Rationalization on the Gross Income in the

Philippines

By:

Atty. Zehan Loren Emban Tocao, REB

A Research Paper

Submitted in Partial Fulfillment of the

Requirements For the Master Degree in Law

The Graduate College

University of Sto. Thomas

April 17, 2018

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 The first known system of taxation was in Ancient

Egypt around BC 2800 in the first dynasty of the old

kingdom. Also, in Rome earlier taxes were called as

portoria and in England, taxes were first used as

emergency measures. In the Philippines, taxation was

used to support the colony, several taxes and monopolies

were established, the buwis (tribute) which could be paid

in cash or in kind with tobacco, chickens, cotton, rice,

blankets or other products depending on the region of the

country. Also, there was the bandala ( from the tagalog

word mandala, a round stack of rice stalks to be threshed),

an annual forced sale and requisitioning of goods such as

rice.

Taxation is defined in many ways. It is defined as an

inherent power by which the sovereign state imposes

financial burden upon persons and property as a means of

raising revenues in order to defray the necessary expenses

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of government.1 It refers to the imposition of financial

charges or other levies, upon a taxpayer by a state such

that failure to pay is punishable by law and also considered

as a mode by which government make exactions for

revenue in order to support their existence and carry out

their legitimate objectives.2 It can be said that taxation is

the most pervasive and the strongest of all the powers of

the government. Indeed, taxes are the lifeblood of the

government, without which, it cannot subsist.3 Primarily,

the purposes of taxes is to generate funds or revenues use

to defray expenses incurred by the government in

promoting the general welfare of its citizenry and to

equitable contribute to the wealth of the nation, protect

the local producers and new industries.

1
Tax Digest by Cresencio Co-Untian, 2002.
2
Tax Law and Jurisprudence by Justice Vitug, 2000.
3
Commissioner v Pineda, 21 SCRA 105.

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 Presently, the characteristics of Philippine Income Tax

Law is direct where tax is imposed on the income-earner,

progressive where tax base increases as the tax rate

increases, comprehensive where the Philippines adopts the

citizenship principle, residence principle, and the source

principle and the Philippine income tax system is a

combination of the global and schedular systems of

taxation. Here, the compensation income, business or

professional income, capital gain and passive income not

subject to final tax, and other income are added together

to arrive at the gross income, and after deducting the sum

of allowable deductions from business or professional

income, capital gain and passive income not subject to

final tax, and other income, in the case of corporations, as

well as personal and additional exemptions, in the case of

individual taxpayers, the taxable income is subjected to

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one set of graduated tax rates; method of taxation under

the NIRC.

At present, the National Internal Revenue Code of

1997 of the Philippines, as amended, provides that income

tax in general are based on net income of taxpayers

whether corporations orindividuals after deductions in the

gross income. Gross income means all income from

whatever source. All income not expressly excluded or

exempted from the class of taxable income.4 However,

gross receipts do not include money or receipts entrusted

to the taxpayer which do not belong to them and do not

redound to the benefit of the taxpayer.5 Income may

include illegal income or from illegal business like jueteng.

Income means all wealth, which flows into the taxpayer

4
Guiterrez v Collector of Internal Revenue

 5
CIR v Tours Specialists Inc

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other than as a mere return of capital. Taxable income

means the pertinent items of gross income specified in the

Tax Code as amended, less the deductions and/or personal

and additional exemptions, if any, authorized for such

types of income, by the Tax Code or other special laws.

Gross income includes, but is not limited to the following:

 Compensation for services, in whatever form

paid, including but not limited to fees, salaries,

wages, commissions and similar item

 Gross income derived from the conduct of trade

or business or the exercise of profession

 Gains derived from dealings in property

 Interest

 Rents

 Royalties

 Dividends

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  Annuities

 Prizes and winnings

 Pensions

 Partner's distributive share from the net income

of the general professional partnerships

The following are the exclusions from gross income?

 Life insurance

 Amount received by insured as return of premium

 Gifts, bequests and devises

 Compensation for injuries or sickness

 Income exempt under treaty

 Retirement benefits, pensions, gratuities, etc.

 Miscellaneous items

income derived by foreign government

income derived by the government or its political

subdivision

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prizes and awards in sport competition

prizes and awards which met the conditions set in the Tax

Code

13th month pay and other benefits

GSIS, SSS, Medicare and other contributions

gain from the sale of bonds, debentures or other certificate

of indebtedness

gain from redemption of shares in mutual fund

A taxpayer may opt to avail any of the following

allowable deductions from gross income: Optional

Standard Deduction - an amount not exceeding 40% of the

net sales for individuals and gross income for corporations;

or Itemized Deductions Bad Debts. The system of Gross

Income Taxation is utilized for the following incomes:

Certain passive Incomes of Individual citizens and

individual resident alien such as interest cash/property

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dividends and capital gains from sale of real property;

Other kinds of income derived from business, practice of

profession, compensation subject to certain deductions.

Under the National Internal revenue Code provides for a

uniform income tax rate imposed on individuals

irrespective the income is derived from compensation,

business or exercise of profession. Further, the following

are the kinds of gross income taxation: Pure gross income

taxation, tax base is the total gross income of an individual

or corporation during the taxable year without any

deduction. Nonresident alien individual not engaged in

trade or business within the Philippines (interest wages

premiums capital gains a tax equal to 25% of such income;

Alien Individual employed by Regional or Area

Headquarters and Regional Operating Headquarters of

Multinational Companies(interest wages premiums capital

gains a tax equal to 15% of such income; Alien Individual

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Employed by Offshore Banking Units (interest wages

premiums capital gains a tax equal to 15% of such income;

Alien Individual Employed by Petroleum Service Contractor

and Subcontractor (interest wages premiums capital gains

a tax equal to 15% of such income and Adjusted or

modified gross income taxation- the tax base is reduced

by some items of deduction. Gross income derived from

business for corporation shall be equivalent to gross sales

less sales returns, discounts and allowances and cost of

goods sold.

However, there are discussions on whether or not a

System of taxation which is based on the gross rather than

on the net income would be more advantageous. There are

some opinions that the same would be beneficial in the

community considering that it will simplify doing business,

it will be considered as an easy built-in business model not

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only for new enterprises but also even for existing ones so

long as issue invoice with respect to goods or receipt for

the sale of services, the procedure for the computation of

income taxation will be simpler, less discretion will be

allowed to the Bureau of Internal Revenue tax examiners

thereby minimizing graft and corruption in the

government, examination or investigation of tax returns

can be made faster, if coupled with withholding tax system

it would provide for more returns to the government and

the same will entail less administrative work in the Bureau

of Internal Revenue tax examiners. But, unfortunately,

taxpayers may suffer net loss if the rule wherein system

of taxation will be based on gross income rather than on

net income will be observed, the rule on taxation may not

be equitable and uniform and it may serve as a

disincentive to further employment in the community.

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