INCOME TAXATION

All Income xx
Less: Exclusions xx
Gross Income xx
Less: Deductions xx
Net income xx
Tax Rate x%
Tax Payable xx
Less: Creditable
Withholding Tax xx
Tax Duexx
Income – any money/ property coming
to a person within a specified period as
payment for the services rendered
(labor), practice of trade or profession or
sale or exchange of goods /property
(trade or business), except return of
capital.
Sources: Labor or service or Capital
(trade or business or property)
Distinction between Capital and Income

1. Capital is fund, while income is a flow

from capital;

2. A fund or property existing at an instant

time is Capital, while flow of services
rendered by that Capital by the payment of
money from it or any other benefit rendered
by a fund of capital in relation to such fund
through a period of time is Income.
Distinction between Capital and Income

3. Capital is wealth, while Income is the

service of the wealth;

4. Capital is the tree, Income is the fruit;

5. Return or recovery of Capital is not

subject to income tax, while Income is
subject to income tax.
Requisites for an income to be taxable –
(When is income taxable?)

1. There must be gain or profit;

2. The gain must be realized or accrued

or received (actual or constructive);

3. It must not be exempt or excluded by

law/treaty.
 How is income realized? Tests of determining
Income -

a.) Severance test/ Theory of separability –

separation of capital and gain

b.) Substantial Alteration Test Theory – there

must be an exchange of something received
which is essentially different from that which
was parted to the extent of the benefit
received. (land for cash, inventory for cash, etc.)
 How is income realized? Tests of determining
Income -

c.) Doctrine of ownership, command or control

– exercise the power to dispose of the income.

d.) Claim of right doctrine – conditioned upon

the presence of a claim or right to the alleged
gain and the absence of a definite
unconditional obligation to return or repay that
which would otherwise constitute a gain.
Income Tax – tax on all yearly
profits, income, gains, emoluments
and the like, of persons arising from
property, profession, trade,
business, offices and activities,
whether gross or net, depending on
the class of taxpayer and of the kind
of income.
ALL INCOME P xx
Less: Exclusions xx
Gross Income P xx

Gross Income – Section 32 (A)

It is not an exclusive enumeration.

Exclusions – receipts of a taxpayer
but are not considered as income for
tax purposes because:
1. They represent return of capital;

2. They are subject to another kind of

internal revenue tax;

3. They are expressly exempt from

income tax under the law or treaty.
Gross Income under Sec. 32 (A) –

1. Compensation Income – all

remuneration for services performed
by an employee for his employer
under an Er-Ee relationship.

E.g. Salaries, wages, fees, commissions

and other similar items.
Items not considered as Compensation
Income: (Sec. 78[A])
1. Agricultural labor paid entirely in
products of the farm where the labor is
performed;
2. For domestic service in a private
home;
3. For casual labor not in the course of
employer’s trade of business;
4. For services rendered by a citizen or
resident for a foreign gov’t or int’l org.
Special provisions on Compensation
Income –
Minimum Wage Earners – exempt
from income tax
Soriano v. SoF, GR no. 184450

OFW – exempt if income/ wage is

earned outside the Phil.
Rate for Compensation Income
A. For compensation income earners (Graduated Rates)
Effective 1 January 2018

Not over PHP250,000 0%

Over 250,000 but not over 400,000 20% of the excess over PHP250,000
Over 400,000 but not over 800,000 30,000 + 25% of the excess over 400,000
Over 800,000 but not over 2,000,000 130,000 + 30% of the excess over 800,000
Over 2,000,000 but not over 8,000,000 490,000 + 32% of the excess over 2,000,000
Over 8,000,000 2,410,000 + 35% of the excess over 8,000,000

Effective 1 January 2023

Not over PHP250,000 0%
Over 250,000 but not over 400,000 15% of the excess over PHP250,000
Over 400,000 but not over 800.000 22,500 + 20% of the excess over 400,000
Over 800,000 but not over 2,000,000 102,500 + 25% of the excess over 800,000
Over 2,000,000 but not over 8,000,000 402,500 + 30% of the excess over 2,000,000
Over 8,000,000 2,202,500 + 35% of the excess over 8M

Source: TRAIN Law RA 10963

Note: For individuals earning purely
compensation income – no more
personal and additional deductions
under RA 10936 (TRAIN Law)
2. BUSINESS OR TRADE INCOME/
PROFESSIONAL INCOME
- Conduct of trade or business
- Practice or exercise of profession

“Doing”, “Engaging in” or “Transacting”

business – implies continuity of
commercial dealings and arrangements
for the purpose of commercial gain or for
purpose of and object of the business
organization.
For manufacturing, merchandising or
mining business –

Gross Sales/ Receipts P xx

Less: Cost of Goods Sold( xx)
Total P xx
Add: All income from incidental and
outside source xx
Gross Income P xx
Cases:

Luzon Stevedoring Co. v. Trinidad

(43 Phil. 803)
Commissioner v. EESC, 64 SCRA 597
AA v. CA, GR no. L-59758
Professional Income – received by a professional
in the exercise of his/ her profession, provided
that there is no employer-employee relationship.

Eg. A lawyer may practice his/her profession as a

legal officer of a corp, his salary as such is
considered compensation income, not a
professional income.
Take note that if compensation income – No
deductions.
3. GAINS DERIVED FROM DEALINGS IN PROPERTY –

a.) Real Properties

a.i – Ordinary assets
a.ii - Capital assets

b.) Personal properties

b.i - Ordinary assets
b.ii - Capital assets
Capital Assets (Sec. 39) – means property
held by the taxpayer (WoN connected with
his trade or business), but does not include
1.) Stock in trade (inventory) 2.) Property
held by the taxpayer primarily for sale
(goods for sale) to customers 3.) Property
used in the trade or business of the
taxpayer, subject to depreciation and 4.)
Real property used in the trade or business.
Capital Assets (Sec. 39) – means property held
by the taxpayer (WoN connected with his trade
or business), but does not include 1.) Stock in
trade (inventory) 2.) Property held by the
taxpayer primarily for sale (goods for sale) to
customers 3.) Property used in the trade or
business of the taxpayer, subject to depreciation
and 4.) Real property used in the trade or
business.
Nos. 1-4 are ordinary assets
Ordinary assets – business or trade income

Capital Assets – three (3) general

classifications
1.) Shares of stock of a DC;
2.) Real properties of individuals and lands
and buildings of corporations, not used in
business or trade;
3.) other types of assets, such as shares of
stock of FC.
4. INTEREST INCOME

Interest – monetary charge for the

privilege of borrowing money, typically
expressed as an annual percentage
rate

Income earner is the creditor.

Rules on the taxability of interest
income:
a.) Interest income from Phil currency
deposits and deposit substitutes (e.g.
trust funds) – 20% FWT
25% for NRA-NETB
30% for NRFC
Commissioner v. CA, et al 207 SCRA
487
Int. Income from government debt
instruments/ securities – tax rates –
same as above.

Int. income from long-term deposits

(at least 5 years maturity period) – e.g.
Time deposits – tax exempt if
individual
Corporations – 20% FWT
Int. Income from deposits under the
foreign currency deposit unit (FCDU)/ off-
shore banking unit (OBU) (foreign/ dollar
accounts)–

15% - RC, C, RA NRA ETB, DC and FC

Tax exempt – NRC, NRFC

Joint account of taxable and non-taxable

persons – pro rate
Interest Income on traditional loans –
regular business income of taxpayer
subject to graduated income tax rates.

Interest on foreign loans granted by

NRFC – subject to 20% FWT, unless a
different tax rate is prescribed by a
treaty.
Interest Income subject to Final
Withholding Tax (FWT) need not be
included in the computation of the
gross income of the taxpayer.
5. RENT INCOME – included in the computation
of gross income.

Income from lease of real properties are subject to 5%

withholding tax, based on gross rental amount.

Personal properties – in excess of P 10,000 annually, except

those under finance lease, rental of poles, satellites and
transmission facilities, rentals of billboards and similar spaces
for advertising in the Phil; cinematographic film rentals to
resident individual/ corporate owners of cinematographic
films, lessors and distributors.
Improvements by lessees on a real property?

Lessor may report the income in the following manner:

a.) Outright method – upon completion, the fair market
value of the improvement;
or
b.) Spread out method – the lessor may spread over the life
of the lease period the estimated depreciated value of the
such improvement at the termination of the lease and
report the income for each of the adequate part.
Lease and Conditional Sale –

Lease – amount of lease is considered as part of

gross income. Prepayments (advances) are taxable
income on the year the prepayment is received.

Conditional sale – (rent-to-own schemes, etc.)

Treated as sale, hence the rules on sale of assets will
apply (whether regular or capital assets).
6. ROYALTIES
Generally a passive income – thus subject to Final
Withholding Tax
Sources: Payments received for the use or the right
to use:
a.) Patent, trademark, model or design;
b.) Secret formula or process;
c.) Industrial, commercial or scientific equipment;
d.) Information concerning industrial, commercial or
scientific experience.
However, when a royalty is sold, the gain is
considered an active business income subject to
regular income tax.

Case:
Commissioner v. S.C. Johnson and Sons, GR No.
127105, 6/25/1999
Read also –
Taxation of royalty under:
RP-US Tax Treaty
RP-China Tax Treaty
7. DIVIDEND INCOME
Dividend – any distribution made by a
corporation to its shareholders out of its
earnings or profits and payable to the
shareholders, whether in money or
property.

Kinds (as to payment)

a.) Cash Dividend
b.) Property Dividend
Who gives dividends:
a.) Corporations (domestic or foreign);
b.) Joint Stock Corporation
c.) Partnerships
d.) Joint Account
e.) Association
f.) Insurance company
g.) Cooperative – tax-exempt dividend
Cash and Property Dividends are
taxable

Stock dividends (if own stocks) are not

taxable – no income on the part of the
taxpayer (shareholder).