ii. Legislations/Statutes (R.A., P.D., E.O.)
iii. Administrative rules and regulations, rulings or opinions of tax officials iv. Judicial decisions
- Stare decisis, meaning, only the decisions of the SC
v. Tax treaties or agreements
REVENUE REGULATIONS
1. Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal
Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes.
N.B. publication not required in Official Gazette
Secretary of Finance: Ceasar V. Purisima
The role of CIR insofar as RRs are concerned, recommends as to what RR will be promulgated by the Secretary of Finance.
2. Revenue Memorandum Orders (RMOs) are issuances that provide directives or instruction; prescribe guidelines; and outline
processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing.
Usually issued by the BIR through the CIR.
3. Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect
to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio.
University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS Page 40
4. BIR Rulings are official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and
interpretation of tax laws.
Difference between RMR and BIR Ruling?
RMR is more comprehensive and encompassing than the BIR Ruling.
BIR Ruling should be in accordance with RMR but BIR Ruling is more common than the RMR.
5. Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions, as well as amplifications
(highlights), of laws, rules, regulations and precedents issued by the BIR and other agencies/offices.
6. Revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that
consolidate the Bureau of Internal Revenue’s position on certain specific issues of law or administration in relation to provisions of the Tax Code, relevant tax laws and other issuances for the guidance of the public.
I. Definition of Income Tax
A tax on all yearly profits arising from property, professions, trades or offices, or A tax on a person’s income, emoluments, profits & the like.
It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year.
Profit:
Investment worth 1000. You lost. So recovered 500. Is there income tax? No. There is no profit. So when we talk of Profit, it means RETURN ON CAPITAL. Thus, ON top of your capital.
II. Nature of Income Tax – national, excise, direct, and general tax.
Income Tax is source “blind”.
National Tax: The BIR has the authority to collect as found in RA 8424, NIRC which took effect on January 1, 1998.
Also considered as Excise tax (tax on exercise of profession/on privilege or right to earn something)
Direct Tax: impact and incidence of taxation is upon the taxpayer. Cannot be shifted to another, thus personal.
General Tax: Levied of all kinds of income. If through gambling or robbery, you earn income, taxable. Thus, SOURCE BLIND (so long as there’s flow of wealth, increase in income, even if source is illegal, should be subject to income tax).
III. Purposes of Income Tax
FISCAL PURPOSE: To provide large amounts of revenue
NON FISCAL PURPOSE:
o To offset regressive sales and consumption of taxes
o To mitigate the evils arising in the unequal distribution of income and wealth
All taxes are for the purpose of raising revenue save for the case of secondary purposes such as to offset the effects of sales and consumption taxes which are seen as regressive taxes by some proponents and in order to mitigate the effects of the inequitable distribution of wealth between different income earners. Of course, this is made together with the imposition of estate taxes because we are taking about wealth and income distribution
IV. Brief Historical Background of Philippine Income Taxation
1. US Revenue Act of 1913—Income Tax of Philippines has an American Origin. This Act administered collection of income tax here in the Philippines. US was trying to collect revenue taxes.
2. Revenue Act of 1916 and War Revenue Act of 1917---amended Rev Act 1913. Still American origin.
3. Act 2833, promulgated by the Philippine Congress under the authority conferred to it under the 1917 Act.—this started during the Commonwealth Era
4. CA 466 or NIRC of 1939—revised, amended, and codified all internal revenue laws embodied in the 1939 NIRC. 5. PD 1158 or NIRC of 1977
6. PD 1994 of NIRC of 1986 which enacted to simplify certain provisions of the NIRC. VAT was first started and introduced in this era. SNITS (Simplified Net Income Tax System) was also introduced here.
University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS Page 41 7. RA 8424, Jan 1 1998, amended by RA 9337. Present Day NIRC.
8. Since American Origin, in case of doubt, they usually refer to US Jurisprudences.
V. Sources of Income Tax Law
- National Internal Revenue Code, as amended
VI. Definition of Terms
Income (broad sense)- all wealth w/c flows into the taxpayer other than as a mere return of capital; includes the forms of income specifically described as gains & profits, including gains derived from the sale or other disposition of capital assets. (Return ON income)
Income means -
accession to wealth gain
flow of wealth
Capital – a fund or property existing at one point of time (while income denotes a flow of wealth during a definite period of time). Capital is wealth, income is the flow of wealth. Should not be subject to income tax.
Example: Manufacturing of Furniture Cost – 1M
Sales – 1M
- Is there an income? None.
- Is cost of sales equated to capital? Not necessarily.
Madrigal vs Rafferty
Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit. A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains."
So what is being taxed is the fruit not the tree.
Illustration:
Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt. Is there taxable income for Rocha?
- No. Rather, it’s Donor’s Tax. There is no income because what has been forgiven is just equivalent to the debt. It is not taxable income but may be subjected to donor’s tax.
Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt in exchange for a free massage for one year. Is there a taxable income?
- Yes. There is already consideration—service. Thus, there can be income. THUS if it is just a mere return OF capital, no income. But if it is a return ON capital, there is an income and such is taxable.
Gain - transaction resulting in increases of wealth capable of pecuniary estimation
Gross Income – income (in its broad sense) less income w/c is by statutory provision or otherwise excluded from the tax imposed by law. This includes but not limited to the enumerations under Section 32a.
Gross Income Taxation – a system of taxation where the income is taxed at gross. The taxpayers under this system are not entitled to any deductions.
Net Income Taxation – system of taxation where the income is taxed at net. The taxpayer may claim allowable deductions. Passive Income – refers to those items of gross income earned by the taxpayer w/o his active/direct participation in the
University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS Page 42 Taxable Income (previously, Net Income) – pertinent items of income as specified in the Tax Code less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Code or other special laws. It is the amount of income that is taxed [Pertinent items of GI – Allowed Deductions]
VII. General principles of Income Taxation in the Philippines
a. A RESIDENT CITIZEN is taxable on all income derived from sources within and without (outside) the Philippines.
Sec 1, Art IV, 1987 Phil CONSTI – The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and
(4) Those who are naturalized in accordance with law.
b. A NON-RESIDENT CITIZEN is taxable only on incomes derived from sources within the Philippines.
Sec 22(e) of NIRC – The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who 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.
(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.
c. An OVERSEAS CONTRACT WORKER (OCW) is taxable only on income from sources within the Philippines. A seafarer 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 the international trade shall be treated as an overseas contract worker.
- Example: Shipper for Coast-wise shipping (inter-island destination not international)—since this is domestic, thus it means you are still domiciled. Thus Taxable within or without.
d. An ALIEN INDIVIDUAL whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines.
e. A DOMESTIC corporation is taxable on all income derived from sources within and without (outside) the Philippines. - Domestic Corp: organized and existing under the laws of the Philippines
- Foreign Corp: under the Foreign laws.
NB: To determine, we do not look at the nationality of stockholders or incorporators BUT we look at the law incorporating
the corporation.
f. A FOREIGN Corporation whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.
VIII. Systems of Income Taxation [Philippines: partly schedular and partly global system of income taxation]
1. Schedular Income Tax System - Follows a schedule of tax rates
- The Tax Code or Congress treats differently every category of income earners. - Usually applicable to Individual Tax Payers
2. Global Income Tax System - follows the proportional rate
University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS Page 43 - applicable to corporate taxpayers: 30%
- a uniform rate or proportional rate for all types of income so long as it is classified within the same class. If it is corporate taxpayer, all the income of the corporations regardless of value is taxed at a flat rate of 30%
IX. Kinds of Income Tax Methods
1. Gross Income Taxation 2. Net Income Taxation Formula:
All income
Less: Exclusions (as enumerated under NIRC)
Gross Income
Less: Deductions*/Exemptions
Net Income or Taxable Income
*DEDUCTIONS: pertains to expenses, loss, interest, tax payments made by corporations plus operating expenses. * Net Income: refers to Taxable income
- For Individual, subjected to graduated tax rate of 5-32% - For Corporation, Final Income Tax of 30%
X. Features of Our Present Income Taxation (RA No. 8424, RA No. 9504, RA No. 9337) – Comprehensive Tax Situs
- To determine taxable income, based on:
Domicile of the taxpayer
Citizenship or Nationality of the taxpayer
Source of the income itself
1. Basic Features of Individual Income Taxation
a. Schedular System of Taxation.
- Graduated Income Tax (GIT); rates: 5% - 32%
- Unlike in corporate, we use Normal Income Tax (NIT); rate: 30% b. Tax rates are progressive in character.
- When tax rate increases as the income of the taxpayer increases. - Tax base increases as tax rate increases.
- Ability to pay principle. (Consistent with constitutional provision) c. Modified gross income taxation as regards pure compensation earner.
- Pure compensation income earner in the Philippines - all income is derived from pure employment (purely under employer-employee relationship, no business income, no passive income, etc.), subjected to gross income taxation although modified.
- Modified because deductions such as expenses (ex.transportation expenses) are not allowed.
- Only personal (P50,000) and additional (P25,000 per dependent) exemption are allowed to be deducted. d. Net income taxation as regards those individual taxpayers that derive business, trade or professional income.
Allowable deductions under Section 34 may be claimed by individual taxpayers who derive business, trade and/or professional income.
- Pure business income earner, pure profession income earner or modified (both income and employment) - allowed to claim deductions; covered by net income taxation. But in all cases, the schedular rates will have to be applied for individuals.
- Background on Individual income taxation—
o Always, always the rates will be schedular. o WON an individual is allowed deductions; RULES:
(1) Pure compensation income earner: modified gross income taxation; deductions would only be personal and additional exemptions which will subjected to
(2) Compensation PLUS business earner or profession or trade earner: net income taxation; deductions are allowed. Logic behind-- is once you earn income other than from employment, you will be expected to have incurred expenses for your business, trade or profession.
University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS Page 44 - Expected to pay within the same day upon filling of return. Regarding last minute questions, taxes still needs to
be paid but rather pay it “Under Protest”. - Self-Assessment System
the taxpayer will be the one who will determine how much is the taxable income (computation) in trade, business or exercise of profession, not the BIR.
if pure compensation earner, employer will be the one who will determine how much is the taxable income. The one who will pay and file is the employer, this is called substituted filling.
f. Under certain cases, “Pay-as-you-Earn” system, as applicable to income subject to withholding tax. - Applicable to income subject to withholding tax.
- Applied primarily to passive income.
- Immediately when earned it will be subjected to tax basically final withholding tax.
- Example: if you have deposits in the bank and it earns interest, the bank will automatically deduct the FWT from the interest income. You did not file yet but the tax is already deducted and remitted by the bank to the BIR.
2. Basic Features of Corporate Income Taxation
a. Global Concept of Taxation
- No schedule, no graduation of tax rates; tax rate is applied as a final tax rate (30%).
b. Corporate taxpayers’ exception- resident foreign corporations are entitled to deductions. Net Income taxation is applicable to domestic corporations and resident foreign corporations.
- Only resident foreign corporations are entitled to deductions, non-resident foreign corporations are not entitled. Not all allowable deductions applicable to domestic corporation are applicable to resident foreign corporation. Subject to reciprocity rule.
- Net Income taxation - applicable to domestic corporations and resident foreign corporations. c. “Pay-as-you-File” system (except in cases of electronic filing system application)
- Exception - in cases of electronic filing system application (EFPS)
3. Criteria Used
a. Residency (Domiciliary Rule)
b. Nationality or citizenship (Nationality Rule) c. Place/Source of Income (Source Rule)
XI. Sources of Income
1) Capital
- A fund or property existing at one point of time. 2) Labor - Taxable if:
- it is for the benefit of another and;
- it has pecuniary value or is capable of pecuniary estimation. 3) Both Labor and Capital
4) Sale of Property
- Shares of tax or real property Example 1:
Farming (fruits and vegetables for personal consumption only);
painter (painted his own house)
*Both are under Self-Help income – not taxable, even if income is sourced from labor. Example 2:
N painted the house of R, in return, R massaged N. - Not taxable; not under self-help income
- If it can be estimated, taxable (conceptually only)
XII. Criteria to Determine if Income is Taxable
1. There is gain or profit
University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS Page 45 o No more condition
o Service is rendered
- Determine if under employer-employee or practice of profession (labor) - NB: In determining the profit for sale of property, the formula is
Amount Received/Realized LESS Cost of Property = Profit
- Concept of accrual and deferral in accounting will not matter because: o Rendered the service- taxable
o Not rendered the service but received the money/payment- taxable (constructive receipt) 2. The gain or profit is realized or received (either actually or constructively)
- Actually or;
o physical possession regardless whether there was service rendered or not - Constructively
o the disposition is under your control although not yet received
o Constructive Receipt concept
Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. The income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made.
The property/income already pertains to the taxpayer or the taxpayer already has the control over the property/income even if it is not yet actually received or not yet in possession. Constructively, has the right to claim as an income because it was already earned or the service was already rendered.
Example: dividends applied to debts of shareholders, interests on saving in bank deposits, matured interest coupons, share in the profits in a general of professional partnership.
*exercise of profession; ex. lawyers; deposits of clients are already treated as income by the BIR. 3. Such gain or profit is not exempt under any law or treaty