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INCOME
• All wealth that flows into the tax payer other that the mere return of
capital coming to a person within a specified time;
• Includes gains and profits and those derived from sale or disposition
of capital assets;
• It may be cash or its equivalents.
Income v Capital
• Income is a flow of wealth during a definite period of time other than
the return of capital while capital are funds or properties used in
producing goods or services;
• Income is for service of wealth, capital is wealth;
• Income is subject to tax and wealth is not;
• Income is the “fruit” of the “tree” of capital.
INCOME TAX
• Tax on all yearly profits arising from property, professions, trades or
offices
BASIS OF INCOME TAXATION
• Right of the government to tax income arises from its partnership in
production of income – it provides the protection, resources,
incentive, and proper climate for such production.
REQUISITES FOR TAXABILITY
OF INCOME
1. Gain or profit – in cash or equivalent;
2. Gain or profit must be realized or received – must be actually or
constructively received by the person to be taxed;
3. Gain or profit must not be excluded by law or treaty.
TEST OF REALIZATION:
ACTUAL V CONSTRUCTIVE
RECEIPT
1. Actual Receipt
• Income is placed into possession and may be in the for of actual
receipt of cash
2. Constructive Receipt
• Income is credited to the account of or set apart for a taxpayer
and which may be drawn upon by him at anytime
• Subject to tax for the year which it is credited or set apart,
although not then actually reduced to possession
TEST OF REALIZATION:
ACTUAL V CONSTRUCTIVE
RECEIPT
• Crediting to the tax payer must be without any substantial
limitation or restriction when payment was made
 Matured interest coupons, due and payable, not collected by
the tax payer
 Interest credited on savings bank deposit
 Dividends applied by the corporation against the indebtedness
of a stockholder
RECOGNITION OF INCOME:
CASH METHOD V ACCRUAL
METHOD
1. Cash Method
 Generally reports income upon cash collection and reports
expenses upon payment;
 Income earned from rendering services is reported that year
whether earned or unearned.
2. Accrual Method
• Income is reported in the year earned and reports expenses when
incurred
• Income is reported irrespective of collection
TESTS IN DETERMINING
WHETHER INCOME IS EARNED
FOR TAX PURPOSES:
1. Flow of Wealth Test
• Test is the source of income
2. Realization/Severance Test/Macomber Test
• No taxable income until there is a separation from capital of
something exchangeable in value
3. Claim of Right Doctrine/Doctrine of Ownership, Command or Control
• Taxable gain is condition upon the presence of a claim of right to
the alleged gain and the absence of a definite unconditional
obligation to return or repay that
TESTS IN DETERMINING
WHETHER INCOME IS EARNED
FOR TAX PURPOSES:
• Tax payer receives money or property and treats it as its own
under the claim of right that the payments are made absolutely. It
is deemed included in the taxpayers income even though right to
income has not yet been perfected.
• It does not matter that the taxpayer’s title to the property s in
dispute and that the property may later on be recovered from the
tax payer.
• If the taxpayer who has included amounts in the income pursuant
to this doctrine subsequently repays those amounts, he may be
entitled to a deduction in the year of repayment when he repays.
TESTS IN DETERMINING
WHETHER INCOME IS EARNED
FOR TAX PURPOSES:
4. All Events Test
• For income or expense to accrue the following must accrue:
a. Fixing of a right to income or liability to pay;
b. Availability of the reasonable accurate determination of
income or liablity
5. Economic Benefit Test/Doctrine of Proprietary Interest
• Any economic benefit to the employee that increases his net
worth is taxable
TESTS IN DETERMINING
WHETHER INCOME IS EARNED
FOR TAX PURPOSES:
6. Control Test
• Power to dispose income or its equivalent of ownership.
FEATURES OF THE PHILIPPINE
INCOME TAX
1. Direct Tax
- Tax burden is borne by the income recipient upon whom the
tax is imposed
2. Progressive Tax
- Tax rate increases as the tax base increases.
- Founded on the ability-to-pay principle
3. Comprehensive System
- Adopts the citizenship principle, residence principles, and
source principle
FEATURES OF THE PHILIPPINE
INCOME TAX
principles, and source principle.
4. Semi – Global or Semi – Schedular
5. American in origin
CRITERIA IN IMPOSING
PHILIPPINE INCOME TAX
1. Citizenship or Nationality Principle
- Basis of the imposition of the tax is the taxpayer’s citizenship.
- As long as one is a Filipino citizen, he is subject to our income
tax law.
2. Residence Principle or Domicile Principle
- Basis of the imposition of income tax is the residence of the
taxpayer.
- All income derived by persons residing in the Philippines shall
CRITERIA IN IMPOSING
PHILIPPINE INCOME TAX
be subject to income tax on the income derive from sources in
the Philippines
3. Source Principle
- Basis of imposition of income tax is the source of income.
- All income derived from sources within the Philippines shall be
subjected to income tax
TYPES OF TAXABLE INCOME:
1. Compensation Income
- Derived from services rendered under an employer – employee
relationship
2. Professional Income
- Fees derived from engaging in an endeavor requiring special
training as a professional as a means of livelihood.
3. Business Income
- Gains or profits derived from rendering services, selling
merchandises, manufacturing, farming, and construction
contracts
TYPES OF TAXABLE INCOME:
4. Passive Income
- Income which the taxpayer merely waits for the amount to
come in such as interests, rolyalty, dividends and winnings and
prizes.
5. Capital gains
- Gains from dealing with capital assets.
SIGNIFICANCE OF KNOWING THE
TYPE OF INCOME
• To determine whether the income is subjected to graduated tax rates
or not
GENERAL PRINCIPLE OF
TAXATION
1. Resident Citizens
- Taxable on all income derived from sources within and without the
Philippines
2. Other Individuals
- Taxable income arising from sources within the Philippines
3. Domestic Corporation
- Taxable on all income derived from sources within and without the
Philippines
4. Foreign Corporation
- Whether engaged in trade or business, only income derived from
sources within the Philippines are taxable.
SITUS OF TAXATION
• Test of taxability is the source. If the source is property, activity or
services which produced the income.
OVERVIEW OF INCOME TAXATION
TYPE OF INCOME FACTORS TO CONSIDER IN
DETERMING THE SOURCE
Salaries, wages, and other Where the services are performed.
compensation
Income from service business Where the services are performed

Sale of personal property – Where it is sold


purchased
Sale of personal property – Where it is produced
produced and sold within
OVERVIEW OF INCOME TAXATION
TYPE OF INCOME FACTORS TO CONSIDER IN
DETERMING THE SOURCE
Sale of personal property – Where it is produced
produced and sold without
Outbound personal property – Allocation – partly within and
produced within, sold without partly without
Outbound personal property – Allocation – partly within and
produced without, sold within partly without
Interest Residence of the Debtor
OVERVIEW OF INCOME TAXATION
TYPE OF INCOME FACTORS TO CONSIDER IN
DETERMING THE SOURCE
Rents Location of Property

Royalties – Natural Resources Location of Property

Royalties – patents, copyrights and Where the property is used


etc
Sale of real property Location of the property
OVERVIEW OF INCOME TAXATION
TYPE OF INCOME FACTORS TO CONSIDER IN
DETERMING THE SOURCE
Sale of natural resources income for the 3-year period
ending with the close of the
taxable year preceding the
declaration of such dividends
Dividends – domestic corporation Limited to same ratio to such
dividends as the gross income of
the corporation from sources
within the Philippines.
OVERVIEW OF INCOME TAXATION
TYPE OF INCOME FACTORS TO CONSIDER IN
DETERMING THE SOURCE
Dividends – foreign corporation Same as domestic corporation, but
must have at least 50% of its gross
income for the 3-year period
ending with the close of the
taxable year preceding the
declaration of such dividends
Sale of Stock – domestic Limited to same ratio to such
corporation stocks as the gross income of the
OVERVIEW OF INCOME TAXATION
TYPE OF INCOME FACTORS TO CONSIDER IN
DETERMING THE SOURCE
corporation from sources within
the Philippines.

Sale of stocks – foreign corporation Same as domestic corporation, but


must have at least 50% of its gross
income for the 3-year period
ending with the close of the
taxable year preceding the sale of
stocks
NOTE
• Source of income of personal services is where the services were
rendered;
• Income of a seafarer on board a foreign vessels that touches
Philippine ports are considered partly within and without – where the
services were actually rendered not citizenship of the vessel;
• Foreign airline companies selling tickets are considered resident
foreign corporation engaged in business in the Philippines and
therefore are taxable for income derived within the Philippines.