Income Tax
- only resident citizens and domestic corporations are
taxable on income derived from all sources, whether
within or outside the Philippines, while the other kinds of
taxpayers are subject to tax only on income derived from
Philippine sources
- tax on the net income or the entire income received or
realized in one taxable year
Income
- gain derived from capital, labor, or both; including
profits gained from dealings in property or as well as any
asset clearly realized whether earned or not
- all wealth which flows into the taxpayer other than as a
mere return on capital
Functions of Income Tax
 to provide large amounts of revenue
 to offset regressive sales and consumption taxes
and together with estate taxes
 to mitigate the evils arising from the inequalities
in the distribution of income and wealth which
are considered deterrents to social progress, by
progressive scheme of taxation
Nature and Purpose of Income Tax
 excise tax since it NOT a tax on persons or
property but a tax on the right to earn income by
an individual or entity for governmental needs
 self-assessing/self-computed
 imposed primarily to raise revenue
Classification of Taxpayers
1. Individuals
a. Citizens who are divided into:
 Resident citizens
 Non-resident citizens
b. Aliens who are divided into:
 Resident aliens
 Non-resident aliens
2. Corporations
a. Domestic
b. Foreign
 Resident
 Non-resident
3. General Partnerships
a. General professional partnership
b. General co-partnership or business
partnerships
4. Estates and trusts
Rates of Individual Income Tax
 Taxes are at a progressive or graduated rate
in the assumption that a person’s ability to
shoulder tax burden increases more rapidly
as income becomes higher
 Tax imposed ranges from 5% to 32%
depending to amount of income
 Married individuals shall separately
compute their individual income tax based
on total taxable income; if it cannot be
determined, it shall be divided equally
 Minimum wage earners are exempt from
payment of income tax; minimum wage
earners are workers in the private sector
with compensation income of not more
than the statutory minimum wage
 Non-resident aliens whose income is
sourced from the Philippines are taxed the
same manner as individual citizens
 For non-resident aliens not so engaged, tax
is 25% of the entire or gross income received
from sources within the Philippines, 15% of
the gross income received as compensation
 Certain passive incomes are subject to
separate and final income tax at fixed rates
Global and Schedular Systems of Taxation
1. Schedular Treatment – income tax treatment
varies and made to depend on the kind or
category of taxable income of the taxpayer
2. Global Treatment – tax treatment views
indifferently the tax base and generally treats in
common all categories of taxable income of the
taxpayer without any distinction as to their type
or nature, and subjects them to a single set of
graduated or fix rates
Systems of taxing income under the Tax Code
1. Under the global tax system, gross compensation
income is aggregated with income from
business, trade, or profession which is then
subjected to a progressive, graduated tax rates.
Employees, self-employed, professionals, and
those with mixed income are subjected to same
tax rates. Corporations’ taxable income is subject
to a flat tax rate.
2. Under the schedular tax system, capital gains
and other passive income subject to final
withholding tax are subject to different sets of
preferential tax rates.
Taxable Income
- Tax base upon which the tax rate is applied or
multiplied to determine the taxpayer’s liability
- Gross income (non-exempt income) less
deductions specified in the tax code or other
special laws
Taxable Income of an Individual
1. Net Compensation Income
- Gross compensation or employment income less
personal/additional exemption, premium
payments on health insurance
2. Net Income
- Gross business/professional income less
allowable deductions
3. Gross Income received by non-resident aliens
- Subject to a flat rate of 25% of such income
Taxation of non-individual taxpayers
- Taxable income is either the net income or the
gross income
- Corporation
 Partnerships, joint stock companies,
joint accounts, associations, insurance
companies
 Domestic corporations and partnerships
are subject to 30% tax upon annual
taxable income
 Proprietary educational institutions and
non-profit hospitals are liable to tax of
10% of taxable income
- General partnerships
 General Professional Partnerships -
Formed solely to exercise common
professions, not trade or business. This is
not subject to income tax but partners
are liable to pay tax for their individual
income.
 General Co-partnerships/business
partnerships – Formed for the purpose
of engaging in trade or business and
treated as a corporation therefore will
have to pay income tax
- Estates and trusts
 Treated as separate taxable entities that
exists for the purpose of managing the
decadent’s property to the heirs. Income
tax imposed applies to income of estate
or other properties held in trust
 Estate (inheritance) refers to all the
property, rights, and obligations of a
person which are not extinguished by
death
 Trust is an arrangement created by will,
agreement or law under which title to
property is held by one person for the
benefit of another.
Taxation of partnerships/partners
 Business partnership – whether registered or not
is considered for tax purposes, corporation and
partners are considered stockholders
 Professional partnerships – not subject to
income tax and withholding tax, income tax is
imposed on partners
Gross Income
- Income of whatever kind derived from whatever
kind and derived by a taxpayer from whatever
source but not including exempt income and
items of gross income subject to final income tax
 Compensation for services such as
salaries and commissions
 Gross income derived from dealings in
property
 Interests
 Rents
 Royalties
 Dividends
 Annuities
 Prizes and winnings
 Pensions
 Partner’s distributive share from net
income of a general professional
partnership
Existence of Taxable Income
- Must be a gain or profit
- Gain must be received or realized
- Gain must not be excluded or exempt by law or
treaty from taxation
- Gain does not need to be cash, can be property
or services but must be appraised for value
- Increase in value is not considered income
Exclusions
- Income that are exempt from tax
- Ex: life insurance proceeds paid to beneficiaries
upon death of insured as it is considered as an
indemnity instead of a gain; Christmas bonus,
13th month pay up to a maximum of 820,000;
prizes and awards made primarily in recognition
 of religious, charitable, scientific, educational,
artistic, literary or civic achievements
Deductions
- Items subtracted from gross income to arrive at
net income allowed by the government under
certain conditions
Basic rules governing deductions
- Must point to some specific provisions of the
statute clearly authorizing deduction claim
- Must be able to prove entitlement to deduction
- Where deductions are authorized by the statute
- Deductions must be claimed under category in
which they belong; taxes should not be declared
by corporations as losses
- If you do not deduct all allowed deductibles
within one year, it is not deductible any more
Kinds of deductions
- Deductions from compensation income
 Only personal and additional
exemptions and amount of premiums
not exceeding 2400 per family or 200 a
month for health insurance are
deductible
- Deductions from business/professional income
 Have the option to elect the optional
standard deduction (OSD) of 40% to
answer for business/professional
expenses in lieu of itemized deductions
- Deductions from corporate income
 Ordinary and necessary business
expenses like research or development
expenditures
 Interests paid on indebtedness
 Taxes except income tax
 Losses not compensated by insurance or
indemnity
 Bad debts (worthless)
 Depreciation of property
 Depletion of natural resources
 Charitable and other contributions
 Research and development
expenditures
 Pension trust contributions of an
employer for the payment of reasonable
pensions to his employees
 Premium payments on health insurance
- Special deductions
 Can be availed by non-profit companies
like educational institutions, insurance
companies and hospitals to be taxed at
10% or 15% of taxable income.
 Estates and trusts are also allowed to
claim additional deductions
- Deductions allowed by special laws
 Business establishments may claim
deductions from gross income the 20%
of sales discounts granted to senior
citizens and persons with disability such
as in public transport fares, medical and
dental services, etc.
Optional Standard Deduction
- Deduction which is an individual other than a
non-resident alien subject to income tax, may
elect an amount not exceeding 40% of his gross
sales or gross receipts
- OSD may be availed by anyone if taxpayer is a
resident of the countries
- OSD allowed to individual taxpayer shall be a
maximum of 40% of gross sales or gross receipts
during taxable year
- Accrual basis: OSD is based on gross sales
- Cash basis: OSD is based on gross receipts
- For other accounting basis, gross sales or gross
receipts shall be determined in accordance with
said acceptable method of accounting
Optional Standard Deduction for Corporations
- Can be availed by domestic corporation and
resident foreign corporation except for non-
resident foreign corporation
- OSD shall be in an amount not exceeding 40% of
their gross income
Optional Standard Deduction for General Partnerships
and the Partners
- GPP is not subject to income tax but partners are
liable to pay income tax in their separate and
individual capacities for their respective
distributive shares in the net income of the GPP
- Same option given to GPP to claim either OSD or
IDs and net income shall be computed in the
same manner as a corporation