INCOME TAX SYSTEM

INCOME TAX SYSTEM

Income Tax System:

• Global Tax System - All income received by the taxpayer
are grouped together, without any distinction as to the type
or nature of the income, and after deducting therefrom
expenses and other allowable deductions, are subjected to
tax at a fixed rate.
 INCOME TAX SYSTEM

Income Tax System:

• Schedular Tax System - Various types/items of income are
classified accordingly and are accorded different tax
treatments, in accordance with schedules characterized by
graduated tax rates.
 INCOME TAX SYSTEM

Income Tax System:

• Semi-Schedular or Semi-Global Tax System – A tax system
that follows a global system and schedular tax system
depending on the tax type, taxpayers, and other criteria.
 FEATURES OF THE PHILIPPINE
INCOME TAX SYSTEM
Features of the Philippine Income Tax System
Ø It is a national tax since it is imposed and collected by the
National Government throughout the country.
Ø It is a general tax since it is levied without any specific or
predetermined purpose. Hence, it may be appropriated for
general purposes.
Ø It is an excise tax as it is imposed on the right or privilege of
a person to receive or earn an income.
 FEATURES OF THE PHILIPPINE
INCOME TAX SYSTEM
Features of the Philippine Income Tax System
ØIt is a direct tax because the tax burden is borne by the
income recipient upon whom the tax is imposed.
ØIndividual income tax system is mainly progressive in nature;
corporations in general are taxed at a flat rate of 25% of
net income.
ØAdopts a semi-global tax system.
ØAdopts a comprehensive tax situs.
INCOME, IN GENERAL
 INCOME

What is income?
 INCOME, DEFINED

• Income may be defined as the amount of

money coming to a person or corporation
within a specified amount of time, whether as
payment for services, interest, or profits from
investments.
 INCOME, DEFINED

• Income means all wealth which flows into the

taxpayer, other than return of capital.
• Income means profit or gains.
 CAPITAL, DEFINED

• On the other hand, capital constitutes the

investment which is the source of the income.
 INCOME VS. CAPITAL

• The essential difference between capital and

income is that capital is the fund, while
income is the flow from that fund.
• Capital is wealth, while income is the service of
wealth.
• Capital is the tree, while income is the fruit of
such tree. (Madrigal vs. Rafferty, G.R. No. L-
12287, August 7, 1918).
 EXERCISE

On December 24, 2024, Jose loaned the

amount of PHP 2 Million to Juan. The loan is due
on March 24, 2025 and Juan is obligated to pay
PHP 2.1 million, the PHP 100,000 pertains to the
interest from the loan. The BIR subjected the
whole PHP 2.1 million to income tax.

Is the BIR correct?

GROSS INCOME
 GROSS INCOME, DEFINED
Section 32 (A) of the Tax Code defines gross income as follows:
Except when otherwise provided in this Title, gross income means 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;
 GROSS INCOME, DEFINED
Section 32 (A) of the Tax Code defines gross income as follows:
Except when otherwise provided in this Title, gross income means all income
derived from whatever source, including (but not limited to) the following
items:
(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.
 EXERCISE
Constance owns and operates an illegal gambling
business. In one year, she was able to earn PHP
2,000,000 from the operations of her gambling
business. When the CIR discovered her income from
said business, she was assessed with deficiency
income tax. Constance argued that income tax
applies to legal income, not to illegal income.

Is the contention of Constance correct?

 GROSS INCOME, DEFINED
• Gross income does not include monies and receipts
entrusted to the taxpayer which do not belong to
them and do not redound to the benefit of said
taxpayer.
 EXERCISE
Pioneer Woodlands Condominium Corporation was
established on January 1, 2023. Since then, the Owners
Association, through the Corporation’s Board of Trustees,
collects Association Dues that are used on the maintenance
and improvement of the common areas of the condominium
for the benefit of the condominium owners.

Are the association dues taxable?

 FORMS AND VALUATION OF
INCOME
Forms of Income
Income may be realized in any form, whether in money,
property, services, or indirect economic benefit. It includes
the forms of income specifically described as gains derived
from sale or disposition of capital or assets.
Valuation of Income
The amount of income to be recognized is generally the
value received or which the taxpayer has the right to
receive.
 CLASSIFICATION OF INCOME
Income as to source
a. Compensation Income
b. Professional Income
c. Business Income
d. Other Income
 CLASSIFICATION OF INCOME
Income as to territorial source (Situs of Taxation)
a. Income within the Philippines
b. Income without (outside) the Philippines
c. Mixed income (partly within and partly without)
 CLASSIFICATION OF INCOME
Income as to taxability
a. Taxable Income
• Ordinary or regular income subject to basis or normal tax
rate for individuals or corporations, as the case maybe.
• Passive income - Passive income is income that you can
earn with relatively minimal effort, such as renting out a
property or earning money from a business without much
active participation.
 CLASSIFICATION OF INCOME
Income as to taxability
a. Taxable Income
• Capital gains subject to capital gains tax such as:
• Gain on sale of shares of stocks of domestic corporations
not listed in the stock exchange; and
• Sale of real properties classified as capital assets located in
the Philippines.
• Special Income subject to special rates.
b. Tax exempt income
TAXABLE INCOME
 TAXABLE INCOME, DEFINED
SEC. 31. Taxable Income Defined. -The term ‘taxable
income’ means the pertinent items of gross income specified
in this Code, less the deductions, if any, authorized for such
types of income by this Code or other special laws
 TAXABLE INCOME, DEFINED
For income to be taxable, the following requisites must be
met:
a) There must be gain;
b) The gain must be realized or received; and
c) The gain must not be excluded by law or treaty from
taxation. (CIR vs. Benedicto, G.R. No. 191999, July 30,
2014)
 TAXABLE INCOME, DEFINED
Hence, when dealing with money or property, the questions
you should ask first to determine is such is taxable are:
a) Is this capital or is it income?
b) Has it been realized/received or is it merely inchoate?
 TAXABLE INCOME
When is gain realized?
• The mere increase in the value of property without actual
realization, either trough sale or other disposition, is not
taxable.
• The realization of income need not take the form of
actual receipt or property by the taxpayer as it may occur
as where there is a constructive receipt.
 TAXABLE INCOME
Constructive Receipt
• Payment is credited to the payee’s account; or
• Payment is set aside for the payee, or otherwise made
available so the payee may draw upon it anytime, or so
the payee.
 EXERCISE
On January 3, 2023, the Geller and Geller Company
purchased an equipment costing PHP 3 Million pesos. The
Company uses the Revaluation Method for PPEs. On
December 31, 2023, the fair value of the property increased
to PHP 4 Million pesos. The BIR subjected the PHP 1 Million
increase in value of the property to income tax.

Is the BIR correct?

 EXERCISE
True or False

a. Cash and property dividends are taxable.

b. Stock dividends are taxable.

SITUS OF TAXATION
(Place of Taxation)

Sections 152 – 165, Revenue Regulations No. 2-1940

 CLASSIFICATION OF INCOME
Income as to territorial source (Situs of Taxation)
Situs means the place of taxation of the income or the
country which has jurisdiction to impose the tax.
a. Income (earned) within the Philippines
b. Income (earned) without (outside) the Philippines
c. Mixed income (partly (earned) within and partly
(earned) outside)
INCOME FROM SOURCES WITHIN THE
PHILIPPINES
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Interest (including interest on bonds, notes and other interest
bearing obligations)

1. The loan was used here in the Philippines; OR

2. The debtor is in the Philippines
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Mr. A, an American living in Las Vegas, Nevada, extended a
loan to his friend Mr. B, a Filipino living in Mexico, Pampanga.
For the year 2023, Mr. B paid Mr. A the amount of P500,000 as
interest from the loan.

Determine the situs of the interest income earned by Mr. A.

 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Dividends

1. From a domestic corporation; and

2. From a foreign corporation unless less than 50 per cent
of its gross income for the three-year period ending
with the close of its taxable year preceding the
declaration of such dividends.
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Sugar Stans, Inc. is a Korean Corporation which derives more
than 50% of its gross income in the Philippines from the sale of
BTS merchandise for the past 3 years. The Company declared
dividends to non-resident Filipino.

Determine the situs of the dividend income received by the

non-resident Filipino.
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Services

Compensation for labor or personal service performed in the

Philippines.
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Marauders, Inc. is an American Company based in Houston,
Texas. Marauders provide services to Muggles, Inc., a
company registered and located in the Philippines. The
services are performed remotely using Marauder’s server in
the Company’s premises. Marauder’s received service fees
from Muggles Company.

Determine the situs of the service fees received by

Marauder’s Company.
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Rentals and Royalties

1. Rentals or royalties from property located within the

Philippines; or
2. From any interest in such property, including rentals or
royalties for the use of or the privilege of using in the
Philippines, patents, copyrights, secret processes and
formulas, goodwill, trademarks, trade brands,
franchises, and other like property.
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Sale of Real Property

Includes gain derived from the sale or other disposition of real

property located in the Philippines.
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Sale of Personal Property

Income derived from the purchase and sale of personal

property shall be treated as derived entirely from the country
in which sold. The world "sold" includes "exchanged".
The "country in which sold" ordinarily means the place where
the property is marketed.
 INCOME FROM SOURCES WITHIN
THE PHILIPPINES
Other Doctrines

• The place of the signing of the contract is NEVER an issue or

a factor in determining the source of income.
• It is the place of activity creating the income which is
controlling, and not the place of business or residence of
the taxpayer.
INCOME FROM SOURCES OUTSIDE THE
PHILIPPINES
 INCOME FROM SOURCES OUTSIDE
THE PHILIPPINES
• Interest other than those derived from sources within.
• Dividends other than those derived from sources within.
• Compensation from labor or personal services performed
outside the Philippines.
• Rentals or royalties from property located outside the
Philippines or any interest in such property.
• Gains, profits, income from sale of real property located
outside the Philippines.
SUMMARY OF SITUS OF TAXATION
 SUMMARY OF SITUS OF TAXATION
Income Test of Source of Income
Interest Income Residence of the DEBTOR
Dividend Income

1. From a domestic corporation 1. Income within

2. From a foreign corporation 2. Income within, if 50% or more of the
gross income of the foreign company
(for the past 3 years) was derived from
sources within the Philippines.
Otherwise, income outside the
Philippines.
Service Income Place of Performance
Rent Income Location of the Property
 SUMMARY OF SITUS OF TAXATION
Income Test of Source of Income
Royalty Income Place of the use of the intangible
Gain on sale of real property Location of the Property
Gain on sale of personal property Place of sale
Gain on sale of domestic shares of stock Income within
 SUMMARY OF SITUS OF TAXATION

Note however the case of Aces Philippines vs.

CIR (GR No. 226680, August 30,2022).
WHY DETERMINE THE SITUS OF TAXATION?
 SITUS OF TAXATION
• Knowing the situs of a particular income is vital in
determining the taxable income as some taxpayers are
taxable on their income from all sources (within and
without) while others are taxable only on income from
sources within the Philippines.
• Factors affecting Situs of Income are as follows:
• Residence or domicile of the taxpayer
• Nationality
• Sources of Income
 CLASSIFICATION OF INDIVIDUAL
Taxpayer
Resident Citizen (RC)
Non-resident citizens (NRC),
resident aliens (RA), and non-
resident aliens engaged in
trade or business (NRA – ETB)
Non-resident aliens not
engaged in trade or business
(NRA – NETB)
TAXPAYERS
Tax Base Sources of Taxable Income
Net Income Taxable for income from
sources within AND without the
Philippines
Net Income Taxable for income from
sources within the Philippines
Gross Income Taxable for income from
sources within the Philippines
 CLASSIFICATION OF CORPORATE
Taxpayer
Domestic Corporations (DC)
Resident Foreign Corporations
(RFC)
Non-resident Foreign
Corporations (NFRC)
TAXPAYERS
Tax Base Sources of Taxable Income
Net Income Taxable for income from
sources within AND without the
Philippines
Net Income Taxable for income from
sources within the Philippines
Gross Income Taxable for income from
sources within the Philippines