TAXATION REVIEW

Module II – INCOME TAX

 GUIDE
1. Is this income? If not, then it’s not really an income tax problem.
2. Who’s the taxpayer? And what’s the source of income?
3. What’s the Specific Rate?
 Income Tax Systems
• Global (Unitary) Tax System –all items of GI, deductions and exemptions
are reported in one income tax return and a single tax is imposed on all
income received or earned, regardless of the activities which produced the
same.
• Schedular – different types of activities are subjected to different types of
tax rates. (depends on classification of TI and the activities which produced
the same.
• Semi-global and semi-schedular
Who is a Taxpayer
a. Kris Konejero is a resident citizen; taxable
within and without
b. Klaus Kloner is a resident alien; taxable for
income derived within;
c. Krisanto is a nonresident citizen; taxable
for income derived within the Phils (Section
22 (E) (2)
d. Kamilo is a nonresident citizen; taxable for
income derived within the Phils regardless of
payment; (Section 22 (E ) (3). Hence, income
derived from Taipei Taiwan is not taxable in
the Philippines.
e. Karen is a nonresident citizen for the
taxable year in which he arrives in the
Philippines with respect to income derived
from abroad until the date of his arrival in the
Phils (Section 22 (E ) (3)
SEE SECTION 51 FOR FILING OF
RETURNS
 SOURCE OF INCOME
• It is the place of activity creating the income which is controlling and not the
place of business or residence of a corporation.
• When the sale is consummated within the Philippines (as in the title to the
property was transferred in the country), the situs of the sale is in the
Philippines and is therefore taxable here. ( A. Soriano Y. Cia vs CIR, GR No.
L-5896, August 31, 1955)
Income Test of Source of Income
Interest Income Residence of Debtor
Dividend Income:
1.) From Domestic Corporation Income within

2.) From Foreign Corporation Income within, if 50% or more of the gross income
of the FC (for the past 3 years) was derived from
sources within the Philippines. Otherwise, income
within

Service Income Place of Performance

Rent Income Location of Property
Royalty Income Place of use of Intangible
Gain on Sale of Real Property Location of Property
Gain on Sale of Personal Property Place of Sale
Gain on Sale of Domestic Shares of Stock Income within
 WHAT IS INCOME? WHAT IS CAPITAL?
• Capital is a fund. Income is a flow.
• Income is all wealth which flows to the taxpayer other than a mere return of capital. It includes earnings,
lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay
and without restriction as to their disposition.
Tests
1. Realization Principle
2. Claim of Right Doctrine
3. Economic Benefit Theory
4. Severance Test Theory
5. All-events Test (Accrual)
Gross Income = Income less Exclusions

Net or Taxable Income = Gross Income less Allowable Deductions

Taxable Compensation Income = Gross compensation less Personal and

Additional Exemptions

Income Tax Due = Taxable or Net Income multiplied by Income Tax Rate

Income Tax Payable = Income Tax Due less Creditable Withholding Tax or Tax
Credit
Doctrine of Constructive Receipt of Income:

Income which is credited to the account of and set apart

for a taxpayer and which may be drawn by him at any
time is subject to tax for the year during which it was so
credited or set apart although not yet then actually
received or reduced to his possession. To constitute
receipt in such case, the income must be credited to the
taxpayer, without any substantial limitation or condition
upon which payment is to be made.
 GROSS INCOME
(Sec 32)
• Except when otherwise provided in this Title, gross income means all income derived from
whatever source, including (but not limited to) the following items:
a. Compensation for services in whatever form paid
b. Gross income from the conduct of trade or business or the exercise of profession
c. Gains from dealings in property
d. Interests
e. Rents
f. Royalties
g. Dividends
h. Annuities
i. Prized and winnings
j. Pensions
k. Partners distributive share from the net income of the general professional partnershipa
 Income from Whatever Source
• Treasure found or punitive damages representing profits lost
• Amounts received by mistake
• Cancellation of the taxpayer’s indebtedness
• Payment of usurious interest
• Illegal gains
• Tax Refund
• Bad Debt Recovery (Take note of Tax Benefit Rule)
 Exclusions
1. Proceeds of life insurance
2. Amount received as return of premium
3. Gifts, bequests and devises
4. Compensation for injuries and sickness (except recovery for lost profits)
5. Income Exempt Under Treaty
6. Retirement Benefits, pensions, gratuities
7. Other Miscellaneous Items
 Retirement Benefits, Pensions, Gratuities
1. Retirement Benefits Received by Officials and Employees of Private Firms, Individuals or Corporations
2. Retirement benefits paid to employees who have reached the age of 60 or more but not beyond 65 years with at
least 5 years of credited service
3. Separation benefits due to death, sickness or other physical disability or for any cause beyond the control of the
said official or employee
4. Social Security benefits, retirement gratuities received by resident or non-resident citizens from foreign
government agencies and other private or public institutions.
5. Benefits received from US Veterans Administration by veterans residing in the Philippines
6. Payment of Benefits under the SSS
7. Benefits received from the GSIS under RA 8291
 Other Exclusions (Miscellaneous)
1. Income received by foreign governments from their investments in the Philippines
2. Income derived by the Government of the Phils or any political subdivision from any public utility r from the exercise of
any essential governmental function
3. Prizes and awards (under certain conditions)
4. Prizes and awards in sports competition granted to athletes whether held in the Philippines or abroad and sanctioned by
their national sports associations
5. 13th month pay and other benefits ( up to 90,000)
6. GSIS, Medicare and other contributions
7. Gains from redemption shares in Mutual Fund Company

(Note: There are also ta-exempt income under special law.

  Classifications of Income Subject to Philippine Income Tax

1. Compensation Income – income which is derived from the rendering of

services under an employer-employee relationship.
2. Professional Income – fees derived from engaging in an endeavor
requiring special training as professional as a means of livelihood, which
includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers
and the like.
3. Business Income – gains or profits derived from rendering services,
selling merchandise, manufacturing products, farming and long-term
construction contracts
4. Passive Income – income in which the taxpayer merely waits for the
amount to come in. It includes, but is not limited to, interest income,
royalty income, dividend income, winnings and prizes.
5. Capital Gain – gain from dealings in capital assets
THREE KINDS OF INCOME

1. CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX

2. PASSIVE INCOME SUBJECT TO FINAL TAX
3. OTHER INCOME (RESIDUAL INCOME) WHICH IS NEITHER
CAPITAL GAIN NOR PASSIVE INCOME
a. Compensation Income
b. Business Income
c. Professional Income
d. Sale or Exchange of Property which is not subject to the capital gain
tax
CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX
PASSIVE INCOME SUBJECT TO FINAL TAX

Final tax means tax withheld from source, and the amount received by the income earner is net of tax already
INDIVIDUAL INCOME TAXATION