Source Kinds of Income/IT B.

RESIDENCE
of Income
• How is residence defined? Meaning of “Engaged in Trade or Business”
Taxpayer Within Without 24(A) 24(B) 24(C) 24(D)
PH PH The term ‘residence’ is to be understood not in its common acceptation as referring
RC / / NIT FWT FWT FWT to ‘dwelling’ or ‘habitation,’ but rather to ‘domicile’ or legal residence, that is, ‘the
NRC / X NIT FWT FWT FWT place where a party actually or constructively has his permanent home, where he,
RA / X NIT FWT FWT FWT no matter where he may be found at any given time, eventually intends to return
NRAETB / X NIT FWT FWT FWT and remain (animus manendi)
NRANETB / X GIT GIT FWT FWT
DC / / NIT FWT FWT FWT DOING BUSINESS – implies a continuity of commercial dealings and arrangements,
RFC / X NIT FWT FWT X and contemplates, to that extent, the performance of acts or works or the exercise
of some of the functions normally incident to, and in progressive prosecution of
NRFC / X GIT GIT FWT X
commercial gain or for the purpose and object of the business organization. [CIR v.
BOAC, G.R. No. L-65773 (1987)]
Estates and Trusts.
Includes:
Sec 60, NIRC
1. soliciting orders, service contracts
Income tax imposed on individuals shall apply to income of estates or of any kind of
2. opening offices, whether called "liaison" offices or branches
property held in trust. [Sec. 60 (A), NIRC]
3. appointing representatives or distributors domiciled in the Philippines or who in
Exceptions: (1) Employee’s trust [Sec. 60, NIRC];
any calendar year stay in the country for a period totaling 180 days or more
(2) Revocable trusts [Sec. 63, NIRC];
4. participating in the management, supervision or control of any domestic
(3) Income for Benefit of Grantor [Sec. 64, NIRC]
business, firm, entity or corporation in the Philippines.
Taxable income of the estate or trust is computed in the same manner as an
Excludes:
individual, subject to certain special rules [Sec 61, NIRC]
1. mere investment as a shareholder in domestic corporations, and/or the exercise
Estate
of rights as such investor
Refers to all the property, rights and obligations of a person which are not
extinguished by his death and those which have accrued thereto since the opening 2. having a nominee director or officer to represent its interests in such corporation
of the succession. [DE LEON citing Arts. 776 and 781 NCC]
3. appointing a representative or distributor domiciled in the Philippines which
Trust transacts business in its own name and for its own account. [RA 7042, Foreign
An arrangement created by will or an agreement under which legal title to property Investments Act]
is passed to another for conservation or investment with the income therefrom and
ultimately the corpus (principal) to be distributed in accordance with the directions Resident citizen - is a citizen of the Philippines who has a permanent home or place
of the creator as expressed in the governing instrument. [DE LEON] of abode in the Philippines to which he/she intends to return whenever he/she is
absent for business or pleasure.

Non-resident Citizens (NRC) [Sec. 22 (E), NIRC]

1. PH citizen who establishes to the satisfaction of the CIR the fact of his physical
presence abroad with a definite intention to reside therein.
2. PH citizen who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis.
3. PH citizen 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. To be considered physically present abroad most of the time during
the taxable year, a contract worker must have been outside the PH for not less than
183 days during such taxable year. [BIR R.R. 1-79, Sec. 2]
4. PH citizen previously considered as a non-resident citizen and who arrives during
the taxable year to reside permanently in the PH - Treated as NRC with respect to
his income derived from sources abroad until his arrival in the PH
ALIENS
1. Resident Alien – An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident for income tax purposes.
a. No/Indefinite Intention = RESIDENT:
If he lives in the Philippines and has no definite intention as to his stay, he is a
resident. A mere floating intention indefinite as to time, to return to another
country is not sufficient to constitute him a transient.
b. Definite Intention = TRANSIENT:
One who comes to the Philippines for a definite purpose, which in its nature
may be promptly accomplished, is a transient.
Exception: Definite Intention but such cannot be promptly accomplished; If his
purpose is of such nature that an extended stay may be necessary for itsnot
accomplishment, and thus the alien makes his home temporarily in the Philippines,
then he becomes a resident.
2. Non-resident Alien
a. Engaged in trade or business within the Philippines - If the aggregate period of
his stay in the Philippines is more than 180 days during any calendar year. [Sec.
25(A)(1), NIRC]
b. Not engaged in trade or business within the Philippines - If the aggregate period
of his stay in the Philippines does not exceed 180 days
Law of Incorporation Test
To determine the residence of a corporation, the Philippines adopted the Law of
Incorporation test under which a corporation is considered domestic if it is
organized or created in accordance with or under the laws of the Philippines and
foreign if it is organized or created in accordance with or under the laws of a foreign
country. [MAMALATEO]
Domestic corporations A corporation created and organized in the
Philippines or under its laws. [Sec. 22 (C), NIRC]
Foreign corporations
A corporation which is not domestic. [Sec. 22 (D), NIRC]
1. Resident foreign corporations – Foreign corporation engaged in trade or
business within the Philippines. [Sec. 22 (H), NIRC]
2. Non-resident foreign corporations – Foreign corporation not engaged in trade
or business within the Philippines. [Sec. 22 (I), NIRC]
FIA, (Foreign Investments Act)
- Sec. 28(A), NIRC => rates of IT of FC
- Secs. 22(B), (C), (D), (H), NIRC
(B) The term 'corporation' shall include one person corporations, partnerships, no
matter how created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose
of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating consortium agreement under
a service contract with the Government. 'General professional partnerships’ 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.
- Title XV Revised Corporation Code
=> Foreign corporations
- Section 3(d), RA No. 7042 (Foreign Investments Act of 1991)
=> defines what “doing business” means
- Revenue Regulations 5-2021
Implements the new Income Tax rates on the regular income of corporations, on
certain passive incomes, including additional allowable deductions from Gross
Income of persons engaged in business or practice of profession pursuant to RA No.
11534 (Corporate Recovery and Tax Incentives for Enterprises Act or CREATE Act),
which further amended the NIRC of 1997
(Published in Philippine Star and Malaya Business Insight on April 9, 2021)
SITUS
In summary, in determining whether an income is taxable in the Philippines, two
factors must be considered:
(I) The citizenship and residence of the person obtaining the gain and
(II) the “source” of income.
To be taxable, the person deriving the profit must be either a citizen or resident of
the country, and the “source” of the income must be in the Philippines.
Sec. 42, NIRC
(A) Gross Income from Sources Within the Philippines
Interests, Dividends (domestic and foreign), services, rentals and
royalties, sale of real and personal property
(B) Taxable Income From Sources Within the Philippines.
General Rule: GI deducted the expenses, 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
Exception: No deductions for interest paid or incurred abroad shall be
allowed from the item of gross income specified in subsection (A)
unless indebtedness was actually incurred to provide funds for use in
connection with the conduct or operation of trade or business in the
Philippines.
(C) Gross Income From Sources Without the Philippines.
Same as A
(D) Taxable Income From Sources Without the Philippines
GI minus allowable deductions
(E) Income From Sources Partly Within and Partly Without the
Philippines
- Secs. 152-165, Revenue Regulations No. 2 (RR 2-1940 or the Income Tax
Regulations) Tax Free: RR No. 02-40 INCOME TAX REGULATIONS (Full Text)
(mikepolancos.blogspot.com)
“produced” means created, fabricated, manufactured, extracted,
processed, cured, or aged => personal property
Allowable Deductions vary as to source WN or WO or partly WI or WO the
Philippines

- Ordinary and necessary trade business or professional expenses,

Interest (indebtedness), taxes,

Limitations on Deductions. - In the case of a nonresident alien individual

engaged in trade or business in the Philippines and a resident foreign
corporation, the deductions for taxes shall be allowed only if and to the
extent that they are connected with income from sources within the
Philippines.
Income

Meaning of Income; income v. recovery of capital investment

Income as opposed to mere return of capital

- Sec. 32(A), 40(A) NIRC

Severance or realization; actual and constructive receipt; imputed income
gross income means all income derived from whatever source, including (but not
limited to) the following items: Sec. 38 and 41, Revenue Regulations No. 2
(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 or business or the exercise of a
profession;

(3) Gains derived from dealings in property;

(4) Interests;

(5) Rents;

(6) Royalties;
CIR v. CA, CTA & Anscor, G.R. No. 108576 January 20, 1999
(7) Dividends; - CIR v. Solidbank, G.R. No. 148191, Nov. 25, 2003
(8) Annuities; • Recovery of Deducted Items: Tax Benefit Principles
(9) Prizes and winnings; - Section 34(E)(1), NIRC

(10) Pensions; and (E) Bad Debts. -(1) In General. - Debts due to the taxpayer actually ascertained to be
worthless and charged off within the taxable year except those not connected with
(11) Partner's distributive share from the net income of the general professional
profession, trade or business and those sustained in a transaction entered into
partnership.
between parties mentioned under Section 36 (B) of this Code: Provided, That
- Sec. 36, Revenue Regulations No. 2 recovery of bad debts previously allowed as deduction in the preceding years shall
be included as part of the gross income in the year of recovery to the extent of the
income tax benefit of said deduction.

• Indirect Receipts – condonation, cancellation of Indebtedness and

Discharge by Third Parties
- Section 50, Rev. Regs. No. 2
 - Secs. 51-53, Revenue Regulations No. 2

• Income from Unlawful Activities; Amounts Received Under Claim of

Right

- CIR v. Javier, G.R. No. 78953, July 31, 1991

- Republic v. Sandiganbayan, GR. No. 152154, July 15, 2003;
- Marco Jr. v. Republic, GR No. 189434, April 25, 2012;
- Marcos v. Republic, G.R. No. 213027, Jan 18, 2017
- Republic v. Marcos, Sandiganbayan Case No 0141, Dec 19, 2019.

• When is Income Taxable? Income v Receipt. Accrual

- Secs. 43-44, NIRC

SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case may be)
in accordance with the method of accounting regularly employed in keeping the
books of such taxpayer, but if no such method of accounting has been so employed,
or if the method employed does not clearly reflect the income, the computation shall
be made in accordance with such method as in the opinion of the Commissioner
clearly reflects the income. If the taxpayer's annual accounting period is other than a
fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting
period, or does not keep books, or if the taxpayer is an individual, the taxable income
shall be computed on the basis of the calendar year.
SEC. 44. Period in which Items of Gross Income Included. - The amount of all items
of gross income shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly accounted for as of a different
period. In the case of the death of a taxpayer, there shall be included in computing
taxable income for the taxable period in which falls the date of his death, amounts
accrued up to the date of his death if not otherwise properly includible in respect of
such period or a prior period.
CIR v. Tours Specialist, G.R. No. L-66416, March 21, 1990
- CIR v. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011
- ING Bank v CIR, G.R. No. 167679, July 22, 2015
• Income Tax Systems
- Global Tax System
Under a global tax system, it does not matter whether the income received by the
taxpayer is classified as compensation income, business or professional income,
passive investment income, capital gain, or other income. 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.
 A global tax system is one where the tax treatment views indifferently the
tax base and generally treats in common all categories of taxable income
of the taxpayer. [Tan v. Del Rosario, Jr., G.R. No. 109289 (1994)]
- Schedular Tax System
Under a schedular tax system, different types of income are subject to different sets
of graduated or flat income tax rates. The applicable tax rate(s) will depend on the
classification of the taxable income and the basis could be gross income or net
income. Separate income tax returns (or other types of return applicable) are filed
by the recipient of income for the particular types of income received.
[MAMALATEO]
 A schedular approach in taxation is one 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., supra]
- Sison v. Ancheta, GR L-59431, July 25, 1984 16

- Semi-schedular or Semi-global Tax System

All compensation income, business or professional income, capital gain and passive
income not subject to final tax, and other income are added together to arrive at
the gross income, and after deducting the sum of allowable deductions, the taxable
income is subjected to one set of graduated tax rates or normal corporate income
tax. With respect to such income the computation is global. For those other income
not mentioned above, they remain subject to different sets of tax rates and covered
by different returns. [Mamalateo]

Note: The Philippines, under the NIRC, follows a semi-schedular and semi-global tax
system.

• Criteria in Imposing Philippine Income Tax

- Nationality/Citizenship
- Residence
- Source
- Sec. 23, NIRC
• Gross Income. Sec. 32(A) NIRC
• Exclusions from Gross Income. Sec. 32(B) NIRC

- Life insurance, amount received by insured as return of

premium, gifts, bequests and devises, compensation for injuries
or sickness, income exempt under treaty, retirement benefits,
pensions and gratuities, miscellaneous such as income derived
by foreign govt, income derived by the PH government or its
political subdivisions, prizes and awards including sports
competition, 13th month pay and other benefits, GSIS SSS and
Medicare benefits, gains from sale of bonds, debentures or
other certificates of indebtedness, gains from redemption of
shares in mutual funds, income derived from sale of gold