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Tax on all yearly profits arising from property professions, trades or offices, or as a tax on person’s income,
emoluments, profits and the like.
Income tax in a direct tax on actual or presumed income (gross or net) of a taxpayer received, accrued, or
realized during the taxable year, which the law does not expressly exempt from taxation.
Different types of income taxes:
1. Personal income tax on individuals (Sec. 24-25, NIRC)
2. Regular corporate income tax (RCIT) on corporations (Sec. 27 [A], NIRC)
3. Minimum corporate income tax (MCIT) on corporations (Sec. 27 [E], NIRC)
4. Capital gains tax (CGT) on sale of shares of stocks of a domestic corporation by any individual
or corporation, who is not a dealer in securities (Secs. 24 [C], 25[A]3, 27[D][5], NIRC);
5. Tax on passive investment income, such as interest, dividend, and royalty (Secs. 24 [B][1]-[2];
25[A][2]; 27[D][1] AND [3]-[4], NIRC )
6. Fringe Benefits Tax (FBT) (Sec. 33, NIRC)
7. Branch Profit Remittance Tax (BFRT) on Philippine (Ph) branches of foreign corporations
operating in the Ph customs territory (Sec. 27, NIRC)
8. Tax on Improperly Accumulated Earnings Tax (IAET) of corporations (Sec.29, NIRC); and
9. Final Withholding Income Tax (FWT) on certain income from sources within the PH payable
to resident or non resident persons, or to certain special persons.
A taxable transaction shall be subject to only one kind of income tax
e.g: sale of real property located in the Ph, which is classified as a capital asset, by a domestic corporation
shall only be subject to the 6% capital gains tax. Such gain from the sale shall not be included in the gross
income, which is considered in determining the net income subject to the regular or minimum corporate
income tax.
On the other hand, real property classified as an ordinary asset is subject only to the ordinary income tax
under the global tax system, whether the seller is an individual or a corporation.

Income Tax Systems

There are three (3) basic types of income tax systems adopted in the Philippines at varying periods. These
are as follows:

Bar Question (1997)

1. Global Tax System. – Under the global tax system (prevailing until 1981), the total allowable
deductions as well as personal and additional exemptions, in case of individuals, or the total
allowable deductions, in case of corporations, are deducted from the gross income (i.e., sum of all
items of taxable income, profit and gain) to arrive at the net taxable income subject to the
graduated income tax rates ranging from 3% to 70%, in case of individuals, or to the two tiered
income tax rates of 25% and 35%, in the case of corporations. It did not matter whether the income
received by the taxpayer was classified as compensation income, business or professional income,
passive investment income (e.g., interest, royalty, or dividend), capital gain, or other income. All
items of gross income, deductions, and personal and additional exemptions, if any, were declared
in one income tax return, and one set of tax rates were applied on the net taxable income.
The formula for computing income tax under the global tax system shall be as follows:
Gross sales xxx
Less: Sales discounts xxx
Sales returns and allowances xxx xxx
Net sales xxx
Less: Cost of goods sold or services xxx
Gross income xxx
Less: Deductions xxx
Personal and additional exemptions (for individual) xxx xxx
Net taxable income xxx
Income tax due xxx
Less: Creditable withholding tax xxx
Special creditable income tax xxx
Quarterly income tax paid xxx xxx
Tax still due and demandable xxx

2. Schedular Tax System. — Under the schedular tax system, adopted by the Philippines by virtue
of Batas Pambansa Big. 135, there are different types of incomes that are subject to different sets
of graduated or flat income tax rates. The applicable tax rate(s) will depend on the classification
of the taxable income and the basis could be gross income (without deductions) or net income (i.e.,
gross income less allowable deductions). Separate income tax return or capital gains tax return,
whichever is applicable, is filed by the recipient of income for the particular types of income
received, but no income tax return is filed by the recipient of passive income subject to final
withholding tax because the withholding agent is primarily responsible for the filing of the
withholding tax return and the payment of final tax to the BIR on such income.1

 In Sison vs. Ancheta (G.R. No. 59431, July 25, 1984), Sison assailed the constitutionality of Batas
Pambansa Big. 135, claiming that by the imposition of higher tax rates (5% to 60%) upon his
income derived from the exercise of his profession, he would be unduly discriminated against
compared to those imposed upon compensation income earners (0% to 35%). The Supreme Court
ruled in favor of the constitutionality of said law. The court said that there is no legal objection to

1 On January 1, 1982, Batas Pambansa Big. 135 adopted the schedular tax system and introduced for the first time the gross income
taxation on compensation income of individuals, wherein the adjusted gross compensation income, after deducting personal and
additional exemptions, is subject to the graduated tax rates ranging from 0% to 35%. Business, professional, and other incomes,
net of allowable deductions, are subject to the graduated tax rates ranging from 5% to 60%. Capital gains from sale of shares of
stock of domestic corporations and real property as well as passive investment incomes are subject to final withholding taxes at
preferential rates. The schedular tax system was enforced from January 1, 1982 to December 31, 1985.
a broader tax base or taxable income by eliminating some deductible items from business or
professional income and at the same time reducing the applicable tax rate on compensation income.

Taxpayers may be classified into different categories. It is enough that the classification must
rest upon substantial distinctions that make real differences. Taxpayers who receive
compensation income are set apart as a class. As there is practically no overhead expense on earning
salaries, these taxpayers are not entitled to make deductions because they are in the same situation,
more or less. In the case of professionals and businessmen, however, there is no uniformity in the
costs and expenses necessary to produce their income. It would not be just then to disregard the
disparities (between individuals deriving compensation income and business/professional income)
by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on
the basis of gross income.
Under the schedular tax system, there are several ways of imposing final income tax on certain
incomes subject to final withholding tax. Thus:
a. Tax base is consideration or fair market value at the time of sale, whichever is higher.
Sale of real property classified as capital asset P900,000
Fair market value of real property 800,000
Income tax due: P900,000 x 6% P540,000

b. Tax base is net capital gain (i.e.. gross selling price or fair market value, whichever is higher,
less cost or adjusted basis).
Sale of unlisted shares of stocks of ABC Corp. P10,000
Cost 5,000
Income tax due:

Selling price P10,000

Less: Cost 5,000
Gain P 5,000
Multiplied by: x 5%
Capital gains tax P 250

c. Tax base is gross income (without any deduction)

Gross interest income on bank peso deposit P1,000
Multiplied by: x 20%
Final withholding tax P200

Gross dividend income from domestic corporation P50,000

received by resident citizen
Multiplied by: x 10%
Final withholding tax P5.000

3. Semi-Schedular or Semi-Global Tax System. — Under the semi-schedular or semi-global tax

system, all compensation income, business or professional income, capital gain, passive income,
and other income not subject to final tax 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, and other income not subject to final tax, in the case of corporation, as well
as personal and additional exemptions, in the case of individual taxpayer, the taxable income {i.e.,
gross income less allowable deductions and exemptions) is subjected to one set of graduated tax
rates (if an individual) or normal corporate income tax rate (if a corporation). With respect to the
above incomes not subject to final withholding tax, the computation of income tax is "global."

However, passive investment incomes subject to final tax and capital gains from the sale
or transfer of shares of stocks of a domestic corporation and real properties remain subject to
different sets of tax rates and covered by different tax returns.

On January 1,1986, the Philippines, through Executive Order No. 37, adopted the semi-
schedular or semi-global tax system and reduced the range of graduated tax rates applied on the net
taxable income of self-employed and professionals from 5% to 60% to 0% to 35%, but it increased
the preferential tax rates on capital gains and passive investment incomes.

On January 1, 1998, the Congress of the Philippines enacted Republic Act No. 8424, which
introduced some structural and administrative reforms. Said law retains the semi-schedular or
semiglobal features of the existing tax system with some refinements. The number of tax brackets
was reduced from ten to six, tax rates were made in multiples of five, and the maximum rate of tax
was reduced by 1% every year. Thus, the maximum rate of tax for 1998 was 34%; for 1999, 33%;
for 2000 and subsequent years, 32%. R.A. No. 9337 increased the corporate income tax rate to 35%
beginning November 1, 2005 but reduced the corporate income tax rate to 30% effective January
1, 2009
To summarize, either (a) the global tax system, or (b) the schedular tax system, or both
(c) the global and schedular tax systems, may be applied, depending on the nature of the income
realized by the taxpayer during the year.

Bar Question (1994)

Distinguish “schedular treatment” from “global treatment” as used in income taxation.
Suggested answer:
Under a schedular system, the various types/items of income (e.g., compensation;
business/professional income) are classified accordingly and are accorded different tax
treatments, in accordance with schedules characterized by graduated tax rates. Since these types
of income are treated separately, the allowable deductions shall likewise vary for each type of
Under the global system, all income received by the taxpayer are grouped together, without any
distinction as to the type or nature of the income, and after deducting therefrom expenses and
other allowable deductions, are subjected to tax at a graduated or fixed rate.

Bar Question (1997)

a) Discuss the meaning of the global and schedular systems of taxation.
b) To which system would you say that the method of taxation under the National
Internal Revenue Code belongs?

Suggested answer:
a) A global system of taxation is one where the taxpayer is required to lump up all
items of income earned during a taxable period and pay tax under a single set of
income tax rates on these different items of income

A schedular system of taxation provides for a different tax treatment of different

types of income so that a separate tax return is required to be filed for each type
of income and the tax is computed on a per return or per schedule basis.

b) The current method of taxation under the Tax Code belongs to a system which is
partly schedular and partly global.

Features of the Income Tax law

Bar Question (1996, 1994)
1. Income tax is a “direct tax” because the tax burden is borne by the income recipient
upon whom the tax is imposed. It is a tax demanded from the very person who, it is
intended or desired, should pay it, while “indirect tax” is a tax demanded in the first
instance from one person in the expectation and intention that he can shift the burden
to someone else (Commissioner v. Tours Specialists, 183 SCRA 402).

2. Income tax is progressive tax, since the tax base increases as the tax rate increases.
It is founded on the ability to pay principle and is consistent with the Constitutional
provision that “Congress shall evolve a progressive system of taxation” (Sec. 28[1],
Art. III, 1987 Constitution).

3. The Philippines has adopted the most comprehensive system of imposing income tax
by adopting the citizenship principle, the residence principle, and the source
principle. Any one of the three principles is enough to justify the imposition of
income tax on the income of a resident citizen and domestic corporation that are
taxed on worldwide income. Other types of taxpayers (individual or corporation) are
taxed only on their income from sources within the Philippines beginning January 1,
1998 following the “territoriality principle.”
4. The Philippines follows the semi-schedular or semi-global system of income
taxation, although certain passive investment incomes and capital gains from sale of
capital assets, namely: (a) shares of stock of domestic corporations; and (b) real
property are subject to final taxes at preferential tax rates.

5. The Philippine income tax law is a law of American origin. Thus, the authoritative
decision of the American official charged with enforcing the U.S. Internal Revenue
Code has peculiar force and persuasive effect for the Philippines. Great weight
should be given to the construction placed upon a revenue law, whose meaning is
doubtful, by the department charged with its execution.

Bar Question (1996)

(1) What are the basic features of the present “income tax system”
Suggested answer:
Our present income tax system can be said to have the following basic features:
a. It has adopted a comprehensive tax situs by using the nationality,
residence, and source rules. This makes citizens and resident aliens taxable
on their income derived from all sources while non-resident aliens are
taxed only on their income derived from within the Philippines. Domestic
corporations are also taxed on universal income while foreign
corporations are taxed only on income from within.

[NOTE: if the same question is asked today, the answer should be:
Resident citizens and domestic corporations are subject to tax on their
worldwide income, while the other types of taxpayer (whether individual
or corporation) are taxed only from sources within the Philippines
beginning January 1, 1998 under R.A 8424]

b. The individual income tax system is mainly progressive in nature in that it

provides graduated rates of income tax. Corporations in general are taxed
at a flat rate of 35% on net income. [NOTE: The corporate tax rate was
reduced to 34% in 1998, 33% in 1999, and 32% beginning January 1, 2000
under R.A. 8424. The corporate tax rate was increased to 35% effective
November 1, 2005 and was reduced to 30%, starting January 1, 2009,
under R.A. 9337 starting November 1, 2005.]

c. It has retained more schedular than global features with respect to

individual taxpayers but has maintained a more global treatment on
Bar Question (1994)
Distinguish a direct tax from an indirect tax.
Suggested answer:
A “direct tax” is one in which the taxpayer who pays the tax is directly liable therefor; that
is, the burden of paying the tax falls directly on the person paying the tax. The impact and incidence
of taxation remain with the person upon whom the tax was imposed.
An “indirect tax” is one paid by a person who is not directly liable therefor, and who may
therefore shift or pass on the tax to another person or entity, which ultimately assumes the tax
burden (Maceda v. Macaraig, 197 SCRA 771). In this case, the impact of taxation is with the
taxable seller of goods or service, while incidence of taxation rests with the final consumer.

Criteria in Imposing Income Tax

1. Citizenship Principle. – A citizen of the Philippines is subject to Philippine income tax
(a) on his worldwide income from within and without the Philippines, if he resides in the
Philippines, or (b) only on his income from sources within the Philippines, if he qualifies
as a non-resident citizen; hence, the income of a non-resident citizen from sources outside
the Philippines shall be exempt from Philippine income tax.

2. Residence Principle. – An alien was subject to Philippine income tax on his worldwide
income because of his residence in the Philippines. This principle was copied from the
United States income tax law, but was discarded in R.A 8424 (1998) in view of the
complexity in tax administration it brings. Thus, an alien (whether resident or non-resident)
is now liable to pay Philippine income tax only on his income from sources within the
Philippines and is exempt from tax on his income from sources outside the Philippines.

3. Source Principle. – An alien or foreign corporation is subject to Philippine income tax

because he derives income from sources within the Philippines. Thus, a non-resident alien
or non-resident foreign corporation is liable to pay Philippine income tax on his income
from sources within the Philippines, such as dividend, interest, rent, or royalty, despite the
fact the he has not set foot in the Philippines.

When is income taxable?

Bar Question (2011)
Income, gain or profit is subject to income tax, when the following requisites are present:
a. The money or property received is income, gain or profit (and not return of

b. The income, gain or profit is received (actually or constructively), accrued, or

realized during the taxable year, and
c. The income, gain or profit is not exempt from tax under Constitution, treaty or
Return or recovery of capital is not subject to income tax. Thus, payment of loan
principal is exempt from income tax. Only the interest earned on the loan is subject
to income tax. Also, cost of sales of manufacturers and dealers of goods or properties,
which represents return of capital, is not subject to income tax.
The income, gain or profit is taxable to the person who earns the income, who
is generally the recipient thereof. In the case of fringe benefits paid to a supervisory
or managerial employee, the person taxed is the employee, but the employer is
required under the law to assume the payment of the fringe benefit tax in behalf of
said employee. Such employee is, however, allowed to claim as business expense
deduction the grossed-up monetary value, consisting of the value of the fringe
benefits and the FBT paid theron.