Contents

Concept of Gross Income.............................................................................................1

Types of Income Taxpayers.........................................................................................3
The General Rules in Income Taxation........................................................................7
The Income Tax Situs Rules........................................................................................7

Concept of Gross Income

Income tax systems:

a) Global tax system

A system employed where the tax system views indifferently the tax base and generally
treats in common all categories of taxable income of the individual.

 It generally provides for uniform rules.

 It generally imposes uniform tax rate.
 It does not generally classify income.

b) Schedular tax system

A system employed where the income tax treatment varies and is made to depend on the
kind or category of taxable income of the taxpayer. It itemizes the different incomes and
provides for varied percentages of taxes, to be applied thereto.

 It classifies income.
 It provides different tax rules.
 It imposes different tax rates.

c) Semi-schedular or semi-global tax system

This is adapted in the Philippine setting. It is a system which provides:

(a) Taxable Income for an individual is subjected to graduated rates; and

(b) Taxable Income for a Corporation is subjected to one normal corporate income tax rate.

Global Schedular
Rate Unitary or single rate Different tax rates
Categories No need for classification as all
of taxable taxpayers are subjected to a Different categories of taxable income
income single rate
Use Corporation Individuals
Rules Uniform rules Different rules
Features of income tax law:
a) Direct Tax: Tax burden is borne by the income recipient upon whom the tax is imposed.
b) Progressive: Tax rate increases as the tax base increases.
 Progressivity of taxation is also mandated by the Constitution. Our income tax system
is one good example of such progressivity because it is built on the principle of the
taxpayer’s ability to pay. Taxation is progressive when its rate goes up depending on
the resources of the person affected. (Reyes vs. Almanzor, G.R. Nos. 49839-46, April
26, 1991).
c) Comprehensive: The income tax is imposed on practically all forms of income
irrespective of nature, whether compensation.
d) Semi-schedular or semi-global tax system: Taxable income (i.e. gross income less
allowable deductions and exemptions) is subjected to graduated tax rates (if an
individual) or one normal corporate income tax rate (if a corporation).
The essential difference between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called capital. A flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time is called an income. Capital is
wealth, while income is the service of wealth.
The Supreme Court of Georgia expresses the thought in the following figurative language:
"The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital
is a tree, income the fruit." (Waring vs. City of Savannah [1878], 60 Ga., 93.) A tax on
income is not a tax on property. "Income," as here used, can be defined as "profits or
gains."1

Definition: An income is the return in money from one's business, labor, or capital invested;
gains, profit or private revenue. (Black’s Law Dictionary)

An income may be defined as the gain derived from capital, from labor, or from both
combined, provided it be understood to include profit gained through a sale or conversion of
capital assets (Eisner vs. Macomber, 252 U.S., 189)

When income is taxable:

1) There must be gain or profit

 Income tax only applies only when there is income, gain or profit. Income, in its broad
sense, means all wealth that flows into the taxpayer other than as a mere return of
capital. Unless otherwise specified, it means cash or its equivalent.
2) The gain must be realized or received
3) The gain must not be excluded by law or treaty from taxation.

Gross Income

1
Madrigal v. Rafferty G.R. No. L-12287 August 7, 1918
Definition: All income derived from whatever source, including (but not limited to) the
following items:

1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar items;
2. Gross income derived from the conduct of trade of business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and,
11. Partner’s distributive share from the net income of the general professional partnership.
(Sec. 32[A] of the NIRC)

Concept of income from whatever source derived

All income not expressly excluded or exempted from the class of taxable income,
irrespective of the voluntary or involuntary action of the taxpayer in producing the income,
and regardless of the source of income, is taxable. (Guitierrez v. CIR, CTA Case No. 65,
August 31, 1995)

It may be legal or illegal.

Examples of income from whatever source

1. Amount of received by mistake
2. Payment of usurious interest
3. Illegal gains
4. Bad debts recovery
5. Tax refund claimed as deduction from gross income in the preceding year

Types of Income Taxpayers

Summary
Individuals Corporations Others
Joint Venture and
Resident Citizen Domestic corporation
Consortium
Nonresident Citizen Resident foreign corporation Partnership
Resident Alien Nonresident foreign corporation Estate
Nonresident alien not engaged
Trust
in trade or business
Nonresident alien engaged in
trade or business
Minimum wage earners
a) Individual taxpayers

(i) Citizens

(a) Resident Citizens- citizen of the Philippines residing in the Philippines

 TAXABILITY: Taxed on WORLWIDE (within and without the Philippines) income. Based
on the graduated rate of 0%-35% of the NET taxable income.

(b) Non-Resident Citizens- Filipino citizen who:

 Establishes to the satisfaction of the Commissioner the fact of his physical presence
abroad with a definite intention to reside therein.
 Leaves the Philippines during the taxable year to reside abroad, either as an immigrant
or for employment on a permanent basis.
 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. “Most of the time”
meaning at least 183 days.
 Has been previously considered as non-resident 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 non-resident 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 (Section 22[E], NIRC).

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.

 TAXABILITY: Taxed on income sourced WITHIN the Philippines. Based on the

graduated rate of 0%-35% of the NET taxable income.

(ii) Aliens

(a) Resident Alien- Individual who not a citizen but resides in the Philippines

 TAXABILITY: Taxed on income sourced WITHIN the Philippines. Based on the

graduated rate of 0%-35% of the NET taxable income.

(b) Non-Resident Aliens

(1) Engaged in trade or business -Individual who is not a citizen, with residence outside
the Philippines, but:

 Engages in trade and/or business in the Philippines (Principle of habituality in

commercial transactions).
 Exercises a profession in the Philippines.
 Comes to and stays in the Philippines for an aggregate period of more than 180 days
during any calendar year (Revenue Regulation 2-98).

 TAXABILITY: Taxed on income sourced WITHIN the Philippines. Based on the

graduated rate of 0%-35% of the NET taxable income.
(2) Not engaged in trade or business- Individual who is not a citizen, with residence
outside the Philippines and does not perform any of the above-mentioned.

 TAXABILITY: Taxed on income sourced WITHIN the Philippines. Based on the fixed
rate of 25% of the GROSS income.

(iii) Special Class of Individual Employees - Minimum Wage Earner (MWE)

 Worker in the private sector paid the statutory minimum wage or an employee in the
public sector with compensation income of not more than the statutory minimum wage in
the non-agricultural sector where he/she assigned.

 TAXABILITY: MWEs shall be exempt from the payment of income tax on their taxable
income. The holiday pay, overtime pay, night shift differential pay and hazard pay
received by such minimum wage earners shall likewise be exempt from income tax.

Summary for Individual taxpayers:

Income
Kind Tax rate Tax base
source
Worldwide
(within
Resident Citizen
and
without)
Nonresident Citizen 0% - 35% Net taxable income
Resident Alien
Nonresident alien not
engaged in trade or Within
business
Nonresident alien
engaged in trade or 25% Gross income
business
Worldwide
(within
Minimum wage earners Exempt
and
without)

b) Corporations

(i) Domestic Corporations- A corporation created or organized in the Philippines or under

its laws.

 TAXABILITY: Taxed on WORLWIDE (within and without the Philippines) income. Based
on the fixed rate of 30% of its NET taxable income.

(ii) Foreign Corporations

(a) Resident Foreign Corporations- A corporation which is not domestic and engaged in
trade or business in the Philippines.

 TAXABILITY: Taxed on income sourced WITHIN the Philippines. Based on the fixed
rate of 30% of its NET taxable income.

(b) Non-Resident Foreign Corporations- A corporation which is not domestic and not
engaged in trade or business in the Philippines.

 TAXABILITY: Taxed on income sourced WITHIN the Philippines. Based on the fixed
rate of 30% of its GROSS income (subject to final withholding tax).

(iii) Joint Venture and Consortium- Under the Philippine setting on taxation, the term
“corporation” includes joint stock companies, joint ventures and consortia.

 TAXABILITY:
General rule: Taxable as corporations
Exception: Joint ventures or consortium formed for the purpose of undertaking a
construction project or engaging in petroleum, coal, geothermal and other energy
operation pursuant to an operating consortium agreement under service contract with
the government - EXEMPT from income tax.

c) Partnerships- Under the Philippine setting on taxation, the term “corporation” likewise
includes partnerships no matter how created or organized.

 TAXABILITY:
General rule: Taxable as corporations
Exception: General professional partnerships - EXEMPT from income tax (Sec. 26,
NIRC).

d) General Professional 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 (Section 22B, NIRC).

 Share of the partners in the profits derived by the GPP will be taxed to me
individually.

e) Estates and Trusts

Estate – refers to the mass of properties left by a deceased person.

Trust – a right to the property, whether real or personal, held by one person for the benefit of
another.

 TAXABILITY: Taxed as an individual

Summary for Corporations and other taxpayers:

Kind Income source Tax rate Tax base

Worldwide (within Net taxable income
Domestic corporation 30%
and without)
Resident foreign Within 30%
corporation
 Kind Income source Tax rate Tax base
30% (final WHT,
Nonresident foreign
subject to tax Gross income
corporation
treaty)
30%
Joint ventures Except: (see
above)
Worldwide (within
Net taxable income
and without) 30%
Partnership
Except: GPP
Estates and Trusts 5%-32%

The General Rules in Income Taxation2

 A citizen of the Philippines, residing therein is taxable on all income derived from sources
within and without the Philippines
 A non-resident citizen is taxable only on income derived from sources within the
Philippines
 An individual citizen of the Philippines who is working and deriving income from abroad
as an Overseas Filipino Worker is taxable only on income from sources within the
Philippines: Provided that a seaman who is a citizen of the Philippines and receives
compensation abroad as a member of the complement of a vessel engaged exclusively
in international trade shall be treated as an overseas contract worker.
 An alien individual whether as resident or not of the Philippines is taxable only on income
derived from sources within the Philippines.
 A domestic corporation is taxable on all income derived from sources within and without
the Philippines
 A foreign corporation whether engaged or not in the trade or business in the Philippines
is taxable only on income derived from sources within the Philippines.

The Income Tax Situs Rules

b.3.4 Classification of income as to source

(i) Gross Income and Taxable Income from Sources Within the Philippines

1. Interest –
a) interest derived from sources within refers to interest earned from deposits on banks
located in the Philippines (location of the blank), or
b) residence of the debtor – interest on bonds, notes, or other interest bearing
obligations
2
Section 23 of the NIRC
2. Dividends – amount received as dividend from a domestic corporation or from a foreign
corporation, subject to the 50% rule, or at least 50% of its gross income is from sources
within the Philippines.

 50% rule: If for the 3-year period preceding the declaration of such dividend, the ratio
of such corporation’s Philippine income to its world (total-within and without) income
is:
 Less than 50% - Entirely without
 50% or more – proportionate

3. Compensation for labor or personal services – services performed in the Philippines.

4. Rentals and royalties – Rentals and royalties from property located in the Philippines or
from any interest in such property, including rentals or royalties for:

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade, brand or other like
property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific
equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge or information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any
such knowledge or information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in connection with the
use of property or rights belonging to, or the installation or operation of any brand, machinery
or other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical

management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and

(iii) Tapes for use in connection with radio broadcasting.

5. Sale of real property – gains, profits and income from sale of real property located in the
Philippines

6. Sale of personal property in case of sale of personal property, the following rules apply:

a. Production and Sale

 Production in whole within and sold within – income purely within
 Produced in whole without and sold without – income purely without
 Produced within or sold without – income partly within and partly without
  Produced without and sold within – income partly within and partly without

b. Mere cases of buy and sell (No Production)

 Place of market rule (place of sale) applies.
 Exception: If the personal property sold are shares of stock of DOMESTIC
corporation, the income is purely within even if the seller sells it abroad. (irrespective
of place of sale)

Taxable Income

General Rule – From the items of gross income specified above, there shall be deducted
the expenses, interests, losses and other deductions properly allocated thereto and a ratable
part of expenses, interests, losses and other deductions effectively connected with the
business or trade conducted exclusively within the Philippines which cannot definitely be
allocated to some items or class of gross income. The remainder, if any, shall be treated in
full as taxable income from sources within the Philippines.

Exception: No deductions for interest paid or abroad shall be allowed from the gross
income from sources within the Philippines unless the indebtedness was actually incurred to
provide funds or use in connection with the conduct or operation of trade or business in the
Philippines.

(ii) Gross Income and Taxable Income from Sources without The Philippines

Gross Income from sources without

1. Interest other than those derived from sources within the Philippines;
2. Dividends other than those derived from sources within the Philippines;
3. Compensation for labor or personal service performed without the Philippines;
4. Rentals or royalties from property located without the Philippines or from any interest in
such property including rentals or royalties for the use of or for the privilege of using
without the Philippines, patents, copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like properties; and
5. Gains, profits and income from the sale of real property located without the Philippines.

 From the items of gross income specified above there shall be deducted the expenses
losses, and other deductions properly apportioned or allocated thereto and a ratable part
of any expense, loss or other deduction which cannot definitely be allocated to some
items or classes of gross income. The remainder, if shall be treated in full as taxable
income from sources without the Philippines.

(iii) Income From Sources Partly Within or Partly Without the Philippines

From the income partly within and partly without, income purely within is derived as follows:

Value of property
within Net
x = P xxx
Value of property income
without

Sales within
Net
Global gross x = P xxx
income
sales