Income Taxation: Regular Income Tax Notes by:

TZM
Chapter 7: Gross Income - Income may realized in any
form, whether in
 Gross income = Gross taxable
 money
income
 property
- Means total income of a
 services
taxpayer subject to tax.
 indirect economic benefit
- All income from whatever
- items indirectly benefitting
source, derived within or
taxpayers are excluded from
without the Philippines, legal or
gross income.
illegal.
- Includes GAINS
 Does not distinguished
 derived from sale or
legal and illegal income.
other disposition of
- “if a taxpayer receives income,
capital.
legally or illegally, without
- Also refer to the amount of
consensual recognition of
money coming to a person or
obligation to repay, that
corporation within specified
income is automatically
time, whether as payment of
taxable.”
services, interest, or profits
 Income from investments.
- All the wealth which flows into
 Valuation of Income
the taxpayer, other than return
- Amount of income recognized
of capital.
is generally the value received
 Capital or which the taxpayer has a
- Constitutes the investment right to receive.
which is the source of income. - Service
 Capital is the FUND, while income  Stipulated price
is the flow.  Absence of Stipulated
 Capital is wealth, while income is price, Fair Value.
the service of wealth. - Transfer of land
 Examples of return of capital and  Fair Market valule or
other than return of capital: Zonal Valuation, WHICH
Mere return of capital EVER IS HIGHER.
 Collection of loans  Classification of Income
receivable 1. Income as to SOURCE;
 Liquidating dividend a. Compensation Income
 A mere increase in the b. Professional Income
value of property(merely c. Business Income
an unrealized increase in d. Other Income
capital) 2. Income as to territorial source;
Receipt other than mere a. Income w/in PH
return of capital b. Income w/out PH
 Interest paid on loans c. Mixed Income (Partly w/in
receivable and w/out)
 Condonation of debt for 3. As to Taxablity
services rendered - Taxable Income
 Excess of selling price over a. Ordinary or Regular Income
the cost of an asset sold b. Passive Income
 Form of Income c. Capital Gains
Income Taxation: Regular Income Tax Notes by:
TZM
d. Special Income subject to  Payor does not
special rates have funds
- Tax exempt income necessary to make
a. By constitutional mandate payment
b. By statute(general or  The amount is not
special) available to the
c. By International comity taxpayer/payee
 Taxable Income
- The pertinent items of gross IMPORTANCE OF THE DOCTRINE OF
CONSTRUCTIVE RECEIPT OF INCOME
income specified less the
It prevents a cash-basis taxpayer from
deductions and/or personal
deliberately turning his back on
and additional exemptions. income and thereby selecting the
Gross Income P xxx year in which he reports it.
Less: Allowable xxx c. the gain must not be excluded
Deductions by law from taxation
Taxable Income P xxx Characteristics of PH Income Tax
Requisites for Income to be
Taxable 1. National Tax – imposed and
a. There must be a gain collected by the National Gov’t.
b. The gain must be realized OR 2. General Tax – levied w/out
received specific or predetermined
purpose.
DOCTRINE OF CONSTRUCTIVE 3. Excise Tax – imposed on the right
RECEIPT
or privilege of a person to receive
It is not the actual receipt but the
or earn an income
right to receive that determines when
to include an amount in the gross Excise Tax is a tax on the
income. production, sale or consumption
The right to receive must be of a commodity in a country.
unconditional, valid and enforceable. (BIR)
- the doctrine of constructive
receipt complements the 4. Direct Tax – payable by the
doctrine of actual receipt as a person upon whom it is directly
test of realization of income. imposed by law.
- There is constructive receipt of 5. Progressive Tax – based upon
income when: one’s ability to pay.
 Payment is credited to  Income Tax System
payee’s account. 1. Schedular Tax System vs
 Payment is set aside for Global Tax System
the payee, or made - Schedular tax system – in
available so the payee accordance with schedules
may draw upon it at the characterized by graduated tax
time. Hence there is no rates.
constructive receipt of - Global Tax - @ fixed rate
income when;
 Constructive SCHEDU GLOBAL
receipt is subject LAR
Tax Treatment: Income tax Uniform tax
to substantial rules varies treatment of
limitations and made to rules
Income Taxation: Regular Income Tax Notes by:
TZM
depend on 1. Adopted a comprehensive tax
the kind or
category of situs, by using nationality,
taxable residence and source rules.
income of
the taxpayer
2. Progressive in nature
Characteristics 3. More scheduler than global
1. Classificatio Categorizes Does not features.
n of Income or classifies “generally”
income catergorize  Situs (Source/place) of Income
or classify GR: the taxing power cannot go
income
2. Tax Rates Imposes diff. Imposes beyond the territorial limits of the
tax uniform tax taxing authority.
treatment rates
and rates
Factors of Situs of income:
3. Applicability Individual NRFC, NRA- - Residences or domicile
taxpayers NETB - Nationality
APPROACHED USED IN THE PH - Source of income
Partly scheduler (Income tax for Rules in Situs of income:
individuals) and partly global(Income 1. Interest
tax for corporations).  Test: residence of the
2. Gross Income Taxation vs Net DEBTOR
Income Taxation 2. Income from services
 Test: the place or
GROSS NET INCOME performance of the
INCOME TAXATION service rendered.
TAXATION
Deduction
 When services are
 No  Allows
and deduction or deductions/exem performed w/in the PH
Exemption exemption ptions and partly w/out the PH,
s allowed - Examples:
- Example:
the allocation should be
Returnable
Income Income based on “time” redered
subject to w/in and w/out the PH
final taxes
No . of days of performance ∈RP
Tax Gross Taxable
No . of days of performance∈RP∧outsi
Base income income
Applicabilit  NRA-NETB  Individual
y  Nonresident taxpayers 3. Rentals and Royalties
corp except  Test: location of the
 Corporate tax property or place where
payers except
non-resident the intangible is used.
foreign corp.  Refer to rentals and
Advantage  Minimizes  Just, fair and
s source of reasonable royalties or from any
graft and  Equitable relief interest. Including;
corruption to tax payers
due to
a. The use of any copy
 More revenue
minimization to gov’t right, patent, design
of margin of  Minimizes tax or model, plan, secret
discretion evasion (by
exercised by BIR) formula or process,
revenue goodwill, trademark,
district
officers trade brand or other
 Simplifies like property or right.
tax system
b. Any industrial,
 Basic features of PH Income commercial or
Taxation scientific equipment
Income Taxation: Regular Income Tax Notes by:
TZM
c. Supply of scientific, PH or partly income w/in
technical, industrial or and w/out.
commercial  Rules:
knowledge or
Sources of Source of Income
information
Dividend
d. Supply of assistance, Domestic Corporation Income is purely from
in a, b, c, - knowledge PH Sources
e. Supply of services by Foreign Corpoation
a non-resident person  Based on the
ratio of the gross If Ratio is:
or his employee in income (GI) for  <50%: Income is
connection wit the preceding 3yrs treated as
use of property. prior t entirely derived
declaration of from sources
f. Technical advice, dividends outside of the PH
assistance or services derived from PH  >=50%: Income
rendered. Like sources. is derived Partyly
Ratio: from sources w/in
 Motion picture
GI −Phils and partly w/out
films × Dividend the PH.
GI−World
 Films or video 7. Mining
tapes for use in  Test: place where mine
connection w/ tv is located
 Tapes for use in 8. Farming
connection w/  Test: place where farm is
radio located
broadcasting 9. Manufacturing Business
4. Gain on sale of real property
 Test: the location of the Source of Income
real property Produced and w/in
5. Gain on sale of personal sold w/in
property Produced and w/out
 Test: “place of sale” sold w/out
Produced in Partly w/in and
except sale of shares of
whole/party w/in w/out
stocks of a domestic
and sold w/out
corporation
Produced in Partly w/in and
 w/in or w/out shall whole/part w/out w/out
derived entirely form and sold w/in
sources within the - Produced = created,
country in which it is fabricated, manufactured,
sold. extracted, processed, cured or
 Gain from sale of stock in aged.
a domestic corporation –
treated as derived from
source w/in PH
regardless of where the
said shares are sold.
6. Dividend income
 Can be purely income or
purely income w/out the
Income Taxation: Regular Income Tax Notes by:
TZM