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Concept of Income

Income Defined

Gross income – (also known as gross taxable income)
means total income of a taxpayer subject to tax. It means
In its broad sense, all income from whatever source, derived
within or without the Philippines, legal or illegal. Proceeds
of embezzlement or swindling; for instance, are income
because embezzler or swindler already has complete domi-
nion over them and can use such for his economic benefit.
Income – means all wealth which flows into the tax-
payer, other than return of capital.
Capital – constitute the investment which is the source of income.
* capital is fund while income is flow.
* capital is wealth while income is service of wealth.


Illustration – INCOME FROM WHATEVER SOURCE
Clifford is a big time swindler. In one year he was able to earn P1,000,000 from his
swindling activities. When the commissioner of Internal Revenue discovered his income
from swindling , the Commissioner assessed him a deficiency income tax for such income.
J.C. Clifford’s lawyer protested the assessment on the following grounds:
1) The income tax applies only to legal income, not to illegal income,
2) Clifford’s receipts from his swindling did not constitute income because he was
under obligation to return the amount he had swindled, hence, his receipt from
swindling was similar to a loan, which h is not income, because for every peso
borrowed he has corresponding liability to pay one peso; and
3) If he has to pay the deficiency income tax assessment, there will be hardly any-
thing left to return to the victims of the swindling.
How will you rule on each of the three grounds for the protest.



Answer:
1) The contention that the income tax applies to legal income and not to illegal
income is not correct. Section 28(a) of the Tax Code include within the purview
of gross income all income from whatever source derived. Hence, the illegality
of the income will not preclude the imposition of the income tax thereon.
2) The contention that the receipts from his swindling did not constitute income
because of his obligation to return the amount swindled is likewise not correct.
When a taxpayer acquires earnings, lawfully or unlawfully, without the consen-
sual recognition,express or implied of an obligation to repay and without res-
triction as to their disposition, he has received taxable income, eventhough it
it may still be claimed that he is not entitled to retain the money, and even
though he may still be adjudged to restore its equivalent.
3) The deficiency income tax assessment is a direct tax impose on the owner which
is an excise on the privilege to earn an income. It will necessarily be paid out of
the same income that were subjected to the tax. Clifford’s liability to pay the
tax is based on his having realized a taxable income from his swindling activities
and will not affect his obligation to make restitution.
FORM OF INCOME
* Income may be realized in any form, whether in money, property, services,
indirect economic benefit. Items indirectly benefitting taxpayers are excluded
from gross income.
* Income includes the forms of income specifically described as gains derived from
sale or other disposition of capital. It also refers to amount of money coming
to a person or corporation within a specified time, whether as payment of
services, interest, or profits from investment.

VALUATION OF INCOME
The amount of income recognized is generally the value received or which the
taxpayer has a right to receive. If the services were rendered at a stipulated price, in the
absence of any evidence to the contrary, such price shall be presumed to be the fair
market value of the compensation received. Transfer of land made by a person to
another in payment of services rendered in the form of attorneys fees shall be consi-
dered as part of the gross income of the latter valued at either the fair market value
or the zonal valuation, whichever is higher, in the taxable year recived.




CLASSIFICATION OF INCOME
1. Income as to source
a. compensation income
b. professional income
c. business income
d. other income
2. Income as to territorial source
a. income within the Philippines
b. Income without the Philippines
c. Mixed income(partly within and without)
3. As to taxability
* Taxable Income
a. Ordinary or Regular income subject to basic/normal tax or
schedular tax under Section 24(A) of the Tax Code
- Reportable ITR(Quarterly, Annually, Substituted filing)
- Subject to expanded withholding tax, if applicable
- rates based on tax tables
- tax credits
- catch-all or basket of other income
b. Passive income subject to final taxes
- subject to final taxes
- withholding taxes constitutes final payment of income tax

- payor is obliged to withhold and remit the corres-
ponding tax
- no need to include in the income tax return
- BIR will run after the withholding agent
- applicable only to income from within
c. Capital gains subject to capital gains taxes
- shares of stocks
- real properties
d. Special income subject to special rates. Subject to special rates
and rules.(i.e. income of PEZA and BOI registered companies)

* Tax exempt income
a. by constitutional mandate
b. by statute( general or special)
c. by international comity (i.e. bilateral agreements, treaties)


TAXABLE INCOME - means the pertinent items of gross income specified in the
In the Tax Code, less the deductions and/or personal and additional exemptions, If any,
authorized for such types of income by the Tax Code or other special laws.(Sec. 31,
Code). It does not include income excluded by law, or which are exempt from income

tax (Sec 32 Code) as well as income subject to final taxes. It includes the gains, profits,
and income derived from whatever source, whether legal or illegal.

Requisites for Income to be Taxable.
1) There must be gain .
The gain need not be in cash derived from sale of assets. It may occur as a result
of exchange of property, payment, assumption, reduction or cancellation of tax-
payer’s indebtedness (except gifts) or other profit realized from completion of a
transaction.
2) The gain must be realized or received.
A mere increase in the value of property without actual realization, either through
sale or other disposition, is not taxable. The realization of income need not take the
form of actual receipt or property by the taxpayer as it may occur as where there
is a constructive receipt of the income by the taxpayer.

The doctrine of constructive receipt complements the doctrine of actual receipt as a test
of realization of income. An amount is constructively received when it is set aside and
made available to taxpayer without substantial restrictions.




There is constructive receipt of income when:

a. Payment is credited to payee’s account; or
b. Payment is set aside for the payee, or otherwise made available so the payee may draw
upon it at any time, or so the payee could have drawn upon it during the taxable year
if notice of intention to withdraw had been given without substantial limitations.


c. The gain must not be excluded by law from taxation.
Incomes that are exempt from tax by law or treaty are not considered in determining
gross income. Income is recognized in the year it is actually or constructively received
in cash or cash equivalent.


Characteristics of Philippine Income Tax
1. National tax.
2. General tax.
3. Excise tax
4. Direct tax
5. Progressive tax








INCOME TAX SYSTEM
1) Schedular Tax System vs Global Tax System
Schedular System – the various types/items of income(compensation; business/
professional income) are classified accordingly and are accorded different
tax treatments, in accordance with schedules characterized by graduated
tax rates. Since these types of income are treated separately, the allowable
deductions shall likewise vary for each type of income.
Global System – all income received by the taxpayer are group together, without
any distinction as to the type or nature of income and after deducting there-
from expenses and other allowable deductions, are subjected to tax at a fixed
rate.
Table 1. Schedular vs Global Tax System

SCHEDULAR GLOBAL

Tax treatment : * Income tax rules varies * Uniform tax
and made to depend on tax treatment or rules
the kind or category of
taxable income of the
taxpayer
Characteristics:
1. Classification of * Categorizes or * Does not
income classifies income ‘’generally’’
categorize or classify
income
2. Tax rates * imposes different tax * Imposes uniform
treatment and rates tax rates

3. Applicability * Individual taxpayers * Corporate taxpayers

Approach used in the Philippines
Partly schedular (i.e. income tax for individuals) and partly global(i.e.income tax for corp.)



2) Gross Income taxation vs Net income taxation

Gross Income taxation Net income taxation
Deductions * No deductions or * Allows and grants deductions /
And exemptions allowed exemptions
Exemptions
^ Example: ^ Example:
Income subject to final Returnable income
taxes

Tax Base * Gross Income * Taxable income

Applicability * Non resident alien not * Individual taxpayers except
engaged in trade or business nonresident alien engaged in
trade or business
* Nonresident foreign
corporation Corporate taxpayers except
non resident foreign corporations
Advantages * Minimizes source of graft and * Just,fair and reasonable
corruption due to minimization of * Equitable relief(deductions &
margin of discretion exercised by exemptions) to tax payers
RDO. * More revenue to the government
* simplifies tax system * Minimizes tax evasion(subject to
counter checking by the BIR
SITUS(SOURCE/PLACE) OF INCOME
Situs – means the place of taxation of the income or the country which has
jurisdiction to impose the tax.
The general rule is that the taxing power cannot go beyond the territorial limits of the
Taxing authority.

Factors affecting situs of income:
a. residence or domicile
b. nationality
c. source of income