INCOME TAX
These are taxes on a
TAXATION
What is taxation?
Taxation is the imposition of financial charges or other levies, upon a
taxpayer by a state such that failure to pay is punishable by law.
When taxes are not fully paid, civil penalties or criminal penalties may
be imposed on the non-paying entity or individual.
It is a mode by which government make exactions for revenue in
order to support their existence and carry out their legitimate
objectives.
It is the 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 of the
government.
Taxation is the most pervasive and the strongest of all the powers of
the government. Taxes are the lifeblood of the government, without
which, it cannot subsist or continue to exist.
The Four R’s of Taxation
Taxation has four main purposes or effects
Revenue: The taxes raise money to spend on public roads, schools and
hospitals, and on more indirect government functions like market regulation
or legal systems.
Repricing: Taxes are levied to address externalities; for example, tobacco is
taxed to discourage smoking, and a carbon tax discourages use of carbon-
based fuels.
Redistribution: This means transferring wealth from the richer sections of
society to poorer sections.
Representation: Direct taxation (such as income taxes) generates the greatest
degree of accountability and better governance.
INCOME TAXATION is defined as taxes imposed on the income of the
taxpayers from whatever sources it is derived. It is a tax on all yearly profits
arising from property, possessions, trades or offices.
person’s income, emoluments and profits.
CHAPTER 1
GENERAL PRINCIPLES
FEATURES OF PHILIPPINE INCOME TAXATION
TAX SITUS
 Literally means the place of taxation, or the country that has
jurisdiction to levy a particular tax on persons, property, rights
or business
The basis of tax situs is the symbiotic relationship—the state or
unit that gives protection has the right to demand support
SITUS OF PERSONS IN INCOME TAXATION
1. Nationality theory—a citizen of the Philippines is subject to Philippine
income tax on his worldwide income, if he resides in the Philippines; or only
on his income from sources within the Philippines if he qualifies as a non-
resident citizen—hence, his income from sources outside the Philippines shall
be exempt from Philippine income tax
2. Domiciliary theory—legal residence; an alien is subject to Philippine
income tax because of his residence in the Philippines
3. Source—place where the income is derived (based on activity)
PROGRESSIVE V. REGRESSIVE SYSTEM OF TAXATION
 Progressive system of taxation—rate of tax increases as the tax base
or bracket increases
 Regressive system—the rate of tax decreases as the tax base or
bracket increases
NOTE: We don’t have any regressive taxes in the Philippines
GLOBAL V. SCHEDULAR SYSTEM OF TAXATION
Individual income taxation adopted the schedular system of
taxation
 Global system—the total allowable deductions as well as personal
and additional exemptions, in the case of individuals or the total
allowable deductions only, in the case of corporations, are deducted
from the gross income to arrive at the net taxable income subject to
the graduated income tax rates, in the case of individuals, or to the
2-tiered income tax rates, in the case of corporations (all items of
gross income, deductions, and personal and additional exemptions, if
any, are reported in one income tax return, and one set of tax rates
are applied on the tax base)
 Schedular system—a system employed where the income tax
treatment varies and made to depend on the kind or category of the
taxpayer’s taxable income
CHARACTERISTICS OF SCHEDULAR SYSTEM OF TAXATION
1. It accords different tax treatment on the income of the individual taxpayer
2. It classifies income
GENERAL PRINCIPLES OF INCOME TAXATION
WHAT ARE THE GENERAL PRINCIPLES OF INCOME TAXATION?
1. A citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources within
the Philippines;
3. An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income
derived from sources within the Philippines: Provided, That a seaman who is a
citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract
worker;
4. An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources
within and without the Philippines; and
6. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the
Philippines.
(………….INSERT NOTES ON DEFINITIONS……….)
CHAPTER 2
CLASSIFICATION OF INCOME TAXPAYERS
 INDIVIDUALS
CITIZENS
The following are citizens of the Philippines:
(1) Those who are citizens of the Philippines at the time of the
adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who
elect Philippine Citizenship upon reaching the age of majority; and
(4) Those who are naturalized in the accordance with law.
Natural-born citizens are those who are citizens of the Philippines
from birth without having to perform any act to acquire or perfect
their Philippine citizenship. Those who elect Philippine citizenship in
accordance with paragraph (3) above shall be deemed natural born
citizens.
NON-RESIDENT CITIZEN
1. A citizen of the Philippines who establishes to the satisfaction of
the Commissioner the fact of his physical presence abroad with a
definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.
3. A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
 physically present abroad most of the time during the taxable
year.
4. A citizen who has been previously considered as nonresident
citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in
which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
Philippines.
5. The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad
or to return to and reside in the Philippines as the case may be
for purpose of this Section.

 ALIENS

RESIDENT ALIEN
It means an individual whose residence is within the Philippines and
who is not a citizen thereof.

NON-RESIDENT ALIEN
It means an individual whose residence is not within the Philippines
and who is not a citizen thereof.

GENERAL PROFESSIONAL PARTNERSHIP

Are partnerships formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived
from engaging in any trade or business.