Course Code AE26

Description Income Taxation

Pre-Requisites
Department: College of Business and Accountancy Week 5

Income Tax: General Principles Module No. 4

LEARNING OUTCOMES

At the end of this module, the student will be able to:

1. Define income.
2. Describe the nature of income taxation.
3. Determine when income is taxable.

INTRODUCTION

Income taxation is in the nature of an excise taxation system, or taxation on the exercise of
privilege, the privilege to earn yearly profits from various sources. It is a system that does not
provide for the taxation of property (Domondon, 2013).

COURSE CONTENT

INCOME TAX SYSTEMS

1. Global tax system - System employed where the tax system views indifferently the tax
base and generally treats in common all categories of taxable income of the individual (Tan
v. Del Rosario, Jr., 237 SCRA 324, 331).
2. Schedular tax system - System employed where the income tax treatment varies and is
made to depend on the kind or category of taxable income of the taxpayer (Tan v. Del Rosario,
Jr., 237 SCRA 324, 331).
3. 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. After deducting the allowable
deductions and exemptions from the gross income, the taxable income is subjected to one
set of graduated tax rate for individual or normal corporate income tax rate for
corporation (Mamalateo, 2014)

Features of the Philippine Income Tax Law

1. Direct tax - 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 (i.e.
income tax, donor’s tax, estate tax. On the other hand, 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 (i.e. value-added tax) here the seller is liable to pay the output
VAT, but shifts the burden to the buyer).
2. Progressive tax - Tax base increases as the tax rate increases. It is founded on the “ability
to pay” principle.
3. Comprehensive - It adopted the citizenship principle, the residence principle, and the
source principle.
4. Semi-schedular or semi-global tax system (Mamalateo, 2014).
General Principles of Income Taxation in the Philippines. – Except when otherwise provided in

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this Code (NIRC):
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources
within and without the Philippines;
(B) A non-resident citizen is taxable only on income derived from sources within the
Philippines;
(C) 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;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income
derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
(F) 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 (Sec. 24, NIRC as amended).

Kinds of Taxpayers:
1. Individuals
a. Citizen
i. Resident Citizen (RC)
ii. Non-Resident Citizen (NRC)
b. Aliens
i. Resident Alien (RA)
ii. Non-Resident Alien (NRA)
(1) Engaged in Trade or Business (NRA-ETB)
(2) Not Engaged in Trade or Business (NRA-NETB)
iii. Special Alien
c. Special class of individual employees
i. Minimum wage earner
2. Corporations
a. Domestic
b. Foreign
i. Resident foreign corporation (RFC)
ii. Non-resident foreign corporation (NRFC)
c. Joint venture and consortium
d. Partnership
3. Estates
4. Trusts

INCOME TAX

Income tax is a tax on all yearly profits arising from property, profession, trade, or business, or a
tax on person’s income, emoluments, profits and the like (Fisher v. Trinidad, G.R. No. L-19030, October 20, 1922).
It is generally regarded as an excise tax. It is not levied upon persons, property, funds, or profits
but on the privilege of receiving said income or profit.

Purposes of income tax

1. To provide large amounts of revenues
2. To offset regressive sales and consumption taxes 3. To mitigate the evils arising from the
inequality in the distribution of income and wealth which are considered deterrents to
social progress by a progressive scheme of taxation (Madrigal v. Rafferty, G.R . No. 12287, August 8,
1918).

State partnership theory - It is the basis of the government in taxing income. It emanates from its
partnership in the production of income by providing the protection, resources, incentive, and
proper climate for such production (CIR v. Lednicky, G.R. Nos. L-18169, L-18262 & L21434, July 31, 1964)

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 Income
Income refers to all wealth which flows into the taxpayer other than as mere return of capital. It
includes the forms of income specifically described as gains and profits, including gains derived
from the sale or other disposition of capital assets (R.R. No. 2, Sec. 36).

Classification of income
As to source:
1. Gross income and taxable income from sources within the Philippines
2. Gross income and taxable income from sources without the Philippines
3. Income partly within or partly without the Philippines

FOCUS QUESTIONS

1. What is income?
2. What are the features of the Philippine income tax law?
3. What are doctrines/principles of income taxation?

LEARNING ACTIVITIES

A. Individual Oral Recitation.

B. Discussion of relevant examples and cases.

ASSESSMENT

Short Quiz
Direction: Answer Questions 1 to 5 found in the LMS Quiz No. 4 Week No. 5
You will be guided with the instructions provided.

ASSIGNMENT

Assignment No. 4
Answer the following questions:
1. How does the Philippines tax income?
2. Why is it important to know the source of income?

RELATED READINGS / REFERENCES

READINGS/REFERENCES:
• Banggawan, Rex. Income Taxation, Laws, Principles, and Applications. Quezon City,
Rex Bookstore, 2019.

Prepared by: Approved by: Noted by:

Noel Velasco, CPA Roman S. Asiño Rito A. Camigla Jr., EdD.

Faculty Program Chair, College of Business and VP for Academic & Student Affairs
Accountancy

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 PLAGIARISM DECLARATION

I hereby certify that the module AE26 – INCOME TAXATION submitted to Trimex
Colleges is entirely my original work, except where otherwise indicated. I am aware of
the College's rules on plagiarism, including those on disciplinary action that may result
from plagiarism. Any use, in any form whatsoever, of the works of any other author shall
be properly recognized and cited at their point of use.

Signature :

Author’s Name : NOEL VELASCO,CPA

Faculty

Date of submission : July 20, 2020

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