Law on Income Taxation

TAXABLE INCOME All pertinent items of gross income less

WEEK 4: GROSS INCOME deductions and/or personal and additional
exemptions, if any, authorized for such types of
SECTION 32A income by this Code or other special laws (see
Section 3, NIRC)
Except when otherwise provided, all income derived from whatever source, including,
but not limited to, the following items: NET INCOME This is gross income less the allowable
1. Compensation for services in whatever form paid, including, but not limited deductions.
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; SEC. 31. TAXABLE INCOME DEFINED
3. Gains derived from dealings in property
4. Interests ● The term ‘taxable income’ means the pertinent items of gross income
5. Rents specified in this Code, less the deductions, if any, authorized for such types
6. Royalties of income by this Code or other special laws.
7. Dividends
8. Annuities INDIVIDUAL
9. Prizes and winnings
10. Pensions; and Gross Income (Section 32)
11. Partner’s distributive share from the net income of the GPP Less: Deductions (Section 34)
= Net Income /Taxable Net Income
Is the enumeration provided in Section 32(A) exclusive?
● NO. Section 32(A) does not intend the enumeration to be exclusive. It =Taxable net income x Tax Rate
merely directs that the types of income listed therein be treated as income =Tax Due
from sources within the Philippines (see CIR VS. AMERICAN AIRLINES
[DECEMBER 19, 1989]). IMPORTANT QUESTIONS TO ASK
● Husband and wife shall compute their individual income tax separately 1. Did you receive anything? ( in cash or in kind/ legal or illegal source)
based on their respective taxable income; if any income cannot be definitely 2. If you did, is it income?
attributed to or identified as income exclusively earned or realized by either 3. If income, is it taxable?
of the spouses, the same shall be divided equally between the spouses for 4. If it were taxable, what kind of tax and what rate of tax do we impose?
the purpose of determining their respective taxable income.

● Minimum wage earners shall be exempt from the payment of income tax
based on their statutory minimum wage rates.
● The holiday pay, overtime pay, night shift differential pay and hazard
pay received by such earner are likewise exempt.
Distinguish gross income from net income and taxable income
For Income to be Taxable, the following elements must exist:
● There must be gain or profit;
● The gain must be realized or received actually or constructively; and
● The gain or profit must not be excluded by law or treaty from taxation.

NET WORTH METHOD

GROSS INCOME All income minus exclusions. (In other words, all
income subject to income tax) ● Another way of computing the taxable income of the taxpayer is by way of
net worth method.
 ● It is done by determining the net assets or simply by deducting the liabilities
from the total assets to arrive at the net worth.
● The result in simple terms is the effect of increase in assets which could only
happen if there is an income.
● Simply put, the assets of the taxpayer cannot increase without the
corresponding income.
● Therefore, if there is an increase in asset, there is an increase in income or
the same is derived from income.

FACTORS AFFECTING GROSS INCOME

1. Persons - whether individual, corporation, estate or trust
2. Sources of income - whether from within or without

KINDS OF INCOME TAX

1. Net income tax [NIT] - Sections 24(A)

2. Final income tax [FIT]-Section 57(A)

● Withholding of Final Tax on Certain Incomes.
● Withholding of Creditable Tax at Source.
● Tax-free Covenant Bonds.

3. Gross income tax [GIT] - Sections 25(B) and 28(B)

SEC. 25.Tax on Nonresident Alien Individual. –
● Nonresident Alien Engaged in trade or Business Within the
Philippines.
● Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines
● Alien Individual Employed by Regional or Area Headquarters and
Regional Operating Headquarters of Multinational Companies.
● Alien Individual Employed by Offshore Banking Units.
● Alien Individual Employed by Petroleum Service Contractor and
Subcontractor.
● Alien Individuals Employed by an Offshore Gaming Licensee and
Service Providers.