INCOME TAX: General Principles
Features of Philippine Income Tax System
❑ DIRECT TAX- tax burden is borne by the income recipient upon whom the tax is imposed
❑ PROGRESSIVE TAX- tax rate increase as the base increases, direct taxes are to be preferred as
much as possible, indirect taxes should be minimized
❑ COMPREHENSIVE SYSTEMS adopts the:
A. Citizenship Principle- tax citizens of the Philippines within or without Philippine income
B. Residence Principle- income earned in the Philippines
C. Source Principle- source of income
❑ SEMI-SCHEDULAR OR SEMI-GLOABL TAX SYSTEM- certain passive incomes are subject to final
taxes at preferential rates while all other incomes are added together to arrive at the gross
income. After deducting the sum of allowable deductions, the taxable income is subjected to
one set of graduated tax rates for an individual or normal corporate income tax rate for
corporations.
Criteria in imposing Philippine Income tax
❑ CITIZENSHIP PRINCIPLE- a citizen taxpayer is subject to income tax: a) on his worldwide income
if he resides in the Philippines; or b) only his income from sources within the Philippines, if he
qualifies as a non-resident citizen
❑ RESIDENCE PRINCPLE- a resident alien is liable to pay income tax on his income from sources
within the Philippines but exempt from tax on his income from sources outside the Philippines
❑ SOURCE PRINCIPLE- a non-resident alien could be subject to Philippine income tax if he derives
income from sources within the Philippines such as dividend, interest, rent, or royalty (mobile
income)
Types of Philippine Income Taxes
❑ NET INCOME TAX/ TAXABLE INCOME (GI – Deductions)
❑ GROSS INCOME
❑ FINAL INCOME TAX (on passive and capital gains)
❑ FRINGE BENEFITS TAX (amount of benefits to managerial and supervisory employee paid by
employer; employee is taxed but burden is on employer)
❑ CAPITAL GAINS TAX (real property and shares of stock not traded in stock market)
❑ CORPORATE INCOME TAX (normal income tax or MCIT)
❑ MINMUM CORPORATE INCOME TAX (2% of gross income)
❑ IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
❑ BRANCH PROFIT REMITTANCE TAX
Taxable Period
General Rule: The accouting period of a taxpayer is a period of twelve (12 months).
❑ CALENDAR YEAR – accounting period from January 1 to December 31 which is allowed if the:
• Taxpayer is INDIVIDUAL
• Taxpayer is a PARTNERSHIP: under Section 52 (B) of the NIRC, in relation to Section 22 (B), a
corporation includes a partnership no matter how created or organized
• Accounting period is other than a fiscal year
• Taxpayer has no accounting period
• Taxpayer does not keep books
• Taxpayer is an estate or trust
❑ FISCAL YEAR – accounting period of twelve (12) months ending on the last day of any month
other than December which is allowed only for corporations.
❑ SHORT PERIOD – a taxpayer may have a taxable period of less than twelve months when:
• Taxpayer dies
• Corporation is newly organized
• Corporation changes its accounting period
• Corporation is dissolved
General Professional Taxable income GPP itself is not taxable,
Partnership however, individual partners
will be taxed depending on
classification
Estate and Trust Taxable income Same basis as an individual
(depending on classification of
decedent, if estate; trustor, if
trust
Domestic Corporation Taxable income Within and without the
Philippines
Resident Foreign Corporation Taxable income Within the Philippines
Non-Resident Foreign Gross income Within the Philippines
Corporation
TAXPAYER TAX BASE TAXABLE ON INCOME
Resident Citizen Taxable income Within and without the
Philippines
Non-resident Citizen Taxable income Within the Philippines
Resident Alien Taxable income Within the Philippines
Non-resident Alien engaged I Taxable income Within the Philippines
trade or business (more than
180 days)
Non-resident Alien not Taxable income Within the Philippines
engaged in trade or business
(180 days or less)
How to tax Individual Taxpayers
A. Citizens
❑ RESIDENT CITIZEN (RC) - citizen of the Philippines residing therein is taxable on all income
derived from sources within and without the Philippines
❑ NON-RESIDENT CITIZEN (NRC) - citizen of the Philippines who is taxable only on his income from
sources within the Philippines if he:
• Established the fact of his physical presence abroad with a definite intention to reside
therein
• Leaves the Philippines during the taxable year to reside abroad, as immigrant or for
employment on a permanent basis
• Works and derives income from abroad and whose employment requires him to be
physically present abroad most of the time (I.e., not less that 183 days) during the taxable
year
• Was previously considered as nonresident citizen arrives in the Philippines at any time
during the taxable year to reside permanently in the Philippines
• Examples: a) Immigrant – one who leaves the Philippines to reside abroad as an immigrant
for which a foreign visa has been secured and b) Permanent employee abroad – one who
leaves the Philippines and works abroad on a more or less permanent basis
• Taxpayer shall submit proof to the CIR to show his intention of leaving the Philippines to
reside permanently abroad or to return to and reside in the Philippines as the case may be
• Non-resident citizens who are exempt from tax with respect to income derived from sources
outside the Philippines shall no longer be required to file information returns from sources
outside the Philippines beginning 2001
❑ CONTRACT WORKER OR OVERSEAS CONTRACT WORKER (OCW) - one who leaves the
Philippines on account of a contract of employment which is renewed from time to time under
such circumstance as to require him toa be physically present abroad most of the time (Not
taxable)
• For OCWs, the time spent abroad is not material for tax exemption purposes. All that is
required is for the worker’s employment contract to pass through and be registered with
the POEA
• An OCW is a Filipino citizen who:
➢ Holds a job outside the Philippines
➢ Is physically present in that foreign country where the job is
➢ Is registered with the POEA, has valid overseas employment certificate
➢ His/her salaries and wages are paid by an employer abroad and are not borne by
any entity or person in the Philippines
B. Aliens
❑ RESIDENT ALIEN (RA) - an individual whose residence is within the Philippines and who is not a
citizen thereof is taxable only on income derived from sources within the Philippines
• One who comes to the Philippines for a definite purpose which in its nature would require
an extended stay, and make his home temporarily in the country, becomes a resident alien.
• Length of stay is indicative of intention.
• An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or not
is determined by his intentions with regard to the length and nature of his stay
• A mere floating intention, indefinite as to time, to return to another country is not sufficient
to constitute him a transient
• If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One
who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished is a transient
• But is his purpose is of such a nature that an extended stay may be necessary for its
accomplishment, and to that end the alien makes his home temporarily in the Philippines,
he becomes a resident, though it may be his intention at all times to return to his domicile
abroad when the purpose for which he came has been consummated or abandoned.
• Loss of residence by alien: An alien who has acquired residence in the Philippines retains his
status until he abandons the same and actually departs from the Philippines. A mere
intention to change his residence does not change his status. An alien who has acquired a
residence is taxable as a resident for the remainder of his stay in the Philippines
❑ NON-RESIDENT ALIEN (NRA) - an individual whose residence is not within the Philippines and
who is not a citizen thereof but doing business therein is taxable only on income from sources
within
• Engaged in trade or business (NRA-ETB) - an alien who comes and stays in the Philippines for
an aggregate period of more than 180 days during any calendar year
• Not engaged in trade or business (NRA-ETB) - an alien whose stay in the Philippines is 180
days or less
C. Special Class of Individual Employees
❑ MINIMUM WAGE EARNER – A worker in the private sector paid the statutory minimum wage,
or an employee in the public sector with compensation income of not more than the statutory
minimum wage in the non-agricultural sector where he/she is assigned
• His earning (I.e. SMW, holiday, overtime, night-shift differential and hazard pay) are exempt
from income tax pursuant to the provisions of the NIRC and other laws, general or special
❑ ALIENS employed by regional or area headquarters and regional operating headquarters of
multinational companies in the Philippines.
• The preferential tax rate of 15% is no longer applicable, without prejudice to preferential
rates under existing tax treaties
❑ ALIENS employed by regional or area headquarters and regional operating headquarters of
multinational companies in the Philippines
• The preferential tax rate of 15% is no longer applicable, without prejudice to preferential
rates under existing tax treaties
❑ ALIENS employed by offshore banking units
• His gross income is no longer subject to the preferential tax rate of 15%, without prejudice
to preferential rates under existing tax treaties
• For married individuals, the husband and wife, subject to the provision of Section 51 (D)
hereof, shall compute separately their individual income tax based in their respective total
taxable income:
• That if any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the small shall be divided equally between the
spouses for the purpose of determining their respective taxable income
• The minimum wage earners as defined in Section 22(HH) of this code shall be exempt from
the payment of income tax on their taxable income.
• Provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard
pay received by such minimum wage earners shall likewise be exempt from income tax
❑ ALIENS employed by petroleum contractors and subcontractors
• His gross income is no longer subject to the preferential tax rate of 15%, without prejudice
to preferential rates under existing tax treaties
How to tax Corporations
❑ CORPORATIONS – a corporation shall include partnership, no matter how created or organized.
It includes joint stock companies, joint accounts, associations, and insurance companies
• But does not include, for the purpose of imposing the 30% regular corporate income tax
(RCIT):
1. General professional partnership; and
2. Joint venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating
or consortium agreement under a service contract with the government
Kinds of Corporations:
➢ DOMESTIC CORPORATION (DC) - created or organized in the Philippines or under its laws and is
liable for income derived from sources within and without
➢ FOREIGN CORPORATION (FC) - organized and existing under the laws of foreign country, which
includes:
• Resident Foreign corporation (RFC) - foreign corporation engaged in trade or business
within the Philippines and is liable from sources within.
• There is no specific criterion as to what constitutes “doing” or “engaging in” or “transacting”
business. Each case must be judge in the light of its peculiar circumstances
• The term implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the functions
normally incident o, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. In order that a foreign corporation may be regarded
as doing business within a state, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent, and not one of a
temporary character
• Nonresident Foreign corporation – foreign corporation not engaged in trade or business
within the Philippines
❖ JOINT VENTURE AND CONSORTIUM
➢ Joint venture is a commercial undertaking by two or more persons, differing from a
partnership that is relates to the disposition of a single lot of goods or the completion of a
single project
➢ Consortium is an association, typically of several business companies
❑ PARTNERSHIP – taxed as a corporation; all other partnership no matter how created or
organized; includes unregistered joint ventures and business partnership
• Exception: that joint ventures are not taxable as corporations when the purpose is for:
➢ Undertaking construction projects; or
➢ Engaging in petroleum, coal and other energy operation under a service
contract with the government
• Partners in a business partnership are considered stockholders. Their distributive shares are
taxed as dividends, and thus subject to final income tax on their gross distributive share.
❑ GENERAL PROFESSIONAL PARTNERSHIPS
• Established solely for purpose of exercising common profession and no part of income
derived from engaging in trade or business
• As an entity, it is not subject to income tax
• Partners are liable for income tax on their distributive share (computed by dividing net
income of GPP)
• Each partner shall report his distributive share as part of his gross income
• Individual partners are subject to regular income tax rate on their taxable income
NON -TAXABLE PARTNERSHIP TAXABLE BUSINESS PARTNERSHIP
Distributive Share: Distributive Share:
a. Distributive share is a partner’s computed and a. Distributive share is a partner’s computed and
ascertained share in the net profits of the ascertained share in the net profits of the
partnership, partnership,
b. Whether actually distributed to the partners b. Whether actually distributed to the partners or
or not not
Will form part of the partner’s gross income in Partner’s distributive share in the net income is
the ITR subject to the graduated income tax subject to a final tax of 10% (resident citizens,
rates nonresident citizens, OCWs, or resident aliens) or
20% (NRAETB)
Will be subjected to a creditable withholding tax
of 15% (if income payments exceed P720,000 for
the current year) to be withheld and paid by the
partnership to the BIR
With regard to partner’s share in net loss of the With regard to partner’s share in net loss of the
partnership: partnership:
May be claimed as a deductible expense in his Not deductible since subject to final tax
personal income tax return
With regard to how the partnership is taxed: With regard to how the partnership is taxed:
Still required to file an annual information return Deemed and treated as corporations subject to
on their incomes and expenses for the purpose the corporate income tax rate
of ascertaining the partner’s taxable share
❑ ESTATE AND TRUST
❖ ESTATE- property, rights, and obligations of a person which are not extinguished by his
death and those that accrue thereto
❖ TRUST- arrangement created by agreement under which title to property is passed to
another for conversation or investment with the income and the corpus/principal
distributed in accordance with the directions of the creator; to be taxable as a separate
entity, grantor must have absolutely and irrevocably given up control and benefit over the
trust
❑ CO-OWNERSHIP- exist whenever the ownership of an undivided thing or right belongs to
different persons; for income tax purposes, the individual co-owners are liable for the taxes due
on their respective shares and the co-ownership itself is not considered as a separate taxable
entity
➢ There is co-ownership in the following instances:
o Two or more heir's inheritance undivided property from a decedent
o A donor makes a gift of an undivided property in favor of two or more donees
▪ It is not taxable when the activities are limited merely to preservation of the co-owned
property but the co-owners are liable for income tax in their separate and individual
capacities
▪ It is taxable when the income of the co-ownership is invested by the co-owners in
business creating a partnership
❑ INCOME TAX – A tax on all yearly profits arising from property, professions, trades, or offices, or
as a tax on a person’s income, emoluments, profits and the like. Income tax is a direct tax.
❑ INCOME
➢ Definition and Nature – income, in the broad sense, means all wealth, which flows into the
taxpayer other than as a mere return of capital. It includes the forms of income specifically
described as gains and profits, including gains derived from the sale or other disposition of
capital assets
• The essential difference between capital and income is that a capital is a fund; income is
a flow. A fund of property existing at an instant of time is called capital. A flow of
services rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital relation to such fund through a period of time is called an
income. Capital is wealth while income is the service of wealth.
• Property is a tree, income is the fruit; labor is a tree, income is the fruit; capital is a tree,
income is the fruit.
• Income – can be defined as profits or gains (Madrigal v Rafferty)
➢ When income is taxable - for taxable income to exist, gain or profit is necessary. Before a
condonation or forgiveness of debt will give rise to a taxable income, there must be an
increase in the assets of the debtor thereby enriching the latter. The condonation of debt
will not be subject to income tax if it does not result in the reduction of the taxable income
of the debtor or the debtor is in a capital deficit position after the condonation
➢ Realization of Income
• TEST OF REALIZATION- under the realization principle, revenue is the generally
recognized when both of the following conditions are met:
o The earning is complete or virtually complete; and
o An exchange has taken place
•This principle requires that revenues must be earned before they are received. Amounts
received in advance are not treated as revenue of the period in which they are received,
but as revenue of the future period or periods in which they are earned. These amounts
are carried as unearned revenue, that is liabilities to transfer goods or render services in
the future – until the earning process is complete.
❖ ACTUAL RECEIPT – occurs when there is a physical transfer of the money consideration
or its equivalent to a person
❖ CONSTRUCTIVE RECEIPT – occurs when the money consideration or its equivalent, is
placed at the control of the person who rendered the service without restrictions by the
payor
▪ EXAMPLES:
▪ Deposits in banks which are made available to the seller of service without
restrictions
▪ Issuance by the payor of a notice to offset any debt or obligation and
acceptance thereof by the seller as payment for services rendered
▪ Transfer of amounts retained by the payor for the account of the seller
➢ Recognition of Income
• Receipt of income for purposes of taxation may be actual or constructive
• The law thus recognizes income as taxable even in the absence of actual/physical
receipt. In fact, Sec. 4(e) of RR No. 12-80 (0n final tax) provides that income could be
recognized by the taxpayer either at the time of its actual receipt or its accrual,
depending on the accounting method used in recognizing income or revenue.
➢ Cash Method of accounting v Accrual Method of accounting
• The accrual method relies upon the taxpayer’s right to receive amounts or its obligation
to pay them, in opposition to actual receipt or payment, which characterizes the cash
method of accounting. Amounts of income accrue where the right to receive them
become fixed, where there is created an enforceable liability. Similarly, liabilities are
accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment *Accrual method is accepted by BIR
