INCOME

TAXATION
IN GENERAL

TAXABLE INCOME
– The essential difference between capital and income is that capital is a fund;
and income is a flow. Capital is wealth, while income is the service of wealth.
– Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital
is a tree, income the fruit.
– Income means profits or gains.
– Income may be defined as the amount of money coming to a person or
corporation within a specified time, whether as payment for services, interest
or profit from investment.
– Cash dividends is taxed as income because it has been realized/received, while stock
dividends is not taxed as income because it is merely inchoate as it is a mere anticipation of
income (it becomes income once you sell it).
One is an actual receipt of profits; the other is a receipt of a representation of the
increased value of the assets of a corporation.
– When dealing with money or property, the questions you should ask are:
o Is this capital or is this income?
o Has it been realized/received or is it merely inchoate?
General Principles

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the
Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract
worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of
the Philippines and who receives compensation for services rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade shall be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources
within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines.
Who are taxable on income derived from all
sources, whether within or outside the
Philippines? Taxed worldwide!
1. Resident citizens.
2. Domestic corporations.
• The other kinds of taxpayers are subject to tax only on income derived
from Philippine sources.
Income Tax on Individual

Resident alien is an individual:

1. Whose residence is within the Philippines
Must be actually present in the Philippines for more than 12 months from his
arrival
2. Who is not a citizen
Mere physical or body presence is enough. Not intention to make the country
one’s abode.
Non-resident citizen:
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.
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.
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.
Who are non-resident citizens? (RR 1-79)
1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa has been secured
2. Permanent employee – one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis
3. Contract worker – one who leaves the Philippines on account of a contract of
employment which is renewed from time to time under such circumstance as to
require him to be physically present abroad most of the time (not less than 183
days)
Non-resident aliens engaged in business in the Philippines
The term "nonresident alien" means an individual whose residence is not within
the Philippines and who is not a citizen thereof.
Who are non-resident aliens?
1. An individual whose residence is not within the Philippines
2. Not a citizen of the Philippines
Determination is by his intention with regard to the length and nature of his stay. (Sec 5,
RR 2)
Alien can either:
• Be deriving income in the Philippines, or
• Stays in the Philippines for more than 180 days during any calendar year (deemed to
be a non-resident alien engaged in the Philippines)
To summarize, individual taxpayers are classified
into:

1. Citizens, who are divided into:

– Resident citizens – those citizens whose residence is within the Philippines; and
– Non-resident citizens – those citizens whose resident is not within the Philippines.
2. Aliens, who are divided into:
– Resident aliens – those individuals whose residence is within the Philippines and are not
citizens thereof; and
– Non-resident aliens – those individuals whose residence is not within the Philippines but
temporarily in the country and are not citizens thereof. They are:
Those engaged in trade or business within the Philippines; and
Those who are not so engaged. (see Sec 23-25)
 Gross Income
Less: Deductions
Taxable Income
Tax Rate
Tax Due
Know the tax base and the tax rate!

– Only resident citizens and domestic corporations are taxed on income derived from
abroad. Worldwide taxable!
– The tax is imposed upon taxable compensation or employment income, business
income, and income derived from the practice of professions derived by citizens and
resident aliens.
– Married individuals shall compute separately their individual income tax based on
their respective total taxable income.
– Minimum wage earners are exempt from the payment of income tax on their
taxable income. Holiday pay, overtime pay, night shift differential pay, and hazard
pay received by them are likewise exempt from income tax.
– A non-resident alien individual engaged in trade or business in the Philippines is
subject to the income tax in the same manner as an individual citizen and a
resident alien on taxable income received from sources within the Philippines.
Passive Income

On Certain Passive Income of Individual Citizens and Resident Aliens

Passive Income

For Non-Resident Aliens Not Engaged in Trade or Business 

Passive Income

For Domestic Corporations 

Rates of Tax on Certain Passive Income of Corporations Tax Rate

1. Interest from currency deposits, trust funds, deposit substitutes and similar 20%
arrangements received by domestic corporations

2. Royalties from sources within the Philippines 20%

3. Interest Income from a Depository Bank under Expanded Foreign Currency Deposit 15%
System

4. Cash and Property Dividends received by a domestic corporation from another 0%

domestic corporation

5. Capital gains from the sale, exchange or other disposition of lands and/or building 6%

6. Net Capital gains from sale of shares of stock not traded in the stock exchange 15% 
Corporation

– The term "corporation" shall include partnerships, no matter how created or

organized, joint-stock companies, joint accounts, association, 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.
Corporations include:
– Partnerships, no matter how created or organized
– Joint-stock companies
– Joint accounts
– Associations
– Insurance companies
– It does not include
o General professional partnerships;
o 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 or consortium agreement under a service contract with
the government. (The JV should NOT be incorporated.)
– Domestic corporations are subject to any or some of the following:
• Capital gains tax
• Final tax on passive income
• Normal tax
• Minimum corporate income tax (MCIT)
• Gross income tax (GIT)
• Improperly accumulated earnings tax (IAET)