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Income Taxation

Romy Ian “Cutie” Lim


Concept of income tax
• An income tax is one levied on the income from property, professions,
trades and offices. It is a direct tax upon the thing called income.
Purpose of Income Taxation
• 1. TO RAISE REVENUE to defray the expenses of the government.
• 2. TO MITIGATE THE EVILS ARISING FROM THE INEQUALITIES OF
WEALTH by a progressive scheme of taxation which places the burden
on those best able to pay. (Madrigal VS RAFFERTY, 38 PHIL. 414)
• 3. TO OFFSET regressive sales and consumption taxes.
CHARACTERISTICS OF PHILIPPINE INCOME TAX

• National Tax: it is imposed and collected by the National Government


throughout the country
• General Tax: It is levied without a specific or predetermined purpose.
Thus, the revenue from income tax may be appropriated for general
public purposes.
• Excise Tax: I It is imposed on the right or privilege of a person to
receive or earn income.
• It is not levied upon the person or property but upon the right of a person to
receive income or profits.
• Direct Tax: It is payable by the person upon whom it is directly
imposed by law. It cannot be shifted or passed on to others.
CHARACTERISTICS OF PHILIPPINE INCOME TAX

• Progressive Tax: It is based upon one’s ability to pay.


BRACKET TAXABLE INCOME PER YEAR INCOME TAX RATE

1 P250,000 and below 0%

2 Above P250,000 to P400,000 20% of the excess over P250,000

3 Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000

4 Above P800,000 to P2,000,000 P130,000 +30% of the excess over P800,000

5 Above P2,000,000 to P8,000,000 P490,000 +32% of the excess over P2,000,000

6 Above 8,000,000 P2,410,000 + 35% of the excess over P8,000,000


MEANING OF INCOME

• Income means all wealth which flows into the taxpayer other than a
mere return of capital. It is derived from:
• The use or employment of labor or capital, or both labor and capital; and/or
• From the sale or other disposition of assets or property.
SOURCES OF INCOME

• The following are sources of income (According to Justice


Dimaampao’s book: “A guide to income taxation”):
• Property (Capital)
• Labor (Services)
• Sale/Exchange of capital asset and activity
SOURCES OF INCOME

• Source of income is any property, activity, or service that produced


the income. (COM v. BOAC, 149 SCRA 395) It may also be in the form
of proceeds from sales of transport documents.
SOURCES OF INCOME

• Under the Tax Code, income derived from whatever source forms part
of the taxpayer’s income. This includes the following:
• Treasure found or punitive damages representing profits lost;
• Amount received by mistake (Javier v. CA, 199 SCRA 824)
• Exception to the rule that Amount received by mistake is not taxable.
• Cancellation of Taxpayer’s indebtedness;
• Payment of usurious interest;
• Illegal gains
• Tax Refund
• Bad Debt Recovery
“INCOME” DISTINGUISHED FROM “CAPITAL”
Capital Income
Fund Flow
Wealth Service of wealth
Tree Fruit

Note: Amounts received as a return of capital are not income.


REQUISITES FOR AN INCOME TO BE TAXABLE

• 1. There must be gain or profit, whether in cash or its equivalent.


(Existence of Income)
• for tax purposes, income does not only refer to the money a taxpayer receives
but includes anything of value.
REQUISITES FOR AN INCOME TO BE TAXABLE

• 2. The gain must be realized or received during the taxable year.


(Realization of Income). This implies that not all economic gains
constitute taxable income.
• Mere increase in the value of the property is not income (unrealized increase
in capital)
• Under the terms “Received” or “Realized” includes Constructive Receipt.
• Doctrine of Constructive Receipt of Income – Income which is
credited to the account of and set apart for a taxpayer and which may
be drawn by him at any time is subject to tax for the year during
which it was so credited or set apart although not yet then actually
received or reduced to his possession.
REQUISITES FOR AN INCOME TO BE TAXABLE
• 3. The gain must not be excluded by law or treaty from taxation. This
means that not all income is required to be included in computing the
taxable income.
• An income may have other elements but the law may specifically exclude the
same from income for tax purposes i.e. certain passive incomes excluded
from income as they are already subject to final taxes.
ACCOUNTING METHOD
• There are two main accounting methods that may be used by the tax
payer. This are the following:

• CASH METHOD
• ACCRUAL METHOD
ACCOUNTING METHOD

• CASH METHOD
• a method of accounting whereby all items of gross income received during
the year shall be accounted for in such taxable year and that only expenses
actually paid shall be claimed as deductions during the year
ACCOUNTING METHOD

• ACCRUAL METHOD
• method of accounting for income in the period it is earned, regardless of
whether it has been received or not. Expenses are accounted for in the
period they are incurred and not in the period they are paid.
DIFFERENCE OF CASH METHOD FROM ACCRUAL
METHOD OF ACCOUNTING
CASH METHOD ACCRUAL METHOD
income is reported in the income is reported in the
year payments are year it is earned while
received while expenses expenses are deducted in
are deducted in the year the year it is incurred,
paid. regardless of receipt or
disbursement of cash.
ADDITIONAL INFO
• Can a taxpayer use a combination of two or more methods of
accounting?
• No. The rule is that a taxpayer may use any one method of accounting but not
a combination of two or more methods of accounting for each type of
business during the taxable year. The use of a hybrid method of accounting is
not allowed (CONSOLIDATED MINES VS. CTA [AUGUST 29, 1974])