TAX 1 | ATTY.
AMAGO
January 6, 2018 Saturday (2 hours)
INCOME TAXATION – General Overview
INCOME TAX
I. DEFINITION OF INCOME TAX
It is a tax on all yearly profits arising from property,
professions, trades or offices, or as a tax on a person’s
income, emolument, profits and the like.
Madrigal vs Rafferty:
Income is a flow of wealth. Income is a flow of services
rendered by a capital through 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.
Income is an item of gain, profit, or any inflow of
wealth into the taxpayer, other than mere return of capital.
Income increases the assets of an individual and is subject
to income tax.
II. NATURE OF INCOME TAX
It is generally classified as an excise tax. It is not
levied upon persons, property, funds or profits but upon the
right of a person to receive income or profits.
The privilege to earn income is the subject matter
of income tax. Therefore, income tax is an excise tax or a
privilege tax.
Other classifications:
1. National tax – imposed by the national
government.
2. Direct tax – burden, as an incidence of taxation,
cannot be shifted to another person.
3. Self-assessing – it’s the taxpayers themselves who
voluntarily disclose to the government the amount
of income they are earning. (Although BIR has
way of checking whether such taxpayers are
disclosing their income religiously and accurately.)
III. PURPOSE OF INCOME TAX
Primary Purpose
 To raise revenue to defray the expenses of the
government.
Secondary Purpose
 To mitigate the evils arising from the
inequality of distribution of income and
wealth through adopting a progressive system of
taxation
 To offset the effects of sales and
consumption taxes which are seen as
regressive taxes by some proponents. (As
discussed by the SC, VAT is said to have a
regressive effect because the persons who end up
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paying the burden of value added tax are the end
consumers who don’t get to transfer it to another
person.)
 Income tax offsets the effects of sales and
consumption taxes through the non-imposition by
the government of additional sales and
consumption taxes just so it can generate
revenues to defray its expenses.
 With the imposition of income tax, the government
need not impose additional sales and consumption
taxes, which will only burden the end consumer
more. Value added tax is only one type of tax
imposed which is seen to be regressive. So that
the government will still be able to generate
revenue, it imposed instead another type of tax,
which is income tax.
IV. BRIEF HISTORICAL BACKGROUND OF
PHILIPPINE INCOME TAXATION
TN: This was not discussed in class
Brief Historical Background of Philippine Taxation
1. US Revenue act of 1913
- This is an Act of the US Congress
- Philippines was occupied by the US and there was
no formal tax law imposed in the Philippines
2. Revenue Act of 1916 and War Revenue Act of 1917
- Still a US law
3. Act 2833
- Because of War Revenue Act of 1917, the
Philippine Congress passed Act 2833 which became the
Income Tax law passed by Philippine Congress
4. CA 466 of 1939
- First tax code of the Philippines
5. PD 1158 or the NIRC of 1977
6. PD 1994
7. RA 8424 of 1997
- Became effective on Jan. 1, 1998
8. RA 9504
- Substantially changed the Income Tax
- Increased the personal and basic exemption
- Introduced the 40% optional standard deduction
- Exemption of minimum wage earners
V. SOURCES OF INCOME TAX LAW
TN: This was not discussed in class
1. Constitution
2. Special Laws
3. NIRC of 1997 as amended
4. Judicial Decisions of the Supreme Court
5. Administrative Rules and Regulations
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- Primary Law governing income tax in the Philippines is the
Constitution
VI. DEFINITION OF TERMS
(Sec. 22)
INCOME (BROAD SENSE)
- Flow of wealth into the hands of the taxpayer
other than mere return of capital
Q: What is wealth?
Anything of value that comes into the hands of the
taxpayer other than a mere return of capital.
Illustration:
Atty: You were given an allowance, did you have to do
anything to get the money? No and that is your income.
But if you use that money to buy goods that you will sell
and you will get a return.
Your P1000 now becomes P1100 after selling yellow paper.
Do you consider everything as wealth? Yes, because 1100
has value.
But, do you consider everything as income? No, only 100 is
the income. 1000 is a mere return of capital.
INCOME (STRICT SENSE)
- Amount of money coming to the taxpayer for the
services performed for the activity which he engaged in or
for an investment he has made including those which do
not have specific owners but comes in the hands of the
finder.
Atty: What is an asset? That which gives benefit to the
taxpayer. If you asset increases, it means you earned
income and that will be subject to tax.
DIFFERENCE BETWEEN CAPITAL AND INCOME
CAPITAL – anything in value that you have in a
moment of time
- Capital is a fund while income is a flow. Capital is
wealth while income is service of wealth
Example:
When someone gives you money to start a business, that
is capital. That is the fund you have to engage in certain
activities to turn it into income.
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It is important to determine when there is income and when
there is capital because we will only tax income and not
capital. There will be a list of items consisting income as
provided for in the Tax Code but you will also realize that
there could be more than those mentioned in the Tax Code.
It is then very important that you can distinguish income
from capital.
VII. GENERAL PRINCIPLES OF INCOME
TAXATION IN THE PHILIPPINES
SEC. 23. General Principles of Income Taxation in
the Philippines. - Except when otherwise provided in this
Code:
(A) A citizen of the Philippines residing therein is taxable
on all income derived from sources within and without the
Philippines;
(B) A nonresident citizen is taxable only on income derived
from sources within the Philippines;
(C) An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas contract
worker is taxable only on income derived 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;
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources
within the Philippines;
(E) A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
(F) 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.
Two Major Classifications of Taxpayers in the
Philippines
1. INDIVIDUALS
2. CORPORATIONS
1. Individuals
i) Resident Citizens
ii) Non-resident Citizens
iii) Resident Alien
iv) Non-resident Alien – [which are classified further
as to whether they are engaged in major business or not]
2. Corporations
i) Domestic
ii) Foreign – [further classified into: resident and
non-resident foreign corporation]
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X. FEATURES OF OUR PRESENT INCOME TAXATION
Semi-Schedular or Semi-Global Income Tax System –
The compensation income, business or professional
income, capital gain and passive income not subject to final
tax, and other income are added together to arrive at the
gross income, and after deducting the sum of allowable
deductions, the taxable income is subjected to one set of
graduated tax rates and which herein the global tax system
entered into and the other income that was mentioned
remains to be subjected to different sets of rates which is
the schedular.
Schedular tax system - when the different types of
income are subject to different sets of graduated tax
rates. There should be separate returns for each
category if income.
[In other words, we make a classification for types of
income and treat them differently with different tax rates
and there is also separate deductions for each category of
income.]
Global tax system – when all items of gross income,
deductions, and personal and additional exemptions, if any,
are reported in one income tax return, and one set of
tax rates are applied on the tax base.
[In other words, items of gross income are lumped
together, there is only one set of deduction for these types
of income and it is subject to one type of tax rate.
Example: Corporate taxpayers where their items of gross
income are lumped together, you make one deduction for
all those expenses related to their business and such other
items which are allowed a deduction under the Tax Code
and then the net amount is subjected to tax rate of 30%]
IX. KINDS OF INCOME TAX METHODS
1. Gross Income Taxation – [Example: For individual
taxpayers, if you happen to be a non-resident citizen not
engaged in trade or business you are subjected to a tax
rate of 25% based on gross income.]
2. Net Income Taxation
Gross Income – refers to all income less exclusions as
provided for under the law.
Net Income – taxable income which refers to all income less
deductions/exemptions.
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[In other words, if it is gross income you do not allow
deductions while in net income, allowable deductions are
taken into consideration.]
VIII. SYSTEMS OF INCOME TAXATION
1. Progressive – income tax rate is proportional tax
rate to the income earned by the individual. The tax rate
increases as the tax base increases. Based on the
individual’s ability to pay.
2. Modified Gross Income taxation as regards pure
compensation earner.
- This is termed as modified gross income taxation
because supposedly gross income taxation does not allow
any deduction but for individual taxpayers they are allowed
deductions in the form of basic personal exemptions and
additional exemptions.
TN: Before there was basic personal and additional
deduction. In the TRAIN, there is no more personal
and additional deduction.
But in case of person earning business or
professional income, there is modified gross income
taxation.
Such individual has an option to be subject to
income taxation at the rate of 8% in excess of
250,000.
Ex: Business income is 750,000. You can either avail of the
tax table or the 8%. If you avail of the 8%, only 500,000
will be taxed (750,000-250,000).
3. “Pay-as-you-File System” – the moment you file
your income tax return that is also the time you make
payment for taxes.
[But now, the banks will receive your return but only if you
also pay the tax due. They will only receive it if you pay as
you file.]
XI. SOURCES OF INCOME
1.) Capital
Example: when you are leasing out a property for a monthly
rent, the property that you own is considered a capital and
it generated an income in the form of rent
2.) Labor
Example: a factory worker who is an employee of a
manufacturing company. Your labor becomes the source for
your salary
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3.) Both labor and capital
(note: capital here is the capital as used in economics)
Example: when you are a doctor, the clinic becomes part of
your capital and the services is part of the labor that
generated professional fees as income
4.) Sale of property
Example: when you sell a property at a price higher than its
cost then the difference is the gain from your dealing with
the property. The sale of such property is the source of the
income and the income comes in the form of a capital gain.
Is it automatic then that if there is income it will be taxable?
NO.
XII. CRITERIA TO DETERMINE IF INCOME IS TAXABLE
1.) The actual existence of a gain or profit- -
- when there is an increase of your wealth. It DOESN’T have
to be cash. It can come in different forms.
- No income if you have a house and you painted it because
it did not increase your wealth.
- But if you asked your friend to paint it for you in return
you would also paint his house, there can be income when
your skills are better than his or if the house you painted
was bigger. There is income in a sense because there is a
difference in what was offered between you two
- security deposits in a lease arrangement for example,
when the lessor requires you to pay a deposit for the lease
contract just in case you break something, it cannot be
considered an income because there is an obligation for you
to return the amount that was temporarily deposited to you.
UNTIL the conditions are actually complied with, like when
a vase breaks.
2.) The gain or profit must be realized or
received
Received- physically acquire the income
Realized- the disposition is under your control although not
yet received.
A mere increase in the value of property is not income, but
merely unrealized increase in capital. It only becomes
realized income when it becomes part of a completed
transaction
3.) Not exempt from income tax
Example of income exempt from tax: Minimum wage
income
XIII. KINDS OF TAXABLE INCOME OR GAIN
1) Capital gain - generated from capital assets
2) Ordinary gain - generated from ordinary assets
Capital asset, definition
Sec 39 (1) - Capital assets means property held by the
taxpayer (whether or not connected with his trade or
business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly
be included in the inventory of the taxpayer if on hand at
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the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the
trade or business, of a character which is subject to the
allowance for depreciation provided in subsection (f) of Sec.
34; or real property used in trade or business of the
taxpayer.
Sec 39 gives a negative definition of "capital assets". The
provision gives an enumeration of what are ordinary assets.
Ordinary assets are assets used in the ordinary course of
business. IOW, capital assets are assets which are not
ordinary assets.
Taxable income, definition
Sec. 31 - The term "taxable income" means the pertinent
items of gross income specified in this Code, less the
deductions and/or personal and additional exemptions, if
any, authorized for such types of income by this Code or
other special laws
Before we can arrive what is taxable income, we have to
know first what gross income is.
Taxable income- definition in Sec 31 of the tax code as
amended by TRAIN. The amendment there is with just the
deduction, before there is a personal and additional
exemption but it is now being scrub out. The remaining
definition of TI is the pertinent items f gross income under
Sec 32A less the allowable deductions authorized by the
law Sec 34.
XIV. GROSS INCOME
A. Gross Income – Except when otherwise
provided in this Title, gross income means all
income derived from whatever source, including
(but not limited to) the following items:
TAKE NOTE:
This enumeration is not exhaustive – “including but not
limited to,” (ex. wealth you chanced upon - one which you
found in the middle of the road; gambling winnings; income
from selling shabu)
There is no distinction between an illegal or legal source of
income - “all income derived from whatever source”
JAMES DOCTRINE – US Supreme Court held that income
from illegal sources are taxable (we follow this doctrine)
INCLUSIONS (Sec. 32A)
Keyword (C-G-G-R-R-D-A-P-P-P)
1. Compensation for services in whatever
from paid, including, but not limited to
fees, salaries, wages, combinations, and
similar items;
2. Gross income derived from the conduct
of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
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4. Interests; taxable in the Ph.

5. Rents;
6. Royalties;
7. Dividends; If earned abroad, then taxable abroad, unless the
8. Annuities; services is rendered by a RESIDENT CITIZEN OF
9. Prizes and winnings; THE PH.
10. Pensions; and
11. Partner’s distributive share from the net
income of the general professional 2. Business I. Merchandising, Farming, Mining
-Place
partnership Income where the business is undertaken.
II. Manufacturing
“FROM WHATEVER SOURCE” – whether the source is legal
or illegal it will be considered as part of the gross income
a. Goods manufactured and sold within the
Including (but not limited) - the provision is not exclusive Philippines – income 
derived purely
within. 

EXCLUSIONS (Sec. 32B)

Note: For exclusion, it does not matter where they b. Goods manufactured & sold outside the
are sourced from, they are still not taxable in the Philippines – income 
derived purely
Philippines.
outside. 

Keyword: (G-L-A-C-I-R-M)
c. Goods manufactured within the Philippines
1. Gifts, Bequests, and Devices and sold outside the 
Philippines –
2. Life Insurance
3. Amounts received by insured as returns income partly within and partly without.
of premiums 

4. Compensation for Injuries or sickness
5. Income exempt under treaty
d. Goods manufactured outside the Philippines
6. Retirement Benefits, Pensions,
Gratuities, etc. and sold within the 
Philippines –
7. Miscellaneous Items income partly within and partly without.


Atty A: you have to familiarize this by reading it at least 7x.
Each item of the gross income has to comply with the situs.
3. Income
from Sale 1. If it involves personal property – the place of
XV. SITUS OF TAXATION or sale. 
(asa makit-an didto ibaligya)
Section 42.
Remember: Exchange 2. Sometimes it’s the contract itself that
of Property determines where the sale happened. If
Within Without
notarized in Cebu City, its clearly w/in
Resident Citizen Yes Yes
Non-resident Yes No the PH. But if notarized somewhere
Citizen/Resident else, then taxable somewhere else bc its
Alien/Non- jurisdiction may be outside the PH.
resident Alien
Domestic Corp Yes Yes
Foreign Corp Yes No 3. If it involves real property – the place or
location of real property 
(regardless
Resident Citizen Taxpayer –taxable within and where the sale may happened, as long
without
as the property is w/in the PH then
All other types of taxpayers – within
Domestic Corporations – within and without taxable in PH)
Foreign Corporations – within and without
RFC, Res alien, Non resident Alien cannot own
1. Place where the service/s is/are rendered. real property
Compensati
on Income If the services are performed in the Ph then

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4. Interest
Under the train pcso winnings no longer exempt
Income Residence of the debtor/borrower.
10. Pension Place where this may be given on account of
Ex: you availed of a loan from a bank in the US, services rendered.
who gets to tax that interest income earned? So, 11. Place where the exercise of profession is
Professional undertaken.
the income is deemed earned here in the PH.
income of
That NRFC which the bank in US may be taxed GPP
here in PH from the interest income that you
earned out of the loan that it provides to the res
Atty A: your analysis does not stop only when you
of PH
know there is income, in addition:
I. Determine who earns the income? –RC?
5. Rent Place where the lease property subject of the NRC? Or Alien? DC? Or FC?
Income contract is located. II. Determine, is this income earned w/in or
w/out the PH?

*either personal or real property If the income happens to be earned here in the PH,
regardless of the taxpayer it is taxable in the PH.
6. Royalties Place where the intangible property is used. But if the income is earned outside the Philippines, it
matters that you determine the taxpayer.
7. Dividend 1. Received from domestic corporation – income
purely within. 

XVII. ALLOWABLE DEDUCTIONS (SEC 34)

2. Received from foreign corporation, look at the
3 year income of the corp.
Total income earned in PH / Total income
earned around tbe world
Review: Taxable Income refers to the items of gross
income less exclusions and exemptions allowed under the
law.
Dumping Ground Formula:

If its more than 85% earned in the PH- GROSS INCOME – EXCLUSIONS – EXEMPTONS =
deemed earned in PH TAXABLE INCOME

If more than 50% but up to 85%- part DEDUCTIONS EXEMPTIONS EXCLUSIONS

in ph; part outside Outflows Inflows Inflows
(you have to (it’s just that it (same as in
spend for them so doesn’t affect exemptions)
If 50% or less –earned out side PH
that you can your tax liability
deduct it from because it is not
8. Annuities Place where the contract was made. your taxable subject to tax)
– any income)
investment
w/c allows
to make
periodic GUIDING PRINCIPLES GOVERNING DEDUCTIONS
payments of
income at
(When can you make a deduction for taxation purposes?)
equal
interval not
in 1.) The taxpayer seeking deductions must point to some
consideratio specific provisions of the statute authorizing the
n of services
deduction, and
rendered
9. Prizes If on account of services rendered- place where
and the services were rendered. 2.) He must be able to prove that he is entitled to the
Winnings deduction authorized or allowed.
Prizes if it requires showcase of talent or skills
Winnings based on chance (bingo, lotto)
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3.) Doubtful provisions pertaining to deductions are strictly item of expenses it can no longer be availed by the
partners. This means that if partnership availed of the OSD
construed against the taxpayer and liberally construed
the partners can only make use of itemized deductions.
against the government.
Any partnership follows the so-called constructive receipt
4.) You must be able to follow statutory requirements. doctrine, which means that regardless of the fat that there
is no declaration of income for the benefit of the partners it
is always presumed that there is distribution of income.
Example: If ever there is a withholding requirement as in
the case of compensation, before a company can make Illustration:
deductions for compensation expense, it must be able to
withhold the taxes for compensation income. A&B partnership which has gross receipts of 1M. Partner A
& B has other business like sari2 store and they have gross
sales of 100K each. Exp of GPP (lawfirm) salaries of the
KINDS OF ALLOWABLE DEDUCTIONS IN THE staff, 500K; utilities 100K
PHILIPPINES
GPP gross receipt: P 1M
1.) Personal and additional deductions/exemptions (sec Less: expense
Salaries 500K
35) Utilities 100K
Net Income 400K
2.) Itemized deductions (secs 34A-K and 34M)

Partner A Partner B
3.) Optional standard deductions of 40% of gross income
Income from GPP P 200K P 200K
Gross sales sari2 100K 100K
- itemized deductions and optional standard deductions
Less: 200K x 40% (80K) (80K)
are MUTUALLY EXCLUSIVE. But then there are items OSD deduction
enumerated in tax code which cannot be deducted: Less: 100K x 40% ( 40K ) ( 40K )
OSD deduction
COHAN RULE: if you fail to substantiate the expenses you Taxable income 180K 180K
are still allowed to make deduction to the extent of 50% * NOTE: Kung nag OSD kas income from GPP mag OSD
of the amount claimed unless its clearly fraudulent. sad kas income sa imong business. Di pwede hybrid.

We have to go back and discuss the pertinent items of

1. Itemized Deductions Keyword: Ex-In-Ta-
Lo-Ba-Cha-Re-Pen-Dep-Dep (this is not yet
included in the Midterms)
With the train the premiums on
hospitalization insurance is scrap out
2. Optional Standard Deductions- 40% of the
gross income (this is included in the Midterms)
Optional meaning it is just in lieu of itemized
deductions, if you don’t want to substantiate your
income then you just avail of OSD.
Are all taxpapyers allowed to avail OSD? No. the ff are
only allowed to avail:
gross income and discuss this one by one.
1. Compensation for services in whatever from
paid, including, but not limited to fees, salaries,
wages, combinations, and similar items;
Other forms of payment other than cash:
1. promissory note- if your able to get the face
of value of the PN w/in the year. If PN is
discounted then you can only get the cash
discounted value of PN.
Time naman so mu continue nata next meeting


1. Resident Citizen
2. Non-resident citizen
3. Resident alien
4. Domestic corporation
5. Resident foreign corporation

Under the TRAIN, there is a clarification. That if a

taxpayer is a GPP (GPP on the level of partnership not
taxable, but on the level of the partners taxable) and on the
part of the partnership already made a deduction for certain

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