THE INCOME TAXATION FRAMEWORK

Prepared by: Mr. Johann Reginald B. Piquero

 LEARNING OBJECTIVES

At the end of the chapter, the student shall

be able to:
1. Describe the framework of income taxation;
2. Identify
the sources of income of individual
taxpayers; and
3. Determine the income sources of corporate
taxpayers.
 INCOME TAXATION FRAMEWORK

The field of income taxation appears sometimes

as a messy academic area because of the complicated
principles governing the determination of taxable
activities of an individual person or a corporate
entity. However, by understanding how its framework
operates, the study of income taxation may be easily
facilitated.
The three constructs in this income taxation
framework are the person subject to tax, the
classification of taxable income, and the type of
income tax imposed.
 INCOME TAX FRAMEWORK FOR AN
INDIVIDUAL TAXPAYER

GROSS TAXABLE INCOME TYPE OF INCOME TAX

THE PERSON

• Compensation • Basic or regular

• Business/exercise of tax
• Individual • Final tax
tax payer profession
• Passive income • Capital gains tax
• Income from dealings
in properties
• Other taxable income
 The framework indicates that an individual
taxpayer may realize income from the following:
1. Purely compensation income
2. Purely business/professional income
3. Mixture of compensation, business/professional,
and other income
 INCOME TAX FRAMEWORK FOR A
CORPORATE TAXPAYER

GROSS TAXABLE INCOME

> Business income TYPE OF INCOME TAX
The person > Passive income > Corporate tax
Corporate taxpayer > Income from dealings in > Final tax
properties > Capital gains tax
> Other taxable income
Corporate entities derive their income from the
following:
1. Business income
2. Other income (passive income, gains from
dealings in property, and other income)
 Type of Income Income Tax Rate
Business income • Basic tax rate of 30% of net
taxable income or 2% of the
gross taxable income,
whichever is higher
• Basic tax rate of 10% for
proprietary educational
institutions and hospitals
Passive income, gains from • Basic tax rate of 30%, final
dealings in properties, and tax rate, or capital gains tax
other income at varying rates
 Estates and trusts are treated as
individual taxpayers for income tax
purposes. General professional
partnership is a tax-exempt entity, while
general partnership is treated as a
corporation.
 CONCEPTS OF GROSS INCOME

Section 32(A) of NIRC, as amended, defines gross

income as all income derived from whatever source,
including, but not limited to, the following items:
1. Compensation for services in whatever form paid,
including, but not limited 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
3. Gains derived from dealings in properties
4. Interest
5. Rents
Cont.

6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partner’s distributive share from the net income
of the general professional partnership
 Simply stated, income refers to the amount of
money or its equivalent representing gains or profit
received by the tax payer from whatever sources
other than those representing return of capital.
Gross income is generally determined as follows:

Cash inflows or their equivalent xxxxx

Less return of capital xxxxx
Gross income xxxxx
GENERAL CLASSIFICATION OF GROSS INCOME

 Taxable income refers to the earnings of a

taxpayer subject to the basic or normal tax, final
tax, or capital gains tax. The tax rates for taxable
income may range from 0% to 35%.
 Non-taxable income refers to earnings of a
taxpayer that are excluded from gross income as
provided in the NIRC, as amended, and other other
tax laws.

Non-taxable income should never be included in the

computation of the gross taxable income.
The basic formula to determine taxable
income is as follows:

Gross income xxxxx

Less: non-taxable income xxxxx
Gross taxable income xxxxx
 REQUISITES FOR INCOME TO BE TAXABLE

1. There must be profit or gain

2. The profit or gain must be realized
3. The gain or profit must not be
excluded by law from income taxation
SOURCES OF TAXABLE INCOME
Income Tax Table on the Taxable Income of Individuals
Cont.

After 2023, the taxable income

levels of individual taxpayers shall be
adjusted once every five years based on
the rules and regulations issued by the
Secretary of Finance.
END 