otherwise provided in Tax Code, the tax is 30% on taxable
income (except certain passive incomes) received during each taxable years from all
sources within and without the Philippines.

2. Proprietary Educational Institutions and Hospitals which are non-profit 10%

on taxable income from the operation of the school or hospital.

A Proprietary Educational Institution is any private school maintained and

administered by private individuals or groups with an issued permit to operate
from the Department of Education (DepEd), or the Commission on Higher
Education (CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with existing laws and
regulations.

3. Tax on Government-Owned or Controlled Corporations all corporations,

agencies or instrumentalities owned or controlled by the government except the GSIS,
SSS, Philippine Health Insurance Corporation (PHIC), Philippine Charity
Sweepstakes Office (PCSO), and Philippine Amusement and Gaming Corporation
(PAGCOR), are subject to such rates of tax upon their taxable income as are imposed
upon associations or corporations engaged in a similar business, industry or activity.

RATES OF TAX ON RESIDENT FOREIGN CORPORATION

1. In general, a resident foreign corporation is taxed in the same manner as a domestic

corporation on its income derived from all sources within the Philippines. That is, a
resident foreign corporation shall be subject to the normal income tax rate of thirty
percent (30%) of its taxable Philippine-sourced income.

INCOME TAXATION READING MATERIALS Page 22

 2. In the computation of taxable income, there shall be deducted from the Philippine-
sourced gross income, such allowable expenses, losses and other deductions properly
allocated thereto and a ratable part of expenses, interests, losses and other deductions
effectively connected with the business or trade conducted exclusively within the
Philippines which cannot definitely be allocated to some items or class of gross
income.

RATES OF TAX ON NON-RESIDENT FOREIGN CORPORATION

1. In general, a non-resident foreign corporation shall pay a tax equal to thirty percent
(30%) of the gross income received during each taxable year from all sources within
the Philippines.

Tax Rate Taxable Base

1. Domestic Corporations:
a. In General 30% (effective Jan. 1, Net taxable income from all sources
2009)
b. Minimum Corporate Income Tax* 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accumulated Taxable Income
2. Proprietary Educational Institution 10% Net taxable income provided that the gross
income from unrelated trade, business or
other activity does not exceed 50% of the
total gross income
3. Non-stock, Non-profit Hospitals 10% Net taxable income provided that the gross
income from unrelated trade, business or
other activity does not exceed 50% of the
total gross income
4. GOCC, Agencies & Instrumentalities
a. In General 30% Net taxable income from all sources
b. Minimum Corporate Income Tax* 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accumulated Taxable Income
5. National Gov't. & LGUs
a. In General 30% Net taxable income from all sources
b. Minimum Corporate Income Tax* 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accumulated Taxable Income
6. Taxable Partnerships
a. In General 30% Net taxable income from all sources
b. Minimum Corporate Income Tax* 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accumulated Taxable Income

INCOME TAXATION READING MATERIALS Page 23

7. Exempt Corporation
a. On Exempt Activities 0%
b. On Taxable Activities 30% Net taxable income from all sources
8. General Professional Partnerships 0%
9. Corporation covered by Special Laws Rate specified under
the respective special
laws
10. International Carriers 2.5% Gross Philippine Billings
11. Regional Operating Head 10% Taxable Income
12. Offshore Banking Units (OBUs) 10% Gross Taxable Income On Foreign Currency
Transaction
30% On Taxable Income other than Foreign
Currency Transaction
13. Foreign Currency Deposit Units (FCDU) 10% Gross Taxable Income On Foreign Currency
Transaction
30% On Taxable Income other than Foreign
Currency Transaction
*Beginning on the 4th year immediately following the year in which such corporation commenced its business
operations, when the minimum corporate income tax is greater than the tax computed using the normal income tax.

Passive Income
1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical composition) 10%
- In general 20%
3. Prizes (P10,000 or less ) 5%
- In excess of P10,000 20%
4. Winnings (except from PCSO and lotto) 20%
5. Interest Income of Foreign Currency Deposit 7.5%
6. Cash and Property Dividends
- To individuals from Domestic Corporations 10 %
- To Domestic Corporations from Another Domestic Corporations 0%
7. On capital gains presumed to have been realized from sale, exchange or other disposition
6%
of real property (capital asset)
8. On capital gains for shares of stock not traded in the stock exchange
- Not over P100,000 5%
- Any amount in excess of P100,000 10%
9. Interest Income from long-term deposit or investment in the form of savings, common or Exempt

INCOME TAXATION READING MATERIALS Page 24

individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates
Upon pretermination before the fifth year , there should be imposed on the entire income
from the proceeds of the long-term deposit based on the remaining maturity thereof:
Holding Period
- Four (4) years to less than five (5) years 5%
- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%
B. For Non-Resident Aliens Engaged in Trade or Business
1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Interest Income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates Upon pre-termination before the fifth year, there Exempt
should be imposed on the entire income from the proceeds of the long-term deposit based on
the remaining maturity thereof: Holding Period:
-Four (4) years to less than five (5) years 5%
-Three (3) years to less than four (4) years 12%
-Less than three (3) years 20%
3. On capital gains presumed to have been realized from the sale, exchange or other
6%
disposition of real property
4. On capital gains for shares of stock not traded in the Stock Exchange
- Not over P100,000 5%
- Any amount in excess of P100,000 10%
C) For Non-Resident Aliens Not Engaged in Trade or Business
1. On the gross amount of income derived from all sources within the Philippines 25%
2. On capital gains presumed to have been realized from the exchange or other disposition of
6%
real property located in the Phils.
3. On capital gains for shares of stock not traded in the Stock Exchange
- Not Over P100,000 5%
- Any amount in excess of P100,000 10%
D) On the gross income in the Philippines of Aliens Employed by Regional Headquarters (RHQ) or Area
Headquarters and Regional Operating Headquarters (ROH), Offshore Banking Units (OBUs), Petroleum
Service Contractor and Subcontractor
On the gross income in the Philippines of Aliens Employed by Regional Headquarters (RHQ) 15%
or Area Headquarters and Regional Operating Headquarters (ROH), Offshore Banking Units
(OBUs), Petroleum Service Contractor and Subcontractor
E) General Professional Partnerships
General Professional Partnerships 0%
F) Domestic Corporations
1) a. In General on net taxable income 30%

INCOME TAXATION READING MATERIALS Page 25

 b. Minimum Corporate Income Tax on gross income 2%
c. Improperly Accumulated Earnings on improperly accumulated taxable income 10%
2) Proprietary Educational Institution and Non-profit Hospitals 10%
- In general (on net taxable income) 10%
- If the gross income from unrelated trade, business or other activity exceeds 50% of the
30%
total gross income from all sources
4) GOCC, Agencies & Instrumentalities
a. In General - on net taxable income 30%
b. Minimum Corporate Income Tax on gross income 2%
c. Improperly Accumulated Earnings on improperly accumulated taxable income 10%
5) Taxable Partnerships
a. In General on net taxable income 30%
b. Minimum Corporate Income Tax on gross income 2%
c. Improperly Accumulated Earnings on improperly accumulated taxable income 10%
6) Exempt Corporation
a. On Exempt Activities 0%
b. On Taxable Activities 30%
8) Corporation covered by Special Laws Rate specified under
the respective special
laws
G) Resident Foreign Corporation
1) a. In General on net taxable income 30%
b. Minimum Corporate Income Tax on gross income 2%
c. Improperly Accumulated Earnings on improperly accumulated taxable income 10%
2) International Carriers on gross Philippine billings 2.50%
3) Regional Operating Headquarters on gross income 10%
4) Corporation Covered by Special Laws Rate specified under
the respective special
laws
5) Offshore Banking Units (OBUs) on gross income 10%
6) Foreign Currency Deposit Units (FCDU) on gross income 10%

FORMULA FOR THE COMPUTATION OF CORPORATE INCOME TAX

1. Domestic Corporation
Gross Income (GI) From All Sources xxx
Less: Deduction From GI From All Sources xxx
= Taxable Income xxx

INCOME TAXATION READING MATERIALS Page 26

 Multiplied by Tax Rate %
= Corporate Income Tax Due/Payable xxx

2. Resident Foreign Corporation

Gross Income (GI) From Philippines Sources xxx
Less: Deduction From GI From Philippines Sources xxx
= Taxable Income xxx
Multiplied by Tax Rate %
= Corporate Income Tax Due/Payable xxx

3. Non-Resident Foreign Corporation

Gross Income (GI) From Philippines Sources xxx
Multiplied by Tax Rate %
= Corporate Income Tax Due/Payable xxx

ILLUSTRATION
Problem 1: FX Corporation, a domestic corporation, shows the following income and deduction for
taxable year 1999.
Gross Income Deductions
Philippine Sources 200,000 80,000
From Foreign Sources:
Singapore 80,000 30,000
Indonesia 50,000 20,000
Compute the income tax payable of FX Corporation.
Solution
Gross Income
Philippine Sources 200,000
Foreign Sources
Singapore 80,000
Indonesia 50,000 130,000
Total Gross Income 330,000
Less: Deductions:
Philippine Sources 80,000
Foreign Sources
Singapore 30,000
Indonesia 20,000 130,000
=Taxable Income 200,000
Multiply by Tax Rate 30%
=Corporate Income Tax Due/Payable 60,000

Problem 2: The University Of Bulacan (UB) had the following income and deductions for taxable
year 2011 and 2012, respectively:

INCOME TAXATION READING MATERIALS Page 27

Gross Income 2011 2012
Educational Income
Tuition Fees 10,000,000.00 5,000,000.00
Sales of Bookstores 200.000.00 100,000.00
Sales of Canteen 300,000.00 100,000.00
Unrelated Educational Income
Rental 4,000,000.00 5,800,000.00
Deductions:
Allowable Expenses 11,000,000.00 6,500,000.00
Purchase of Library Books 1,500,000.00 500,000.00
Purchase of classrooms tables, chairs others 2,500,000.00 1,000,000.00

Compute the income tax of UB for taxable year 2011 and 2012 respectively.
SOLUTION
Gross Income 2011 2012
Educational Income
Tuition Fees 10,000,000.00 5,000,000.00
Sales of Bookstores 200.000.00 100,000.00
Sales of Canteen 300,000.00 100,000.00
10,500,000.00 5,200,000.00
Unrelated Educational
Income
Rental 4,000,000.00 5,800,000.00
Gross Income 14,500,000.00 11,000,000.00
Deductions:
Allowable Expenses 11,000,000.00 6,500,000.00
Purchase of Library Books
1,500,000.00 500,000.00
Purchase of classrooms
tables, chairs others 2,500,000.00 14,000,000.00 1,000,000.00 8,000,000.00
Taxable Income 500,000.00 3,000,000.00
Multiply by Tax Rate 10% 30%
Income Tax Due/Payable 50,000.00 900,000.00

Problem 3: D Crushers corporation is a resident foreign corporation with corporate gross

income for taxable year 2000 of 5,000,000.00 from Philippines sources and allowable deductions
amounting to 3,000,000.00. Compute its income tax.

Solution
Gross Income
Philippine Sources 5,000,000
Total Gross Income
Less: Deductions:
Philippine Sources 3,000,000
=Taxable Income 2,000,000
Multiply by Tax Rate 30%
=Corporate Income Tax Due/Payable 60,000

INCOME TAXATION READING MATERIALS Page 28

Problems 4: D Moonlight Corporation is non-resident foreign corporation with gross income
for taxable year 2000 of 10,000,000.00 from Philippine sources and deduction in the amount of
8,000,000.00.

Solution
Gross Income
Philippine Sources 10,000,000
Multiply by Tax Rate 30%
=Corporate Income Tax Due/Payable 90,000

VAT PHILIPPINES: THE CONCEPT OF VAT

VAT has two components:

1. Output VAT, and
2. Input VAT

Here in the Philippines, we are required to include VAT to our sales and pass it on to the
customer, generally. We are, therefore, required to remit this VAT (equivalent to 12%) to the
Bureau of Internal Revenue (BIR). That is your Output VAT. However, during the course of
business, we also incur some expenses. That means VAT was passed on to us already. That is
your Input VAT.
So to make things even simpler, Output VAT comes from your revenues, while Input VAT comes
from your expenses.

If you will take a look at any receipt, say, from your nearest coffee shop. You will see a
breakdown at the bottom. It would look something like this photo below.

INCOME TAXATION READING MATERIALS Page 29

Notice how the VAT (12%) is separated from the Vatable Amount? In this case, the coffee shop
earned Php 151.79 and the Php 18.21 goes directly to the BIR as payment for taxes.
BIR TAX INFORMATION ON VALUE ADDED TAX
Sections 105 to 115 of the National Internal Revenue Code of 1997, as amended

Description
Value-Added Tax is a form of sales tax. It is a tax on consumption levied on the sale, barter,
exchange or lease of goods or properties and services in the Philippines and on importation of
goods into the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer,
transferee or lessee of goods, properties or services.

Who are required to file vat returns?

Any person or entity who, in the course of his trade or business, sells, barters, exchanges,
leases goods or properties and renders services subject to VAT, if the aggregate amount of
actual gross sales or receipts exceed One Million Nine Hundred Nineteen Thousand Five
Hundred Pesos (P1,919,500.00).
A person required to register as VAT taxpayer but failed to register
Any person, whether or not made in the course of his trade or business, who imports
goods

Monthly VAT Declarations

Tax Form
BIR Form 2550M - Monthly Value-Added Tax Declaration (February 2007 ENCS)

Documentary Requirements
1. Duly issued Certificate of Creditable VAT Withheld at Source (BIR Form No. 2307), if
applicable

INCOME TAXATION READING MATERIALS Page 30

2. Summary Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax
at Source (SAWT), if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Duly approved Tax Credit Certificate, if applicable
5. Authorization letter, if return is filed by authorized representative.

Procedures
1. Fill-up BIR Form No. 2550M in triplicate copies (two copies for the BIR and one copy for the
taxpayer)
2. If there is payment:
File the Monthly VAT declaration, together with the required attachments, and pay the
VAT due thereon with any Authorized Agent Bank (AAB) under the jurisdiction of
the Revenue District Office (RDO)/Large Taxpayers District Office (LTDO) where the
taxpayer (head office of the business establishment) is registered or required to be
registered.
The taxpayer must accomplish and submit BIR-prescribed deposit slip, which the bank
teller shall machine validate as evidence that payment was received by the AAB. The
AAB receiving the tax return shall stamp mark the word "Received" on the return and
machine validate the return as proof of filing the return and payment of the tax.
In places where there are no duly accredited agent banks, file the Monthly VAT
declaration, together with the required attachments and pay the VAT due with the
Revenue Collection Officer (RCO) or duly authorized Treasurer of the Municipality
where such taxpayer (head office of the business establishment) is registered or required
to be registered.
The RCO or duly authorized Municipal/City Treasurer shall issue a Revenue Official
Receipt upon payment of the tax.
3. If there is no payment:
File the Monthly VAT Declaration, together with the required attachments with the
RDO/LTDO/Large Taxpayers Assistance Division, Collection Agent or duly authorized
Municipal/ City Treasurer of Municipality/City where the taxpayer (head office of the
business establishment) is registered or required to be registered.
Deadline
Monthly VAT returns BIR Form 2550M:
Not later than the 20th day following the end of each month (manual filing)
Quarterly VAT returns BIR Form 2550Q:
Within twenty five (25) days following the close of taxable quarter (manual filing)
For EFPS filing, please visit the BIR website for detailed and updated dates of deadlines.

HOW DO I COMPUTE THE VAT?

A: The Value Added Tax is computed by getting the difference of the output tax and input tax. If
you are the seller, you pass on the VAT to your client by adding 12 percent to your selling price.

If you are the buyer of goods and services, you will need to pay VAT by computing for your
output tax and input tax. Output tax is computed by dividing your total sales with the factor

INCOME TAXATION READING MATERIALS Page 31

9.3333. For example, your total sales is P112,000. Your output tax is computed by dividing
P112,000 with 9.333, which means your output tax is P12,000.

The input tax applies to your expenses that have VAT receipts. Take your total expenses and
divide it by 9.333. For example, your total expenses is P44,800. Your input tax is P44,800
divided by 9.333, which gives you P4,800.

Now that you have computed both output and input taxes, you can compute your VAT which is
P7,200 (P12,000 - P4,800).

HOW TO COMPUTE VALUE ADDED TAX PAYABLE

Value Added Tax Payable is normally computed as follows:

1. Computing Net VAT Payable on VAT exclusive Sales/Receipts

Total Output Tax Due or Total Vatable Sales/Receipts x 12%

Less: Total Allowable Input Tax or Total Vatable Purchases x 12%
Equals: VAT Payable

Sample Computation of VAT Payable:

Lets assume that,
Total Vatable Sales (VAT exclusive) = P100,000
Total purchases with VAT receipts (VAT exclusive) = P70,000
P100,000 x 12% or P12,000
P70,000 x 12% or P8,400
VAT Payable = P3,600

2. Computing Net VAT Payable on VAT inclusive Sales/Receipts

Total Output Tax Due or Total Vatable Sales / 1.12 x 12%
Less: Total Allowable Input Tax or Total Vatable Purchases / 1.12 x 12%
Equals: VAT Payable

Sample Computation of VAT Payable:

Example based on the above assumption:
Total Vatable Sales (VAT inclusive) = P112,000
Total purchases with VAT receipts (VAT inclusive) = P78,400
P112,000 /1.12 x 12% or P12,000
P78,400 /1.12 x 12% or P 8,400
VAT Payable = P3,600

Or an alternative computation:
P112,000 /9.333 or P12,000
P78,400 /9.333 or P 8,400
VAT Payable = P 3,600

INCOME TAXATION READING MATERIALS Page 32

Output Tax means the VAT due on the sale, lease or exchange of taxable goods or properties or
services by any person registered or required to register under Section 236 of the Tax Code.

Input Tax means the VAT due on or paid by a VAT-registered on importation of goods or local
purchase of goods, properties or services, including lease or use of property in the course of his
trade or business. It shall also include the transitional input tax determined in accordance with
Section 111 of the Tax Code, presumptive input tax and deferred input tax from previous period.

Total Vatable Purchases are your total purchases from VAT registered suppliers. This should be
supported with VAT receipts.

ACCOUNTING PERIODS AND METHODS OF ACCOUNTING CONCEPTS

For taxations purposes, accounting period refers to taxable year which ordinarily consist
of twelve (12) months. The tax code recognizes two accounting periods, namely 1)
calendar year 2) fiscal years. The term fiscal year means an accounting period of twelve
(12) months ending on the last day of any month other than December (Sec.22 [Q], tax
code). Calendar year is construed as the period from January 1 to December 31
inclusive. Ordinarily, calendar year means three hundred sixty five (365) days except
leap year, and is composed of twelve months varying in length (blacks law dictionary).
The latter period is used as the basis if the tax payer has no annual accounting period, or
does not keep books or if the taxpayer is an individual ( Sex .43 ,Tax Code)
GENERAL
The rule is that taxable income shall be computed upon the basis of the taxpayers annual
accounting period in accordance with the method of accounting regularly employed in
keeping the books of such taxpayer ( Sex . 43 , Ibid )
METHODS OF ACCOUNTING
They are different kinds of methods of accounting namely;
1. Cash Basis
2. Accrual Basis
3. Hybrid Method
4. Crop Year Basis
5. Installment Basis
6. Percentage Of Completion Basis
7. Completed Contract Basis
CASH BASIS
Cash basis is the method under which income is recorded only when received and
expenses are not deducted until paid out within the taxable year.

Under the cash basis the following taxpayers must report their income
a. Those who keep records the cash receipts and disbursement method
b. Those who do not keeps books and record
c. Those whose books and record are inadequate to reflect their taxable income

INCOME TAXATION READING MATERIALS Page 33

ACCRUAL BASIS
Accrual basis is a method of keeping accounts under which income earned is included in
gross income. Whether received or not, and expenses incurred are allowed as deductions
although not yet paid.
HYBRID METHOD
Hybrid method is the method of accounting under which the taxpayer reports his taxable
income through the combination of cash and accrual method, or he may adopt one or the
other at his option as in his judgment it clearly reflects his true income.
CROP YEAR BASIS
Crop year basis is a method of accounting under which expense in the production of
crops are deducted in the taxable year in which the gross income from crops have been
realized.
INSTALLMENT METHOD / BASIS (SEC. 49, TAX CODE; SEC. 175 176, REVENUE
REGS. NO.2)
Installment basis is a method under which the taxpayer reports as income only a part of
the gross profit to be realized from the sale / disposal of property on the installment plan
equivalent to that proportion of the amount of the installments actually received in a
taxable year, which the gross profit realized when payment is completed, bears to the
total contract price.
Formula:
Gross Profit/Contract Price X Installment Payments Actually Received = Income to be
reported for the year

Illustrative Problem
Mr. X owns a residential lot costing 200,000. He sold said lot for 400,000 on installment to
Mrs. Y payable for a period of eight (8) years at 50,000 a year. Compute the yearly profit of
Mr. X for income tax purposes.

Solution:
Contract Price 400,000,00
Less: Cost 200,000,00
Gross Profit 200,000,00

200,000/400,000 X 50,000 = 25,000.00

25,000.00 = Yearly gain to be reported by Mr. X

Real Property
Formula:
Installment Payment/Contract Price X Tax Due = Portion of Tax Payable

Problem:
Mr. M owns a piece of land costing 700,000.00. On December 14, 1998, he sold the same to
Ms. L for 900,000.00. The terms of payment are as follows

INCOME TAXATION READING MATERIALS Page 34

Down payment in 1998 was 200,000.00
Payment in 1999 350,000.00
Payment in 2000 350,000.00

Compute the capital gains tax to be paid by Mr. M in 1998, 1999 and 2000

Solution:

Contract Price 900,000.00

Installment payments: 1998 200,000.00
1999 350,000.00

Capital Gains Tax

Selling price =900,000.00
Rate of tax X 0.06
54,000.00
Computation of Annual Capital Gains Tax
1998 200,000.00/900,000 X 54,000.00 = 11,880.00
1999 350,000.00/900,000 X 54,000.00 = 21,060.00
2000 350,000.00/900,000 X 54,000.00 = 21,060.00

PERCENTAGE OF COMPLETION BASIS

Percentage of completion basis is a method under which gross income already earned
though not yet received based on duly certified estimates of architects or engineers, is
reported in a taxable year and all deductions there from for the same year, even if not yet
paid, are taken into account.
INDIRECT METHODS OF DETERMINING INCOME
Indirect methods may be utilized to stop and deter the commission of tax evasion as well
as tax avoidance. Toward this and the BIR Commissioner may resort to the following
indirect methods.
A. Percentage of receipts or sales method
B. Net Worth method
C. Excess cash expenditures method
D. Other methods such
1. Reconstruction of income through the use of evidence of business dealings of
taxpayers
2. Examination of customers or suppliers record
3. Examination of records of government agencies
4. Compilation of checks cashed.
PERCENTAGE OF RECEIPTS OR SALE METHOD
This is an indirect method whereby gross profit is reconstructed by ascertaining the total
sales or receipts and takes the average of gross profit to such sales or receipts or taxable
income to gross income, which average may be taken from return filed or from figures
reflecting gross profit and net profit of business similar to that of the taxpayer.

INCOME TAXATION READING MATERIALS Page 35

NET WORTH METHOD
This method is otherwise called or referred to as the Net Worth Expenditures
Method or Inventory. It is based on the accounting formula that an increase in net
worth plus non-deductible disbursements minus non-taxable receipts equals net
income. It is used to determine unreported income basing on the theory that an increase
in net worth, if unreported and unexplained by the taxpayer, comes from income derived
from a taxable source.
EXCESS CASH EXPENDITURES METHOD
Excess cash expenditures basis is a method under which the aggregate yearly
expenditures are deducted from the declared yearly income.

TAX REMEDIES

For taxation purposes,-a remedy may refer to the enforcement of right, prevention of violation of
such right or a cause of action that a taxpayer or the government may exercise to protect their
respective right.

REMEDIES UNDER THE TAX CODE

SEC. 202 FINAL DEED TO PURCHASER

Taxpayer shall not redeem the property as herein provided, the Revenue District Officer shall, as
grantor, execute a deed conveying to the purchaser so much of the property as has been sold, free
from all liens of any kind whatsoever.

SEC. 203 PERIOD OF LIMITATION UPON ASSESSMENT & COLLECTION

Except as provided in sec. 222 internal revenue taxes shall be assessed within 3 years after the
last day prescribed by law for the filing of the return and no proceeding in court without
assessment for the collection of such taxes shall began after expiration of such period.

SEC. 204 AUTHORITY OF THE COMMISSIONER TO COMPRISE, ABATE AND

REFUND OR CREDIT TAXES
A. Compromise the payment of any internal revenue tax when:
1. A reasonable doubt as to the validity of the claim against the taxpayer exist
2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed
tax
B. Abate or cancel a tax liability when:
1. The tax or any portion thereof appears to be unjustly or excessively assessed
2. The administration and collection costs involved do not justify the collection of the
amount due.
C. Credit or refunds taxes erroneously or illegally received or penalties imposed without
authority
A Tax Credit Collection validly issued under the provisions of this code may be applied
against any internal revenue tax excluding withholding taxes, for which the taxpayer is
directly liable.

INCOME TAXATION READING MATERIALS Page 36

TAX REMEDIES OF THE GOVERNMENT

1. Administrative remedies which include:

a. distraint of personal property
b. levy of real property
c. enforcement of forfeiture of property
d. enforcement of tax lien
e. requiring the filing of bonds
f. requiring proof of filing income tax returns
g. deportation of aliens
h. inspection of books of account
i. use of national tax register

2. Judicial Remedies which include

a. ordinarily civil action; and
b. criminal action

ADMINISTRATIVE REMEDIES EXPLAINED

A. Distraint - is the seizure by the government of personal property, tangible or intangible
to enforce the payment of taxes and to be followed by its public sale if the taxes are not
voluntarily paid. This remedy may be classified into:
Actual Distraint there is a taking of possession of the personal property out of
the taxpayer into that of the Government.
Constructive Distraint taxpayer is merely prohibited from disposing of his
property.
B. Levy is seizure of real property to enforce the payment of taxes.
C. Forfeiture implies a deprivation or destruction of a right in consequence of the
nonperformance of some obligation or condition.
D. Tax lien is a legal charge established by law on either real or personal property as a
security to ensure payment of taxes.
Tax lien are extinguished by the ff. cause
destructive of the property
payment of taxes due plus increments thereto:
expiration of the term of the lien
if the property subject to lien passes unto the bands of an innocent purchaser
E. Requiring the Filing of Performance Bonds
This requirement is to secure the payment of taxes or to forces compliance with certain
provisions of the tax laws or rules and regulation of the implementing agency
F. Requiring Proof of Filing of Income Tax Returns (ITR)
Individuals or corporations intending to engage in trade or business or occupation or to
practice a profession is required to present proof of filing and payment of ITR before a
license or permit can be issued.
G. Deportation of aliens
Any alien who:
Knowingly and fraudulently evades the payment of any internal tax.

INCOME TAXATION READING MATERIALS Page 37

 Willfully refuses to pay such tax and its accessory penalties after the decision on tax
liability rendered by the Commissioner of Internal Revenue, or the Court of Tax
Appeals or any competent judicial tribunal shall have become final and executory to
deportation.
8. Inspection of Books of Accounts
- It is within the power of internal revenue officers to examine and inspect books of
accounts and other accounting records of taxpayers.
9. Use of the National Tax Register
- is a record of the names of person residing in each city or municipality.

JUDICIAL REMEDIES EXPLAINED

Civil action as provided in Tax Code:
(1) Refers to suit instituted by the government to collect internal revenue taxes in the ordinary
courts
(2) Includes appeals by the taxpayer to the Court of the Tax Appeals from decisions of the
Commissioner of Internal Revenue on the disputed assessment.

Criminal action is instituted:

(1) To enforce collection of delinquent taxes.
(2) Includes appeals by the taxpayer to the Court of the Tax Appeals from decisions of the
Commissioner of Internal Revenue on the disputed assessment.

TAX REMEDIES OF TAXPAYERS

A taxpayer may avail of the ff. remedies under the Tax Code: to wit:
To dispute an assessment
To ask for refund on internal revenue taxes illegally or erroneously collected
To question validity of forfeiture of cash refund taxes and a tax credit
To contest forfeiture of chattel.

INCOME TAXATION READING MATERIALS Page 38