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Chapter I: Overview of Income Taxation Revenue regulations are formal interpretations of Tax

Code provisions promulgated by the Sec. of Finance, upon Fort Bonifacio Dev. Co. v. Commissioner. In case of
Income Tax recommendation of the Commissioner of Internal Revenue conflict between statute and an administrative order, the
pursuant to Sec. 244. former must prevail. A contrary conclusion would mean
Fisher v. Trinidad. Income tax is defined as a tax on all the Commissioner could very well moot the law or
yearly profits arising from property, professions, trades or As RRs are promulgated by the Sec. of Finance, arrogate legislative authority unto himself.
offices, or as a tax on a persons income emoluments, there is permanence and stability in tax laws.
profits and the like. RRs cannot just be changed or amended by Hilado v. Collector. Regulations implementing doubtful
rulings and other administrative issuances signed statutory provisions have strong persuasive force, but they
Income tax is a direct tax on actual or presumed by the Commissioner. are not conclusive upon the courts.
income (gross or net) of taxpayers during the To revoke, modify or amend existing RRs,
taxable year another RR is required. Income Tax Systems

GR: Income tax applies only when the income, profit or BIR Rulings are less formal interpretations of the Tax Code 1. Global Tax Systems
gain is realized or received [Sec. 39(B)]. provisions issued by the Commissioner of Internal Revenue
pursuant to Sec. 4 of the Tax Code. Prevailing until 1981
XPN: When real property classified as a capital asset is sold The total allowable deductions as well as
by a taxpayer, in which case, the law presumes that there Forms of BIR Rulings: personal and additional exemptions, in case of
is a capital gain realized from the sale, and the basis of the individuals, or the total allowable deductions, in
capital gains tax is the gross selling price or fair market a. BIR Rulings case of corporations, are deducted from the
value as determined by the Commissioner whichever is b. VAT Rulings gross income to arrive at the net taxable income
higher (capital gains tax of 6%) c. ITAD rulings Subject to the graduated income tax rates
d. DA rulings ranging from 3% - 70%, in case of individuals, or
When listed shares of stocks of a DC are traded in a local e. Revenue Memorandum Circulars to the tiered income tax 25% and 35%, in case of
stock exchange, the law imposes of 1% stock transaction corporations.
tax (percentage tax), which based on the gross selling price Other sources of tax laws: It does not matter whether the income received
without deducting cost. was classified as compensation income, business
1. Constitution or professional income, passive investment
GR: A final income tax (FIT) may also be imposed on 2. Tax treaties income, capital gain, or other income.
certain one-time transactions like the sale of real property 3. General and Special laws Gross income, deductions, and personal and
classified as capital assets 4. Decisions of the SC and CTA additional exemptions, if any, were declared in
one income tax return, and one set of tax rates
XPN: principal residence of the taxpayer which is exempt Guagua Electric Co. v. Collector. The Tax Code is a special were applied on the net taxable income.
upon satisfaction of certain conditions law which prevails over the NCC, which is a general law.
Formula under the Global Tax System:
Income Tax Law Hilado v. Collector. The Tax Code is classified as civil in
nature and not a political law, hence, it is enforced even GROSS SALES
Philippine income tax law is embodied in Title II during enemy occupation. Less: Sales Discounts
of NIRC and: Sales returns and disallowances
Lorenzo v. Posadas. Although penalties are provided for
(a) Revenue regulations promulgated by the Sec. of violations of the Tax Code, it is not penal law NET SALES
Finance upon recommendation of Commissioner Less: Cost of goods sold or services
of Internal Revenue Mindanao Bus Co. v. Collector. Regulations promulgated
(b) BIR rulings and other administrative issuances in accordance with law have the force and effect of law. GROSS INCOME
signed by the Commissioner of Internal Revenue Less: Deductions
to implement and interpret various provisions of Valerio v. Sec. of Agriculture and Natural Resources. Personal and additional exemptions (for
the tax law Administrative regulations should be given the same force individual)
as rules of court in order to maintain the regularity of
administrative proceedings.
NET TAXABLE INCOME income, and after deducting the sum allowable 2. Residence or Domicile Principle an alien is
deductions from business or professional subject to Philippine income tax because of his
INCOME TAX DUE income, capital gain and passive income, capital residence in the Philippines.
Less Creditable withholding tax gain and other income subject to final tax, in the 3. Source of Income Principle an alien is subject
Quarterly Income Tax Paid case of corporations, as well as personal and to Philippine income tax because he derives
Tax Still Due and Demandable additional exemptions in the case of individual income from sources within the Philippines.
taxpayer, the taxable income is subjected to one
2. Schedular Tax Systems set of graduated tax rates (individual) or normal Types of Philippine Income Tax
corporate income tax (corporation).
Adopted by virtue of B.P. 135 Adopted through E.O. 37 (1 January 1986) 1. Graduated income tax on individuals;
Different types of incomes that are subject to R.A. 8424 (1 January 1988) 2. Normal corporate income tax on corporations;
different sets graduated or flat income tax rates 3. MCIT on corporations;
The applicable tax rates will depend on the Features of the Philippine Income Tax Law 4. Special income tax on certain corporations;
classification of the taxable income and the basis 5. Capital gains tax o sale or exchange of unlisted
could be gross income (w/o deductions) or net 1. Direct tax tax burden is borne by the income shares of stock of a DC classified as a capital
income. recipient upon whom the tax is imposed. asset;
Separate ITR or capital gains tax return, 6. Capital gains tax on sale or exchange of real
whichever is applicable, is filed by the recipient Commissioner v. Tours Specialists, Inc and CTA. Indirect property located in the Philippines classified as a
of income for the particular types of income tax is a tax demanded in the first instance from one person capital asset;
received in the expectation and intention that he can shift the 7. FWT on certain passive investment income;
But no ITR is filed by recipient of passive income burden to someone else. 8. FWT on income payments made non-residents
subject to FTW because the withholding agent is 9. Fringe benefit tax
primarily responsible for the filing of the 2. Progressive tax tax base increases as the tax 10. Branch profit remittance tax
withholding tax return and the payment of final rate increases. 11. Tax on improperly accumulated earnings
tax to the BIR on such income.
This is founded on the ability to pay principle When a person sells a real property classified as
Sison v. Ancheta. The SC upheld the constitutionality of and consistent with the Constitutional provision capital asset located in the Philippines and pays
B.P. 135. There is no legal objection to a broader tax base that Congress shall evolve a progressive system 6% capital gains tax, he will no longer have to
or taxable income by eliminating some deductible items of taxation declare his gain from such sale and pay the
from business or professional income and at the same ordinary income tax based on his net taxable
time reducing the applicable tax rate on compensation 3. Most comprehensive system of imposing income during the year. Only one type of income
income. income tax by adopting the citizenship, tax shall be paid on the transaction.
residence and source principle.
Several ways of imposing FIT on certain incomes subject to 4. Semi-schedular or semi-global systems Western Minolco Corp. v. Commissioner. The 35%
FWT: although certain passive investment incomes, transaction tax on money market transactions under Sec.
capital gains on sales of shares of stock of 210 of the 1977 Tax Code as an income tax on interest
a. Tax base is consideration or fair market value at domestic corporations and real property located earnings of lenders and payers was considered by the SC.
the time of the sale, whichever is higher. in the Philippines, and other incomes subject to
b. Tax base is net capital gain. Whichever is higher, final tax at preferential rates. Marinduque Mining and Industrial Corp. v.
less cost or adjusted basis. 5. American origin authoritative decisions of the Commissioner. The transaction tax, although nominally
c. Tax base is gross income (without any deduction) U.S Courts and officials charged with enforcing categorized as a business tax, is in reality withholding
U.S. Internal Revenue Code have peculiar force (income tax) as positively stated in Letter of Instructions
3. Semi-Schedular or Semi-Global Tax System and persuasive effect for the Philippines. No. 340.

All compensation income, business or Criteria in Imposing Philippine Income Tax The BIR effectively considers the of 1% stock
professional income, capital gain, passive transaction tax under Sec. 127(A), Title V of the
income, and other income not subject to final 1. Citizenship or Nationality Principle citizen of Tax Code as another form of income tax that
tax are added together to arrive at the gross the Philippines is subject to income derived from may be credited against the foreign income tax
sources within and without. liability of a foreign corporation.
Income, Gain or Profit is not Exempt from Tax
When is Income Taxable
The income, gain or profit may be exempt from
Requisites: income tax under Sec. 30(B), Constitution or tax
treaty or a special law.
1. There is income, gain or profit
2. Income, gain, or profit is received or realized GR: In case of doubt, income, gain or tax is taxable
during the taxable year XPN: If there is exemption from tax
3. Income, gain or profit not exempt from income
Provisions of Tax Code Prevail Accounting Principles
Existence of Income, Gain or Profit
All returns required to be filed by the Tax Code
Conwi v. CTA. Income tax in its broadest sense, means all shall be prepared in conformity with the Tax
wealth that flows into the taxpayer other than a mere Code
capital return of capital
RMC No. 22-2004. In case of difference between the
Income is an amount of money coming to a person or provisions of the Tax Code and rules and regulations
corporation within a specified time, whether as payment implementing the Tax Code, on one hand, and the
for services, interest or profit from investment generally accepted accounting principles (GAAP) and the
generally accepted auditing principles (GAAS), on the
Unless otherwise specified, it means cash or its equivalent. other, the provisions of the Tax Code shall prevail.
Income can also be thought of as flow of the fruits of
ones labor. Effects of the Application of Tax Treaties

Payment of loan principal represents mere GR: The provisions of the Tax Code (domestic law) shall
return of capital which is exempt from income apply on the income, gain or profit of any person liable to
tax income tax.

Realization of Receipt of Income XPN: Bilateral tax treaties which the Philippines had
concluded with other Contracting States that may have
GR: A mere increase in the value of the property is not different tax treatments with respect to incomes and rates
income but merely an unrealized increase in capital. A of taxes.
decrease in the value of the property is not allowable as a
deductible loss. In case of conflict of tax treaties and domestic laws, the
former shall prevail.
No income is derived nor a loss incurred by the
owner until after the actual sale or other XPN to XPN: Where the rate of tax imposed under the
disposition of the property in excess of its cost domestic law is lower than the rate imposed under the tax
treaty, the lower tax rate under the domestic law shall
Limpan Investment Corp. v. Commissioner. Income is prevail.
received not only when it is actually handed to a person
but also when it is merely constructively received by him.

Commissioner v. Isabela Cultural Corp. The accrual of

income and expenses is permitted when the All Events
Test has been met because it does not demand the
amount of income or liability be known absolutely