MODULE 4 Requisites of Taxable Income

1. There must be gain or profit.

2. The gain must be received (cash basis) or realized
(accrual method of accounting).
PRINCIPLES OF • Constructive receipt – occurs when the money
consideration or its equivalent is placed at the
INCOME TAXATION control of the person who rendered the service
without restrictions by the payor. E.g.
• Bank deposits which are made available
Income to the seller of services without restrictions
All wealth which flows into the taxpayer other than as a • Issuance by the debtor of a notice to offset
mere return of capital. any debt or obligation and acceptance
thereof by the seller as payment for the
A gain derived from capital, from labor or from both services rendered.
combined, including profits gained from dealings in 3. The gain must not be excluded or exempt by law or
property or as well as any asset clearly realized. treaty from taxation.

Increase in net worth other than from donation and Systems of Taxation
succession (inheritance). 1. Global Treatment – system where the tax treatment
view indifferently the tax base and generally treats in
Capital common all categories of taxable income without any
Fund or property used in producing goods and services. distinction as to their type or nature and subjects
them to a single set of graduated or fixed tax rates.
Capital vs. Income
Capital Income E.g. Taxpayer is an individual with the following data:
Fund or property existing Flow of services Net compensation income P 600,000
at an instant of time rendered by that capital Net income from business/
through a period of time practice of profession. 1,000,000
Wealth Service of Wealth Non-operating income 400,000
By Analogy: Tree Fruit

Illustration: GLOBAL TREATMENT

RETURN OF CAPITAL VS. TAX COMPUTATION

RETURN ON CAPITAL (INCOME)
Net compensation income P 600,000
Net income from business/ practice of profession. 1,000,000
E.g. In 2018, Mr. A bought a land for P500,000. In 2019, he sold it for P1.2 million. Determine the
Non-operating income 400,000
following: (a) return of capital and (b) return on capital?
Taxable income P2,000,000
Personal Income Tax 402,500
Amount/
Consideration Received Return of Capital Return on Capital

P1,200,000 P500,000 P700,000

2. Schedular Treatment – system employed where the

income tax treatment varies and made to depend on
the kind or category of taxable income.
RETURN OF CAPITAL VS.
RETURN ON CAPITAL (INCOME) E.g. The taxpayer is an individual with the following data:
Royalties from books P200,000
E.g. ABC Corp. sold its delivery truck for P350,000. At the time of sale, the truck had a book
value of P600,000. Determine the following: (a) return of capital and (b) return on capital? Dividends from domestic corporation 100,000
Interest derived from Peso bank deposit. 5,000

Amount/
Consideration Received Return of Capital Return on Capital

SCHEDULAR TREATMENT
P350,000 P350,000 P0

TAX COMPUTATION Tax Rate/s Tax

Royalties from books P200,000 10% P20,000

Income Tax Dividends from domestic corporation 100,000 10% 10,000

Interest derived from Peso bank deposit 5,000 20% 1,000
Tax on a person’s income, emoluments, profits arising
from property, practice of profession, conduct of trade or TOTAL P305,000 P31,000
business or on pertinent items of gross income less the
deductions if any, authorized for such types of income
by law.

Functions of Income
1. To provide large amounts of revenues 3. Semi-Global/ Semi Schedular – adopted in the
2. To offset regressive sales and consumption taxes Philippines.
3. To mitigate the evils arising from inequalities in the
distribution of income and wealth which are
deterrents to social progress

Nature and Purpose of Income Tax

1. It is an excise tax
2. It is self-assessing or self-computed.
3. It is imposed primarily to raise revenue

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 Taxable Persons Source of Income Regular Corporate Income Tax

SYSTEM OF TAXATION WITHIN THE INTRODUCTION

OUTSIDE THE TO Tax Base/
CORPORATIONS PHILIPPINES INCOME
PHILIPPINES TAX Taxable Amount Tax Rate/s

INCOME
Domestic Corporations YES YES Net Income 20%/ 25%

TAXABLE
TAX-EXEMPT
Foreign Corporations
a) Resident
FINAL TAX Engaged in Business YES NO Net Income 25%
REGULAR INCOME
E.g. Final Tax on Passive
TAX
Income (Interest from EXCLUSIONS
E.g. Personal Income Tax
bank deposit, dividends, b) Non-resident
(0% -35%) E.g. SSS, GSIS benefits,
royalties, prizes, etc.), Retirement benefits, 13th Not engaged in Business YES NO Gross Income 25% (Final Tax)
Regular Corporate
Capital Gains Tax (gain on
Income Tax (20%/25%) month pay and other
sale of domestic shares,
benefits up to P90,000,
sale of real prop. etc. Gross Income = Sales less Cost of Sales/Services and add Other Income
Net Income = Gross Income less Deductions

GLOBAL APPROACH SCHEDULAR APPROACH

Factors that Determine Situs for Income Tax Illustration:

1. Citizenship
2. Residence
3. Source of Income
E.g. The taxpayer has the following data for taxable year 2023:

INTRODUCTION TO
General Principles of Philippine Income Taxation INCOME TAX
WITHIN THE PHILIPPINES OUTSIDE THE PHILIPPINES

Except when otherwise provided in Tax Code:

Gross Income P7,000,000 P3,000,000

1. A citizen of the Philippines residing therein is taxable

on all income derived from sources within and Business Expenses P3,000,000 P1,000,000

without the Philippines;

Non-business Expenses P2,000,000 P1,000,000

2. A nonresident citizen is taxable only on income

derived from sources within the Philippines;

3. An individual citizen of the Philippines who is working Resident

Citizen
Non-Resident
INTRODUCTION
Citizen Alien TO
Resident NRA
Engaged
NRA
Not Engaged
and deriving income from abroad as an overseas INCOME TAX
contract worker is taxable only on income derived Gross Income P10,000,000 P7,000,000 P7,000,000 P7,000,000 P7,000,000
from sources within the Philippines: Provided, That a
seaman who is a citizen of the Philippines and who Less: Deductions 4,000,000 3,000,000 3,000,000 3,000,000 0
receives compensation for services rendered abroad
as a member of the complement of a vessel engaged Taxable Income 6,000,000 4,000,000 4,000,000 4,000,000 P7,000,000

exclusively in international trade shall be treated as

an overseas contract worker; Regular Income Tax/
Final Income Tax P1,602,500 P1,002,500 P1,002,500 P1,002,500 P1,750,000 (FT)

4. An alien individual, whether a resident or not of the

Philippines, is taxable only on income derived from
sources within the Philippines;
INTRODUCTION
Domestic
Corporation
TO
Resident Foreign
Corporation
Non-resident
Foreign Corp.
INCOME TAX
5. A domestic corporation is taxable on all income
derived from sources within and without the Gross Income P10,000,000 P7,000,000 P7,000,000

Philippines; and
Less: Deductions 4,000,000 3,000,000 0

6. A foreign corporation, whether engaged or not in Taxable Income P6,000,000 P4,000,000 P7,000,000

trade or business in the Philippines, is taxable only

on income derived from sources within the Regular Income Tax/
Final Income Tax P1,500,000 P1,000,000 P1,750,000 (Final Tax)

Philippines.

Income Taxation of Individual and Corporate Classification of Income Taxpayers

Taxpayers
1. Individuals
a. citizens
Taxable Persons Source of Income
INTRODUCTION TO
Regular Income Tax
(1) resident citizens
INDIVIDUALS
WITHIN THE
PHILIPPINES
INCOME
OUTSIDE THE
PHILIPPINES
TAX Taxable
Tax Base/
Amount Tax Rate/s
(2) non-resident citizens
b. aliens
Resident Citizens YES YES Net Income 0% – 35% (1) resident aliens
Non-resident Citizens YES NO Net Income 0% – 35%
(2) non-resident aliens
(a) engaged in trade or business within
Resident Aliens YES NO Net Income 0%– 35% the Philippines
Non-Resident Aliens
a) Engaged in Trade
(b) not engaged in trade or business
or Business YES NO Net Income 0% – 35% within the Philippines
b) Not engaged in
Trade or Business YES NO Gross Income 25% (Final Tax)
2. Corporations
a. Domestic
b. Foreign
(1) resident foreign corporation
(2) non-resident foreign corporation

3. Partnerships

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 a. Business Partnerships 5. Non-resident alien not engaged in trade or business
b. General Professional Partnerships within the Philippines (NRANETB) – a non-resident
alien who shall come to the Philippines and stay for
4. Estates and Trusts an aggregate period of 180 days or less during any
calendar year.

INDIVIDUALS 6. Special aliens employed by:

• Regional or area headquarters and regional
1. Resident Citizen (RC) – a citizen of the Philippines operating headquarters of multinational
and resident thereof. corporations
• Offshore banking units
Citizens of the Philippines • Foreign petroleum service contractors and
1. Those who are citizens of the Philippines at the subcontractors
time of the adoption of this Constitution; o Now subject to same tax as those imposed
2. Those whose fathers or mothers are citizens of upon RA (0%-35%), NRAETB (0%-35%)
the Philippines; and NRANETB (25%). The old rate was
3. Those born before January 17, 1973, of Filipino 15%.
mothers, who elect Philippine citizenship upon
reaching the age of majority; and Tax Schedule for RC, NRC, RA, and NRAETB
4. Those who are naturalized in accordance with
law. (Sec. 1, Art. IV, 1987 Constitution) Effective January 1, 2023 and onwards
Net income Tax
2. Non-resident Citizen (NRC) – a citizen of the
Philippines but not a resident thereof.
Not over P250,000 0%
A Filipino citizen:
Over P250,000 but not 15% of the excess over
a. who establishes to the satisfaction of the
over P400,000 P250,000
Commissioner the fact of his physical presence
abroad with a definite intention to reside Over P400,000 but not P22,500 + 20% of the
over P800,000 excess over P400,000
therein.
Over P800,000 but not P102,500 + 25% of the
b. who leaves the Philippines during the taxable over P2,000,000 excess over P800,000
year to reside abroad, either as an immigrant or Over P2,000,000 but P402,500 + 30% of the
for employment on a permanent basis. not over P8,000,000 excess over
P2,000,000
c. who works and derives income from abroad P2,202,500 + 35% of
and whose employment thereat requires him to Over P8,000,000 the excess over
be physically present abroad most of the time P8,000,000
during the taxable year (or at least 183 days).
For NRANETB – 25% of Gross Income
d. who is previously considered as a non-resident
and who arrives in the Philippines at anytime
during the taxable year to reside thereat CORPORATIONS
permanently shall be considered non-resident
for the taxable year in which he arrives in the Corporation (Tax Code)
Philippines with respect to his income derived Includes one-person corporations, partnerships, no
from sources abroad until the date of his arrival. matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
An overseas contract worker (OCW) or overseas association, or insurance companies,
Filipino worker (OFW) is a Filipino citizen employed
in foreign country who is physically present in a Corporation (Revised Corporation Code)
foreign country as a consequence of employment. An artificial being created by operation of law, having
To be considered as an OCW/OFW, he must be the right of succession and the powers, attributes, and
duly registered as such with Philippine Overseas properties expressly authorized by law or incidental to
Employment Administration (POEA) with a valid its existence.
Overseas Employment Certificate (OEC)
One-Person Corporation
A seafarer or seaman is a Filipino citizen who A corporation with a single stockholder; Provided, That
receives compensation for services rendered only a natural person, trust or an estate may form a one
abroad as a member of the complement of a vessel person corporation.
engaged exclusively in international trade. To be
considered as an OCW/OFW, he must be duly
Exceptions:
registered with POEA with a valid OEC with a valid
• General professional partnerships
Seafarer’s Identification Record Book or Seaman’s
Book issued. By the Maritime Industry Authority • Joint venture or consortium formed for the purpose
(MARINA). of undertaking construction projects or
• Joint venture or consortium formed for the purpose
3. Resident alien (RA) – an individual whose residence of engaging in petroleum, coal, geothermal and
is within the Philippines and who is not a citizen other energy operations pursuant to an operating
thereof. consortium agreement under a service contract
with the Government.
4. Non-resident alien engaged in trade or business
within the Philippines (NRAETB)– a non-resident Kinds of Corporate Taxpayers
alien individual who shall come to the Philippines 1. Domestic Corporation – duly organized and existing
and stay therein for an aggregate period of more under the laws of the Philippines
than 180 days during any calendar year. 2. Foreign Corporation – duly organized and existing
under the laws of any foreign country.

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 a. Resident Foreign Corporation – engaged in Offshore Upon effective of
trade or business within the Philippines. Banking Unit the CREATE
b. Non-Resident Foreign Corporation – not (Taxed as RFC) 25% (April 11, 2021)
engaged in trade or business within the Regional
Philippines. Operating
Headquarters
3. Special Corporation – given special treatment by the (ROHQ) 25% January 1, 2022
Tax Code. Nonresident 25% January 1, 2021

• Proprietary educational institutions – any Others Tax Rate Base

private schools maintained and administered
by private individuals or groups with an issued International Gross Philippine
permit to operate from the Department of carrier (RFC) 2.5% Billings
Education or the Commission on Higher Nonresident Gross rentals,
Education or the Technical Education and owner or lessor lease or charter
Skills Development Authority (TESDA), as the of vessel 4.5% fees from leases
case may be. or charters to
Filipino citizens or
• Proprietary hospitals – any private hospitals, corporations
which are non-profit, maintained and approved by
administered by private individuals or groups. MARINA
o Non-profit – no net income or asset Nonresident
accrues to or benefits any member or cinematographic Gross income
specific person, with all the net film owner, from all sources
income or assets devoted to the lessor or within the
institution’s purposes and all its distributor 25% Philippines
activities not for profit. Nonresident
lessor of aircraft, Gross rentals or
• International carrier doing business in the machinery and fees
Philippines (resident foreign corporation) other equipment 7.5%
• Non-resident owner or lessor of vessel
• Nonresident cinematographic film owner,
lessor or distributor
• Nonresident lessor of aircraft, machinery and Tax-Exempt Corporations
other equipment 1. Labor, agricultural or horticultural organization not
organized principally for profit.
4. Government-owned or Controlled Corporations 2. Mutual savings bank not having a capital stock
(GOCCs) – corporations owned or controlled by the represented by shares, and cooperative bank
Government. Subject to income tax imposed on without capital stock organized and operated for
corporations or associations engaged in similar mutual purposes and without profit.
business, industry or activity, except: 3. A beneficiary society, order or association,
• Government Service Insurance System operating for the exclusive benefit of the members
(GSIS) such as a fraternal organization operating under
• Social Security System (SSS) the lodge system, or mutual aid association or a
• Philippine Health Insurance Corporation nonstock corporation organized by employees
(PHIC) providing for the payment of life, sickness,
• Local water districts accident, or other benefits exclusively to the
members of such society, order, or association, or
Normal Corporate Income Tax Rate nonstock corporation or their dependents.
Domestic Corporation (BEFORE – 30%) 4. Cemetery company owned and operated
Rate Effectivity exclusively for the benefit of its members.
In General 25% July 1, 2020 5. Nonstock corporation or association organized and
Corporations with Net operated exclusively for religious, charitable,
Taxable Income not scientific, athletic, or cultural purposes, or for the
exceeding P5 million rehabilitation of veterans, no part of its net income
and Total Assets not or asset shall belong to or inure to the benefit of any
exceeding P100 million, member, organizer, officer or any specific person.
excluding the land on 20% July 1, 2020 6. Business league chamber of commerce, or board
which the particular of trade, not organized for profit and no part of the
business entity’s office, net income of which inures to the benefit of any
plant and equipment are private stock-holder, or individual.
situated. 7. Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare.
Proprietary Educational Institutions and Hospitals 8. A nonstock and nonprofit educational institution.
Rate Effectivity 9. Government educational institution.
10. Farmers' or other mutual typhoon or fire insurance
1% July 1, 2020 to June 30, 2023
company, mutual ditch or irrigation company,
10% July 1, 2023
mutual or cooperative telephone company, or like
If gross income from unrelated business, trade or activity
organization of a purely local character, the income
exceeds 50% of the total gross income, regular
of which consists solely of assessments, dues, and
corporate income tax shall be imposed.
fees collected from members for the sole purpose
of meeting its expenses.
11. Farmers', fruit growers', or like association
Foreign Corporations
organized and operated as a sales agent for the
Rate Effectivity purpose of marketing the products of its members
Resident 25% July 1, 2020 and turning back to them the proceeds of sales,

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 less the necessary selling expenses on the basis of 2. Taxable or Business Partnerships – taxable just like
the quantity of produce finished by them. a corporation.

Exception Income Tax Liability of Partner

The income of whatever kind and character or from any 1. Share of a partner in General Professional
of their properties, real or personal, or from any of their Partnership (GPP)
activities conducted for profit regardless of the a. Each partner shall report as gross income his
disposition made of such income, shall be subject to distributed share actually or constructively
income tax. received in the net income of GPP. The share
is subject to creditable withholding tax of 10%
E.g. Capital gain on sale of real property and rentals (for current income payment up to P720,000)/
earned by a religious organization are taxable 15% (for more than P720,000). Partners are
regardless of the disposition of the income. liable in their separate and individual
capacities.
b. Each partner in a GPP shall, report as gross
PARTNERSHIPS income his distributed share in the net income
of the GPP, based on his agreed ratio.
Partnership (Civil Code of the Philippines)
Two or more persons bind themselves to contribute 2. Share of a partner in Taxable or Business
money, property or industry to a common fund with the partnership
intention of dividing profits among themselves. Share of a partner in the net income of a
taxable or business partnership (dividend) shall
Different from co-ownership (ownership of undivided be subject to a final tax as follows.
thing belongs to different persons), but it will be treated • RC, NRC and RA – 10%
as unregistered partnership if the purpose was not • NRAETB – 20%
limited to the conservation or preservation of the • NRANETB – 25%
common fund or properties acquired by them.

Kinds of Partnership Business Partnership vs. General Professional

1. General Professional Partnerships – formed by Partnership: Tax Formula
persons for the sole purpose of exercising their
common profession and no part of the income of Business Partnership
which is derived from engaging in any trade or Gross Income (includes other income not subjected to
Final Tax)
business. Less: Allowable Deductions (Itemized Deductions or
Optional Standard Deductions – 40% of Total Gross
Income)
General Professional Partnership
Gross Income (includes other income not subjected to
Final Tax
Less: Allowable Deductions (Itemized Deductions or
Optional Standard Deductions – 40% of Total Gross
Income)

Net Income from Operations (Taxable Income) Net Income from Operations

INTRODUCTION TO Less: Corporate Income Tax (20%/25%) X

INCOME TAX
Net Income from Operations, After Tax X
E.g. Cloud and Noctis (both resident citizens) formed a partnership. For the taxable year 2023, the partnership
has gross income and operating expenses amounting to P30 million and P12 million, respectively. Add: Other Income Subject to Final Tax (Net) X

General Professional Net Distributable Income Net Income from Operations/ Distributable Income
Business Partnership Partnership
Profit & Loss Ratio Profit & Loss Ratio
Gross Income P30,000,000 P30,000,000
Distributive Share of Partner – 10%/15% Creditable
Distributive Share of Partner – 10% Final Tax Withholding Tax & Ordinary Income Tax (0%-35%)
Less: Deductions 12,000,000 12,000,000

Net Income before Tax 18,000,000 P18,000,000

Partner - Business Partnership Partner - General Professional Partnership
Income Tax 4,500,000 0
Sales or Receipts Sales or Receipts
Distributable Net Income after Tax P13,500,000 P18,000,000
Less: Cost of Sales/Services (None if Optional Less: Cost of Sales/Services (None if Optional Standard
Standard Deduction is elected) Deduction is elected)

E.g. Partnerships formed by CPAs or Lawyers to Gross Income from Operations Gross from Operations
practice their common profession. Less: Itemized Deductions or Optional Standard Less: Itemized Deductions or Optional Standard
Deductions – 40% of Gross (Net) Sales or Receipts Deductions – 40% of Gross (Net) Sales or Receipts

2. Taxable or Business Partnerships – All other Net Income from Operations Net Income from Operations

partnerships except general professional Add: Non-operating Income Not Subjected to Final Tax
(EXCLUDE Distributive Share of Partner)
Add: Non-operating Income Not Subjected to Final Tax
(INCLUDE Distributive Share of Partner)

partnerships no matter, how created or organized.

They include unregistered joint ventures and Taxable Income Taxable Income

business partnerships.

E.g. Partnership engaged in retail or Partner - Business Partnership Partner - General Professional Partnership
manufacturing business.
Taxable Income Taxable Income

The taxable income for a taxable year, after Apply: Graduated Rates (0% to 35%) Apply: Graduated Rates (0% to 35%)

deducting the corporate income tax imposed

therein, shall be deemed to have been actually or Income Tax Due Income Tax Due

constructively received by the partners in the same Less: Creditable Withholding Taxes Less: Creditable Withholding Taxes (INCLUDE
10%/15% CWT on Income Payments to Partner)
taxable year and shall be taxed to them in their
individual capacity whether actually distributed or Less: Quarterly Payments Less: Quarterly Payments

not. Income Tax Payable Income Tax Payable

Income Tax Liability of Partnership

1. General Professional Partnerships – not subject to
corporate income tax, but are required to file returns
of their income for the purpose of furnishing
information as to the share of each partner in the net
gain or profit, which each partner shall include in his
individual return.

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Illustration: E.g. Mr. A died leaving an income-producing property
worth P10 million to B and C.

INTRODUCTION TO For taxable 2023 and pending judicial settlement of the

INCOME TAX estate of Mr. A, the property earned rentals amounting
E.g. Cloud and Noctis (both resident citizens) formed a partnership. For the taxable year 2023, the partnership to P1 million.
has gross income and operating expenses amounting to P30 million and P12 million, respectively.

Business Partnership Cloud (50%) Noctis (50%)

The property worth P10 million is subject to ESTATE
Share of the Partner in the Net
Income after Corporate Income Tax P6,750,000 P6,750,000
TAX, while the rentals are subject to INCOME TAX to be
Less: 10% Final Tax on Passive
paid by the executor or administrator of the estate of Mr.
Income – to be remitted to the BIR
by the Partnership
675,000 675,000
A.
Share of the Partner, net of Final Tax
(Amount to be received from the
Partnership) P6,075,000 P6,075,000 If there is no pending judicial settlement, the rentals shall
be subjected to income tax based on the share of each
heir in the rentals or net income.

INTRODUCTION TO
Trust
INCOME TAX A right to the property, whether real or personal, held by
E.g. Cloud and Noctis (both resident citizens) formed a partnership. For the taxable year 2023, the partnership one person for the benefit of another.
has gross income and operating expenses amounting to P30 million and P12 million, respectively.

General Professional
Partnership Cloud (50%) Noctis (50%)
A relationship that arises when the a person (trustor)
Share of the Partner in the transfers property to another (trustee) to hold and
Distributable Net Income P9,000,000 P9,000,000

Less: 15% Creditable Withholding

administer for the exclusive benefit of a third person
Tax (Prepaid Tax) – to be remitted
by the Partnership to the BIR 1,350,000 1,350,000
(beneficiary)
Share of the Partner, net of 15%
CWT (Amount to be received from
Partnership) P7,650,000 P7,650,000

Tax Implications of the Income earned by the Trust

Property

INTRODUCTION TO
a. Irrevocable Trusts
INCOME TAX The trust, through the trustee or fiduciary, is liable
E.g. Cloud and Noctis (both resident citizens) formed a partnership. For the taxable year 2023, the partnership for the payment of income tax. The distribution of
had gross income and operating expenses amounting to P30 million and P12 million, respectively. trust income during the taxable year to the
General Professional Partnership
Cloud (50%) Noctis (50%) beneficiaries is deductible from the trust’s taxable
Share of the Partner in the Distributable Net Income
(assume that this is the sole income of the partner) P9,000,000 P9,000,000 income.
Personal Income Tax Due (using graduated rates under
the TRAIN Law) P2,552,500 P2,552,500 b. Revocable Trusts
Less: Creditable Withholding Tax (CWT) 1,350,000 P1,350,000 The trustor is subject to the payment of income tax
Personal Income Tax Still Due or Payable P1,202,500 P1,202,500 on the trust income, and not the trust.

E.g. Mr. A, the trustor or grantor, created a trust

designating Mr. B as the trustee with the obligation to
ESTATES AND TRUSTS manage the property for the benefit of Mr. C, the
beneficiary.
Both subject to income tax using progressive rates for
individuals. If the trust is irrevocable, the income derived from the
property covered by the trust agreement is taxable to the
trust.
Tax Schedule
Effective January 1, 2023 and onwards If it is revocable, the income from the property is taxable
Net income Tax to the trustor or Mr. A.

Special Deduction for Estates and Trusts

Not over P250,000 0% Aside from business expenses, the income distribution
to the heirs or beneficiaries can be deducted from the
Over P250,000 but not 15% of the excess over gross income of the estates and trusts.
over P400,000 P250,000
Over P400,000 but not P22,500 + 20% of the Formula:
over P800,000 excess over P400,000 Sales/Revenues/Receipts/Fees
Over P800,000 but not P102,500 + 25% of the Less: Sales Returns, Allowances and Discounts
over P2,000,000 excess over P800,000
Net Sales/Revenues/Receipts/Fees
Over P2,000,000 but P402,500 + 30% of the
Less: Cost of Sales/Services (applicable only if
not over P8,000,000 excess over availing of Itemized Deductions)
P2,000,000
P2,202,500 + 35% of Gross Income from Operations
Less: Allowable Deductions (Itemized Deductions /
Over P8,000,000 the excess over
Optional Standard Deduction)
P8,000,000
Income Distribution to the Heirs or
Beneficiaries
Estate
Mass of properties left by a deceased person. Taxable Income
Apply: Progressive Tax Rates
Tax Implications of Income earned by the Estate: Income Tax Due
a. Estate under judicial settlement – income is taxable Less: Tax Credits/Payments
to the estate Income Tax Payable
b. Estate under extrajudicial settlement – income is
taxable to the heirs.

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 INTRODUCTION TO
INCOME TAX
E.g. The estate of Mr. X had a gross income and operating expenses of P50,000,000 and P20,000,000,
respectively. During the year, the executor distributed income amounting to P8,000,000 each to Y and Z, the
sole heirs of Mr. X.
Income Tax of the With Without
Estate of Mr. X Income Distribution Income Distribution
Gross income P50,000,000 P50,000,000
Less: Allowable deductions

Operating expenses (20,000,000) (20,000,000)

Income distribution to the

heirs/beneficiaries (16,000,000) 0
Taxable income P14,000,000 P30,000,000

Income Tax Due P4,302,500 P9,902,500

Tax Treatment of the Income Received from the

Estate and Trust
Income received by the heir or beneficiary is subject to
personal income tax.

INTRODUCTION TO
INCOME TAX
E.g. The estate of Mr. X had a gross income and operating expenses of P50,000,000 and P20,000,000,
respectively. During the year, the executor distributed income amounting to P8,000,000 each to Y and Z, the
sole heirs of Mr. X.
Income Tax Due of Y With Income Distribution Without Income Distribution

Income received from the Estate P8,000,000 P0

Income Tax Due (Graduated Rates) P2,202,500 P0

Income Tax Due of Z With Income Distribution Without Income Distribution

Income received from the Estate P8,000,000 P0
Income Tax Due (Graduated Rates) P2,202,500 P0

CLWTAXN Module 4: Principles of Income Taxation (Atty. V. Salud) v012024 7

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