INCOME, TAX SYSTEMS
1. GLOBAL TAX SYSTEM
➢ System employed where the tax system views indifferently the tax base and generally treats in
common all categories of taxable income of the individual
➢ All items of gross income, deductions, personal and additional exemptions are reported in one
income tax return and a single tax is imposed on all income received or earned, regardless of the
activities which produces the income.
➢ ALL INCOME IN ONE BASKET = TAXING THE ENTIRE BASKET.
2. SCHEDULAR TAX SYSTEM
➢ System employed where the income tax treatment varies and is made to depend on the kind or
category of taxable income of the taxpayer.
➢ Different types of activities are subjected to different types of tax rates. The tax rates depend on
the classification of taxable income and activities which produced the income.
3. SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM
➢ All compensation income, business or professional income, capital gain, passive income, and other
income not subject to final tax are added together to arrive at the gross income. After deducting the
allowable deductions and exemptions from the gross income, the taxable income is subjected to
one set of graduated taxrate for individual or normal corporate income tax rate for corporation
(Mamalateo, 2014).
➢ It is the system followed in the Philippines.
➢ Schedular means that tax rates will differ based on the tax based.
***Global is usually applied to corporations, as corporations are taxed at a singlerate, regardless
of the tax base; while the schedular system is applied to individuals as they are subjected to different
tax rates based on their bracket.
FEATURES OF THE PHILIPPINE INCOME TAX LAW
a) Direct tax– Tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax
demanded from the very person who it is intended or desired, should pay it (i.e. income tax, donor’s
tax, estate tax). On the other hand, indirect tax is a tax demanded in the first instance from one
person in the expectation and intention that he can shift the burden to someone else (i.e., valueadded tax [“VAT”], where the seller is liable to pay the output VAT, but shifts the burden to the buyer).
b) Progressive tax– Tax base increases as the tax rate increases. It is founded on the “ability to pay”
principle.
c) Comprehensive – It adopted the citizenship principle, the residence principle and the source
principle.
d) Semi-schedular or semi-global tax system
BASIC FEATURES
1. It has adopted a comprehensive tax situs by using the nationality, residence, and source rules. This
makes citizens and resident 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 income from within.
2. The individual income tax system is mainly progressive in nature in that it provides graduated rates of
income tax. Corporations in general are taxed at a flat rate of thirty-five percent (35%) of net income.3. It
has retained more scheduler than global features with respect to individual taxpayers but has maintained
a more global treatment on corporations.
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX
1. Citizenship Principle – A citizen of the Philippines residing in the Philippines is taxable on all income
derived from sources within and without the Philippines while a nonresident citizen is taxable only on
income derived from sources within the Philippines;
2. Residence Principle – All income derived by persons residing in the Philippines, whether citizens or
aliens, whether domestic or foreign corporations, shall be subject to income tax on the income derived
from sources within the Philippines.
3. Source principle – All income derived from sources within the Philippines shall be subject to income
tax.
GENERAL PRINCIPLES OF INCOME TAXATION
Except when otherwise provided in the NIRC:
1. A citizen of the Philippines residing therein is taxable on all income derived from sources within
and without the Philippines;
2. A nonresident citizen is taxable only on income derived from sources within the Philippines;
3. An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income from sources within the Philippines: Provided,
that a seaman who is a citizen of the Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged exclusively in international trade shall be
treated as an overseas contract worker;
4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived
from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources within and without the
Philippines; and,
6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only
on income derived from sources within the Philippines
Types of Philippine Income Taxes

Taxable Income
The result of the following formula (Sec. 31, NIRC):
Taxable Income = Gross Income – Allowable Deductions
Q: What are the types of Philippine Income Tax?
A: The following are the types of Philippine Income Tax imposed:
1. Graduated and gross income tax for individuals (Secs. 24 and 25, NIRC);
2. Capital Gains Tax on sale or exchange of unlisted shares of stock of a domestic corporation classified
as capital asset (Secs. 24(C), 25(B), 27(D)(2), 28(A)(7)(c), and 28(B)(5)(c), NIRC);
3. Capital gains tax on sale of or exchange of real property located in the Philippines, classified as capital
asset (Secs. 24(D), 25(B), and 27(D)(5), NIRC);
4. Final withholding tax on certain passive income (Secs. 24(B), 25(A), 25(B), 27(D), 28(A)(&)(b),
28(B)(5)(b), NIRC); corporate income tax on Domestic Corporations (Sec. 27, NIRC);
6. Minimum Corporate Income Tax on Domestic Corporations (Sec. 27(E), NIRC);
7. Final Withholding Tax on income payments made to non- residents;
8. Fringe Benefits Tax (Sec. 33(A), NIRC);
9. Branch profit remittance tax (Sec. 28(A)(5), NIRC);
10. Tax on Improperly Accumulated Earnings (Sec. 29(A), NIRC); and
11. Special income tax on certain corporations.
Types of Philippine Income Taxes
Q: What is the importance of knowing the classification of a taxpayer?
A: It is important to know the classification of a taxpayer to determine the applicable:




Gross Income
Income tax rate;
Exclusion from gross income; and
Deduction.
Kinds of Taxpayers
Q: What are the classes of taxpayers?
A: Taxpayers are classified into the following:
1. Individuals
a) Citizen
i.
Resident Citizen
ii.
Non-resident Citizen
b) Aliens
i.
Resident Alien
ii.
Non-resident Alien – engaged in trade or business or not engaged in trade or business
c) Special class of individual employees – minimum wage earner.
2. Corporations
a) Domestic
b) Foreign – classified into resident or non-resident foreign corporation and joint venture and
consortium
NOTE: the term corporation shall not include GPP and a joint venture or consortium formed for purposes
of undertaking construction projects engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract with the Government. (Sec.
22(B), NIRC)
3. Partnerships
4. General Professional Partnerships (GPP)
5. Estates and Trusts
Taxable Period
Q: What is a taxable period?
A: Taxable period is the calendar year or the fiscal year upon the basis of which the net income is
computed for income tax purposes.
Q: What are the kinds of taxable periods?
A: The kinds of taxable periods are:
1. Calendar period – The twelve (12) consecutive months starting January 1 and ending on December 31.
This shall be the basis for computing net income:
When the taxpayer is an individual;
When the taxpayer does not keep books of account;
When the taxpayer has no annual accounting period; or
When the taxpayer is an estate or trust.
NOTE: Taxpayers other than a corporation are required to use only the calendar period.
2. Fiscal Period – It is a period of twelve (12) months ending on the last day of any month other than
December. (Sec. 22(Q), NIRC)
The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before
the fourth (4th)of the month following the close of the fiscal year, as thecase may be.
3. Short Period
GENERAL RULE: The taxable period, whether it is a calendar year or fiscal year always consists of
twelve (12)months.
EXCEPTION: The following are instances when the taxpayer may have a taxable period shorter
than twelve (12) months:
When the corporation is newly organized and commenced operations on any day within a
year;
When the corporation changes its accounting period;
When a corporation is dissolved;
When a Commissioner of Internal Revenue, by authority, terminates the taxable period of a
taxpayer; and
In case of final return of the decedent and such period ends at the time of his death.
Period wherein Income and Deductions are to be Taken Up
Q: When should items of Gross Income be included?
A: GENERAL RULE: The amount of all items of gross income shall be included in the gross income for
the taxable year in which these were received by the taxpayer;
Unless, under methods of accounting permitted by Section 43 of the NIRC, any such amounts are to
be properlyaccounted for as of a different period. (Section 44, NIRC)
Q: When shall Deductions and Credits be taken up?
A: Deductions shall be taken up in the taxable year it is “paid or accrued” or “paid or incurred”. (Section 45,
NIRC)
NOTE: In case of death of a taxpayer, his taxable income shall be the amount of income accrued up to
the time of his death and he shall be allowed deductions of an amount of expenses accrued up to the date
of his death.
In case a taxpayer elects to change his accounting period, the net income shall be computed on the basis
of the new accounting period. This must be with the approval of the CIR and is subject to the provisions
of Section 47 of the NIRC.
CONCEPT OF INCOME
Definition of Income
Q: What is Income?
A: Income refers to all wealth which flows into the taxpayer other than a mere return of capital.
 An income is an amount of money coming to a person or corporation within a specified time, whether as
payment for services, interest or profit from investment.
 Unless otherwise specified, it means cash or its equivalent. (Hernando Conwi vs. CIR G.R. No. 48532
August 31, 1992)
Q: Differentiate income and capital
A: Income is a flow; and Capital is a fund. Capital is a tree; income the fruit. (Madrigal v. Raferty, G.R.
No. 12287, [August 7, 1918], 38 PHIL 414-424)
WHEN INCOME IS TAXABLE?
Q: What are the requisites for income to be taxable?
A: For income to be taxable:
There must be gain;
The gain must be realized or received; and
Gain must not be excluded by law or treaty from taxation. (Chamber of Real Estate and Builders’
Association v. Romulo, G.R. No. 160756, March 9, 2010)
TESTS IN DETERMINING WHETHER INCOME IS EARNED FOR TAX PURPOSES
Q: What are the tests in determining whether income is earned for tax purposes?
A: The following are the tests in determining whether income is earned for tax purposes:
1. Realization Test – Revenue is generally recognized when both of the following conditions met:
a) The earning process is complete or virtually complete; and
b) An exchange has taken place. (Manila Mandarin Hotels, Inc. vs. CIR, CTA case no. 5046, March
24, 1997)
c) “Income” in an income tax law means cash or its equivalent, unless it is otherwise specified. It
does not mean chooses in action or unrealized increments in the value of property. (Fisher v.
Trinidad, supra.)
2. Claim of Right Doctrine – A taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of a definite unconditional obligation to return or repay.
3. Economic Benefit Test, Doctrine of Proprietary Interest – taking into consideration the pertinent
provisions of law, income realized is taxable only to the extent that the taxpayer is economically benefited.
4. Severance Test – income is recognized when there is separation of something which is of exchangeable
value. (Eisner v. Macomber, 252 US 189, 1920)
5. All-events Test
Requirements:
a) Fixing of a right to income or liability to pay; and
b) Availability of reasonable accurate determination of such income or liability. (CIR vs. Isabela
Cultural Corporation, February 12, 2007)
NOTE: The amount of liability does not have to be determined exactly, it must be determined with reasonable
accuracy. Reasonable accuracy implies something less than an exact or completely accurate amount. (Ibid.)
6. Flow of Wealth Test – The test of taxability is the “source”, that is the property, activity, or service that
produced the income, which determines whether any gain was derived from the transaction. (CIR v. British
Overseas Airways Corporation, G.R. No. L-65773-74, April 30, 1987)
METHODS OF ACCOUNTING
Distinguish Between Cash and Accrual Method
Q: Differentiate cash vs. accrual method of accounting.
A:
Cash Basis
Cash basis is a method of accounting whereby all items of gross income received during the year shall be
accounted for such taxable year and that only expenses actually paid for shall be claimed as deductions
during the year.
The method of accounting is generally used by taxpayers who do not keep regular books of accounts.
Under this method, income is realized upon receipt of cash or its equivalent including those constructively
received (such as deposits for the taxpayer’s account by customers) but not including gifts or donations.
Users of cash basis accounting are mostly individuals engaged in business and practice of profession,
professional partnerships and professional service organizations.
Accrual Basis
Accrual basis is a method of accounting for income in the period it is earned regardless of whether it
has been received or not.
In the same manner, expenses are accounted for in the period they are incurred and not in the period
they are paid.
Under this method, net income is being measured by the excess of income earned during the period
over the expenses incurred.
Expenses not being claimed as deductions by taxpayers in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year.
Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for next year.
Used by taxpayers whose nature of business uses inventories since this method of accounting will
correctly reflect income by matching purchases and expenses against sales.
This method is being applied by most medium and large corporations. (Revenue Audit Memorandum
Order No. 1-00, [March 17, 2000])
SPECIAL METHODS OF ACCOUNTING
For Long-Term Contracts
Q: How are long-term contracts accounted for?
A: Income from long-term contracts is recognized based on the percentage of completion of the
project. (Section 48, NIRC)
NOTE: Long-term contracts, for the purposes of this discussion, shall mean building,
installation or construction contracts covering a period in excess of one (1) year.
Installment Basis
Q: How are sales on an installment basis accounted for?
A: The following shall account for their income payments as follows:
1. Sales of Dealers in Personal Property –
Under rules and regulations prescribed by the Secretary of Finance
Upon recommendation of the Commissioner
A person who regularly sells or otherwise disposes of personal property on the installment
plan
May return as income therefrom in any taxable year
That proportion of the installment payments actually received in that year
Which the gross profit realized or to be realized when payment is completed
Bears to the total contract price.
2. Sales of Realty and Casual Sales of Personality – In the case of a casual sale or other casual
disposition of personal property
Other than property of a kind which would properly be included in the inventory of the
taxpayer.
If on hand at the close of the taxable year,
For a price exceeding Php1,000 or
Of a sale or other disposition of real property.
If in either case the initial payments do not exceed twenty five percent (25%) of the
selling price
The income may
Under the rules and regulations prescribed by the Secretary of Finance
Upon recommendation of the Commissioned
Be returned on the basis and in the manner above prescribed in this Section.
NOTE: “Initial Payments” means
The payments received in cash or property
Other than evidence of indebtedness
Of the purchaser during the taxable period in which the sale or other disposition is made.
3. Sale of Real Property Considered as Capital Asset by Individuals –
An individual who sells or disposes of real property,
Considered as capital asset, and
Is otherwise qualified to
report the gain therefrom under Subsection (B)
May pay the capital gains tax in installments
Under rules and regulations to be promulgated by the Secretary of Finance
Upon recommendation of the Commissioner.
SITUS (SOURCE / PLACE) OF INCOME
Income
Situs of Income
Interest
Residence of the debtor
Dividends
From Domestic Corporation: Income within From
Foreign Corporation: Income within, subject to 50%
Rule
Services
Place of performance
Rentals
Location of the property
Royalties
Place of use or exercise
Sales of Real Property
Location of realty
Sale of Personal property
Produced within and sold without (vice
versa): Partly within and without
Purchase within and sold without (vice versa):
Entirely in the country sold
Shares of stock of a domestic corporation:
Entirely from sources within
COMPLIANCE REQUIREMENTS
Any merchant or business organization, in whatever form or nature, if liable for any of the national tax
as provided for by the Tax Code, are mandated to comply with the following requirements:
1. Registration with the Bureau of Internal Revenue
2. Keeping of accounting books/records
3. Issuance of sales invoices and official receipts
4. Filing of tax returns and payments of related taxes
5. Withholding of taxes on specified / certain payments to suppliers-sellers
Registration Fee Payment of P530 for the following:
P500 Registration fee
P30 for loose DST or Proof of Payment of Annual Registration Fee (ARF).
GROSS INCOME
Definition
Gross Income – means the total amount of income earned/ received without yet considering any
deduction.
Distinguish: gross income, net income, and taxable income
Gros income (Gl) – Refers to the total amount of income, gains, profits earned and derived from whatever
sources without yet considering any deduction permitted by law, if any.
Net Income (NI) – Refers to the total amount of remaining income, gain, profit earned and derived from
whatever sources after considering the deductions permitted by law.
Taxable Income – Refers to a gain, profit or income item which is subject to income tax based either
gross amount (final income tax) or at net amount (basic income tax)
Sources of income subject to tax
a. Compensation income
Refers to all kinds of items of remunerations /emoluments earned or received in return for services
rendered.
Compensation income maybe earned or derived from an employer employee relationship or from
other contractual service activities which are not compensation income from employment. These are
deemed taxable income and unless expressly exempt from income tax or subject to final income tax,
shall be considered income subject to the basic income tax, hence are part of the gross income on
the taxpayer's income tax return.
Compensation income for services rendered, out of an employee-employer relationship, shall
include, among others, the following remuneration items:
1. Salaries, wages and allowances
2. Fees, including directors fee
3. Commissions, fringe benefits
4. Honoraria
5. Tips, gratuities
6. Profit sharing
Compensation for services are ordinarily earned and received in the form of money but these may
also be received in kind or both in money and in kind. Income representing non-cash receipts or
property are measured and recognized at their fair market value in the period earned or received.
b. Fringe benefits
is defined as any good, service or other benefits furnished or granted in cash or in kind by an employer
to its employees, whether officials, managers, supervisors, or rank and files.
c. Professional income
fees received by a professional from the practice of his profession
PROVIDED: That there is no emp-emp relationship between him and his client. – otherwise it is
deemed as compensation income.
d. Income from business
Business Income – These are earnings resulting or derived from its main line of commercial
business activity, such as gross profit from sales of goods or services. This refers to the
income, profit or gain earned and derived from the conduct or pursuit of trade, business or
the exercise of a profession
e. Income from dealings in property
These refer to profit, income, or gain earned /derived from the sale or exchange of assets.
When an asset is resulting gain or loss might arise. When the sales price of said property is
greater than its cost basis sold, there is a gain, whereas there is a loss if the reverse occurred.
Examples are gain or loss from sale of personal jewelry, gain or loss from sale of used
business furniture and equipment.
f. Passive investment income
g. Annuities and proceeds from life insurance or other types of insurance
h. Prizes and awards
In general, prizes, winnings income on achievements, competitions, raffle draws that are neither
expressly exempt from income tax nor subject to final income tax are deemed/treated as taxable
income subject to basic income tax, hence shall be included in the gross income on the income tax
returns of the taxpayers.
i. Pension, retirement benefit, or separation pay
These income refer to the specified allowances or compensations paid in a lump-sum or regularly
(usually on a monthly basis) to a retired employee as a result of his retirement/separation from
employment. In general, pension, retirement, gratuity pays/benefits are treated as income subject to
basic income tax hence shall be included in the gross income on the income tax returns of the
taxpayers, unless all requisites fu exemption are met complied with.
The following pension benefits, retirement benefits, gratuity benefits received by an individual shall
be classified as exempt from income tax:
1. Pension, retirement, gratuity benefits received from GSIS /SSS are exempt from income tax;
2. Pension, retirement, gratuity benefits/pays received from private employers;
a. Exempt from Income tax if complied with all the three (3) requirements:
1) Age is fifty years (50) or over;
2) Length of Service is ten (10) years or over;
3) First retirement only
b. Taxable Income subject to basic income tax, if violated any of the above-cited three
requirements.
Separation Pay/Termination Pay
j. Income from any source
These are certain receipts, whether cash or non-cash, that are considered/deemed income and shall
be part of the reportable taxable gross income on the taxpayers income tax returns, such as:
1. Income of a taxable estate distributed or credited to the taxpayers-heirs
2. Income of a taxable trust, distributed or credited to the taxpayers-beneficiary or grantor
3. Gain income from illegal and immoral transactions /activities.
4. Condonation /forgiveness of receivables in return for services rendered.
Exclusions
There are three criteria or reasons why receipts (cash or non-cash) are excluded from the computation or the gross
income reportable on the taxpayer's income tax return, to wit:
1. The receipt does not fall under the definition of the word "Income", such as a return of capital which is
classified as not income item. Examples are cash collection of the principal 'amount of loan receivable
excluding interest if there is any, sale of property at cost price if without gain, gifts and inheritance.
2. The receipt falls under the definition of the word Income", but is expressly classified as income exempt
from income tax. Examples are 13h month pay, bonus and incentive pay not exceeding P90,000 per year,
and prizes or winnings of P10,000 or less from the PCSO lotto/sweepstakes tickets draws.
3. The receipt falls under the definition of the word "Income" but is expressly classified as income subject
to final income tax. Examples are interest income on bank deposits in Philippines which is subject to a
final income tax of 20%, and sale of real property in Philippines held as capital asset which is subject to
6% on the gross sales price or fair market value, whichever amount is higher.