Taxation (2)

TAX

Definition: An enforced proportional contribution levied by the lawmaking body of the state to raise revenue for public purposes.

Elements of Tax

• Enforced Contribution: Compulsory payment by individuals or entities.
• Legally Levied: Imposed by the lawmaking body of the state.
• Proportionate: Based on the ability to pay or a fixed percentage.
• Payable in Money: Generally settled in monetary form.
• Revenue-Raising Purpose: Aimed at generating funds for government use.
• Public Use: Used for the welfare of the public.

Situs of Taxation

Definition: The place of taxation, determined based on certain factors.

Factors Affecting Situs of Taxation

• Subject matter of tax.
• Nature of the tax.
• Citizenship of the taxpayer.
• Residence of the taxpayer.

Applications by Category

• Person: Based on the taxpayer’s residence.
• Real Property/Tangible Personal Property: Location of the property.
• Intangible Personal Property: Owner's domicile unless another situs is established.
• Income: Taxpayer’s residence, citizenship, or place where income is earned.
• Business, Occupation & Transactions: Place where business operates or transaction occurs.
• Gratuitous Transfer of Property: Taxpayer’s residence, citizenship, or property location.

Income

Definition: Wealth flowing into the taxpayer, excluding the return of capital. It includes money or property earned from business, labor, or investments, whether legal or illegal.

Examples: Gains, profits, salary, wages.

Income Tax

Definition: A tax on yearly profits arising from property, profession, trade, business, or passive income such as emoluments, profits, and the like.

Categories of Income

• Compensation Income
• Business Income
• Mixed Income
• Passive Income
• Capital Gains from Sale of Stocks (not traded through a local stock exchange)
• Capital Gains from Sale of Real Properties
• Fringe Benefits

Gross Income

Definition: The total income of a taxpayer subject to tax.

Items of Gross Income

• Compensation for services
• Gross income from trade or business
• Gains from property dealings
• Interest income
• Rent
• Royalties
• Dividends
• Annuities
• Prizes and winnings
• Pensions
• Partner’s distributive share of net income in general partnerships

Taxable Income

Definition: Gross income less authorized deductions specified by the tax code or special laws.

Compensation Income

Definition: Remuneration for services rendered by an employee under an employer-employee relationship, excluding income specifically exempted by law.

Forms of Compensation

• Compensation paid in kind
• Living quarters and meals
• Facilities and privileges of small value (de minimis benefits)
• Tips and gratuities
• Pension, retirement, and separation pay
• Fixed/variable allowances (e.g., transportation, representation)
• Vacation and sick leave allowances
• Deductions made by employers from employee compensation

De Minimis Benefits

Definition: Facilities and privileges of small value provided to employees that are not subject to income tax or withholding tax.

Examples (BIR Guidelines)

• Monetized unused vacation leave credits (up to 10 days/year)
• Medical cash allowance for dependents (₱1,500/semester or ₱250/month)
• Rice subsidy (₱2,000 or one sack of 50kg rice/month)
• Uniform/clothing allowance (₱6,000/year)
• Medical assistance (up to ₱10,000/year)
• Laundry allowance (₱300/month)
• Achievement awards (up to ₱10,000/year)
• Gifts during Christmas or anniversaries (up to ₱5,000/year)
• Daily meal allowance for overtime work (up to 25% of basic minimum wage)
• CBA and productivity incentive benefits (up to ₱10,000/year)