1.

DEFINITION OF INCOME
Income – gain derived from capital, or from labor, or from both labor and capital, including the gain derived
from the sale or exchange of capital assets; amount of money coming to a person or corporation within a
specified time, whether as payment for services, interest, or profit from investment.

Income refers to all wealth which flows into the taxpayer other than as mere return of capital. It includes
the forms of income specifically described as gains and profits, including gains derived from the sale or
other disposition of capital assets (R.R. No. 2, Sec. 36).

Income is a flow of service rendered by capital by payment of money from it or any benefit rendered by a
fund of capital in relation to such fund through a period of time (Madrigal v. Rafferty, G.R. No. 12287,
August 8, 1918).

2. DEFINITION OF INCOME TAX

Income tax – tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a
person’s income, emoluments, profits, and the like; may be succinctly defined as a tax on income, gross or net,
realized in one year; generally regarded as excise tax (not levied upon persons, property, funds, or profits but
upon the right of a person to receive income or profits)

3. DEFINITION OF TAXABLE INCOME

Taxable income is the pertinent items of gross income specified in the NIRC, less deductions, if any, authorized
for such types of income.
SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross income
specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized
for such types of income by this Code or other special laws.
Taxable income is the amount of income used to calculate how much tax an individual or a company owes to
the government in a given tax year. It is generally described as adjusted gross income (which is your total
income, known as “gross income,” minus any deductions or exemptions allowed in that tax year)

Gross income is all income subject to tax. Net income refers to gross income less the allowable deductions and exemptions.
Taxable income is the pertinent items of gross income specified in the NIRC, less deductions, if any, authorized for such
types of income.

4. INCOME DISTINGUISHED FROM CAPITAL

Capital is a fund or property existing at one distinct point of time.
Income, on the other hand, denotes a flow of wealth during a definite period of time.
gain derived from capital, or from labor, or from both labor and capital, including the gain derived from the
sale or exchange of capital assets; amount of money coming to a person or corporation within a specified
time, whether as payment for services, interest, or profit from investment.
While capital is wealth, income is the service of wealth.
5. INCREASE IN THE VALUE OF SHARES IS NOT AN INCOME

6. NATURE OF CAMPAIGN CONTRIBUTIONS - REVENUE REGULATION 7-2011

REVENUE REGULATIONS NO. 7-2011 issued on June 14, 2011 prescribes the policies in the tax treatment of
campaign contributions and expenditures.
Campaign contributions must have been utilized to cover a candidate's expenditures for his/her electoral
campaign to be considered as exempt from Income Tax.
Unutilized/excess campaign funds, that is, campaign contributions net of the candidate's campaign
expenditures, shall be considered as subject to Income Tax, and as such, must be included in the candidate's
taxable income as stated in his/her Income Tax Return (ITR) filed for the subject taxable year.
Any candidate — winning or losing — who fails to file with the COMELEC the appropriate Statement of
Expenditures required under the Omnibus Election Code shall be automatically precluded from claiming such
expenditures as deductions from his/her campaign contributions. As such, the entire amount of such
campaign contributions shall be considered as directly subject to Income Tax.

7. ORDINARY INCOME – SEC 22 (Z), NIRC

The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital
asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is
treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from
the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary
loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale
or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss'
shall be treated as loss from the sale or exchange of property which is not a capital asset.

8. SUBJECTS OF INCOME TAX

INDIVIDUALS CORPORATIONS ESTATES TRUST

A. Citizen A. Domestic Corporation
a) Resident Citizen (RC)
b) Non-Resident Citizen (NRC)
B. Aliens B. Foreign Corporation
a) Resident Alien (RA) a) Resident foreign
b) Non-Resident Alien (NRA) corporation (RFC)
(1) Engaged in Trade or b) Non-resident foreign
Business (NRA-ETB) corporation (NRFC)
(2) Not Engaged in Trade or
Business (NRA NETB)
c) Special Alien

C. Special class of individual employees C. Joint venture and consortium

a) Minimum wage earner

D. Partnership

1) resident citizen – A citizen of the Philippines residing in the Philippines.

2) non-resident citizen –
 i. 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
ii. 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.
iii. 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.
iv. A citizen who has been previously considered as nonresident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the date of his
arrival in the Philippines.
v. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be.

3) resident alien – individuals whose residence is within the Philippines and who is not a citizen thereof

4) non-resident alien engaged in trade or business – individuals whose residence is not within the
Philippines and who is not a citizen thereof that is engaged in trade or business

5) domestic corporation – those created or organized in the Philippines or under its laws
6) resident foreign corporation – foreign corporations engaged in trade or business within the
Philippines

7) non-resident alien not engaged in trade or business – individuals whose residence is not within the
Philippines and who is not a citizen thereof that is engaged in trade or business

8) non-resident foreign corporation or foreign corporation not doing business in the Philippines –
foreign corporations not engaged in trade or business within the Philippines

9. KINDS OF INCOME TAX

1) Net Income Tax
Net income taxation is a system of taxation where the income subject to tax may be
reduced by allowable deductions.

Taxable income or net income

This refers to the pertinent items of gross income specified in the NIRC, less the deductions
and/or personal and additional exemptions, if any, authorized for such types of income by
the NIRC or other special laws.

2) Gross Income Tax

 3) Final Income Tax

10. CHARACTERISTICS OF INCOME TAX

1) Direct tax – the individual pays it directly to the government
2) National Tax – imposed and collected by the national government through the Bureau of Internal
Revenue (BIR)
3) Excise Tax – not levied upon persons, property, funds, or profits but upon the right of a person to
receive income or profits
4) General Tax – general levy by a government that offers no special benefit to the taxpayer, but only a
support to governmental programs that benefit all
5) Progressive Tax - tax that imposes a larger burden (relative to resources) on those who are richer; as
the tax base increases, tax rate also increases; based on the taxpayer’s ability to pay

11. SITUS OF TAXATION (place of taxation; the country that has the power and jurisdiction to levy and collect the
tax)

12. FACTORS OF SITUS OF TAXATION

1) citizenship
2) residence
3) subject matter
4) nature of tax
5) source of income
6) location of property
7) use of labor or property

13. INCOME ACCORDING TO SOURCE

1) income from sources within the Philippines
2) income from sources outside the Philippines
3) income from sources partly within and partly without the Philippines

GROSS INCOME refers to 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 property;
4. Interests;
 5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income of the general professional partnership.

14. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES

1) Interests derived from sources within the Philippines
2) Dividends from domestic and foreign corporations, if more than 50% of its gross income for the
three-year period ending with the close of the taxable year prior to the declaration of dividends was
derived from sources within the Philippines
3) Compensation for services performed within the Philippines
4) Rentals and royalties from properties located in the Philippines or any interest in such property
including rentals or royalties for the use of or for the privilege of using within the Philippines
intellectual property rights such as trademarks, copyrights, patents, etc.
5) Gains on sale of real property located in the Philippines
6) Gains on sale of personal property other than shares of stock within the Philippines
7) Gains on sale of shares of stock in a domestic corporation

15. TAXABLE INCOME FROM SOURCES WITHIN THE PHILIPPINES

16. GROSS INCOME FROM SOURCES WITHOUT THE PHILIPPINES

1) Interest derived from sources other than those within the Philippines
2) Dividends derived from sources other than those within the Philippines
3) Compensation for services performed outside the Philippines
4) Rentals and royalties from properties located outside the Philippines or any interest in such property
including rentals or royalties for the use of or for the privilege of using outside the Philippines
intellectual property rights such as trademarks, copyrights, patents, etc.
5) Gains, profits, and income from the sale of real property located without the Philippines
CIR v. British Overseas Airways Corporation, G.R. No. L-65773-74, 30 April 1987

17. TAXABLE INCOME FROM SOURCES WITHOUT THE PHILIPPINES

18. INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT

Gains, profits, or incomes other than those enumerated above shall be allocated or apportioned to sources
within or without the Philippines

19. ALLOCATION OF DEDUCTIONS FROM SOURCES WITHIN AND WITHOUT

20. GAINS, PROFITS AND INCOME FROM SALE OF PERSONAL PROPERTY

Sale of personal property: Place where the sales contract was consummated. –
It depends:
1) Personal property produced within and sold without, or produced without and sold within the
Philippines

Any gain, profit, or income shall be treated as derived partly from sources within and partly from
sources without the Philippines.
 2) Purchase of personal property within and sale without, or purchase without and sale within the
Philippines

Any gain, profit, or income shall be treated as derived entirely from sources within the country in
which sold.

3) Shares of stock in a domestic corporation

Gain, profit, or income is treated as derived entirely from sources within the Philippines,
regardless of where said shares are sold

21. ANNUAL ACCOUNTING PERIOD

The accounting period is the taxable year. It is a fixed period of time, consisting of twelve (12) months, upon
the basis of which the taxable income is computed and the income tax imposed.

22. CALENDAR YEAR, TAXABLE YEAR AND FISCAL YEAR

1) Calendar year – period of twelve months beginning January 1 to December 31 of every year
2) Fiscal year – a period of twelve months ending on the last date of any month other than December
3) Taxable year – the calendar year, or the fiscal year ending during such calendar year, upon the basis
of which the net income is computed under the NIRC. It includes, in the case of a return made for a
fractional part of a year, the period for which such return is made.

23. CHANGE OF ACCOUNTING PERIOD

Change of accounting period by corporate taxpayers – Only corporations may change their accounting period,
from fiscal year to calendar year, from calendar year to fiscal year, or from fiscal year to another; BIR approval
is required in changing as accounting period; application must be filed at any time not less than thirty (30) days
before the last day of filing its income tax returns on the basis of changing its original accounting period.

24. ACCOUNTING METHODS

Accounting methods are accounting techniques used to measure income
a)Accrual basis – income is recognized when earned regardless of when received; expense is
recognized when incurred regardless of when paid
Income is said to have accrued when the right to receive is established or when an enforceable right to
secure payment is created against the counterparty.
b)Cash basis – income is recognized when received, and expense is recognized when paid

Accounting methods for tax purposes comprise a set of rules for determining how to report income and
deductions.

As a general rule, the law does not provide for a specific method of accounting to be employed by the
taxpayer. The law only authorizes the CIR to employ particular method of accounting of income where:

a) The taxpayer does not employ a method for computing income, or

b) The taxpayer’s method for accounting does not clearly reflect the income (Domondon, 205, citing
Sec. 43 of NIRC).

CASH METHOD VERSUS ACCRUAL METHOD OF ACCOUNTING

In cash method, income is recognized only upon actual or constructive receipt of cash payments or
property but no deductions are allowed from the cash income unless actually disbursed through an actual
or constructive payment in cash or property.
 Stated otherwise, income is earned when cash is collected, and expense is incurred when cash is
disbursed.

Meanwhile, in accrual method, income is recognized in the period it is earned, regardless of whether it
has been received or not. In the same manner, expenses are accounted for in the period they are incurred
and not in the period they are paid (Domondon, 2013).

Amounts of income accrue when the right to receive them become fixed, when there is a created
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment (CIR v. Isabela Cultural Corp., G.R. No. 172231,
February 12, 2007).

25. SCHEDULAR AND GLOBAL SYSTEM OF TAXATION

1) Global tax system – System employed where the tax system views indifferently the tax base and
generally treats in common all categories of taxable income of the individual (Tan v. Del Rosario, Jr.,
237 SCRA 324, 331); all income received by the taxpayer are grouped together, without any
distinction as to type or nature of the income, and after deducting therefrom expenses and other
allowable deductions, are subjected to tax at a graduated or fixed rate.
2) Schedular tax system – System employed where the income tax treatment varies and is made to
depend on the kind or category of taxable income of the taxpayer (Tan v. Del Rosario, Jr., 237 SCRA
324, 331); the various types of income (i.e. 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.
3) Semi-schedular or semi-global tax system – All compensation income, business or professional
income, capital gain, passive income, and other income not subject to final tax are added together to
arrive at the gross income. After deducting the allowable deductions and exemptions from the gross
income, the taxable income is subjected to one set of graduated tax rate for individual or normal
corporate income tax rate for corporation (Mamalateo, 2014).

26. CREDITABLE WITHHOLDING TAX SYSTEM

Under the creditable withholding tax system, taxes withheld on certain income payments are intended to
equal or at least approximate the tax due of the payee on said income.

Withholding tax is a method of collecting income tax in advance from the taxable income of the recipient of income. Thus,
if the income of the recipient is exempt from income tax, no withholding of tax is required to be made by the payor of such
income, which is constituted as a withholding agent.