LESSON: CONCEPT OF INCOME Within and Without – RC & DC
A. Return on Capital
Income is all wealth which flows into a taxpayer other than as a
mere return OF capital. It is therefore a return ON capital
(return on investment).
B. Nontaxable and Taxable Income
 Nontaxable Income – excluded by law or treaty from
taxation, not part of determination of taxable income
and gross income.
 Taxable Income – pertinent items of gross income
specified in the Tax Code less deductions (if any)
and/or personal and additional exemptions authorized
by the Tax Code or other special laws.
C. Characteristics of Taxable Income
 There must be gain or profit.
 The gain must be realized or received.
 The law or treaty does not exclude the gain from
taxation.
1. There must be gain or profit.
- Value received in service or excess of capital invested. If
a debt is cancelled, one must include the cancelled amount
in your gross income, and pay taxes on that “income,” unless
you qualify for an exclusion or exception.
2. The gain must be realized or received.
- Realization may be either in - actual receipt or constructive
receipt.
- Increase in value of property is not income but an unrealized
increase in invested capital.
2.1 Income Constructively Received – income
credited to the account or segregated in favor of a person. It
can be withdrawn anytime without limitations and conditions.
Examples: Interest on savings bank, Matured interest coupons
not yet collected, dividends by corporation, share in profit of a
partner in general professional partnership even not yet
collected, and intended payment in court (designation).
******Real Property (Capital Asset) sold is subject to
capital gains tax of 6% of the SP or FMV (w/c is higher).
3. The law or treaty does not exclude the gain from taxation.
- General: All income from whatever sources are TAXABLE. –
Exceptions: Unless a law or treaty exempts it from taxation.
D. Sources of Income
Sources are ascribed to the PLACE where it is EARNED. It is
governed by the situs of taxation.
Taxable WITHIN and WITHOUT –
Resident Citizens (RC) and Domestic Corporations (DC).
Taxable WITHIN ONLY –
Non-resident Citizens (NRC), Resident Alien (RA), Non-
resident Alien (NRA) and Foreign Corporations (FC).
Within only – NRC, RA, NRA, FC.
Income from sources WITHIN the Philippines.
- Income within, taxable within
A. Compensation for labor/services derived from PH
B. Interest on bonds, notes, deposits earned in PH
C. Dividends declared received from Domestic Corporation
D. Rentals and royalties from property located within the PH
E. Gains, profits, & income from sale of real and personal property in the PH
Income from sources OUTSIDE the Philippines.
- Income outside, taxable only if the taxpayer is a RC and DC.
- Income outside by NRC and FC is NOT subject to tax in the PH.
A. Compensation for labor/services by Overseas Contract Workers
B. Interest on bonds, notes, deposits earned abroad
C. Dividends declared received from Non Resident Domestic Corporation
D. Rentals and royalties from property located outside the PH
E. Gains, profits, & income from sale of real and personal property outside PH
Income from WITHIN AND OUTSIDE the Philippines.
- Income within and outside the PH from RC and DC is taxable
E. Classification of Income (Income From)
1. Compensation Income – employer-employee relationship
2. Profession or Business Income – sale or receipts
Revenue from Sales Revenue from Profession
Business Income (Gross Profit) Business Income (Gross Profit)
= Sales minus SR, SA, SD, COGS = Gross Receipts minus R, A, D
3. Passive Income – taxpayer waits for the amount. These are
Royalty, Interest, prizes, and winnings
4. Capital Gain – income from sale of assets not used in
business or trade (sale of family home or shares of stock)
Compensation Income Normal Tax
Profession or Business Income Normal Tax
Passive Income Final Tax
Capital Gains Final Tax,
RULE: Income subjected to FINAL TAX; Capital Gains and
Passive Income are NO longer be reported using NORMAL
TAX in the ANNUAL INCOME TAX RETURN (ITR).
 Income Tax Return (ITR) – formal statement of
taxpayer’s taxable income and deductions reported in
BIR prescribed form using NORMAL or REGULAR
TAX RATE.
F. Normal Tax VS. Final Tax
 Normal Tax or Regular/Ordinary/Customary Tax
- Creditable bc it approximates tax due on income
- Earnings OUTSIDE by RC (except OFW) and DC
are subject to NORMAL TAX.
******Regular Tax Rate for Individual effective Jan 1, 2018
until Dec 31, 2022(0%, 20%. 25%, 30%, 32%, 35%)
******Regular Tax Rate for Corporate (30%)
 o Self-employed individuals receiving income
from the conduct of trade or business and/or
practice of profession

o Individuals deriving mixed income, i.e.,

compensation income and income from the
Effective Jan 1, 2023
conduct of trade or business and/or practice
of profession
 Final Tax
- Income subject to complete withholding tax o Individuals deriving other non-business, non-
- Earnings no longer included in Taxable income professional related income in addition to
subject to regular/normal tax compensation income not otherwise subject
- Full and Final Payment to a final tax
- Examples: Interest, Royalty, and Dividend Income
Sales of real property and shares of stock (Capital
o Individuals receiving purely compensation
income from a single employer, although the
Gains on Capital Asset).
income of which has been correctly withheld,
but whose spouse is not entitled to
G. Forms and Valuation of Income substituted filing

Income can be received in the form of  Non-resident citizens receiving income from sources
- Cash, within the Philippines
- Property,
- Service  Aliens, whether resident or not, receiving income from
- All of the three. sources within the Philippines

 Cash – money or money substitutes Non-Individuals

 Property – right of ownership over tangible and
intangible thing earned  Corporations including partnerships, no matter how
 Service – performance based income created or organized.

Valuation  Domestic corporations receiving income from sources

1. Cash – Face Value
2. Promissory Notes/Note Receivables
Interest Bearing – Face Value/ Fair Market Value
Non Interest Bearing – Present Value/ Discounted Value
within and outside the Philippines
 Foreign corporations receiving income from sources
within the Philippines
 Estates and trusts engaged in trade or business

3. Property – Fair Value of Property

 Shares of Stock – Fair Value at the date the income
was earned/received.

4. Service – Face Value or At the Price of Service

 If Face Value is absent, Fair Market Value

Who are Required to File Income Tax Returns?

Individuals

 Resident citizens receiving income from sources

within or outside the Philippines

o Employees deriving purely compensation

income from two or more employers,
concurrently or successively at any time
during the taxable year

o Employees deriving purely compensation

income regardless of the amount, whether
from a single or several employers during
the calendar year, the income tax of which
has not been withheld correctly (i.e. tax due
is not equal to the tax withheld) resulting to
collectible or refundable return