INCOME TAXATION

Atty. Percy Valsan Jun P. Donalvo, CPA

National Internal Revenue Code as amended by RA 10963 (TRAIN Law) and RA 11534
(CREATE Act)

PRELIMINARIES
I. Income taxation
a. Definition
b. Nature
II. Income tax systems
a. Global tax system
b. Schedular tax system
c. Semi-schedular or semi-global tax system
III. Features of the Philippine income tax law
a. Direct
b. Progressive
c. Comprehensive
d. Semi-schedular or semi-global tax system
IV. Criteria in imposing Philippine income tax
a. Citizenship principle
b. Residence principle
c. Source principle
V. Types of Philippine Income tax
VI. Taxable period – NIRC; Sec. 43, 46
a. Calendar period
b. Fiscal period
c. Short period (Sec. 46, 47)
VII. Kinds of Taxpayers (NIRC1, Sec. 22 (A), Sec. 22 (B))
a. Individuals
• Rev. Reg. No. 8-2018
i. Citizens
1. Resident citizens
2. Non-resident citizens (Sec. 22 (E))
• BIR Ruling 517-2011
• BIR Ruling 305-2016
ii. Aliens
1. Resident aliens (Sec. 22, (F))
2. Non-resident aliens (Sec. 22 (G))
a. Engaged in trade or business (Sec. 25 (A) (1))
b. Not Engaged in trade or business
iii. Special class of individual employees
1. Minimum wage earner (Sec. 22 (HH))
b. Corporations (Sec. 22 (B)); as amended by RA 11534, Sec. 4

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National Internal Revenue Code, as amended by RA 10963.

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 i. Domestic corporations (Sec. 22 (C))
ii. Foreign corporations (Sec. 22 (D))
1. Resident foreign corporations (Sec. 22 (H))
2. Non-resident foreign corporations (Sec. 22 (I))
CIR v. Interpublic Group of Companies, GR 207039, 14 Aug 2019
iii. Joint venture and consortium (Section 22 (B))
c. Partnerships (Section 22 (B)), NCCP2 Art. 1767
d. General professional partnerships (Section 22 (B))
e. Estates and trusts (Sec. 22 (A))
f. Co-ownerships

INCOME TAX PROPER

VIII. General principles of Income Taxation
• NIRC, Sec. 23, Section 22
• Rev. Reg 1-79
• BIR Ruling No. 517-2011
• BIR Ruling No. 305-2016

IX. Income
a. Definition, Income v. Capital
• CIR v. CA, et al (GR 108576, 20 Jan 1999)
• Association of Non-Profit Clubs, Inc. v. BIR, GR 228539, 26 Jun 2019
• CIR v. Federation of Golf Clubs, GR 226449, 28 Jul 2020
b. Nature
c. When income is taxable
• NIRC, Sec. 31
• Madrigal v. Rafferty (GR L-12287, 7 Aug 1918)
• Fisher v. Trinidad (GR L-17518, 30 Oct 1922)
• Conwi v. CTA (GR 48532, 31 Aug 1992)
• CIR v. Julita Campos Benedicto (GR 191999, 30 Jul 2014) (Resolution)
• In the Matter of Declaratory Relief, GR 215801, 15 Jan 2020
i. Existence of income
ii. Realization of income
1. Tests of realization
2. Actual v. Constructive receipt
• Limpan Investment v. CIR (GR L-21570, 26 July 1966)
iii. Recognition of income
iv. Methods of accounting
1. Cash method
2. Accrual method
3. Installment payment
4. Deferred payment
5. Percentage of completion (Long-term contracts)

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 • CIR v. Lancaster Philippines, GR183408, 12 Jul 2017
v. Test in determining whether income is earned for tax purposes
1. Realization tests
2. Claim of right doctrine or doctrine of ownership, command, or
control
3. Economic benefit test, doctrine of proprietary interest
4. Severance test
5. All events test

X. TAXATION ON INDIVIDUALS

a. Gross income – NIRC, Sec. 32(A)

i. Definition
• Association of International Shipping Lines v. Secretary of
Finance and CIR, GR 222239, 15 Jan 2020
ii. Concept of income from whatever source derived
iii. Gross income v. Net Income v. Taxable Income
• NIRC; Sec. 42(B)
iv. Classification of income as to source
1. Within the Philippines – NIRC; Sec. 42(A)
2. Without the Philippines – NIRC; Sec. 42(C)
3. Partly within or without the Philippines
v. Normal tax v. Final Tax, Tax Treatment
vi. Sources of income subject to normal tax

1. Compensation income
• NIRC, Sec. 32 (A) (1);
• Rev. Reg. No. 10-2008
• NIRC, Sec. 32 (7) (e)
a. In General
b. Fringe benefits
• Sec. 33 (A), (B), (C)
• Rev. Reg. No. 3-98
• Rev. Reg. No. 5-2011
• Rev. Reg. No. 8-2012
• Rev. reg. No. 1-2015
• Rev. Reg. No. 11-2018
i. Definition and Concept
ii. Taxable and non-taxable fringe benefits
iii. De minimis benefits
• Confederation for Unity and Recognition and
Advancement of Government Employees v. CIR,
GR 213446, 3 Jul 2018
c. Minimum wage earners (Sec. 24 (A) (2), last paragraph)

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 • Soriano v. Secretary of Finance, GR 184450, 24 Jan
2017 (with companion cases)

2. Business income
• NIRC; Sec. 32 (A) (2)

3. Gains - NIRC; (Sec. 32 (A) (3)

a. Type of Gains
i. Ordinary Gain
ii. Capital Gain
iii. Actual Gain
iv. Presumed Gain
v. Net capital gain

b. Computation of capital gain (or loss) – Sec. 40, NIRC as

amended by RA 11534, Sec. 10

c. Tax treatment
i. Ordinary Gain
ii. Capital Gain
iii. Capital Gains Tax
1. Shares of Stocks of Domestic Corporations
a. Individuals:
• Citizens (Cit.) & Resident Alien
(RA) - Sec. 24(C)
• Nonresident Aliens Engaged in
Trade or Business (NRAETB) –
Sec. 25(A)(3) in rel. Sec. 24(C)
• Nonresident Aliens Not Engaged in
Trade or Business (NRANETB) –
Sec. 25(B)

2. Real Property located in the Philippines

a. Individuals:
• Cit. & RA – Sec. 24(D)(1)
• NRAETB – Sec. 25 (A)(3) in rel.
Sec. 24(D)
• NRANETB – Sec. 25(B)
• Exception: Principal Residence
(Sec. 24(D)(2))

3. Real Property outside the Philippines

4. Interests
a. Individuals:
• Cit. & RA - NIRC, Sec. 24(B)(1)
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 • NRAETB - Sec. 25(A)(2)
• NRANETB - Sec. 25(B)

5. Rents
a. Lease of personal property
b. Lease of real property
c. Tax treatment of
i. Leasehold improvements
ii. VAT added to rental
iii. Advance rental (long term lease)
6. Royalties
a. Passive v. Active Royalties
b. Individuals:
• Cit. & RA - NIRC, Sec. 24(B)(1)
• NRAETB - Sec. 25(A)(2)
• NRANETB – Sec. 25(B)

7. Dividends
• Cit. & RA - NIRC, Sec. 24(B)(2)
• NRAETB - Sec. 25(A)(2)
• NRANETB – Sec. 25(B)
a. Types of dividends
i. Cash dividend
ii. Stock dividend
1. Sec. 73
a. General Rule
b. Exemption; Requisites
iii. Property dividend
iv. Liquidating dividend
• CIR v. A. Soriano Corp; GR 108576, 20 Jan 1999
• CIR v. Manning; GR L-28398, 6 Aug 1975
• Wise & Co., Inc. v. Meer; GR No. 48231, 30 June 1947

8. Prizes and Winnings –

a. Prizes
• Cit. & RA - NIRC, Sec. 24(B)(1)
• NRAETB – Sec. 25(A)(2) as amended by RA 11534, Sec.
25
• NRANETB – Sec. 25(B)
• Sec. 32(B)(7)(c)
• Sec. 32(B)(7)(d)

b. Winnings (Sec. 24 (B) (1))

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 • Cit. & RA- NIRC, Sec. 24(B)(1)
• NRAETB

9. Pensions, Annuities, Proceeds of Life Insurance

• Sec. 32(B)(6)

10. Share in GPP’s Income

11. Others
a. Forgiveness of indebtedness
b. Recovery of debts written off
c. Receipt of tax refunds or credits

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