LESSON 3 – CONCEPT OF INCOME Income from sources WITHIN the Philippines.
- Income within, taxable within
A. Return on Capital
Income is all wealth which flows into a taxpayer other than as
a mere return OF capital. It is therefore a return ON capital
(return on investment).
B. Nontaxable and Taxable Income
 Nontaxable Income – excluded by law or treaty from
taxation, not part of determination of taxable income
and gross income.
 Taxable Income – pertinent items of gross income
specified in the Tax Code less deductions (if any)
and/or personal and additional exemptions
authorized by the Tax Code or other special laws.
C. Characteristics of Taxable Income
 There must be gain or profit.
 The gain must be realized or received.
 The law or treaty does not exclude the gain from
taxation.
1. There must be gain or profit.
- Value received in service or excess of capital invested. If
a debt is cancelled, one must include the cancelled amount
in your gross income, and pay taxes on that “income,” unless
you qualify for an exclusion or exception.
2. The gain must be realized or received.
- Realization may be either in - actual receipt or constructive
receipt.
- Increase in value of property is not income but an
unrealized increase in invested capital.
2.1 Income Constructively Received – income
credited to the account or segregated in favor of a person. It
can be withdrawn anytime without limitations and conditions.
Examples: Interest on savings bank, Matured interest
coupons not yet collected, dividends by corporation, share in
profit of a partner in general professional partnership even
not yet collected, and intended payment in court
(designation).
******Real Property (Capital Asset) sold is subject to
capital gains tax of 6% of the SP or FMV (w/c is higher).
3. The law or treaty does not exclude the gain from taxation.
- General: All income from whatever sources are TAXABLE.
– Exceptions: Unless a law or treaty exempts it from taxation.
D. Sources of Income
Sources are ascribed to the PLACE where it is EARNED. It
is governed by the situs of taxation.
Taxable WITHIN and WITHOUT
– Resident Citizens (RC) and Domestic Corporations (DC).
Taxable WITHIN ONLY
– Non-resident Citizens (NRC), Resident Alien (RA), Non-
resident Alien (NRA) and Foreign Corporations (FC).
Within and Without – RC & DC
Within only – NRC, RA, NRA, FC.
A. Compensation for labor/services derived from PH
B. Interest on bonds, notes, deposits earned in PH
C. Dividends declared received from Domestic Corporation
D. Rentals and royalties from property located within the PH
E. Gains, profits, & income from sale of real and personal property in the PH
Income from sources OUTSIDE the Philippines.
- Income outside, taxable only if the taxpayer is a RC and DC.
- Income outside by NRC and FC is NOT subject to tax in the PH.
A. Compensation for labor/services by Overseas Contract Workers
B. Interest on bonds, notes, deposits earned abroad
C. Dividends declared received from Non Resident Domestic Corporation
D. Rentals and royalties from property located outside the PH
E. Gains, profits, & income from sale of real and personal property outside PH
Income from WITHIN AND OUTSIDE the Philippines.
- Income within and outside the PH from RC and DC is taxable
E. Classification of Income (Income From)
1. Compensation Income – employer-employee relationship
2. Profession or Business Income – sale or receipts
Revenue from Sales Revenue from Profession
Business Income (Gross Profit) Business Income (Gross Profit)
= Sales minus SR, SA, SD, COGS = Gross Receipts minus R, A, D
3. Passive Income – taxpayer waits for the amount. These
are Royalty, Interest, prizes, and winnings
4. Capital Gain – income from sale of assets not used in
business or trade (sale of family home or shares of stock)
Compensation Income Normal Tax
Profession or Business Income Normal Tax
Passive Income Final Tax
Capital Gains Final Tax,
RULE: Income subjected to FINAL TAX; Capital Gains and
Passive Income are NO longer be reported using NORMAL
TAX in the ANNUAL INCOME TAX RETURN (ITR).
 Income Tax Return (ITR) – formal statement of
taxpayer’s taxable income and deductions reported
in BIR prescribed form using NORMAL or
REGULAR TAX RATE.
F. Normal Tax VS. Final Tax
 Normal Tax or Regular/Ordinary/Customary Tax
- Creditable bc it approximates tax due on income
- Earnings OUTSIDE by RC (except OFW) and DC
are subject to NORMAL TAX.
******Regular Tax Rate for Individual effective Jan 1, 2018
until Dec 31, 2022(0%, 20%. 25%, 30%, 32%, 35%)
******Regular Tax Rate for Corporate (30%)
Effective Jan 1, 2023
  Final Tax
- Income subject to complete withholding tax
- Earnings no longer included in Taxable income
subject to regular/normal tax
- Full and Final Payment
- Examples: Interest, Royalty, and Dividend Income
Sales of real property and shares of stock (Capital
Gains on Capital Asset).

G. Forms and Valuation of Income

Income can be received in the form of

- Cash,
- Property,
- Service
- All of the three.

 Cash – money or money substitutes

 Property – right of ownership over tangible and
intangible thing earned
 Service – performance based income

Valuation

1. Cash – Face Value