INCOME TAX tax on all yearly profts arising from

property, professions, trades, or ofces

- tax on a persons income, emoluments, profts, and the
like.
*Income tax IS a direct tax on ACTUAL or PRESUMED
income.
PRESUMED INCOME sale of real property when it is a
capital asset and shares of stocks traded in S.E. (IT IS A
SET TAX NO MATTER WHO IT IS)

INCOME TAX LAW
1. NIRC
2. Revenue Regulatons promulgated by the Secretary
of Finance upon recommendaton of Commissioner
of Internal Revenue
3. BIR rulings and other administratve issuances
4. RA 9504
OTHER SOURCES:
1. Consttuton
2. Tax Treates
3. General and Special laws
4. SC decisions
5. CTA decisions
1. TAX CODE Special Law, defeats NCC
- Not a PENAL LAW and in NATURE (TC has penaltes but
is NOT a PENAL LAW)
- CIVIL in nature, not POLITICAL (even if it is on the
working of the government)
2. REGULATIONS have the force and efect of law.
- NOT given the same weight as a Rule of Court
- Given a MORE LIBERAL interpretaton
* A rule or regulaton must be CONSISTENT with the
ENABLING STATUTE to be VALID in case of confict
between a statue and an administratve order, the
STATUTE MUST PREVAIL!
* Regulatons in CONFLICT of LAW (Statute) are NULL
and VOID!
Regulatons implementng DOUBTFUL STATUTORY
PROVISIONS have strong persuasive force but they are
NOT CONCLUSIVE upon the courts!
INCOME TAX SYSTEMS
1. GLOBAL TAX SYSTEM all kinds of income LESS all
allowable deductons and personal exemptons
EQUALS NET TAXABLE INCOME
- NET TAXABLE INCOME taxed based on GRADUATED
INCOME RATES.

2. SCHEDULAR TAX SYSTEM there are several types
of income, subject also to several types of tax
(graduated or fat rates) (maybe based on GROSS
INCOME or NET INCOME)
- taxpayers may be classifed into DIFFERENT
CATEGORIES. It is enough that the classifcatons
must rest on SUBSTANTIAL DISTINCTIONS that make
REAL DIFFERENCES.

3. SEMI-SCHEDULAR/SEMI-GLOBAL TAX SYSTEM
FEATURES OF PHIL. INCOME TAX LAW
1. It is a DIRECT TAX.
- Borne by the income recipient upon whom the
tax is imposed (contractng partes may stpulate
in their contract that the FINAL CAPITAL GAINS
TAX due on the transacton shall be borne by
the BUYER).
2. It is a PROGRESSIVE TAX.
- tax base increases as the tax rate increases.
3. MOST COMPREHENSIVE system of imposing
income tax.
- Citzenship principle, residence principle, and
source principle.
- Citzen is subject to worldwide income if he is
a RESIDENT and on his Phil. Source Income if
NON-RESIDENT.
- Residents or Domicile Principle = Resident
Alien is liable to pay income tax from sources
WITHIN the Philippines BUT is EXEMPT if
income is OUTSIDE the Philippines.
- Source of Income Principle = An Alien is
subject to Philippine Income Tax when he
derives income from sources WITHIN the
Philippines.

4. Philippines adopts the SEMI-SCHEDULAR/SEMI-
GLOBAL SYSTEM OF TAXATION.
5. Philippine income tax law is a law of AMERICAN
ORIGIN.
- decisions of US courts and ofcials have
peculiar force and persuasive efect in the
Philippines.

WHEN IS INCOME TAXABLE?
1. There is INCOME, GAIN, or PROFIT.
2. The income, gain, or prof is RECEIVED OR
REALIZED during the taxable year.
3. The income, gain, or proft is NOT EXEMPT from
income tax.
INCOME, GAIN, OR PROFIT
- INCOME = all wealth that fows into the taxpayer other
than mere return of capital.
= fow of the fruits of ones labor.
REALIZATION OR RECEIPT OF INCOME
* If the value of REAL PROPERTY rises, it is NOT
TAXABLE. If it decreases, it is also NOT A LOSS.
* Income is derived or losses incurred if there is a SALE
in EXCESS of the COST or below the COST.
* Income is realized when EARNED. Loss is realized
when INCURRED.
* Requires that the taxpayer has, at its disposal, the
informaton necessary to compute the amount with
reasonable accuracy which implies something less than
an exact or completely accurate amount (ALL EVENTS
TEST).
INCOME, GAIN, OR PROFIT IS NOT EXEMPT FROM TAX.
* The tax code, tax treaty, or other regulaton must
EXPRESSLY state the exempton.
* GR: Taxaton
- EXEMPTION: Exempton. To be construed
STRICTLY AGAINST exempton.
- Tax Treates
- GR: NIRC applies
-EXEMPTION: in case of confict
between NIRC and Tax treaty, the tax treaty will prevail
-Ex to Ex: when the domestc law
imposes a lower tax rate than the tax treaty, the
domestc law shall prevail

Chapter III
WHO ARE TAXPAYERS?
* In general, taxpayer is any person subject to tax
imposed by the tax code.
* PERSON is an individual, estate or trust, partnership,
associaton, or a corporaton.
SUBJECT TO TAX same with LIABLE TO TAX
INDIVIDUAL TAXPAYERS
- Citzen
- Alien
WHO IS A CITIZEN?
- Resident and Non-resident citzens
ALIENS
- resident aliens and non-resident aliens
NON RESIDENT ALIENS
- engaged in trade or business in the Philippines
- NOT engaged in trade or business in the Philippines.

WHO IS A CITIZEN?
1. Those who are Filipino Citzens at the tme of
the adopton of the 1987 Consttuton.
2. Those whose parents are citzens of the
Philippines.
3. Those born BEFORE the 1973 consttuton
whose mothers were Filipinas and elected to
become Filipinos at the age of majority.
4. Naturalized in accordance with law.
* Citzens of the Philippines who marry ALIENS shall
RETAIN their citzenship UNLESs by omission, they are
deemed to have renounced their citzenship.
* You can only have ONE TAX STATUS (either NON-
RESIDENT or RESIDENT citzen).
- UNLESS at some part of the year, you are a
RESIDENT and then at the later part of the year, you
have become a NON-RESIDENT (or vice versa).
RESIDENT CITIZENS
(a) engaged in TRADE or BUSINESS or exercise in
PROFESSION in the PHIL
(b) NOT engaged in TRADE or BUSINESS or exercise
in PROFESSION in the PHIL
(c) engaged in TRADE or BUSINESS or exercise in
PROFESSION in the PHIL and at the same tme
derives compensaton and other income
(MIXED).

NON-RESIDENT CITIZEN:
WHO IS SUCH?
1. Phil Citzen who establishes the fact of his
physical presence abroad with a DEFINITE
INTENTION to reside therein
2. Leaves the PHIL to reside ABROAD, either as an
IMMIGRANT or for PERMANENT EMPLOYMENT.
3. Works and derives income from ABROAD and
whose employment REQUIRES him to be
PHYSICALLY PRESENT abroad MOST of the tme
(183 days)
4. A Citzen who was previously considered as
NON-RESIDENT CITIZEN.
*BALIKBAYAN TRIPS to the PHIL DO NOT INTERRUPT his
residence abroad (for the purpose of 183 days)
- Employment must be on PERMANENT BASIS,
not just more or less permanent basis.
* PILOTS, STEWARDESSES, and other CREW members
- if they hold IMMIGRANT/WORKING VISAS and lef for
abroad, they are NON-RESIDENT CITIZENS.
*Employees under SECONDMENT AGREEMENT are
NON-RESIDENT if they spend 183 days abroad during a
TAXABLE YEAR.
ALIENS
*An alien actually present in the Philippines WHO IS
NOT a mere TRANSIENT or SOJOURNER is a RESIDENT!
*If he lives in the PHIL and has NO DEFINITE INTENTION
TO STAY, he is STILL A RESIDENT!
*If he COMES FOR A DEFINITE PURPOSE, which in its
nature may be promptly accomplished, he is deemed a
TRANSIENT (Non-Resident)!
*Resident Alien LOSES his resident citzen status if he
ACTUALLY LEAVES the PHIL and ABANDONS his
RESIDENCY thereof WITHOUT ANY INTENTION of
returning!
RESIDENT ALIENS
*An individual whose RESIDENCE is in the PHIL who is
NOT A CITIZEN thereof.
*Is taxed ONLY from his PHIL-SOURCED income.
*PRE-ARRANGED ALIEN EMPLOYEE when an alien
WORKS here in the PHIL and TAKES UP HIS DOMICILE
HERE, he is now a RESIDENT ALIEN.
NON-RESIDENT ALIENS
*An individual whose RESIDENCE is NOT in the PHIL and
is NOT a CITIZEN thereof.
Test of Engaged in Trade or Business if his aggregate
period of stay in the PHIL is MORE THAN 180 days
during ANY CALENDAR YEAR, he shall be deemed a
NON-RESIDENT ALIEN doing business in the PHIL.
INDIVIDUALS SUBJECT TO PREFERENTIAL TAX RATES
Alien individuals employed by:
1. Regional/Area HQ and Regional Operatng HQ of
Multnatonal Companies in PHIL.
2. Ofshore Banking Units established in PHIL
3. Foreign Service Contractor/Subcontractor
engaged in Petroleum operatons in PHIL
*Same TAX TREATMENT shall apply to FILIPINOS
employed and occupying the same positons as those of
ALIENS. They may choose to be taxed either at the 15%
PREFERENTIAL TAX RATE on the GROSS INCOME or at
the GRADUATED TAX RATES.
ESTATES AND TRUSTS
*An estate is created by operaton of law, when an
individual dies, leaving propertes to his compulsory or
other heirs.
TAXABLE INCOME OF ESTATES & TRUSTS SHALL
INCLUDE:
THOSE INCOME WHICH:
1. Income accumulated in TRUST for the beneft
of:
-unborn/unascertained persons
-persons with CONTINGENT interests
2. Income accumulated/held for FUTURE
DISTRIBUTION according to a will/trust.
3. Income distributed or accumulated by the
FIDUCIARY to the BENEFICIARIES
4. Income collected by a GUARDIAN of an INFANT
(held/distributed as directed by court)
5. Income received by ESTATES (deceased) during
ADMINISTRATION or SETTLEMENT period of the
estate.
THE ABOVE INCOME SHALL EITHER BE:
*TAXABLE TO THE FIDUCIARY if trust instrument is
IRREVOCABLE
- Such is REVOCABLE when power to REVEST (grantor
ttle) is VESTED:
1. GRANTOR either ALONE or with a third person
without any SUBSTANTIAL ADVERSE INTEREST
2. ANY 3
RD
PERSON NOT having any SUBSTANTIAL
ADVERSE INTEREST.
*TAXABLE TO THE GRANTOR if trust instrument is
REVOCABLE.
TRUST
EMPLOYEES TRUST
- the income of an employees trust is EXEMPTED if:
1. Contributons made are for the PURPOSE of
DISTRIBUTING to the employees the earnings
and principal of the fund accumulated by the
trust in accordance with such plan.
2. It should be ONLY for the EXCLUSIVE BENEFIT of
the employees.
*Any amount ACTUALLY DISTRIBUTED to any employee
shall be TAXABLE TO HIM in the year in which it was
distributed to the extent that it exceeds the amount
contributed by such employee.
*The amount distributed may be DEDUCTED from the
TAXABLE INCOME of the ESTATE or TRUST, provided that
the BENEFICIARY or HEIR shall include such amount in
their TAXABLE INCOME.

CO-OWNERSHIP
*Co-owners in a co-ownership REPORT their share of
the income from the PROPERTY owned in COMMON by
them in their INDIVIDUAL TAX RETURNS.
*Co-ownership IS NOT CONSIDERED as a separate
taxable entty.
*Co-ownership is TERMINATED upon PARTITION.
IN THE CASE OF THE DEATH OF A DECEDENT:
- the heirs invested the common propertes and income
in a common fund and placed them under a SINGLE
MANAGEMENT, an UNREGISTERED PARTNERSHIP is
CREATED!

*Test for UNREGISTERED PARTNERSHIP: if the purpose
of the sale of the propertes is for the LIQUIDATION of
the CO-OWNERSHIP and are FEW & ISOLATED and NOT
HABITUAL, it is NOT AN unregistered partnership!

GENERAL PROFESSIONAL PARTNERSHIP (GPP)
A GPP is a partnership formed by persons for the
sole purpose of exercising their profession, and NO
PART OF THE INCOME is derived from engaging in
any trade/business.
*NOT CONSIDERED as a separate taxable entty.
*Individual Partners are taxed SEPARATELY.
*The share of an individual partner is deemed to have
been ACTUALLY/CONSTRUCTIVELY received by the
partner in the SAME TAXABLE YEAR in which such
partnership net income was earned, and SHALL BE
TEAXED to them in the INDIVIDUAL CAPACITY, whether
actually distributed or not.
- END OF INDIVIDUAL TAXPAYERS -
CORPORATIONS
*FOREIGN CORP formed other than the laws of the
PHIL
*DOMESTIC CORP formed with the PHIL law.
GR: DOMESTIC CORP is taxed on its WORLDWIDE
INCOME.
GR: FOREIGN CORP is taxed only on PHIL-SOURCED
INCOME
*NOT TAXED AS CORPORATION (Separate taxable entty)
1. GPPs
2. Joint Ventures/Consortums formed for the
purpose of constructon/energy projects
*REGULAR BANKING UNIT (RBU) and FOREIGN
CURRENCY DEPOSIT UNIT (FCDU)
*LOCAL WATER DISTRICTS are TAXABLE since they are
not COMPOSITE of the ESSENTIAL GOVERNMENTAL
FUNCTIONS as contemplated by laws.
FOREIGN CORPORATIONS
TWO TYPES:
1. Resident
2. Non-Resident
*RESIDENT FOREIGN CORP is a foreign corp engaged in
TRADE/BUSINESS WITHIN the PHIL.
*10% Preferental income tax for REGIONAL OPERATING
HQ of multnatonal companies.
*30% corporate income tax all other Philippine
branches
*OFFLINE INTERNATIONAL AIR CARRIER if the fow of
wealth occurred in the PHIL, you are DOING BUSINESS in
the PHIL regardless if you are OFFLINE!
* PHIL BRANCH is merely an EXTENSION of the head
ofce.
GR: The Head Ofce is the SAME JURIDICAL ENTITY as its
branch.
-EX: when the head ofce of the FOREIGN
CORP independently invested in a
DOMESTIC COURT without the funds
passing through its PHIL BRANCH, it shall be
taxed similarly as a NON-RESIDENT FOREIGN
CORP.

SUBSIDIARY BRANCH and BRANCH, COMPARED

- SUBSIDIARY BRANCH is considered a DOMESTIC CORP
while a BRANCH of a FOREIGN CORP is considered as a
RESIDENT FOREIGN CORP.

GROSS INCOME

* What is GROSS INCOME?
*What is NET INCOME?
* What is SBL?
*SOURCES OF INCOME
1. INTERESTS residence of the debtor
2. DIVIDENDS residence of the corp paying
dividend.
3. SERVICES place where service was performed.
4. RENTALS & ROYALTIES locaton of the property
or interest in such property.
5. SALE OF REAL PROPERTY locaton of real
property
6. SALE OF PERSONAL PROPERTY produced here
and sold outside PHIL in whole or in part (and
vice versa) is derived sourced within and
sourced without the PHIL.
- bought within PHIL and sold OUTSIDE PHIL
(vice versa) is derived from sources within the
country in which the thing was sold.