INCOME TAXATION 8.

Exemption of revenues and assets of non-

stock, non-profit educational institution from
Taxation taxation
Taxation is the process by which a
government, through its lawmaking body, imposes *Items 1 and 2 protect the taxpayer from the promulgation
of tax laws that are unconstitutional, unjust, or
charges on its inhabitants to raise money for public
unreasonable. Items 3 to 5, on the other hand, protect the
use. taxpayer from the potential abuse by the Congress of its
powers to promulgate tax laws.
Purpose of Taxation
• Revenue purpose - the primary purpose of Theory and basis of Taxation
taxation is to raise revenue that will be used The government cannot exist without money.
to in defraying government expenses. The government, therefore, has the right to compel
• Non-revenue purposes – taxation may also those within its jurisdiction to pay taxes. This is
be used to achieve certain social and based on the following:
economic objectives, such as the following: • Reciprocal duties of protection and
Regulate inflation support- the government protects the
Minimize the adverse effects of certain activities welfare of its people, in return, the people
Equitable distribution of wealth support the government.
• Benefits received principle- taxes are used
Nature of Taxation for the benefit of the public.
• Inherent power- taxation is one of the three
inherent powers of a sovereign state Aspects of Taxation
(Eminent domain, Police power, and • Levy- tax laws, specifying the object and
Taxation). amount of taxation, are enacted.
• Legislative- tax laws must first be enacted • Collection- tax laws are implemented and
before taxes can be imposed. administered.
• Subject to constitutional and inherent The Bureau of Internal Revenue (BIR) is tasked
limitations- the power of taxation is in collecting national taxes and administering the
considered plenary, subject only to provisions of national tax laws while the Local
constitutional and inherent limitations. This Government is tasked in collecting local taxes
means that the government can tax anything and administering local tax laws.
or anyone within its jurisdiction.
Principles of a sound tax system
Inherent limitations on the power of taxation • Fiscal Adequacy- revenues should be
• Purpose- taxes can only be levied for public sufficient to defray expenditures.
purposes • Theoretical Justice- taxes are proportionate
• Territorial jurisdiction- the government to the taxpayer’s ability to pay.
may levy taxes only on person and properties • Administrative Feasibility- tax laws can be
within its jurisdiction implemented efficiently and effectively,
• Non-delegation of legislative power to avoiding unnecessary inconvenience and
tax- the power to create tax laws rests with confusion on the part of the taxpayers.
the Congress and this power cannot be
delegated, except as expressly allowed by Taxes
law. Taxes are mandatory contributions imposed
• Tax exemption of government entities upon persons and property for the support of the
• International comity- the government may government.
not tax the property belonging to a foreign
government Characteristics of Tax
• It is mandatory.
Constitutional limitations on the power of taxation • It is levied by the lawmaking body.
1. Due process and equal protection of the laws • It is imposed primarily to raise revenues for
2. Rule of uniformity and equity in taxation the government.
3. President’s power to veto tax bills • It is generally payable in money.
4. A law granting any tax exemption needs the • It is proportionate in character.
concurrence of the majority of the members • It is levied on persons and property over
of the Congress which the taxing authority has jurisdiction.
5. Supreme Court’s power to make final • It is levied for public purposes.
judgment on tax cases
6. Non-imprisonment for non-payment of poll Classification of taxes
tax • As to subject matter:
7. Exemption of religious, charitable, or • Personal, capitation or poll
educational entities, non-profit cemeteries, tax- a fixed amount charged
and churches from property taxation to all persons residing within a
 specified territory irrespective has earned income is liable to pay income tax. A
of their occupation or property person who engages in business is liable to pay
(e.g., community tax or business tax, whether or not he/she earns income
cedula). therefrom.
• Property tax- tax imposed on
properties based on their Classification of Individual Income Taxpayers
value or some other method Individual income taxpayers are classified into
of apportionment (e.g., real the following:
estate tax). • Resident citizen- a Filipino citizen residing
• Excise tax- tax imposed permanently in the Philippines.
upon the performance of an • Non-resident citizen- a Filipino citizen
act, the enjoyment of a residing permanently abroad or works
privilege, or the engaging in abroad most of the time (i.e., at least 183
an occupation (e.g., donor’s days during the taxable year).
tax). • Resident alien- a foreigner residing in the
• As to who bears the burden: Philippines.
• Direct tax- tax which the • Non-resident alien- a foreigner not residing
taxpayer must pay and in the Philippines.
cannot shift to another (e.g.,
income tax). Resident citizens are taxed on ALL income they
• Indirect tax- tax which the derive from sources within and outside the
taxpayer can shift to another Philippines.
(e.g., VAT). Nonresident citizens are aliens are taxed only on
• As to determination of the amount: income they derive within the Philippines.
• Ad Valorem- tax based on
the value of the property (e.g., Sources of Income
real estate tax) Classification Within Outside
• Specific- tax based on the Phils. the Phils.
weight, volume, or other
physical unit of measurement 1. Resident citizen  
(e.g., excise tax on wines)
• As to scope: 2. Non-resident citizen  
• National tax- tax levied by
the national government (e.g., 3. Resident alien  
income tax, VAT).
• Local tax- tax levied by the 4. Non-resident alien  
local government (e.g.,
community tax, real estate Income Taxation
tax, etc.).
• As to rate or graduation: Income includes all inflows of wealth to the
• Proportional- tax based on a taxpayer other than those that represents a mere
fixed rate (e.g., VAT). return of capital.
• Progressive- tax based on
an increasing rate as the Gross Income refers to all income derived from
taxable amount increases whatever source, including (but not limited to):
(e.g., income tax). Compensation income
• Regressive- tax based on a Business income, including income from practice of
decreasing rate as the profession
taxable amount increases. Passive income (such as, interest income, and
prizes and winnings.
Income Tax vs. Business Tax
Compensation Income
Income tax is a tax on a person’s income Compensation Income is income that is
derived from employment, business, trade, practice typically derived from employment.
of profession, or from property, after excluding the Salaries- compensation that is normally quoted on a
deductions allowed under the law. per month basis and is paid periodically for the
performance of a regular work.
Business tax is a tax on the production, sale, Wages- compensation that is quoted on a per hour
or consumption of goods and services, leasing of basis and is paid based on the number of hours
property, or other business activities. worked

Simply stated, income tax is a tax on income Note: The (1) personal exemption of
while business tax is tax on business. A person who P50,000, (2) additional exemption of
 P25,000 per dependent child; and (3) the government duties and therefore
premium for health and hospitalization EXEMPT from taxation.
insurance of P2,400 per year had been
REMOVED under the Tax Reform for However, additional compensation
Acceleration and Inclusion (TRAIN) Law. allowance (ACA) received by a
Therefore, the income tax is not imposed government employee is included in
anymore on Taxable Income but on “Other Benefits” and is TAXABLE but
Compensation Income. subject to a limit.

Income Tax Table II. For non-government employees, the

allowances described above are typically
*For the years 2018-2022 TAXABLE, except when:
Annual income Tax rate a. the allowance represents
P250,000 and below None reimbursement for necessary
more than P250,000 to 20% of excess over expenses incurred in the pursuit
P400,000 P250,000 of trade, business, or profession;
P30,000 + and
more than P400,000 to
25% of excess over b. the allowance is subject to
P800,000
P400,000 liquidation.
P130,000 +
more than P800,000 to
30% of excess over III. Allowances and other privileges given to
P2,000,000
P800,000 the employee for the benefit of the
P490,000 + employer are typically EXEMPT from
more than P2,000,000 to
32% of excess over
P8,000,000 taxation.
P2,000,000
P2.41 million +
more than P8,000,000 35% of excess over IV. Benefits given to managerial or
P8,000,000 supervisory employees on account of
their position are subject to fringe
*For the years 2023 onwards benefits tax (e.g., house/housing
Annual income Tax rate assistance, car, maid, driver and the
P250,000 and below None like).
more than P250,000 to 15% of excess over
P400,000 P250,000 2. 13th month pay- is additional compensation
P22,500 + mandated by law to be given to rank-and-file
more than P400,000 to employees (i.e., non-managers). Thirteenth
20% of excess over
P800,000 month pay is equal to an employee’s one (1)
P400,000
P102,500 + month basic salary. However, if the
more than P800,000 to
25% of excess over employee has not worked for the entire year,
P2,000,000
P800,000 this amount is prorated.
P402,500 +
more than P2,000,000 to
30% of excess over Rules:
P8,000,000
P2,000,000 Thirteenth month pay is NOT taxable
P2,202,500 + up to P90,000 under TRAIN Law. Any excess
more than P8,000,000 35% of excess over over this amount is TAXABLE.
P8,000,000
3. Christmas Bonus- is additional
Other Forms of Compensation
compensation provided to the employee at
Aside from salaries and wages, gross
the discretion of the employer. Most often
compensation income may also be in the form of any
than not, the timing of payment of 13th month
of the following:
pay and Christmas bonus coincide.
1. Fixed or Variable Allowances- e.g.,
Rules:
representation allowance, transportation
The Christmas bonus is split into the
allowance, cost of living allowance (COLA),
following:
and the like.
a. Non-performance based bonus (known
as “Other benefits”); and
Rules:
b. Performance based bonus
I. For government employees,
representation and transportation
I. The non-performance based (“Other
allowance (RATA) and personal
Benefits) portion is COMBINED with the
economic relief allowance (PERA) are
13th month pay and subjected to the total
considered reimbursements for
limit of P90,000. Any excess over this
expenses incurred while performing
amount is taxable
 II. The performance-based portion, if the P90,000 limit. Any excess is
received under collective bargaining taxable.
agreement (CBA) and productivity
incentive schemes, is NOT taxable up to 5. Overtime pay- compensation for worked
a limit of P10,000. performed beyond regular working hours.

Rules:
4. De minimis Benefits- are other forms of
I. Meal allowance given to the employee for
benefit that are of relatively small value and overtime work is NOT taxable if it does
are given to employees (rank-and-file and not exceed 25% of the basic minimum
managerial or supervisory) to promote wage. (see item ‘j’ in de minimis benefits)
health, goodwill, contentment, and work II. Reimbursement for transportation cost
efficiency. incurred by the employee in relation to
The following are considered “de minimis” overtime work is NOT taxable.
benefits:
a. Monetized unused vacation leave credits 6. Hazard pay- additional compensation for
of private employees not exceeding 10 employees performing dangerous work.
days during a year.
b. Monetized value of vacation and sick 7. Commission- e.g., percentage of sales
leave credits paid to government officials made by a salesman
and employees
c. Medical cash allowance to dependents of 8. Fees- additional compensation received by
employees not exceeding 1,500 per an employee for service rendered (e.g.,
semester or 250.00 per month director’s fees).
d. Rice subsidy of 2, 000.00 or one sack of
50 kg. rice per month. 9. Honoraria- payment for a service which
e. Uniform and clothing allowance not normally has no set price (e.g., honorarium
exceeding 6, 000 per year given to a guest speaker).
f. Actual medical assistance e.g. medical
allowance to cover medical and 10. Vacation and sick leaves- paid vacation
healthcare needs, annual and sick leaves used by the employee are
medial/executive check-up, maternity TAXABLE.
assistance, and routine consultations,
not exceeding 10, 000 per year. Rules:
g. Laundry allowance not exceeding 300 Unused vacation and/or sick leaves
per month that are MONETIZED (i.e., converted into
h. Employees achievement awards, e.g. for cash) are considered de minimis benefits
a length of service or safety and subject to the following limits:
achievement, which must be in the form a. Monetized unused vacation leave credits
of a tangible personal property other than of private employees not exceeding ten
cash or gift certificate, with an annual (10) days during the year.
monetary value not exceeding 10,000 b. Monetized value of vacation and sick
received by the employee under an leave credits paid to government official
established written plan which does not employees.
discriminate in favor of highly paid
employees 11. Retirement pay- compensation paid to a
i. Gifts are given during Christmas and retiring employee. Retirement pay is
major anniversary celebrations not generally TAXABLE, except in the following
exceeding 5, 000 per employee per year instances:
j. Daily meal allowance for overtime work 1. The retirement pay is paid by the Social
and nigh/graveyard shift not exceeding Security System (SSS), Government
25% of the basic minimum wage on per Service Insurance System (GSIS), or the
region basis United States Veterans Administration;
k. Benefits received by an employee by a 2. The retirement pay is paid by a private
collective bargaining annual monetary employer and:
value received from both CBA and 1. The employer’s retirement plan is
productivity incentive schemes combined approved by the BIR;
do not exceed 10, 000 per employee per 2. The employee has been
taxable year. employed for at least 10 years by
the same employer;
Rules: 3. The employee is at least 50 years
I. De minimis benefits are NOT taxable old at the time of retirement; and
up to the prescribed limits stated 4. The employee is availing the
above. retirement pay for the first time.
II. Any excess de minimis benefits is
considered “Other benefits” and is 12. Separation pay- compensation paid in
included in the “13th month pay and exchange for the termination of an
Other Benefits” and is SUBJECT to employee’s employment other than from
 retirement. compensation concurrently from two or more
employers at any time during the taxable
Rules: year shall file an income tax return.
I. If availed of voluntarily, separation • An individual whose income has been
pay is TAXABLE subject to final tax
II. If availed involuntarily, separation is • A minimum wage earner (MWE) or an
NOT taxable. Examples of individual who is exempt from income tax.
involuntary separation pay include
death, sickness, or disability of the When and where to file and pay?
employee, bankruptcy of the • The return shall be filed, and the tax shall be
employer, and other causes beyond paid on or before April 15 of the year
the control of the employee. following the taxable year.
• For Electronic Filing and Payment System
13. Compensation paid in kind- compensation (eFPS) tax filers, the filing and payment shall
is normally in the form of cash. However, be made electronically through the BIR
there may be instances where the employee website.
receives non-cash items as compensation • For Non-eFPS tax filers, the filing and
for services rendered. Generally, non-cash payment shall be made through any
items are taxed based on their fair market Authorized Agent Bank (AAB) located within
value. If the non-cash item qualifies as de the territorial jurisdiction of the Revenue
minimis benefit, it shall be subjected to its District Office (RDO) where the taxpayer is
respective limits. registered.

Other Exclusions from Compensation Income How to accomplish the form?

The following are allowed deductions from • Provide the required information in CAPITAL
compensation income: LETTERS using black ink. Punctuation
1. Employee contribution for the following: marks, like comma and period, shall likewise
a. Social Security System (SSS)- for private be provided whenever necessary.
employees • Mark applicable boxes with an “X”.
b. Government Service Insurance System • Do NOT write “NONE” or mark any other
(GSIS)- for government employees marks in the box/es.
c. Philippine Health Insurance Corporation • Three (3) copies shall be filed—two (2),
(PhilHealth) including the original copy, for the BIR and
d. Home Development Mutual Fund one (1) as copy of the taxpayer.
(HDMF) or popularly known as Pag-IBIG
(Pagtutulungan sa Kinabukasan: Ikaw,
Bangko, Industriya, at Gobyerno)
e. Union dues
2. Compensation for Injuries or Sickness- received
through Accident or Health Insurance or under
Workmen’s Compensation Acts

Annual Income Tax Return (ITR)—

BIR Form No. 1700

BIR Form No. 1700 is the annual income tax

return applicable to individual taxpayers who are
earning purely compensation income, including non-
business or non-profession income.

Who shall file BIR Form 1700?

• Resident citizen deriving compensation
income from within and outside the
Philippines.
• Resident alien or Non-resident citizen
deriving compensation income from within
the Philippines.

Who are exempt from filing BIR Form 1700?

• An individual earning purely compensation
income, derived within the Philippines and on
which the income tax has been withheld
correctly. However, an individual deriving