TAXATION LAW 1 – NOTES CO
TAXATION - GENERAL PRINCIPLES & DOCTRINES
TAXATION
• A mode of raising revenue for public purposes
• The power by which the sovereign raises revenue to
defray the necessary expenses of government.
• It is a way of apportioning the cost of government
among those who in some measure are privileged
to enjoy the benefits and must therefore bear its
burden.
• It is the inherent power of the sovereign exercised
through 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.
LIFEBLOOD DOCTRINE
• Taxation is a governmental necessity, for indeed,
without taxation, a government can neither exist nor
endure. Taxes are the lifeblood of the government
and their prompt and certain availability is an
imperious need.
• Taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance
On the other hand, such collection should be made
in accordance with law as any arbitrariness will
negate the very reason for government itself. It is
therefore necessary to reconcile the apparently
conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may
be achieved. (CIR vs. Algue)
BREAD AND BUTTER PRINCIPLE
• To exist, the state needs lifeblood (taxes) because
there is a necessity for continuous existence.
NATURE OF TAXATION
The nature of the State’s power to tax is two-fold. It is
both an inherent and a legislative power.
1. Inherent Attribute of Sovereignty
• The power to tax is an attribute of sovereignty and
is inherent in the State. It is a power emanating from
necessity because it imposes a necessary burden
to preserve the State's sovereignty (Phil. Guaranty
Co. v. Commissioner)
• It is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every
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independent government, without being expressly
conferred by the people (Pepsi-Cola Bottling
Company of the Phil. v. Mun. of Tanauan, Leyte)
• It does not need constitutional conferment.
Constitutional provisions do not give rise to the
power to tax but merely impose limitations on what
would otherwise be an invincible power (Churchill
and Tait v. Concepcion).
2. Legislative in Character
• It is inherently legislative in nature and character in
that the power of taxation can only be exercised
through the enactment of law.
• It is legislative in nature since it involves the
promulgation of laws. The legislature determines
the coverage, object, nature, extent and situs
[CONES] of the tax to be imposed. Such power is
exclusively vested in the legislature except where
the Constitution provides otherwise (Art. VI, Sec.
28[2], Art. X, Sec. 5, Constitution) (1 Cooley
Taxation, 3rd Ed.).
• It is based on the principle that taxes are a grant of
the people who are taxed, and the grant must be
made by the immediate representative of the
people, and where the people have laid the power,
there it must remain and be exercised (CIR v.
Fortune Tobacco Corporation).
THEORIES IN TAXATION
1. Necessity Theory
• The theory behind the exercise of the power to tax
emanates from necessity. Without taxes, the
government cannot fulfill its mandate of promoting
the general welfare and wellbeing of the people
(Gerochi v. DOE). It is a necessary burden to
preserve the State’s sovereignty and a means to
give the citizenry an army to resist aggression, a
navy to defend its shores from invasion, a corps of
civil servants to serve, public improvements for the
enjoyment of the citizenry, and those which come
within the State’s territory and facilities and
protection which a government is supposed to
provide.
2. Benefits Protection Theory (Doctrine of
Symbiotic Relationship)
• It involves the power of the State to demand and
receive taxes based on the reciprocal duties of
 TAXATION LAW 1 – NOTES CO
support and protection between the State and its
citizen.
• Taxes 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.
Hence, despite the natural reluctance to surrender
part of one’s earned income to the taxing
authorities, every person who is able must
contribute his share in the running of the
government. 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 material and moral
values” (CIR v. Algue)
• Special benefits to taxpayers are not required. A
person cannot object to or resist the payment of
taxes solely because no personal benefit to him can
be pointed out arising from the tax (Lorenzo v.
Posadas, 64 Phil. 353). The expenses of
government, having for their object the interest of
all, should be borne by everyone, and the more man
enjoys the advantages of society, the more he
ought to hold himself honored in contributing to
those expenses (ABAKADA Guro Party List v.
Ermita)
HOW EXTENSIVE IS THE TAXING POWER?
• The power of taxation reaches to every trade or
occupation; to every object of industry, use,
enjoyment; to every species of possession, and it
imposes a burden which in case of failure to
discharge the same may be followed by seizure,
confiscation or forfeiture of the property.
1. COMPREHENSIVE, as it covers persons,
businesses, activities, professions, rights and privileges.
2. UNLIMITED, as illustrated in the case of Tio v.
.Videogram Regulatory Board where the Supreme Court
held that the power to impose taxes is one so unlimited
in force and so searching in extent that the courts
scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the
discretion of the authority which exercises it.
3. PLENARY, as it is presumed complete. Under the
NIRC, the BIR may avail of certain remedies to ensure
the collection of taxes.
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4. SUPREME. Taxation, although referred to as the
strongest of all the powers of the government, cannot
be interpreted to mean that it is superior to the other
inherent powers of the government. It is supreme
insofar as the selection of the subject of taxation is
concerned.
OBJECTIVE OR PURPOSES OF TAXATION
1. Primary Purpose
• To raise revenues "for the support of government
and for all public needs”
• To raise funds or property to enable the State to
promote the general welfare and protection of its
citizens.
• Raising of revenues (Bagatsing v. Ramirez)
2. Secondary Purposes
a. Reduce social inequality
• Our present tax system has adopted the
progressive system of taxation, i.e., the tax rate
increases as the tax base increases. This system
aims at reducing the inequality in the distribution of
wealth by preventing its undue concentration in the
hands of a few individuals.
b. Encourage the growth of local industries
• It is a settled rule that the power to tax carries with it
the power to grant tax exemptions. Tax exemptions
and tax reliefs serve as incentives to encourage
investment in our local industry and thereby
promote economic growth.
c. Protect our local industries against unfair competition
• The Tariff and Customs Code allows the imposition
of certain taxes (countervailing and dumping duties)
upon imported goods or articles to further protect
our local industry. R.A. 8752 (Anti-Dumping Act)
imposes stricter conditions.
d. Implement the police power of the state (regulatory
purpose).
• The power of taxation may be used as an
implement of the police rJbwer of the State through
the imposition of taxes with the end in view of
regulating a particular activity.
 TAXATION LAW 1 – NOTES CO

STAGES OF TAXATION designated to make our tax system sound. However, if a

tax law runs contrary to the principle of theoretical
1. Levy or Imposition (Tax Legislation) – This refers to justice, such violation will render the law unconstitutional
the enactment of a law by Congress authorizing the considering that under the Constitution, the rule of
imposition of tax. It further contemplates the taxation should be uniform and equitable.
determination of the subject of taxation, purpose for
which the tax shall be levied, fixing the rate of taxation
and the rules of taxation in general.
DISTINCTIONS BETWEEN THE THREE INHERENT
2. Assessment and Collection (Tax Administration) – POWERS OF THE STATE
This is the act of administration and implementation of
the tax law by executive through its administrative TAXATION POLICE EMINENT
agencies. POWER DOMAIN
Authorit Government Governmen Government
3. Payment – The act of compliance by the taxpayer, y who or its political t or its or public
including such options, schemes or remedies as may be exercise subdivision political service
legally available. s the subdivision companies
power and public
PRINCIPLES/CANONS OF A SOUND TAX SYSTEM utilities
Purpose To raise Promotion To facilitate
1. Fiscal Adequacy - Sources of revenues must be revenue in of general the taking of
adequate to meet government expenditures (Chavez v. support of welfare private
Ongpin), and other public needs. This is in consonance the through property for
with the doctrine that taxes are the lifeblood of the Government. regulations public
government. Regulation is purpose
merely
2. Theoretical Justice - A sound tax system must take incidental.
into consideration the taxpayers' ability to pay. Our laws Persons Upon the Upon On an
mandate that taxes must be reasonable, just, fair, affected community community individual as
conscionable. Under Art. VI, Section 28(1) of the or class of or class of the owner of
Constitution, the rule of taxation must be uniform and individuals individuals a particular
equitable. The State must evolve a progressive system property
of taxation. Taxation is said to be equitable when its Amount No ceiling Limited to No
burden falls on those better able to pay; taxation is of except the cost of imposition,
progressive when its rate goes up depending on the monetar inherent regulation, the owner is
resources of the person affected. y limitations issuance of paid the fair
impositi license or market value
3. Administrative Feasibility - Tax laws must be on surveillance of his
capable of effective and efficient enforcement. They property
must not obstruct business growth and economic Benefits Protection of Maintenanc The person
development. received a secured e of healthy receives the
organized economic fair market
A violation of the principle of a sound tax system society, standard of value of the
may or may not invalidate a tax law benefits society/ No property
received direct taken from
A tax law will retain its validity even if it is not in from benefit him/ Direct
consonance with the principles of fiscal adequacy and government/ benefit
administrative feasibility because the Constitution does No direct results
not expressly require so. These principles are only benefit
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 TAXATION LAW 1 – NOTES CO

Non - Tax laws Contracts Contracts iii. Grant by Congress of authority to the president to
impairm generally do may be may be impose tariff rates (Art. VI , Sec. 28)
ent of not impair impaired impaired iv. Prohibition against taxation of religious, charitable
contract contracts, entities, and educational entities (Art. VI, Sec. 28)
s unless: v. Prohibition against taxation of non-stock, non-
government profit educational institutions (Art. IX , Sec. 4)
is party to vi. Majority vote of Congress for grant of tax
contract exemption (Art. VI , Sec. 28)
granting vii. Prohibition on use of tax levied for special purpose
exemption (Art. VI, Sec. 29)
for a viii. President’s veto power on appropriation, revenue,
consideration tariff bills (Art. VI, Sec. 27)
Test of Must not be Must Must be for ix. Non-impairment of jurisdiction of the Supreme
validity contrary to comply with public Court (Art. VI, Sec. 30)
inherent and the tests on purpose and x. Grant of power to the LGUs to create its own
constitutional “lawful with sources of revenue (Art. IX, Sec. 5)
limitations subjects” payment of xi. Origin of Revenue and Tariff Bills (Art. VI, Sec. 24)
and “lawful just xii. No appropriation or use of public money for
means” compensatio religious purposes (Art. VI, Sec. 28)
n
B. Provisions indirectly affecting taxation (Art. III,
1987 Constitution)
SIMILARITIES i. Due process (Sec. 1)
ii. Equal protection (Sec. 1)
1. They are inherent powers of the State. iii. Religious freedom (Sec. 5)
2. All are necessary attributes of the sovereign. iv. Non-impairment of obligations of contracts (Sec.
3. They exist independently of the Constitution. 10)
4. They constitute the three methods by which the
5. State interferes with private rights and property. INHERENT LIMITATIONS
6. They presuppose equivalent compensation. 1. Public Purpose - Tax is considered for public
7. The legislature can exercise all three powers. purpose if:

SCOPE AND LIMITATIONS OF THE TAXING POWER a) It is for the welfare of the nation and/or for greater
portion of the population;
Inherent limitations [PITIE] b) It affects the area as a community rather than as
1. Public Purpose individuals;
2. Inherently Legislative c) It is designed to support the services of the
3. Territorial government for some of its recognized objects.
4. International Comity
5. Exemption of government entities, agencies • Public purpose is presumed in all tax laws
6. and instrumentalities • Generally, it is for the common good of the people.
This is because the power of taxation may be used
Constitutional limitations as an import of police power. Congress may choose
A. Provisions directly affecting taxation to create tax law that will benefit a specific group of
i. Prohibition against imprisonment for non-payment people or industry in a business. It may also be
of poll tax (Art. III, Sec. 20) used for regulation of certain acts.
ii. Uniformity and equality of taxation (Art. VI, Sec. • Tax laws must be equitable and reasonable
28)

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 TAXATION LAW 1 – NOTES CO
Determination when enacted tax law is for public
purpose
It lies in the Congress. However, this will not prevent the
court from questioning the propriety of such statute on
the ground that the law enacted is not for a public
purpose; but once it is settled that the law is for a public
purpose, the court may no longer inquire into the
wisdom, expediency or necessity of such tax measure.
2. Non-delegability of the Power to Tax
General Rule: The power to tax is exclusively vested in
the legislative body, being inherent in nature; hence, it
may not be delegated (Delegata potestas non potest
delegari).
The powers which Congress is prohibited from
delegating are those which are strictly, or inherently and
exclusively, legislative. Purely legislative power, which
can never be delegated, has been described as the
authority to make a complete law, complete as to the
time when it shall take effect and as to whom it shall be
applicable; and to determine the expediency of its
enactment (ABAKADA Guro Party List v. Hon. Exec.
Sec.). It cannot be delegated without infringing upon the
theory of separation of powers (Pepsi-Cola Bottling
Company of the Phil. v. Mun. of Tanauan).
Exceptions:
a. Delegation to Local Government – Refers to the
power of LGUs to create its own sources of revenue
and to levy taxes, fees and charges (Art. X, Sec. 5,
1987 Constitution)
b. Delegation to the President – The authority of the
President to fix tariff rates, import or export quotas,
tonnage and wharfage dues or other duties and
imposts (Art. VI, Sec. 28(2), 1987 Constitution).
3. International Comity
• Tax immunities are granted upon other sovereign
states as courtesy to the international community.
• The Constitution expressly adopted the generally
accepted principles of international law as part of
the law of the land (Art. II, Sec. 2, 1987
Constitution).
• Reasons:
a. Par in parem non habet imperium. As between
equals there is no sovereign (Doctrine of
Sovereign Equality).
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b. The concept that when a foreign sovereign
enters the territorial jurisdiction of another, it
does not subject itself to the jurisdiction of the
other.
c. The rule of international law that a foreign
government may not be sued without its consent
so that it is useless to impose a tax which could
not be collected.
4. Territoriality
General Rule: The taxing power of a country is limited to
persons and property within and subject to its
jurisdiction.
Reasons:
• Taxation is an act of sovereignty which could only
• be exercised within a country’s territorial limits.
• This is based on the theory that taxes are paid for
the protection and services provided by the taxing
authority which could not be provided outside the
• territorial boundaries of the taxing State.
Exceptions
a. Where tax laws operate outside territorial
jurisdiction –
i.e. Taxation of resident citizens on their incomes
derived abroad.
b. Where tax laws do not operate within the territorial
jurisdiction of the State.
i. When exempted by treaty obligations; or
ii. When exempted by international comity.
5. Exemption from taxation of government entities
General Rule: The government is exempt from tax.
Reason: Otherwise, we would be “taking money from
one pocket and putting it in another” (Board of
Assessment Appeals of Laguna v. CTA)
Exception: When it chooses to tax itself. Nothing
prevents Congress from decreeing that even
instrumentalities or agencies of the government
performing government functions may be subject to tax.
Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its
wisdom (MCIAA v. Marcos,).
CONSTITUTIONAL LIMITATIONS
1. Due Process Clause
“No person shall be deprived of life, liberty, or property
without due process of law xxx (Art. III, Sec. 1).”
 TAXATION LAW 1 – NOTES CO
Substantive Due Process
a. Tax must be for public purpose;
b. It must be imposed within territorial jurisdiction
Procedural Due Process
No arbitrariness or oppression either in the assessment
or collection.
Violations of the due process clause
a. Tax amounting to confiscation of property
b. Subject of confiscation is outside the jurisdiction of
the taxing authority
c. Law is imposed for a purpose other than a public
purpose
d. Law which is applied retroactively imposes unjust
and oppressive taxes
e. The law is in violation of inherent limitations
2. Equal Protection
“No person shall be denied the equal protection of the
laws (Art. III, Sec. 1).”
It means that all persons subjected to such legislation
shall be treated alike, under like circumstances and
conditions, both in the privileges conferred and in the
liabilities imposed
The power to select subjects of taxation and apportion
the public burden among them includes the power to
make classifications. The inequalities which result in the
singling out of one particular class for taxation or
exemption infringe no Constitutional limitation (Lutz v.
Araneta,).
Requisites for a valid classification
a. Apply both to Present and future conditions;
b. Apply Equally to all members of the same class;
c. Must be Germane to the purposes of the law;
d. Must be based on Substantial distinction.
Principle of Equality
It admits of classification or distinctions as long as they
are based upon real and substantial differences between
the persons, property, or privileges and those not taxed
must bear some reasonable relation to the object or
purpose of legislation or to some permissible
government policy or legitimate end of the government.
NOTE: Inequality of taxes means substantial differences.
Practical equality is constitutional equality. There is no
imperative requirement that taxation shall be absolutely
equal, only that tax laws be framed with a view to
apportioning the burdens of government so that each
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person enjoying government protection shall be required
to contribute so much as is his reasonable proportion,
and no more. "Perfect equality in taxation," it has been
said, "will remain an unattainable goal as long as laws
and government and man are imperfect."
3. Progressive Taxation
The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation
(Art. VI, Sec. 28[1]).
Uniformity – It means that all taxable articles or kinds of
property of the same class shall be taxed at the same
rate. A tax is considered uniform when it operates with
the same force and effect in every place where the
subject is found. Different articles may be taxed at
different amounts provided that the rate is uniform on the
same class everywhere, with all people at all times.
Equitability – Taxation is said to be equitable when its
burden falls on those better able to pay.
Equality – It is accomplished when the burden of the tax
falls equally and impartially upon all the persons and
property subject to it.
Progressive taxation
Taxation is progressive when tax rate increases as the
income of the taxpayer increases. It is based on the
principle that those who are able to pay more should
shoulder the bigger portion of the tax burden.
5. Prohibition against imprisonment for non-
payment of poll tax
“No person shall be imprisoned for debt or non- payment
of a poll tax (Art. III, Sec. 20).”
Poll tax is one levied on persons who are residents
within the territory of the taxing authority without regard
to their property, business or occupation. Thus, only the
basic community tax under the LGC could qualify as a
poll tax, and the non-payment of other (additional) taxes
imposed, not being in the nature of poll taxes, may
validly be subjected by law to imprisonment.
6. Origin of Revenue and Tariff Bills
“All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and
private bills shall originate exclusively in the House of
 TAXATION LAW 1 – NOTES CO
Representatives, but the Senate may propose or concur
with amendments (Art VI, Sec. 24).”
The appropriation, revenue or tariff bills originate from
the House of Representatives on the theory that, elected
as they are from the districts, the members of the House
of Representatives can be expected to be more sensitive
to the local needs and problems.
The Senate may not only concur with amendments but
also propose amendments. To deny the Senate's power
not only to "concur with amendments" but also to
"propose amendments" would be to violate the
coequality of legislative power of the two houses of
Congress and in fact make the House superior to the
Senate (Tolentino v. Secretary of Finance).
7. Grant by Congress of authority to the president to
impose tariff rates
“The Congress may, by law, authorize the President to
fix within specified limits and subject to such limitations
and restrictions at it may impose, tariff rates, import and
export quotas, tonnage and wharfage dues and other
duties or imposts within the framework of the national
development program of the Government (Art. VI, Sec.
28 [2]).”
Requisites on the authority of the President in imposing
tax
a. Delegated by Congress through a law – The
authorization granted to the President must be
embodied in a law. Hence, the justification cannot
be supplied simply by inherent executive powers.
b. Subject to Congressional limits and restrictions –
The authorization to the President can be exercised
only within the specified limits set in the law and is
further subject to limitations and restrictions which
Congress may impose. Consequently, if Congress
specifies that the tariff rates should not exceed a
given amount, the President cannot impose a tariff
rate that exceeds such amount.
c. Within the framework of national development
program.
8. Grant of power to the LGUs to create its own
sources of revenue
“Each LGU shall have the power to create its own
sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the
7
Congress may provide, consistent with the basic policy
of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments (Art. X, Sec.
5).”
Delegation of legislative taxing power to local
governments is justified by the necessary implication that
the power to create political corporations for purposes of
local self-government carries with it the power to confer
on such local government agencies the authority to tax.
9. President’s veto power on (1) appropriation, (2)
revenue, (3) tariff bills
“The President shall have the power to veto any
particular item or items in an appropriation, revenue or
tariff bill but the veto shall not affect the item or items
which he does not object (Art. VI, Sec. 27[2])”
The item or items vetoed shall be returned to the Lower
House of Congress together with the objections of the
President. If after consideration 2/3 of all the members of
such House shall agree to pass the bill, it shall be sent,
together with the objection, to the other House by which
it shall likewise be considered, and if approved by 2/3 of
all the members of that House, it shall become a law
Veto – the power of the President to reject or refuse to
sign a bill, sending the bill back to the house where it
originated along with his objections.
10. Majority vote of Congress for grant of tax
exemption
“ No law granting any tax exemption shall be passed
without the concurrence of a majority of all the members
of Congress (Section 28 [4], Art. VI)”
The inherent power of the State to impose taxes carries
with it the power to grant tax exemptions.
Exemptions may be created:
a. By the Constitution
b. By statute, subject to limitations as the Constitution
may provide.
Required vote for grant of tax exemption
In granting tax exemptions, the absolute majority vote of
all the members of Congress is required. It means at
least 50% plus 1 of all the members voting separately
(Art. VI, Sec. 28[4], 1987 Constitution).
 TAXATION LAW 1 – NOTES CO
Tax amnesties, tax condonations, and tax refunds are in
the nature of tax exemptions. Such being the case, a law
granting tax amnesties, tax condonations, and tax
refunds requires the vote of of an absolute majority of
the members of the Congress.
Reason for the separate vote for Senate and Congress:
Because the sheer number of Congressmen would dilute
the vote of the Senators.
Required vote for withdrawal of such grant of tax
exemption
A relative majority or plurality of votes is sufficient, that
is, majority of a quorum.
11. Prohibition against taxation of religious,
charitable entities, and educational entities
“Charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from
taxation (Art. IV, Sec. 28 [3])”
It covers real property taxes only. Accordingly, a
conveyance of such exempt property can be subject to
transfer taxes.
Meaning of “actual, direct and exclusive use of the
property for religious, charitable and educational
purposes”
• It is the direct and immediate and actual application
of the property itself to the purposes for which the
charitable institution is organized. It is not the use of
the income from the real property that is
determinative of whether the property is used for
tax-exempt purposes.
12. Prohibition against taxation of non-stock, non-
profit educational institutions
“All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. Xxx
Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall
be exempt from tax (Sec 4 (3] and [4], Art XIV).
Actually, directly, and exclusively used
The use of the term “actually, directly, and exclusively
used” referring to religious institutions cannot be applied
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to non-stock, non-profit educational institutions. The
provision of Article VI, Section 28(3) applies to religious,
charitable, and educational institutions – while Article
XIV applies solely to non-stock, non-profit educational
institutions.
13. Non-impairment clause
“No law impairing the obligation of contracts shall be
passed (Art. III, Sec. 10)”
Instances when there is impairment of the obligations of
contract
When the law changes the terms of the contract by:
a. Making new conditions; or
b. Changing conditions in the contract; or
c. Dispenses with the conditions expressed therein.
Rationale for the non-impairment clause in relation to
contractual tax exemption
When the State grants an exemption on the basis of a
contract, consideration is presumed to be paid to the
State and the public is supposed to receive the whole
equivalent therefore.
NOTE: This applies only where one party is the
government and the other party, a private person.
Rules regarding non-impairment of obligation and
contract with respect to the grant of tax exemptions
a. If the grant of the exemption is merely a
spontaneous concession by the legislature, such
exemption may be revoked. (Unilaterally granted by
law)
b. If it is without payment of any consideration or the
assumption of any new burden by the grantee, it is
a mere gratuity and exemption may be revoked.
(Franchise)
c. However, if the tax exemption constitutes a binding
contract and for valuable consideration, the
government cannot unilaterally revoke the tax
exemption. (Bilaterally agreed upon)
NATURE, DEFINITION & CHARACTERISTICS OF TAX
TAXES
• These are enforced proportional contributions from
persons and properties, levied by the State by virtue
of its sovereignty for the support of the government
and for all its public needs
• Enforced Contributions because it is an obligation
created by law
 TAXATION LAW 1 – NOTES CO

• Proportional in character since taxes are based on Basis Demand of Demand of

one’s ability to pay sovereignty proprietorship
Amount Generally, the Amount is limited
CHARACTERISTICS OF TAXES amount is to the cost and
1. It is levied by the State which has jurisdiction over unlimited maintenance of
the person or property public
2. It is levied by the State through its Law-making body improvement
3. It is an Enforced contribution not dependent on the Purpose For the support For the use of
will of the person taxed of the another’s
4. It is generally Payable in money government property
5. It is Proportionate in character Authority May be imposed May be imposed
6. It is levied on Persons and property by the State only by private
7. It is levied for a Public purpose individuals or
entities
ELEMENTS OF A VALID TAX
1. It should be for a public purpose TAX DEBT
2. It should be uniform Basis Obligation Obligation based
3. That either the person or property being taxed be created by law on contract,
within the jurisdiction of the taxing authority express or
4. The tax must not impinge on the inherent and implied
constitutional limitations on the power of taxation Assignability Not assignable Assignable
Mode of Payable in Payable in
TAX AS DISTINGUISHED FROM OTHER FORMS OF Payment money money or in kind
EXACTIONS Set-off Not subject to Subject to set-off
set-off
TAX TARIFF/CUSTOM Effect of May result in No imprisonment
DUTIES Payment imprisonment (except when
Coverage An all-embracing Only a kind of tax debt arises from
term to include therefore limited crime)
various kinds of coverage Interest Bears interest Interest depends
enforced only if delinquent upon the written
contributions stipulation of the
imposed upon parties
persons for the
Prescription Governed by the Governed by the
attainment of
special ordinary periods
public purpose
prescriptive of prescription
Object Persons, Goods imported or periods provided
property, etc. exported for in the NIRC

TAX PENALTY
TAX TOLL
Definition An enforced Sanction
Definition An enforced A consideration proportional imposed as a
proportional paid for the use contribution from punishment for a
contribution from of a road, bridge persons and violation of the
persons and or the like, of a property for law or acts
property for public nature public purpose/s deemed
public purpose/ injurious;
violation of tax

9
 TAXATION LAW 1 – NOTES CO

laws may give 2. Ad valorem – tax based on the value of the property
rise to imposition with respect to which the tax is assessed. It requires
of penalty the intervention of assessors or appraisers to
Purpose To raise revenue To regulate estimate the value of such property before the
conduct amount due can be determined. E.g. Real estate
Authority Maybe imposed Maybe imposed tax, Income tax, Donor’s tax and Estate tax
by the State only by private 3. Mixed – a choice between ad valorem and/or
entities specific depending on the condition attached.

TAX REVENUE D. As to purposes:

Definition An enforced All funds or 1. General/Fiscal or Revenue – tax imposed solely for
proportional income derived the general purpose of the government. E.g. Income
contribution from by the tax and Donor’s tax
persons and government 2. Special / Regulatory or Sumptuary – tax levied for
property for whether from tax specific purpose, i.e. to achieve some social or
public purpose/s or other sources. economic ends E.g. Tariff and certain duties on
imports

KINDS OF TAXES E. As to scope or authority to impose:

A. As to object:
1. Personal/Poll or Capitation tax – A fixed amount
imposed upon all persons, or upon all persons of a
certain class, residents within a specified territory,
without regard to their property or occupation. E.g.
Community tax
2. Property tax – Tax imposed on property, whether
real or personal, in proportion either to its value, or
in accordance with some other reasonable method
of apportionment. E.g. Real Property tax
3. Privilege/Excise tax – a charge upon the
performance of an act, the enjoyment of a privilege,
or the engaging in an occupation. An excise tax is a
tax that does not fall as property tax. E.g. Income
tax, Estate tax, Donor’s tax, VAT
B. As to burden or incidence:
1. Direct taxes are demanded from the very person
who, as intended, should pay the tax which he
cannot shift to another.
2. Indirect taxes are demanded in the first instance
from one person with the expectation that he can
shift the burden to someone else, not as a tax but
as a part of the purchase price.
C. As to tax rates:
1. Specific – tax of a fixed amount imposed by the
head or number, or by some standard of weight or
measurement. E.g. Excise tax on cigar, cigarettes
and liquors
10
1. National tax – Tax levied by the National
Government. E.g. Income tax, Estate tax, Donor’s
tax, VAT, Other Percentage taxes and Documentary
Stamp taxes
2. Local or Municipal – A tax levied by a local
government. E.g. Real Estate tax and Community
tax
F. As to graduation:
1. Progressive – A tax rate which increases as the tax
base or bracket increases. E.g. Income tax, Estate
tax and Donor’s tax
2. Regressive – The tax rate decreases as the tax
base or bracket increases.
3. Proportionate – A tax of a fixed percentage of
amounts of the base (value of the property, or
amount of gross receipts etc.) E.g. VAT and Other
Percentage taxes
NATURE OF TAX LAWS
Generally CIVIL in nature; they are neither political nor
penal in nature (Republic vs. Vda de Fernandez)
INTERPRETATION OF TAX LAWS
1. Tax Laws must be interpreted as written
• When there is ambiguity, rules of statutory
construction may be used to search for
legislative intent. However, when the meaning of
the law is clear, the statute must be enforced as
written.
 TAXATION LAW 1 – NOTES CO

2. Imposition of tax burdens is not presumed Elements of Direct Double Taxation

• Tax statutes are strictly construed against the 1. The same property is taxed twice when it should
government be taxed only once; and
2. Both taxes are imposed
3. Doubts should be resolved liberally in favor of • on the same subject matter,
taxpayer • for the same purpose,
• In order to protect the taxpayer against abuse • by the same taxing authority,
application of tax laws, the law on prescription • within the same jurisdiction,
being a remedial measure should be interpreted • during the same taxing period; and
liberally in favor of the taxpayer, • the taxes must be of the same kind or character

4. Tax exemptions are strictly construed against
the taxpayer
• Tax exemption should be construed strictissimi
juris against the taxpayer. Exemptions cannot be
established by mere implication but must be
clearly expressed by the law.
All the elements must be present in order to apply
double taxation in its strict sense.
b. Indirect (Broad sense) - It is a permissible double
taxation. It is indirect when some elements of direct
double taxation are absent.

5. Tax laws are applied prospectively NOTE: Double taxation in the strict sense pertains to the
• Tax laws are generally applied prospectively direct double taxation. This means that the taxpayer is
except when it is clearly provided by the taxed twice by the same taxing authority, within the
legislative intent that a tax statute shall operate same taxing jurisdiction, for the same property and same
retroactively. Retroactive application should not purpose. On the other hand, double taxation in broad
be given when it would be harsh and oppressive sense pertains to indirect double taxation. This extends
against the taxpayer. to all cases in which there is a burden of two or more
impositions. It is the double taxation other than those
SOURCES OF TAX LAWS covered by direct double taxation.
1. Constitution
2. National Internal Revenue Code ESCAPES FROM TAXATION
3. Tariff and Customs Code
4. Local Government Code (Book II) 1. Shifting of Tax Burden
5. Local tax ordinances / City or municipal tax codes Shifting is the transfer of the burden of tax by the original
6. Tax treaties and international agreements payer or the one on whom the tax was assessed or
7. Special laws imposed to another or someone else without violating
8. Court decisions the law.
9. Revenue rules and regulations and administrative
rulings and opinions Impact of Taxation Incidence of Taxation
It refers to the statutory It is the economic cost of
DOUBLE TAXATION liability to pay the tax. It tax. It is also known as
There is no constitutional prohibition against double falls on the person burden of taxation.
taxation in the Philippines. It is something not favored, originally assessed with It is the payment of tax.
but is permissible, provided some other constitutional a particular tax. (Burden)
requirement is not thereby violated, such as the It is the imposition of tax.
requirement that taxes must be uniform (Liability)
It is on the seller upon It is on the final consumer,
Types of Double Taxation whom the tax has been the place at which the tax
a. Direct (Strict sense) - Double taxation in the imposed. comes to rest.
objectionable or prohibited sense since it violates
the equal protection clause of the Constitution
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 TAXATION LAW 1 – NOTES CO

2. Tax Avoidance / Tax Minimization
Tax avoidance is a scheme where the taxpayer uses
legally permissible alternative method of assessing
taxable property or income, in order to avoid or reduce
tax liability.
It is a tax saving device within the means sanctioned by
law. This method should be used by the taxpayer in
good faith and at arm’s length
3. Tax Evasion / Tax Dodging
Tax evasion is a scheme where the taxpayer uses illegal
or fraudulent means to defeat or lessen payment of a
tax.
2. To allow the taxpayer to sue when there is a claim
that public funds are illegally disbursed or public
money is being deflected to any improper purpose, or
that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law;
3. Significantly, a taxpayer need not be a party to the
contract to challenge its validity.
A taxpayer is allowed to sue where there is a claim that
• Public funds are illegally disbursed, or
• That public money is being deflected to any improper
purpose, or
• That there is wastage of public funds through the
enforcement of an invalid or unconstitutional law

It is a scheme used outside of those lawful means and Two (2) requisites of a Taxpayer’s suit:
when availed of, it usually subjects the taxpayer to 1. Public funds derived from taxation are disbursed by
further or additional civil or criminal liabilities (CIR v. The a political subdivision or instrumentality and in doing
Estate of Benigno Toda Jr). so, a law is violated or some irregularity is
committed; and
Elements to be considered in determining that there is
tax evasion NOTE: A taxpayer’s suit would fail if what are alleged to
a. Course of action is Unlawful; be illegally disposed of are object which were acquired
b. Accompanying State of mind which is described as from private sources (Joya, et al. v. PCGG, et al., G.R.
being evil, in bad faith, willful or deliberate and not No. 96541, August 24, 1993).
accidental; and
c. End to be achieved, i.e., payment of less than that 2. The petitioner is directly affected by the alleged act.
known by the taxpayer to be legally due, or non-
payment of tax when it is shown that the tax is due. IS THE POWER TO TAX A POWER TO DESTROY?
1. US Chief Justice Marshall dictum - The power to tax
TAX EVASION TAX AVOIDANCE involves the power to destroy.
Validity Legal and not Illegal and subject
subject to to criminal penalty It is a destructive power which interferes with the
criminal penalty personal and property rights of the people and takes
Effect Minimization of Almost always from them a portion of their property for the support of
taxes results in absence the government (Paseo Realty & Development
of tax payment. Corporation v. CA, G.R. No. 119286, October 13, 2004).
TAXPAYER’S SUIT Therefore, it should be exercised with caution to
It is a case where the act complained of directly involves minimize injury to the proprietary rights of the taxpayer. It
the illegal disbursement of public funds collected through must be exercised fairly, equally and uniformly, lest the
taxation. tax collector kill the ‘hen that lays the golden egg’
(Roxas v. CTA, 23 SCRA 276).
In the case of Abaya v. Ebdane (515 SCRA 720), the
prevailing doctrine in the taxpayer’s suits is: NOTE: It is more reasonable to say that the maxim “the
power to tax is the power to destroy” is to describe
1. To allow the taxpayers to question contracts entered degree of vigor with which the taxing power may be
into by the National Government or government employed in order to raise revenue, and not the
owned and controlled corporations allegedly in purposes for which the taxing power may be used
contravention of law; (Cooley, 1876).
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 TAXATION LAW 1 – NOTES CO
2. Justice Holmes dictum – “The power to tax is not
the power to destroy while this Court sits.”
While taxation is said to be the power to destroy, it is by
no means unlimited. When a legislative body having the
power to tax a certain subject matter actually imposes
such a burdensome tax as effectually to destroy the right
to perform the act or to use the property subject to the
tax, the validity of the enactment depends upon the
nature and character of the right destroyed. If so great
an abuse is manifested as to destroy natural and
fundamental rights which no free government
consistently violate, it is the duty of the judiciary to hold
such an act unconstitutional.
Reconciliation of the two dicta
Marshall’s view refers to a valid tax while Holmes’ view
refers to an invalid tax.
The power to tax involves the power to destroy since the
power to tax includes the power to regulate even to the
extent of prohibition or destruction, when it is used
validly as an implement of police power in discouraging
and prohibiting certain things or enterprises inimical to
the public welfare.
However, if it is employed solely to raise revenues, the
modern view is that it cannot be allowed to confiscate or
destroy. If this is to be done, the tax may be successfully
attacked as an unconstitutional exercise of discretion,
which is usually vested in the legislature.
INCOME TAXATION
PREVAILING CODE OF TAX LAWS
• R.A. 8424, The National Internal Revenue Code
of 1997 (January 1, 1998)
• R.A. 9504, Amendment to the NIRC (July 2008)
• R.A. 10963, The Tax Reform for Acceleration
and Inclusion/TRAIN (January 1, 2018)
INCOME TAX
It is a tax on all yearly profits arising from property,
profession, trade or business, or a tax on person’s
income, emoluments, profits and the like.
It is generally regarded as an excise tax. It is not levied
upon persons, property, funds or profits but on the
privilege of receiving said income or profit.
13
INCOME
It refers to all wealth which flows into the taxpayer other
than as mere return of capital. It includes the forms of
income specifically described as gains and profits,
including gains derived from the sale or other disposition
of capital assets (R.R. No. 2, Sec. 36).
WHEN IS INCOME TAXABLE
1. There must be gain or profit
2. The gain must be realized or received
SOURCES OF INCOME
1. Income Within – it comprises earnings from within
the Philippine territory (Sec. 42A of NIRC)
2. Income Without – it refers to earnings coming from
outside the Philippines derived from foreign
countries (Sec. 42c of NIRC)
3. Income Partly Within and Without – are earnings
from sources partly within and partly without the
Philippines (Sec. 42E of NIRC)
INDIVIDUAL TAXPAYERS
1. RESIDENT CITIZEN (RC)
• Filipino citizen who stayed permanently in the
Philippines or stayed outside the Philippines for less
than 183 days during the taxable year
2. NON-RESIDENT CITIZEN (NRC)
• A citizen of the Philippines who:
a. Establishes to the satisfaction of the CIR the fact
of his physical presence abroad with a definite
intention to reside therein;
b. Leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for
employment on a permanent basis;
c. Works and derives income from abroad and
whose employment thereat requires him to be
physically present abroad most of the time
during the taxable year;
d. Has been previously considered as a
nonresident citizen and who arrives in the
Philippines at any time during the taxable year to
reside permanently in the Philippines. (Note:
Treated as NRC with respect to income derived
from sources abroad until the date of his arrival)
• Filipino citizen who stayed outside of the Philippines
for 183 days or more during the taxable year and
has established sufficient proof to the CIR of his
 TAXATION LAW 1 – NOTES CO
definite intention to reside outside PH on a
permanent basis.
OVERSEAS CONTRACT WORKERS (Special Citizens)
• A seaman who is a citizen of the Philippines and
who receives compensation for services rendered
abroad as a member of the complement of a vessel
engaged exclusively in international trade.
• An individual citizen of PH who is working and
deriving income abroad whom is taxable only on
income from sources within PH.
• PH citizen employed in a foreign country by a
foreign employer and must be registered with the
POEA and have been issued an overseas
employment certificate (OEC)
3. RESIDENT ALIEN (RA)
• An individual whose residence is within the
Philippines but who is not a citizen thereof
• It includes individuals who have stayed in PH for
more than one year from date of arrival
4. NON-RESIDENT ALIEN ENGAGED IN TRADE OR
BUSINESS (NRA-ETB)
• A citizen of another country, not residing in the
Philippines, but engaging in economic or
commercial activities here in the Philippines.
• Those who have stayed within the Philippines for
more than 180 days during the taxable year.
Engaged in Trade or Business
• When an alien doing a commercial activity for profit
or gain and such is habitually done
• It refers to economic or commercial activities or
exercising your profession.
Indicators to determine if a non-resident citizen is
engaged in trade or business
a. If an alien stays here in the Philippines for an
aggregate period of 180 days or more for the entire
year
b. Principle of Habituality – when an alien enters into
contracts or commercial transactions in the
Philippines, on a more or less regular basis
• The concept is repetitive; continuing
• It does not mean, however, that in a one single
contract, you are not engaging in a trade or
business
14
c. Putting up a branch of your business here in the
Philippines
d. Hiring of agents here in the Philippines
e. Hiring of employees here in the Philippines
5. NON-RESIDENT CITIZEN NOT ENGAGED IN
TRADE OR BUSINESS (NRA-NETB)
• Those who have stayed within the Philippines for
only 180 days or less during the taxable year and
have no business income derived within PH.
SPECIAL ALIENS
• It refers to those alien or Filipino citizens who are
taxed with 15% tax rate based on their gross
compensation income.
• Special aliens are individuals with managerial/highly
technical positions working in:
a. Regional or area headquarters and regional
operating headquarters of multinational
companies established in the Philippines
b. Offshore banking units (OBU) established in the
Philippines. OBUs are foreign banks allowed to
operate in the Philippines and to conduct foreign
currency transactions
c. Petroleum service contractors and sub-
contractors in the Philippines
CORPORATE TAXPAYERS
1. DOMESTIC CORPORATION (DC)
• A corporation created or organized in the
Philippines or under its laws and is liable for its
income from sources within and without (NIRC, Sec.
22 [C])
2. RESIDENT FOREIGN CORPORATION (RFC)
• A corporation which is not domestic and is engaged
in trade or business in the Philippines and is liable
for income from sources within the Philippines
3. NON-RESIDENT FOREIGN CORPORATION (NRFC)
• A corporation which is not domestic and not
engaged in trade or business in the Philippines and
is liable for income from sources within and without
4. SPECIAL TYPES OF DOMESTIC CORPORATIONS
A. Proprietary educational institution (PEI)
• It is any private school maintained and administered
by private individuals or groups with an issued
permit to operate from the Department of Education,
 TAXATION LAW 1 – NOTES CO
Culture and Sports (DECS), 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 regulation.
• They are not tax-exempt but are rather taxed at a
preferential rate of 10% on their taxable income,
except on certain passive incomes which are
subject to final tax.
Predominance test
If the gross income from unrelated trade/business/other
activity exceeds 50% of the total gross income from all
sources, the entire taxable income of the proprietary
educational institution shall be subject to the regular
corporate tax rate of 30%.
B. Non-stock Non-profit Educational Institution
(NSNPEI)
“Art. XIV, Sec. 4 (3) All revenues and assets of non-
stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall
be exempt from taxes and duties.”
5. SPECIAL TYPES OF FOREIGN CORPORATIONS
• Those corporations subject to different tax rates
A. Special RFC
• Domestic depositary banks (foreign currency
deposit units)
• International carriers
• Offshore banking units
• Regional or Area Headquarters and Regional
Operating Headquarters of multinational
companies
B. Special NRFC
• Non-resident cinematographic film owners,
lessors or distributors
• Non-resident owners or lessors of vessels
chartered by Philippine nationals
• Non-resident lessors of aircraft, machinery and
other equipment
GENERAL CO-PARTNERSHIPS
• Any partnership other than General Professional
Partnership
• For purposes of the Tax Code, they are also
corporate taxpayers
15
GENERAL PROFESSIONAL PARTNERSHIPS
• One which is established exclusively or solely for
the exercise of the common profession of the
partners and no part of its income is derived from
trade or business.
• They are not subject to income tax but are required
to file information returns for its income for the
purpose of furnishing information as to the share in
the net income of the partnership, which each
partner should include in his individual return.
Partners shall be liable for income tax in their
separate and individual capacities.
TAX-EXEMPT CORPORATIONS (Sec. 30)
The following organizations shall not be taxed in respect
to income received by them as such:
a. Labor, agricultural or horticultural organization not
organized principally for profit;
b. Mutual savings bank not having a capital stock
represented by shares, and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit;
c. A beneficiary society, order or association,
operating fort he exclusive benefit of the members
such as a fraternal organization operating under the
lodge system, or mutual aid association or a
nonstock corporation organized by employees
providing for the payment of life, sickness, accident,
or other benefits exclusively to the members of such
society, order, or association, or nonstock
corporation or their dependents;
d. Cemetery company owned and operated
exclusively for the benefit of its members;
e. Nonstock corporation or association organized and
operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income
or asset shall belong to or inures to the benefit of
any member, organizer, officer or any specific
person;
f. Business league chamber of commerce, or board of
trade, not organized for profit and no part of the net
 TAXATION LAW 1 – NOTES CO
income of which inures to the benefit of any private
stock-holder, or individual;
g. Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
h. A nonstock and nonprofit educational institution;
(UNCONSTITUTIONAL ACCDG TO JUSTICE
DIMAAMPAO’S BOOK)
i. Government educational institution;
j. Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like
organization of a purely local character, the income
of which consists solely of assessments, dues, and
fees collected from members for the sole purpose of
meeting its expenses; and
k. Farmers', fruit growers', or like association
organized and operated as a sales agent for the
purpose of marketing the products of its members
and turning back to them the proceeds of sales,
less the necessary selling expenses on the basis of
the quantity of produce finished by them;
The moment they invest their income or receive income
from their properties, real or personal conducted for
profit, such income derived from those properties is
subject to tax.
NOTE: If religious, charitable or social welfare
corporations derive income from their properties or any
of their activities conducted for profit, income tax shall be
imposed on said items of income irrespective of their
disposition (CIR v. YMCA,).
However, in case of non-stock, non-profit educational
institution, as long as the income is actually, directly and
exclusively used for educational purpose, such income is
exempt as provided for in Art. XIV, Sec. 3 of the 1987
Constitution.
16
EXEMPTIONS
A. R.A. 8424 (Effective: 1/1/1998)
• Personal Exemption
Married P 32,000
Head of Family P 25,000
Single P 20,000
Head of the Family
• An unmarried or legally separated man or woman
with one or both parents, or with one or more
brothers or sisters, or with one or more legitimate,
recognized natural or legally adopted children living
with and dependent upon him for their chief support,
where such brothers or sisters or children are not
more than twenty-one (21) years of age, unmarried
and not gainfully employed or where such children,
brothers or sisters, regardless of age are incapable
of self-support because of mental or physical defect.
• Additional Exemption
P 8,000/ dependent not exceeding four.
The additional exemption for dependent shall be claimed
by only one of the spouses in the case of married
individuals.
In the case of legally separated spouses, additional
exemptions may be claimed only by the spouse who has
custody of the child or children: Provided, That the total
amount of additional exemptions that may be claimed by
both shall not exceed the maximum additional
exemptions herein allowed.
Dependent means a legitimate, illegitimate or legally
adopted child chiefly dependent upon and living with the
taxpayer if such dependent is not more than twenty-one
(21) years of age, unmarried and not gainfully employed
or if such dependent, regardless of age, is incapable of
self-support because of mental or physical defect.
Nonresident alien individual engaged in trade, business
or in the exercise of a profession in the Philippines shall
be entitled to a personal exemption in the amount equal
to the exemptions allowed in the income tax law in the
country of which he is a subject - or citizen, to citizens of
the Philippines not residing in such country, not to
exceed the amount fixed in this Section as exemption for
citizens or resident of the Philippines: Provided, That
 TAXATION LAW 1 – NOTES CO

said nonresident alien should file a true and accurate
return of the total income received by him from all
sources in the Philippines, as required by this Title.
B. R.A. 9504 (Effective: 7/1/2008)
• Personal Exemption
P 50,000, without regard to status
In the case of married individual where only one of the
spouses is deriving gross income, only such spouse
shall be allowed the personal exemption.
b. When the husband is not gainfully employed or
does not have any income
c. When the husband is living abroad or a Non-
Resident Citizen (OFW)
In taxable year 2008, exemptions should be applied in
the following manner:
• From January to June 2008, half of the value of
exemptions granted under RA 8424;
• From July to December 2008, half of the value
exemptions granted under RA 9504.

• Special Additional Exemption Change of Status - If the taxpayer marries or should

P 25,000/dependent not exceeding four have additional dependent(s) during the taxable year,
the taxpayer may claim the corresponding additional
Married Individuals - additional exemption for exemption, as the case may be, in full for such year.
dependents shall be claimed by only one of the spouses
C. R.A. 10963 (Effective 1/1/2018)
Legally separated spouses - additional exemptions may Repeal of Provision on Allowance of Personal
be claimed only by the spouse who has custody of the Exemption for Individual Taxpayer. - Individual
child or children: Provided, That the total amount of taxpayer is no longer allowed to claim basic personal
additional exemptions that may be claimed by both shall exemption or additional exemption for dependents
not exceed the maximum additional exemptions herein
allowed. TAX BASE
TAXABLE INCOME
Dependent means a legitimate, illegitimate or legally • It means the pertinent items of gross income
adopted child chiefly dependent upon and living with the specified in this Code, less the deductions
taxpayer if such dependent is not more than twenty-one and/or personal and additional exemptions, if
(21) years of age, unmarried and not gainfully employed any, authorized for such types of income by this
or if such dependent, regardless of age, is incapable of Code or other special laws. (R.A. 8424)
self-support because of mental or physical defect. • It means the pertinent items of gross income
specified in this Code, less deductions, if any,
• Dependent for chief support – the parent authorized for such types of income by this Code
provides for the basic needs of the child. It does or other special laws. (TRAIN Law)
not mean, especially for those who are legally
separated and those who have children but NOTE: Every income from whatever source (legal or
without a spouse, that the other parent is not illegal) is taxable
supporting the child. There is joint support. What
is important is that the parent claiming for AE INCOME TAX FINAL TAX
supports the child and provides for his basic a tax on all yearly profits A term used to describe
needs, not necessarily to the exclusion of the arising from property, the tax on earnings that
other parent. profession, trade or have been subjected to
business, or a tax on complete withholding tax
General Rule: Among married couples, it is the husband person’s income, payment at source. These
who is entitled to claim the additional exemption. emoluments, profits and are earnings no longer
Exceptions: The wife can claim the additional exemption the like. included in the
in the following instances: determination of taxable
a. When the husband executes a waiver income subject to regular
tax.
17
 TAXATION LAW 1 – NOTES CO

These are withheld by the 1C. PRIZES

withholding agent and • A reward for a contest or a competition. It
such constitutes as a full represents remuneration for an effort reflecting
and final payment of the one’s superiority.
income tax due from the
payee on the said income R.A. 9504 TRAIN Law
More than P 10,000 More than P 10,000
1. PASSIVE INCOME - 20% - 20%
• An income is considered as passive income when P 10,000 & below P 10,000 & below
the taxpayer merely waits for it to be realized. - Net Income Tax - Net Income Tax
• Under sec 24(b), a final tax is imposed upon gross
passive income of citizen and resident aliens. 1D. WINNINGS
• Once it has been subject to final tax, it is no longer • A reward for an event that depends on chance such
included in the ITR taxable income. Deductions and as winnings from gambling, lottery or raffle ticket.
exemptions are not allowed to reduce the tax based
on passive income. R.A. 9504 TRAIN Law
Regardless of amount Regardless of amount
Kinds of Passive Income - 20% - 20%
1A. INTEREST INCOME PCSO & Lotto Winnings PCSO & Lotto Winnings
• It is an earning derived from depositing. - Exempt from tax P 10,000 & More than
below P 10,000
R.A. 9504 TRAIN Law - exempt - 20%
Local Currency Deposit Local Currency Deposit -
- 20% 20% 2. CASH AND PROPERTY DIVIDENDS
Foreign Currency Foreign Currency Deposit • These are any distribution made by a corporation to
Deposit – 7.5% – 15% its shareholders out of its earnings or profits and
Interest income from long-term deposit or investment payable to its shareholders, whether in money or in
in the form of savings, common or individual trust other property.
funds, deposit substitutes, investment management
accounts and other investments evidenced by Kinds of Dividends
certificates in such form prescribed by the BSP: a. Cash Dividend – paid in given sum of money

5 yrs and more – exempt from final tax b. Property Dividend – one paid in corporate property
4 yrs to less than 5 yrs. – 5% such as bonds, securities or stock investments held
3 yrs to less than 4 yrs. – 12% by the corporation, not its own stock. They are
Less than 3 yrs. – 20% taxable to the extent of the fair market value of the
property received at the time of distribution.
1B. ROYALTIES
• A payment or portion of proceeds paid to the owner c. Stock Dividend – one paid by a corporation with its
of a right. own stock.

R.A. 9504 TRAIN Law Requirements for a dividend income to be a passive

Books, Literary Works & Books, Literary Works & income:
Musical Composition - Musical Composition - a. It must be cash or property dividend
10% 10% b. It must be received by an individual taxpayer
Other Patents – 20% Other Patents – 20% c. It must come from a domestic corporation

18
 TAXATION LAW 1 – NOTES CO

Tax treatment of dividend received from DOMESTIC located in the Philippines, including pacto de
Corporation retro sales and other forms of conditional sale.
• A tax that is imposed on earnings the seller has
R.A. 9504 TRAIN Law gained from the sale of capital assets.
RC, RA, NRC 10%
NRA-ETB 20% R.A. 9504 TRAIN Law
NRA-NETB 25%
DC, RFC Exempt 6% capital gains tax, based on the 
selling price or
NRFC 15% subject to zonal value of the property, 
whichever is higher 

allowance of tax
credit
• Basis for “whichever is higher” – because there is a
tendency to under-declare the selling price just to
3. CAPITAL GAINS FROM SHARES OF STOCK NOT reduce the amount of tax to be paid.
LISTED/NOT TRADED • CGT is imposed regardless whether there is no
• What is controlling is whether or not the shares of income 
realized because gain is presumed.
stock are traded in the local stock exchange and not • Generally, it is the seller who pays for the CGT unless
where the actual sale happened it was stipulated by the parties in the contract that it is
• A final tax is imposed upon the net capital gains the buyer who will pay.
realized during the taxable year from the sale,
barter, exchange or other disposition of shares of Q: What if I bought a property for P 1M and I disposed it
stock in a domestic corporation, except shares sold, for P 500,000, do I still need to pay the 6% CGT even if I
or disposed of through the stock exchange. did not incur any income at all?

R.A. 9504 TRAIN Law A: YES, despite the loss. 6% CGT is payable whether
Greater than P 100,000 15% CGT regardless of there is an actual income or there is a loss. The reason
- 10% CGT amount for this is because CGT is imposed on the transaction,
not on the gain.
Less than P 100,000
- 5% CGT CORPORATIONS – PASSIVE INCOME
1A. INTEREST INCOME
If there is income, it is taxable. If there is no income, it is
not taxable. Local Currency Foreign Currency
Deposit Deposit
If the stocks are traded and listed DC 20% FWT (R.A. 9504)
7.5% FWT
R.A. 9504 TRAIN Law (TRAIN Law)
0.5 of 1% Percentage 0.6 of 1% Percentage Tax 15% FWT
Tax of the Gross Selling of the Gross Selling Price RFC 20% FWT 7.5% FWT
Price NRFC Shall considered
as part of gross Exempt
4. CAPITAL GAINS FROM SALE OR EXCHANGE OF income subject
REAL PROPERTY LOCATED IN THE PHILIPPINES to 30% NCIT.

Capital Gains Tax

• A tax imposed on the gains presumed to have 1B. ROYALTIES
been realized by the seller from the sale, • 20% FWT
exchange, or other disposition of capital assets

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 TAXATION LAW 1 – NOTES CO
1C. CAPITAL GAINS FROM SHARES OF STOCK NOT
LISTED/NOT TRADED
R.A. 9504 TRAIN Law
Greater than P 100,000 15% CGT regardless of
- 10% CGT amount
Less than P 100,000
- 5% CGT
1D. CAPITAL GAINS FROM SALE OR EXCHANGE OF
REAL PROPERTY LOCATED IN THE PHILIPPINES
DC 6% CGT
RFC N/A
NRFC N/A
1E. DIVIDENDS
Inter-corporate Dividends
• When a dividend is declared by one corporation and
received by another corporation which is a
stockholder to the former.
DC/RCF – DC Exempt
15% FWT
Tax Sparing Rule - the
dividends received shall be
subject to 15% FWT,
provided, that the country
NRFC – DC in which the corporation is
domiciled either (i) allows a
tax credit of 15% against
the taxes due from the
foreign corporation for
taxes deemed paid or (ii)
does not impose income
tax on such dividends 
 2. TRANSPORATION / REPRESENTATION
DC – FC 30% NCIT
30% NCIT, IF the income
of the foreign corporation
is derived from sources
within the Philippines; IF
RFC/NRFC – FC the said income is derived
from sources outside the
Philippines, the dividends
received shall be exempt
from tax. 
 COMPENSATION
20
COMPENSATION INCOME
• It is any remuneration for rendering personal
services. Generally, it is obtained from an employer-
employee relationship between payor and recipient.
Requisites for taxability of compensation income
1. Personal services Actually rendered
2. Payment is for such Services rendered
3. Payment is Reasonable
Employer-employee Relationship
• It exists when the person for whom services are
rendered hast the right to control and direct the
individual who performs the services, not only as to
the result of accomplishing the work but also as to
the details and means by which that result is
accomplished.
Kinds of Compensation Income
1. BASIC SALARY/WAGE
A. Salary
• It refers to earnings received periodically for a
regular work other than manual labor
• Such is already subject to withholding tax
B. Wage
• It refers to earnings received usually according to
specified intervals of work, as by the hour, day, or
week
C. Commission
• It refers to percentage received by an individual
from sales or a certain quota 

D. Honoraria
• It refers to payments given in recognition for
services performed for which established practice
discourages charging a fixed fee
ALLOWANCES
• Generally, these are compensation subject to
withholding tax
• Any amount paid specifically, either as advances
or reimbursements for travelling, representation
and other bona fide ordinary and necessary
expenses incurred or reasonably incurred by the
EE in the performance of his duties are NOT
SUBJECT TO
WITHHOLDING TAX, if the following conditions
are present
 TAXATION LAW 1 – NOTES CO

a. It is for the ordinary and necessary R.A. 9504 TRAIN Law

expenses paid or incurred by the 32% FBT on the 35% FBT on the Grossed-
EE in the pursuit of the ER’s trade, Grossed-Up Monetary Up Monetary Value
business, or profession Value
b. EE is required to account/liquidate GMUV = Actual MV/65%
for the foregoing expenses GMUV = Actual MV/68%

NOTE: a. Housing 

• If subject to liquidation in pursuit of the business of b. Expense account 

the employer, not part of CI 
 c. Vehicle of any kind 

• If the expenditure is discretionary, part of 
CI 
 d. Household personnel such as maid, driver
and 
others 

3. TIPS e. Interest on loans at less than market rate to
• Tips paid directly to the employee (by a customer of the 
extent of the difference between the market
the employer) which are not accounted for by the rate 
and the actual rate granted 

employee to the employer are considered taxable f. Membership fees, dues and other expenses borne
income, but not subject to withholding tax. by 
the employer for the employee in social and
• If tips are pooled and distributed to the employee, it athletic 
clubs or other similar organizations 

is subject to withholding tax. g. Holiday and vacation expenses 

h. Expenses for foreign travel 

FRINGE BENEFITS i. Educational assistance to the employee or
• These are any goods, services or other benefits his 
dependents 

furnished or granted by an employer in cash or in j. Life or health insurance and other non-life insurance
kind, in addition to basic salaries, to an individual premiums or similar amounts in excess of what the
employee law allows (NIRC, Sec. 33 [B])

Fringe Benefits Tax
• A final withholding tax imposed on the grossed-up
monetary value (GMV) of fringe benefit furnished,
granted or paid by the employer to the employee
If the benefit is not tax-exempt and the recipient is:
. A rank and file employee – the value of such
fringe benefit shall be considered as part of the
compensation income of such employee
subject to tax payable by the employee. 
 double-bladed. It is because if one is the ER and
. A managerial or supervisory employee – the
value shall not be included in the
compensation income of such employee
subject to tax. The fringe benefit tax (FBT) is
payable by the employer on behalf of the
employee (NIRC, Sec. 33). 
 income will be reduced and the tax payable will be
• FBT is not an additional tax on the employer.
Rather, the employer can claim the fringe benefit
and the FBT as a deductible expense from his
gross income. The deduction for the employer is the
grossed-up monetary value of the fringe benefit.
• The FBT is a measure to ensure that an income tax
is paid on fringe benefits. If they were given in cash,
an income is automatically withheld and collected
by the government. An additional compensation
which is given in non-cash form is virtually untaxed.
Such a situation has caused inequity in the
distribution of the tax burden. The FBT can enhance
the progressiveness and fairness of the tax system
• The consequence of FBT to the government is
the other is a supervisory personnel, the ER gives
the EE fringe benefits and the ER makes it appear
that the fringe benefit is part of the EE’s salary, the
ER can claim that as deduction to his income
because it is an allowable deduction thus, taxable
lowered. But on the part of the EE, fringe benefit
must be declared as part of income but some
people do not declare it, so there is under
declaration. Therefore, the EE reduced his income.
In effect, lower tax payable.

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 TAXATION LAW 1 – NOTES CO

Fringe Benefit Valuation: DE MINIMIS BENEFITS

A. HOUSING • These are facilities or privileges furnished or offered
• If owned by ER – 5% of the FMV or zonal value, by an employer to his employees that are of
whichever is higher multiplied by 50% relatively small value and are offered or furnished
• If ER purchased the house – 5% of the AC x by the employer merely as a means of promoting
50% the health, goodwill, contentment and efficiency of
his employees.
B. VEHICLE
• If paid in cash - 100% Qualify:
• 
If paid in installment - Acquisition Cost / 5 Years;
(5 years is a generally accepted period of 1. Private employees:
installment) a. Vacation leave - exempt
Monetized unused up to 10days
C. EXPENSE ACCOUNT vacation leave credits b. Sick leave – always
• Expenses incurred by the employee but which are of employees taxable
paid by his employer; 

• Expenses paid for by the employee but reimbursed 2. Government employees:
by his employer; 
 Vacation and sick leave
are always tax exempt
D. HOUSEHOLD HELP regardless of the number
• Expenses of the EE which are borne by the ER for of days.
household personnel
Medical cash Not exceeding ₱750 per
E. TRAVELS allowance to semester or ₱125 per
• There should be no service requirement in return. If dependents of month
there is a requirement to serve after, it is not a employees
fringe benefit – because it is for the advantage of
the ER. Rice subsidy ₱1,500 or one sack of 50-
kg rice per month
Fringe Benefits exempt from tax amounting to not more
1. Fringe benefits which are authorized and exempted than P1,500
from tax under the NIRC or special laws (e.g.
separation benefits which are given to employees Not exceeding ₱5,000 per
who are involuntarily separated from work) 
 Uniforms and clothing annum
2. Contributions of the employer for the benefit of the allowances
employee to retirement, insurance and
hospitalization benefit plans 
 Actual medical Not exceeding ₱10,000
3. Benefits given to the rank and file employees, assistance, e.g. per annum
whether granted under a collective bargaining medical allowance to
agreement or not 
 cover medical and
4. De minimis benefits, whether given to rank and file healthcare needs,
employees or to supervisory or managerial annual
employees 
 medical/executive
5. Fringe benefits granted to employee as required by check up, maternity
the nature of, or necessary to the trade, business or assistance, and
profession of the employer 
 routine consultations
6. Fringe benefits granted for the convenience of the
employer 
 Laundry allowance Not exceeding ₱300 per
month
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 TAXATION LAW 1 – NOTES CO

Employee In the form of tangible • Manufacturing – making of a product and 
selling

achievement awards personal property other it to people 

under an established than cash or gift certificate • Construction businesses – percentage of
written plan which with an annual monetary completion or the completed contract; reporting
does not discriminate value not exceeding of income 
is required for income tax purposes 

in favor of highly paid ₱10,000 • Income from farming – this includes
employees 
(e.g. for income 
derived from livestock and poultry; sale
length of service or of crops, trees, fruits; as well as farming
safety achievement) equipment 


Gifts given during Not exceeding ₱5,000 per Professional fees/Practice of profession 

Christmas and major employee per annum • It refers to the fees received by a professional from
anniversary the practice of his profession, provided that there is
celebrations no employer-employee relationship between him
and his clients.
Daily meal allowance Not exceeding 25% of the • Professional income shall be subject to creditable
for overtime work basic minimum wage on a withholding tax rates prescribed
per region basis
Interests or Compensation fee derived from lending
Benefits received by Not exceeding ₱10,000 money, regardless if it is against the usury laws or is
virtue of Collective per employee per annum an illegal business of lending 

Bargaining Agreement • For the use of the taxpayer’s money by another
(CBA) and person
productivity incentive
scheme RENTAL INCOME
• Earnings derived from leasing real estate as well as
personal property
Threshold of Other Benefits • If one lets another use or enjoy a thing owned by
the former for a fee or compensation, or rental or
R.A. 9504 TRAIN Law lease.
P 82, 000 P 90, 000 • Official receipt registered with the BIR is the proof of
rental income.
BUSINESS INCOME (Non-Compensation Income) • In a lease of real property, improvements introduced
• Income derived from trade or business. This by the lessor should be identified whether it would
encompasses all kinds of business for purposes of remain as the property of the lessor at the end of a
profit, whether legal or illegal. Income derived from contract.
business is subjects of taxation • If it is a permanent improvement, then it is subject
to income tax choosing between:
BUSINESS . Outright Method - the fair market value of the
• Any commercial activity engaged in as a means of building or improvement shall be reported as
livelihood or profit of an individuals or group. additional rent income at the time when such
building or improvements are completed; and 

Examples . Spread Out Method – allocate over the life of the
• Service Business, where the taxpayer is not lease the estimated book value of such buildings
an 
employee (Barbershop, Spa, etc.) 
 or improvements at the termination of the lease
• Food Businesses 
 and report as additional rent for each year of the
• Merchandising – purchasing commodities in f
 inal lease an aliquot part thereof in addition to the
form but sells the products to the public 
with a regular rent income. 

mark-up price 

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 TAXATION LAW 1 – NOTES CO

Example Capital Assets

A lessee introduced an improvement in the property of • Are those assets held by the taxpayer but not
the Lessor (fence that is worth P80,000.00). the rental of intended primarily to be sold but intended to be
the property is P120,000.00 per annum for a period of 5 used.
years. The said improvement was introduced on the • Properties held by the taxpayer whether or not
second year. connected with his trade or business but does
not include ordinary assets as defined in sec
A.) Outright Method 39A
1.) P120,000.00

2.) P200,000.00 (120k + 80k) Examples
3.) P120,000.00 • My business is selling of subdivided lots. –

4.) P120,000.00
 subdivided lots are ordinary assets
5.) P120,000.00 Office building – capital assets
• Car Dealer – cars in the showroom – ordinary
B.) Spread-out Method assets
1.) P120,000.00 Own car – capital assets
2.) P140,000.00 • Furniture business – office furniture and fixtures in
3.) P140,000.00 showroom – ordinary assets
4.) P140,000.00 Office furniture used in the business – capital assets
5.) P140,000.00
Reason for the distinction between ordinary and capital
DIVIDEND INCOME assets
• If dividend does not fall under passive income. • If what is sold is an ordinary asset, any income
derived from that transaction will be treated as
GAIN ON SALE OF ASSETS business income
• For tax purposes, determine what kind of asset was • If what is sold is a capital asset, determine first
sold. the holding period. Then it will be subjected to
• This refers to income derived from sale, and/or 6% CGT.
exchange of assets which results in gain because of
Holding Period
the excess of the amount or value received by the
1. Long term Period - Where the taxpayer held the
taxpayer over the determined value of the property capital asset sold for more than 12 months, the gain
he has disposed of. derived therefrom is taxable only to the extent of
50%.
Ordinary Assets
• Are those assets of the taxpayer which are held 2. Short term Period - Consequently, if the taxpayer
primarily to be sold in the ordinary business of the held the capital asset sold for a year or less, the
whole gain shall be taxable.
taxpayer
a. Stock in trade of the taxpayer 
 The same also applies to capital loss. It is a form of tax
b. Other property of a kind which would properly be avoidance since the taxpayer can exploit it in order to
included in the inventory of the taxpayer 
on hand reduce his tax due.
at the close of the taxable year 

c. Or property held by the taxpayer primarily held
EXCLUSIONS
for sale to customers in the ordinary course of
• It refer to the flow of wealth to the taxpayers which
his trade or business 

are not considered part of gross income for
d. Property used in the trade or business, of a
purposes of computing the taxpayer’s taxable
character which is subject to the allowance for
income due to the following:
depreciation provided in Subsection (F) of
a. It is exempted by the fundamental law or by
Section 34.
statute;
e. Real property used in trade or business
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 TAXATION LAW 1 – NOTES CO

b. It does not come within the definition of income. It is not taxable as income tax. It is subject to Donor’s tax
or Estate Tax.
1. Life insurance proceeds 

2. Amount received by insured as return of premium 
 4. COMPENSATION FOR INJURY OR SICKNESS
3. Gifts, bequests and devises 
 • It is received by the taxpayer because of an injury or
4. Compensation for injuries or sickness 
 sickness. It is not taxable.
5. Income exempt under treaty 
 . Amounts received through accident or health
6. Retirement benefits, pensions, gratuities, etc. 
 insurance or Workmen’s Compensation Act as
7. Miscellaneous items. compensation for personal injuries or sickness 

th
a. 13 month pay and other Benefits; 
 . Amounts of any damages received whether by
b. Prizes and awards 
 suit or agreement on account of such injuries or
c. Prizes and awards in sports competitions 
 sickness 

d. Income derived by foreign government 

e. Income derived by the government or Non-taxable
its 
political subdivisions 
 • Personal injuries or sickness
f. GSIS, SSS, Medicare and other contributions 
 • Any other damages recovered on account of
g. Gains from the sale of bonds, debentures personal injuries or sickness
or 
other certificate of indebtedness 
 • Exemplary and moral damages for out-of-court
h. Gains from redemption of shares in settlements including attorney’s fees
mutual 
fund (NIRC, Sec. 32 [B]) 
 • Alienation of affection, or breach of promise to
marry
1. LIFE INSURANCE PROCEEDS • Any amount received as a return of capital or
Requirements for exclusion: reimbursement of expenses
a. It must be a life insurance
b. There is an insured Taxable
c. Beneficiary is the taxpayer • Actual damages for loss of anticipated profits
d. Amount received is because of the death of the • Moral and exemplary damages awarded as a result
insured person of breach of contract
e. It must be payable upon the death. • Interest for nontaxable damages
• Any damages as compensation for unrealized
If the proceeds are invested, the fruit of the proceeds is income
now taxable.
5. RETIREMENT GRATUITUES, SEPARATION
2. RETURN OF PREMIUM BENEFITS
Recipient is the taxpayer who is also the insured person. • If it is received from SSS or GSIS, it is not taxable
The insured person received the premium he paid for the by law.
life insurance. It is not taxable because it is merely a • Separation Pay due to death, sickness, or physical
return of capital. disabilities or for causes beyond the EE’s control, it
is not taxable.
3. GIFTS, BEQUESTS, & DEVICES
Gifts – it refers to any property legally and validly Conditions in order to avail the exemption under a
transferred from the donor to the donee. Reasonable Retirement Benefit Plan
a. The RPBP must be approved by the BIR; 

Bequest – it is a gift of personal property and b. The retiree must have been in the service of same
employer for at least 10 years at the time
Devise – It is a gift of real property. of 
retirement; 

c. The private employee or official must be at least 50
Both are donations mortis causa. years old at the time of his retirement; and

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 TAXATION LAW 1 – NOTES CO

d. The benefits under the RPBP must have been • Regional or international financing institutions
availed of only once. established by foreign government 


6. INCOME EXEMPT UNDER TREATY 7E. Gains from the sale of bonds, debentures or
• Income of any kind, to the extent required by any other certificate of indebtedness
treaty obligation binding upon the Government of • The bonds, debentures or other certificate of
the Philippines is exempt from tax indebtedness sold, exchanged or retired must be
with a maturity of more than five (5) years.
7. MISCELLANEOUS ITEMS
TH
7A. 13 MONTH PAY & OTHER BENEFITS 7F. Gains from redemption of shares in a mutual
Gross benefits received by officials and employees of fund company
public and private entities may be excluded from gross Mutual fund company means an open-end and close-
income provided that the total exclusion shall not exceed end investment company as defined under the
P82,000 (90,000). The excess would be considered as Investment Company Act
part of the compensation income of the employee where
it is subject on a schedular rate.
BAD DEBTS (An item on Deductions)
7B. PRIZES & AWARDS Rule of thumb: every income from whatever source
Requisite for exemption of prizes & awards (legal or illegal) is taxable
a. Primarily in recognition of Scientific, Civic, Artistic,
Religious, Educational, Literary, or Charitable Receivables – money expected by a taxpayer from his
achievement debtors

b. The recipient was selected without any action on his
part to enter the contest or proceeding; and 
 Payables – money to be paid by a taxpayer to his
c. He is not required to render substantial future creditors because of a debt he owes to them
services as condition to receiving the prize or
award. 
 Presumption: not all receivable will be collected. If a
receivable from a debt owed to by a debtor, for any
7C. PRIZES & AWARDS IN SPORTS COMPETITION reason, cannot be collected – they are called BAD
Requisites for the exclusion of prizes and awards in DEBTS
sports competition from gross income
a. All Prizes and awards; 
 BAD DEBTS are those receivables that cannot be
b. Granted to Athletes; 
 collected. These are doubtful account because there is
c. In local and international sports Tournaments no certainty on whether they could still be collected or
and 
competitions; and 
 not. They are allowed deductions for purposes of income
d. Sanctioned by their national sports associations 
 tax. This happens when a taxpayer exhausted his efforts
as well available legal remedies in collecting his credit
7D. INCOME DERIVED BY FOREIGN GOVERNMENT from his debtor/s.
a. It must be an income derived from investments in
the Philippines; 
 However, bad debts recovered, after the said deduction
b. It must be derived from Bonds, Loans or other were declared should be considered income on the part
Domestic securities, Stocks or Interests on deposits of the tax payer which will be subject to tax.
in banks; 

c. The recipient of such income from investment in the
Philippines must be a:
• Foreign government; 

• Financing institutions owned, controlled
or 
financed by foreign government; or 


26