Module 3: Introduction to

Income Taxation
The concept of INCOME
Why is income subject to tax?
• Income is regarded as the best measure of taxpayers’ ability to pay
tax. It is an excellent object of taxation in the allocation of
government costs.
What is INCOME for taxation purposes?
• The tax concept of income is simply referred to as “gross income”
under the NIRC.
• A taxable item of income is referred to as an “item of gross income”
or “inclusion in gross income”
Elements of Gross Income
• It is a return on capital that increases net worth.
• It is a realized benefit.
• It is not exempted by law, contract, or treaty.
Capital items deemed with infinite value
• “incapable of pecuniary valuation”
Recovery of lost capital vs. Recovery of lost
profits
• The loss of capital results in decrease in net worth while the loss of
profits does not decrease net worth.
• The recovery of lost capital merely maintains net worth while the
recovery of lost profits increases net worth.
• Therefore, the recovery of lost profits is a return on capital.
Types of Income Taxpayers
A. Individuals
1. Citizen
a. resident citizen
b. non-resident citizen
2. Alien
a. resident alien
b. non-resident alien
b.1. engaged in trade or business
b.2. not engaged in trade or business
3. Taxable estates and trusts
B. Corporations
1. Domestic corporation
2. Foreign corporation
a. resident foreign corporation
b. non-resident foreign corporation
General rules in Income Taxation
Taxable on income earned
Within Without
A. Individual taxpayers  
Resident citizen 
Non-resident citizen 
Resident alien 
Non-resident alien 

B. Corporate taxpayers
Domestic corporation  
Resident foreign corporation 
Non-resident foreign corporation 
Situs of income
• Situs of income should be differentiated from the source of income.
The latter pertains to the activity or property that produces the
income.
• Situs is important in determining whether or not an income is taxable
in the Philippines.
Illustration
In Philippine
Taxpayer’s income
peso

Interest income from deposits in a foreign bank 300,000

Interest from domestic bonds 50,000

Royalties from books published in the Philippines 100,000

Rent income from the properties abroad (the lease contracts were executed in the Philippines) 150,000

Professional fees for services rendered in the Philippines to non-resident clients (paid in US
dollars) 400,000
Applying the situs rules, the following are the
situs of the income
Within Without World total

Interest on foreign deposits - P300,000 P300,000

Interest from domestic bonds P50,000 - P50,000

Royalties from books in the

P100,000 - P100,000
Philippines

Rent income on foreign

- P150,000 P150,000
properties

Professional fees P400,000 - P400,000

Total P550,000 P450,000 P1,000,000