Tests in Determining Income

1. Flow of Wealth Test

The test of taxability is the “source,” i.e., the property, activity or service that produced the income
determines whether any gain was derived from the transaction.

2. Realization/Severance Test
There is no taxable income until there is a separation from capital of something of exchangeable
value, thereby supplying the realization or transmutation which would result in the receipt of
income. The essence of the test is that in order for income to be taxed, it is to be severed from the
property from which it was derived.

3. Claim of Right Doctrine

A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the
absence of a definite conditional obligation to return or repay that which would otherwise
constitute a gain. Also called the doctrine of ownership, command and control.

4. All-Events Test
For income to accrue, this test requires: a) the fixing of a right to income or liability to pay; and b)
the availability of the reasonable accurate determination of such income or liability.

5. Economic Benefit Test

Any economic benefit to the employee that increases his net worth, whatever may have been the
mode by which it is effected.

6. Control Test
The power to dispose of income is the equivalent of ownership of it. The exercise of that power to
procure the payment of income to another is the enjoyment and hence the realization of the
income by him who exercises it.

Non-Resident Citizens (Sec. 22 (E), NIRC)

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.

Meaning of “Unintrerrupted”
The phrase “uninterrupted period” should not be interpreted literally as to negate the continuity of
residence abroad. If the reason for the physical presence abroad is established such as employment on a
more or less regular tenure, such physical presence abroad for the taxable year is not deemed
interrupted by reason of visits or travels to the Philippines, no matter how often made as to negate the
citizen’s status as a non-resident citizen.
Condominium Dues - NOT taxable
The common areas of a condominium are held by the unit owners through the condominium
corporation which is formed to preserve and maintain their appurtenant interest in the common areas.
This incidental activity conducted not for profit or gain is not a business activity. Considering the
character and purpose of the dues, it is more logical to consider them as contributions to be used to
directly benefit the unit owners themselves and not as income payments received by the corporation in
the ordinary course of business.

Condominium dues do not constitute income as they are only held in trust for the benefit of unit owners
from whom they were collected, to pay for authorized expenses incurred.

Joint Venture
The BIR has ruled that the MOA entered into by and between ALI and API providing for the construction
of an office tower to be jointly owned by them on a 60-40 basis to be leased out to and between the 2
corporations on the basis of their corresponding contribution to the corporation, has not by itself
created a taxable joint venture.

However, the joint venture to be subsequently entered into by and between them for the leasing of
building floors, or portions thereof separately owned by them will create a joint venture subject to tax
under Section 27 (A), separate and distinct from ALI and API.

Deposit Substitutes (Sec. 22 (Y), NIRC)

The term 'deposit substitutes' shall mean an alternative form of obtaining funds from the public (the
term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one
time), other than deposits, through the issuance, endorsement, or acceptance of debt instruments for
the borrower's own account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer. These instruments may
include, but need not be limited to, bankers' acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas
(BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments
with recourse: Provided, however, That debt instruments issued for inter-bank call loans with maturity
of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit substitute debt
instruments.

Progressivity of Income Tax

The objective is to prevent the undue concentration of wealth in the hands of a few individuals.
Progressivity is keystoned on the principle that those who are able to pay should shoulder the bigger
portion of the tax burden (Aban).