Grade 12 ABM: Income Taxation and the National Internal Revenue Code

Comprehensive vocabulary flashcards covering the principles, legal sources, taxpayer classifications, processes, and forms in Philippine income and business taxation.

National Internal Revenue Code (NIRC) of 1997

The primary law governing national internal revenue taxes in the Philippines, enacted as Republic Act No. 8424 (Tax Reform Act of 1997), amended by subsequent laws including the TRAIN Law (RA 10963), CREATE (RA 11534), and EOPT (RA 11976), and enforced by the Bureau of Internal Revenue (BIR).

1987 Philippine Constitution (Article VI, Section 28)

The supreme source of tax rules in the Philippines, ratified by the Filipino people, mandating that the rule of taxation shall be uniform and equitable and that Congress shall evolve a progressive system.

Revenue Regulations (RR)

Formal tax rules issued by the Secretary of Finance upon the recommendation of the BIR Commissioner to implement tax statutes (e.g., RR 11-2018 on withholding tax on compensation and RR 29-2025 on de minimis benefits).

BIR Circulars and Rulings

Official issuances released by the BIR Commissioner that provide specific administrative guidelines and clarifications on how tax rules apply to particular factual situations.

Fiscal Adequacy

A principle of a sound tax system requiring that government revenue must be sufficient to meet public expenditures, including financing schools, hospitals, public roads, and disaster response operations.

Administrative Feasibility

A principle of a sound tax system requiring tax laws to be clear, simple, and convenient to comply with and enforce, without incurring collection costs that exceed the revenue raised.

Theoretical Justice

A principle of a sound tax system requiring that taxes must be fair and apportioned according to the taxpayer's ability to pay, such that higher earners shoulder a greater proportion of the tax burden.

Taxation (Inherent Power of the State)

The inherent sovereign power of the State to raise revenue by imposing enforced levies, subject to the key limitations that the revenue must serve a public purpose and the levy must be uniform and equitable.

Police Power

The inherent power of the State to regulate individual liberty and private property for the promotion of general public welfare and health, limited by reasonableness and requiring no compensation to the property owner.

Eminent Domain

The inherent power of the State to expropriate private property for public use upon the payment of just compensation to the owner.

Regulatory Purpose of Taxation

A non-revenue purpose of taxation utilized to discourage the consumption of harmful goods, such as levying excise taxes on tobacco products, alcohol, and sweetened beverages.

Redistributive Purpose of Taxation

A non-revenue purpose of taxation that seeks to mitigate wealth inequality, demonstrated by applying a progressive income tax structure with a $0\%$ rate on the first $₱250,000$ of taxable income.

Protective Purpose of Taxation

A non-revenue purpose of taxation implemented to shield domestic businesses from foreign competitors through the imposition of customs duties and tariffs on imported merchandise.

Developmental Purpose of Taxation

A non-revenue purpose of taxation intended to encourage capital investment and economic growth through the granting of tax incentives and tax holidays to registered enterprises.

Income Taxation

A tax levied on net earnings and profits accrued by individuals and corporate entities from compensation, trade, business, exercise of a profession, and passive investments, documented via the Income Tax Return (ITR).

Business Taxation

A tax levied on commercial transactions and sales, which includes a $12\%$ Value-Added Tax (VAT) on gross sales exceeding $₱3,000,000$ annually, a $3\%$ percentage tax on non-VAT registered entities, and local business permits and taxes.

BIR Form 1902

The official BIR application form used by individual employees to register and secure a Taxpayer Identification Number (TIN).

BIR Form 1901

The official BIR application form used by self-employed persons, sole proprietors, and professionals to register and acquire a Taxpayer Identification Number (TIN).

Compensation Income

Remuneration received for services performed under an employer-employee relationship, including basic pay, wages, overtime, and allowances, subject to graduated income tax rates and employer withholding.

Passive Income

Earnings derived from investments or capital property without active operational effort by the taxpayer (e.g., bank deposit interest, dividends, and royalties), commonly subjected to a final withholding tax at source.

Capital Gains

Profits realized from the disposition or sale of a capital asset (such as real property or corporate shares), subject to special statutory tax rates like the $6\%$ capital gains tax on real property.

Resident Citizen (Tax Base)

A Filipino citizen residing in the Philippines, taxed on all income earned from sources both inside and outside the territorial boundaries of the Philippines.

Non-Resident Citizen (Tax Base)

A Filipino citizen residing or working outside the Philippines (such as an OFW or seafarer), subject to Philippine income taxation strictly on income derived from Philippine sources.

Direct Taxes

Taxes where the statutory liability and the economic burden reside with the exact same taxpayer and cannot be shifted to another party (e.g., income tax, estate tax, donor's tax, and real property tax).

Indirect Taxes

Taxes formally collected from the seller or vendor but whose actual economic incidence is shifted to the buyer as a component of the retail purchase price (e.g., VAT, excise tax, percentage tax, and customs duties).

Progressive Tax

A tax classification where the tax rate increases as the underlying tax base or income bracket increases, exemplified by the Philippine individual income tax rates ranging from $0\%$ to $35\%$.

Proportional Tax

A tax structure that applies a single, uniform percentage rate across all levels of the tax base, such as the $12\%$ standard VAT rate or the $20\%$ final tax on bank interest.

Regressive Tax

A tax dynamic where the financial burden claims a larger percentage of total earnings from lower-income individuals than from higher-income individuals, an effect commonly produced by flat indirect taxes like VAT.

BIR Form 2316

The Certificate of Compensation Payment / Tax Withheld accomplished annually by an employer for each employee, showing the compensation paid and taxes withheld, furnished to the employee by January 31 and filed with the BIR by the end of February.

Substituted Filing

An administrative arrangement in which an employer's year-end submission of BIR Form 2316 takes the place of an individual Income Tax Return (ITR) for an employee who earned purely compensation income from a single employer and whose tax was accurately withheld.

Part IV-A of BIR Form 2316

The summary section of BIR Form 2316 used to report gross compensation, non-taxable compensation, taxable compensation, tax due, and total taxes withheld.

Part IV-B of BIR Form 2316

The detailed schedule of BIR Form 2316 that provides an itemized breakdown of basic salary, 13th month pay, de minimis benefits, allowances, and statutory contributions extracted from payroll records.

Gross Income (Section 32, NIRC)

All wealth flowing into the taxpayer from whatever source, including compensation, business profits, interest, and dividends, unless expressly excluded by statutory law.

Taxable Income (Section 31, NIRC)

The legal base upon which graduated tax rates are computed, determined as gross income minus statutory exclusions and allowable deductions.

Exclusions from Gross Income (Section 32(B), NIRC)

Statutorily exempt inflows excluded from the gross income computation, including life insurance proceeds paid upon death, gifts and inheritances, compensation for injuries, and mandatory social contributions (GSIS, SSS, PhilHealth, Pag-IBIG).

13th Month Pay and Other Benefits Ceiling

A combined tax-exempt ceiling of up to $₱90,000$ per calendar year under the NIRC, covering mandatory 13th month pay, bonuses, productivity incentives, and excess de minimis benefits.

Minimum-Wage Earners (MWEs) Exemption

A statutory income tax exemption granted to workers receiving the statutory minimum wage, extending to their basic wage, holiday pay, overtime pay, night shift differential, and hazard pay.

De Minimis Benefits

Facilities or privileges of relatively small value furnished by an employer to employees (such as rice subsidies, clothing allowances, and laundry allowances) that are exempt from income tax up to specific regulatory limits under RR 29-2025.

Optional Standard Deduction (OSD)

A simplified deduction method allowing self-employed individuals and corporations to deduct a flat $40\%$ of gross sales or gross receipts instead of presenting itemized expense receipts and books.

8% Income Tax Option

A tax alternative available to purely self-employed individuals and professionals with gross sales or receipts not exceeding $₱3,000,000$, calculated as $8\%$ on gross sales or receipts over $₱250,000$, in lieu of both graduated income tax rates and the $3\%$ percentage tax.

Tax Credit

A dollar-for-dollar (or peso-for-peso) direct reduction against the calculated tax due (such as creditable withholding tax evidenced by BIR Form 2307 or employer-withheld taxes), as contrasted with a deduction which reduces taxable income.