HO 3 : INCOME TAXATION : GROSS INCOME 1

INCOME TAXATION

Income taxation is in the nature of an excise taxation system, or taxation on the exercise of
privilege, the privilege to earn yearly profits from various sources. It is a system that does not provide
for the taxation of property.

*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.

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.

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 tax rate for individual or normal corporate income tax rate for corporation

Taxable Period

Taxable period is a period within which the net income is computed as a whole for income tax
purposes.

*Kinds of taxable periods

1. Calendar period.
- the 12 consecutive months starting from January 1 and ending December 31.
2. Fiscal period
- it is a period of 12 months ending on the last day of any month other than December.

Taxpayers

*Kinds of Taxpayers:

1. Individuals
a. Citizen
i. Resident Citizen (RC)
ii. Non-Resident Citizen (NRC)
b. Aliens
i. Resident Alien (RA)
ii. Non-Resident Alien (NRA)
(1) Engaged in Trade or Business (NRA-ETB)
(2) Not Engaged in Trade or Business (NRA-NETB)
iii. Special Alien
c. Special class of individual employees
i. Minimum wage earner
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2. Corporations
a. Domestic
b. Foreign
i. Resident foreign corporation (RFC)
ii. Non-resident foreign corporation (NRFC)
c. Joint venture and consortium
d. Partnership
3. Estates
4. Trusts

INCOME TAX

Income tax is a tax on all yearly profits arising from property, profession, trade, or business, or a
tax on person’s income, emoluments, profits and the like.

Income

Income refers to all wealth which flows into the taxpayer other than as mere return of capital. It
includes the forms of income specifically described as gains and profits, including gains derived from
the sale or other disposition of capital assets

Income vs. Capital

INCOME CAPITAL
Any wealth which flows into the Constitutes the investment
taxpayer other than a mere return which is the source of income
of capital
Is the service of wealth Is the wealth
Is the fruit Is the tree
Flow Fund
Income is subject to income tax Return or recovery of capital is
not subject to income tax

GROSS INCOME

Except when otherwise provided, gross income means all income derived from whatever source,
including but not limited to the following items:

1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions 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*
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions and
11. Partner’s distributive share from the net income of the general professional partnership
(NIRC, Sec. 32 [A])

*To be discuss in detail

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Gross income vs. net income

BASIS GROSS INCOME NET INCOME

As to deductions Allows no deductions Allows deductions
As to exemptions Grants no exemptions Grants exemptions
As to tax base Gross Income Net Income

Different Types of Income

1. Compensation income

Compensation income includes all remuneration for services rendered by an employee for his
employer unless specifically excluded under the NIRC.

2. Gross Income from the conduct of trade, business or exercise of a profession

This includes income from any trade or business, legal or illegal, and whether registered or
unregistered.

3. Gains derived from dealings in property

The gains or losses in dealing in ordinary assets are subject to regular income tax.

Ordinary assets – refer to properties held by the taxpayer used in connection with his trade
or business which includes the following:

a. 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 the close of the taxable year;
b. Property held by the taxpayer primarily for sale to customers in the ordinary course of
trade or business;
c. Property used in the trade or business of a character which is subject to the allowance
for depreciation provided in the nirc; and
d. Real property used in trade or business of the taxpayer.

4. Interest income

It is the amount of compensation paid for the use of money or forbearance from such use.

Note: Only the interest income from loans and notes rediscounting are items of gross income
subject to regular income tax. The interest on deposits and treasury notes are items of gross income
subject to final income tax.

5. Rental income

Rental income is a fixed sum, either in cash or in property equivalent, to be paid at a definite
period for the use or enjoyment of a thing or right. All rentals derived from lease of real estate or
personal property, of copyrights, trademarks, patents and natural resources under lease.

6. Royalty Income

A share of the earnings as from invention, book or play, paid to the inventor, writer, etc. for the
right to make, use or publish the same.
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Tax Treatment of Royalty Income

Subject to 10% final tax Royalties on books, other literary works
and musical composition from sources
within the Philippines.
Subject to 20% final tax Royalties derived from sources within the
Philippines other than royalties subject
to 10% to final tax
Subject to basic tax Royalties derived by RC and DC from
sources without the Philippines.

7. Dividends

Dividend is any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property.

Summary of Tax Treatment of dividend received from domestic

corporation
RECIPIENT TAXABLE (TAX RATE) / EXEMPT
DC / RFC Tax exempt
RC, NRC, RA 10%
NRA – ETB 20%
NRA – NETB 25%
NRFC 30% subject to preferential treaty
tax rate

Dividend received from foreign corporation.

Dividend received from foreign corporation is subject to Philippine income tax if at least 50% of the
world (total) income of the foreign corporation must be derived from the Philippines for three years
preceding the declaration of such dividend

8. Annuity

It refers to the periodic installment payments of income or pension by insurance companies during
the life of a person or for a guaranteed fixed period of time, whichever is longer, in consideration of
capital paid by him. The portion representing return of premium is not taxable while that portion that
represents interest is taxable.

9. Prizes and winnings

It refers to amount of money in cash or in kind received by chance or through luck and is generally
taxable except if specifically mentioned under the exclusion from computation of gross income under
Sec. 32[B] of NIRC.

Generally, prizes exceeding ₱10,000 and other winnings from sources within the Philippines shall
be subject to 20% final withholding tax, if received by a citizen, resident alien or non-resident engaged
in trade or business in the Philippines.
If the recipient is a non-resident alien not engaged in trade or business in the Philippines, the
prizes and other winnings shall be subject to 25% final withholding tax.
If the recipient is a corporation (domestic or foreign), the prizes and other winnings are added to
the corporation’s operating income and the net income is subject to 30% corporate income tax.
 HO 3 : INCOME TAXATION : GROSS INCOME 5

RECIPIENTS TAX RATES

Citizen, resident alien or non- Subject to 20% final withholding
resident engaged in trade or tax
business in the Philippines
Non-resident alien not engaged Subject to 25% final withholding
in trade or business in the tax
Philippines
Corporation (domestic or Subject to 30% corporate income
foreign) tax

Prizes and winning subject to income tax:

1. Prizes derived from sources within the Philippines not exceeding ₱10,000 are included in
the gross income.
2. Winnings derived from sources within the Philippines is subject to final tax on passive
income except PCSO and lotto winnings which are tax exempt.
3. Prizes and winnings from sources outside the Philippines

Prizes and awards exempt from income tax:

1. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational,
artistic, literary, or civic achievement provided, the following conditions are met:
a. The recipient was selected without any action on his part to enter the contest or proceeding; and
b. The recipient is not required to render substantial future services as a condition to receiving the
prize or award.

2. All prizes and awards granted to athletes in local and international sport competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national sports
associations

NOTE: The national sports association referred to by law that should sanction said sport activity
is the Philippine Olympic Committee.

3. Prizes that winning inventors receive from the nationwide contest for the most innovative New
and Renewable Energy Systems jointly sponsored by the PNOC and other organizations for during the
first ten years reckoned from the date of the first sale of the invented products, provided that such sale
does not exceed ₱200,000 during any twelve-month period

Summary of tax treatment of prizes and other winnings

Exempt from tax 1) Prizes and award made primarily in
recognition of
•Religious, charitable;
•Scientific;
•Educational artistic, literary;
or
•Civic achievement.

Provided the recipient was:

a) Selected without any action on
his part to enter the contest or
proceeding (not constituting gains
 HO 3 : INCOME TAXATION : GROSS INCOME 6

from labor); and

b) Not required to render
substantial future services as a
condition to receive the
prize/award.

2) All prizes and awards granted to

athletes in local and international
sports competitions and tournaments,
whether held in the Philippines or
abroad and sanctioned by their
respective national sports association

3) PCSO.
Subject to basic tax 1) Prizes and Other winnings derived
by resident citizens and domestic
corporation from sources without the
Philippines.

2) Prizes and Winnings received by

corporation from sources within the
Philippines

3) Prizes received by individuals from

sources within the Philippines
amounting to P10,000 or more
Subject to 20% final tax 1) Prizes received by individuals
(except NRA-NETB) from sources
within Philippines exceeding ₱10,000

2) Other winnings from sources within

the Philippines regardless of amount
(Other than PCSO and Lotto winnings)
Subject to 25% final tax Prizes and other winnings (including
PCSO and Lotto winnings) received by
NRA-NETB

10. Pensions, retirement benefit or separation pay

It refers to amount of money received in lump sum or on staggered basis in consideration of

services rendered given after an individual reaches the age of retirement. Pension being part of gross
income is taxable to the extent of the amount received except if there is a BIR approved pension plan
(NIRC, Sec. 32 B [6]).