Midterm Notes

Credit to Atty. C. Llamado

Introduction to Income Tax

Concept of Income Tax

An income tax is one levied on the income from property or an occupation. It is direct tax upon
the thing called income.

Purpose of Income Tax

The imposition of the income tax is intended:

1. To raise revenue to defray the expenses of the government; and

2. To mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation
which places when the burden on those best able to pay.

Meaning of Income

Income means all wealth which flows into the taxpayer other than a mere return of capital.
Income is a gain derived from:

a. The use or employment of labor or capital, or both labor and capital; and/or
b. From the sale or other disposition of assets or property (both ordinary and capital)

Income distinguished from capital?

Capital is a fund, income is a flow. Capital is wealth, while income is the service (or fruit) of
wealth. Capital is the three, income the fruit.

Amounts received as a return of capital are not income those are return of capital.

(Return of capital – getting back what was invested: return on capital – receives more
than the amount that was invested)

Requisites for Taxability of Income

1. There must be a gain or profit whether in cash or its equivalent;

2. The gain must be realized or received; and
3. The gain must not be excluded by law or international treaty from taxation.

Classification of Income According to Source (refers to the activity, or property or labor that gave rise or
produced the income)

1. Income from sources within the Philippines;

2. Income from sources without the Philippines; and
3. Income from sources partly within and partly without the Philippines.
 Situs of Income is the pace of taxation of the income or the country which has jurisdiction to impose
the tax. For income tax purposes, income may be taxed in one or more or all of the following places
or countries.

1. The place where the taxpayer is a citizen;

2. The place where the taxpayer is a resident; and
3. The place where the income is earned o derived.

General Categories of Individual Taxpayers

1. Resident Citizen
a. Citizens at the time of the adoption of the 1987 Constitutions.
b. Those whose fathers and mothers are citizens
c. Those born before Jan 17, 1973 of Filipino mother, and who elect Philippine
citizenship upon reaching majority age or
d. Those who are naturalized in accordance with law and whose residence is
within the Philippines.
2. Non-Resident Citizen
a. Citizen who establishes the fact of his physical presence abroad with a
definite intention to reside therein;
b. Citizen who leaves for abroad either as an immigrant, or for employment on
permanent basis;
c. Citizen who derives from abroad which requires him to be physically present
abroad most of the time (183 days or more during the year.)
3. Overseas Contract Worker
a. Considered as Non Resident Citizen
b. Revenue Regulation 1-2011 defines OCWs as Filipino citizens employed in
foreign countries, commonly referred to as OFWs, who are physically
present in a foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and are not borne
by entities or persons in the Philippines. Hence, OFWs are classified as
nonresident citizens for tax purposes, to be considered as an OCW or OFW,
they must be duly registered as such with the Philippine Overseas
Employment Administration (POEA) with a valid Overseas Employment
Certificate (OEC).
4. Resident Alien
a. Not a citizen but whose residence is within the Philippines
b. Not a mere transient or sojourner as determined by his intention regarding
the nature and length of stay.
5. Non-resident Alien
5.1 NRA Engaged in trade and business if stay in the Philippine is for more than
180 days during the year
5.2 NRA Not Engaged in trade and business if stay in the Philippine for 180 days
or less than during the year.

Minimum wage earner: worker whether in the public or private sector, who is paid not more than the
statutory minimum wage is tax exempt.
Graduated Tax Table

Annual

250,000 and below None (0%)

250,000 to 400,000
400,000 to 800,000
800,000 to 2,000,000
2,000,000 to 8,000,000
Above 8,000,000
20% of excess over 250,000
30,000 + 25% of excess over 400,000
130,000 + 30% of excess over 800,000
490,000 + 32% of excess over 2,000,000
2.41million + 35% of excess over 8million

Monthly

20,833 and below None (0%)

20,833 to 33,332
33,333 to 66,666
66,667 to 166,666
166,667 to 666,666
Over 666,667
20% of excess over 20,833
2,500 + 25% of excess over 33,333
10,833.33 + 30% of excess over 66,667
40,833.33 + 32% of excess over 166,667
200,833.33 + 35% of excess over 666,666

Taxable
W/IN Compensation Gra
Resident Citizen W/O Compensation Income Income     R
Income from Business or
Non Resident Citizen W/IN Practice of Prof Gra
Gross Income Less Deduction
Income from Business or R
Overseas Contract Worker W/IN Practice of Prof
Income from Business or
Resident Alien W/IN Practice of Prof
or Gross Sales / Receipts
Non Resident Alien Engaged in Trade Income from Business or
and Business W/IN Practice of Prof
Non Resident Alien Non Engaged in Income from Business or
plus Non Operating Income
Trade and Business W/IN Practice of Prof

Tax Formula 1

Gross Compensation Income

Less: SSS, PHIC, HDMF, Union dues (Employees Contribution)
Taxable Compensation Income
Used Graduated Tax Table 0% to 35%

Tax Formula 2

Gross Income
Less: Itemized Deduction or 40% Optional Standard Deduction
Taxable Income
Used Graduated Tax Table 0% to 35%
Tax Formula 3

Gross Compensation Income

Add: Net Income from Business or Practice of Profession or Trade
Less: SSS/PHIC/HDMF/Union Dues
Taxable Income
Used Graduated Tax Table 0% to 35%

Tax Formula 4

8% option based on gross sales / receipts plus non operating income