GROSS INCOME

Introduction to Gross Income

Income Defined

Gross income means, in its broad sense, all income from whatever source, derived within or
without the Philippines, whether legal or illegal. The tax code does not distinguish legal and illegal
income. Proceeds of embezzlement or swindling, for instance, are Income because embezzler or
swindler already has complete dominion over them and can use such for his economic benefit. In
the case of James vs. United States, the Supreme Court of the U.S. held that "If a taxpayer
receives Income, legally or illegally, without consensual recognition of obligation to repay, that
income is automatically taxable".

"Income" means all wealth which flows into the taxpayer, other than retum of capital. It imports
something distinct from principal or capital. On the other hand, "Capital" constitutes the
investment which is the source of income. Therefore, capital is fund while income is the flow.
Capital is wealth, while Income is the service of wealth. Capital is the tree while income is the fruit.
 Examples of Return of capital and OTHER THAN Return of Capital:

Mere return of capital Receipt other than mere return of capital

Collection of loans Interest paid on loans receivable

receivable Condonation of debit for services
Liquidating dividend rendered
A mere increase in the Excess of selling price over the cost of
value of property (merely an asset sold
an unrealized increase
in capital)
Forms of Income

Income may be realized in any form, whether ner in money, property. services, indirect economic benefit.
Items indirectly benefitting taxpayers are excluded from gross income. Income includes the forms of income
specifically described as gains derived from sale or other disposition of capital. It also refers to the amount of
money coming to a person or corporation within a specified time, whether as payment of services, interest, or
profits from investment.

Valuation of Income

The amount of income recognized is generally the value received or which the taxpayer has a right to receive.
If the services were rendered at a stipulated price, in the absence of any evidence to the contrary, such price
shall be presumed to be the fair market value of the compensation received. Transfer of land made by a
person to another in payment of services rendered in the form of attorney's fees shall be considered as part of
the gross income of the latter valued at either the fair market value or the zonal valuation, whichever is higher,
in the taxable year received.
 CLASSIFICATION OF INCOME
1. Income as to source
a. Compensation income
b. Professional income
c. Business Income
d. Other income

2. Income as to territorial source

a. Income within the Philippines
b. Income without the Phillippines
c. Mixed Income (partly within and without)

3. As to taxability
*Taxable income
a. Ordinary or Regular income subject to basic or normal tax such as the scheduler tax under Section 24(A) of the
Tax Code, as amended
•Reportable in the ITR (Quarterly and Annually, Filing)
• Subject to expanded withholding tax, if applicable
•Tax credits
•Catch-all or basket of other income
b. Certain Passive Incomes
•Subject to final withholding taxes
•Withholding taxes constitutes final payment of income tax
•Payor is obliged to withhold and remit the corresponding tax
•No need to include in the income tax return
•BIR will run after the withholding agent
•Applicable only to certain passive income derived from sources within the Philippines such as
interest income on bank deposit and royalties.

c. Capital gains subject to capital gains taxes, specifically:

•Gain on sale of shares of stock of a domestic corporation sold directly to a buyer.
• Sale of real properties classified as capital assets located in the Philippines.

d. Special income subject to special rates.

Subject to special rates and rules (i.e., income of PEZA and BOI registered companies subject to 5%
special corporate income tax as provided under the Tax Code, as amended by CREATE Act).
*Tax exempt income
a. By constitutional mandate
b. By statute (general or special)
c. By international comity (le., bilateral agreements, treaties)

TAXABLE INCOME

Taxable income means the pertinent items of gross income specified in the Tax Code,
less deductions, if any, authorized for such type of income by the Tax Code of other
special laws. It does not include income excluded by law, or which are exempt from
income tax as well as income subject to final taxes. Hence, it pertains to all income
subject to basic and creditable withholding taxes. It includes gains, profits, and
income derived from whatever source, whether legal or illegal.
Requisites for Income to be Taxable
Doctrine of constructive receipt:
a)There must be gain
The gain need not be in cash derived from sale of assets. It may It is not the actual receipt but the
occur as a result of exchange of property, payment, assumption,
reduction or cancellation of the taxpayer's indebtedness (except
right to receive that determines
gifts) or other profit realized from a completion of a transaction. when to include an amount in the
gross income(Filipinas Synthetic
b)The gain must be realized OR received Fibr Corp. vs CA). The right to
A mere increase in the value of property without actual realization, receive must be unconditional,
either through sale or other disposition, is not taxable.The realization
of income need not take the form of actual receipt or property by
valid and enforceable.
the taxpayer as it may occur as where there is a constructive receipt
of the income by the taxpayer.

The doctrine of constructive receipt complements the doctrine of actual

receipt as a test of realization of income. An amount is constructively received
when it is set aside and made available to a taxpayer without substantial
restrictions.
There is constructive receipt of income when: Importance of the Doctrine of
Constructive Receipt of Income:
>Payment is credited to payee’s account or
>Payment is set aside for the payee , or otherwise
made available to the payee may draw upon it at any It prevents a cash-basis taxpayer
time, or so the payee could have drawn upon it from deliberately turning his
during the taxable year if notice of intention to back on income and thereby
withdraw had been given without substantial
selecting the year in which he
limitations.Hence, there is no constructive receipt of
income when:
reports it.Not recognizing the
constructive receipt of income as
Constructive receipt is subject to substantial realized income clearly would
limitations
open the door to tax avoidance
Payor does not have funds necessary to make
payment and possibly, tax evasion.
The amount is not available to the taxpayer/payee
c) The gain must not be excluded by law from taxation.

Incomes that are exempt from tax by law or treaty are not considered in determining gross
income.Income is recognized in the year it is actually or constructively received in cash or cash
equivalent.

CHARACTERISTICS OF PHILIPPINE INCOME TAX

1. NATIONAL TAX-It is imposed and collected by the National Government throughout the country.
2. GENERAL TAX-It is levied without specific or predetermined purpose.Hence, the revenue from
income tax may be appropriated for general purposes.
3. EXCISE TAX- It is imposed on the right or privilege of a person to receive or earn an income.
4. DIRECT TAX-It is payable by the person upon whom it is directly imposed by law.It cannot be shifted
or passed on to others
5. PROGRESSIVE TAX-It is based upon one’s ability to pay.The rate of income tax increases as the tax
base increases.
 INCOME TAX SYSTEMS

1.) SCHEDULAR TAX SYSTEM VS. GLOBAL TAX SYSTEM

Under a “Schedular System”, the various types/terms of income

(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.On the other hand, all income received by a taxpayer
under the “Global Tax System” 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.The distinctions of the two income tac
systems are summarized as follows:
2).GROSS INCOME TAXATION VS. NET INCOME TAXATION

The income tax system of the Philippines may be characterized under two
general categories.The Gross income taxation and Net Income taxation.The
different componets of gross income for tax purposes are enumerated under
Section 32 of the Tax Code, as amended.
 BASIC FEATURES OF PHILIPPINE INCOME TAXATION

1.) It has adopted a comprehensive tax situs by using the nationality,residence , and
source rules.This makes citizens and residenr aliens taxable on their income derived
from all sources while non-resident aliens are taxed only on their income derived
from within the Philippines.Domestic corporations are also taxed on universal income
while foreign corporations are taxed only on income from within.

2.) The individual income tax system is mainly progressive in nature in that it provides
a graduated rates of income tax.Corporations in general are taxed at a flat rate of
either 20%, or 25% under the CREATE Act.

3.) It has retained more schedular than global features with respect to individual
taxpayers but has maintained a more global treatment on corporations.
Chapter 7 7-Introduction to Gress Incene

SITUS (SOURCE/PLACE) OF INCOME

Gross income may be derived entirely from sources within the Philippines, entirely from sources
without the Philippines, or from sources partly within and partly without the Philippines.

Knowledge of the "situs" of a particular income is vital in determining the taxable income as some
taxpayers are taxable on their income from all sources (income within and without such as in the
case of resident citizens and domestic corporations) while others are taxable only on their income
from sources within the Philippines only.

Factors affecting Situs of income are as follows:

Residence or domicile of the taxpayer
Nationality
Source of income
RULES in determining the "situs" of income:

1. Interest

Interest income refers to income derived from interest on bonds, notes or other interest-bearing obligations of residents, corporate or
otherwise.

2. Income from services

Income from services refers to compensation for labor or personal services performed.

3. Rentals and Royalties

The test of source of income is the location of the property or place where the intangible is used.

a. The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right.

b. The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment.

c. The supply of scientific, technical, industrial or commercial knowledge or information.

d. The supply of any assistance that is ancillary and subsidiary to, and is fumished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in paragraph.

e. The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging
to,

f. Technical advice, assistance or services rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project or scheme; and the use of or the right to use

-Motion picture films;

-Films or video tapes for use in connection with television; and
-Tapes for use in connection with radio broadcasting.

4. Gain on sale of real property. The test of source of income is the location of the real property.

5. Gain on sale of personal property

The test of source of income is the "place of sale except sate of shares of stocks of a domestic corporation a and income
derived from Gaine, profita and income ne derived from the purchase of personal property within and its sale without the
Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived
entirely form sources within the country in which is sold.
6.Considered as purely income within or purely Income without the Philippines or partly income within and
without. The following rules shall be observed.

7.Mining
-The test of source of income is the place where mine is located

8. Farming
-The test of source of income is the place where farm is located

9. Manufacturing Business

Produced and sold within

Produced and sold without

Produced in whole/part within and sold without
Produced in whole/part without and sold within.

Source of income
•Within
•Without
•Partly within and without
•Partly within and without
THANK YOU!!!