CHAPTER 4 SOURCES OF INCOME

Relevance of determining the source of income

It relates to the income taxability of the taxpayers because most taxpayers are liable only for income derived from sources within the Philippines.
Taxpayers liable for income tax from all sources (within & without the Philippines)
There are two (2), these are:
1. Resident Citizen; and
2. Domestic Corporation.
What are the guidelines in determining whether income derived is from sources within and without the Philippines?
A.
1.

GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES (SECTION 42 [A])

TYPE OF INCOME
Interest (SECTION 42 [A][1])
1.1. Interest derived from sources within the Philippines (Interest on
Bank Deposits)
1.2. Interest on bonds, notes or other interest-bearing obligations of
residents, corporate or otherwise

2.

Dividends (SECTION 42 [A][2])

2.1. Issued by Domestic Corp(DC)
2.2. Issued by Foreign Corp. Resident or Non-Resident

DETERMINATION
Location of the Bank
If the bank is located within the Philippines, considered a source
within.
Residence of the Obligor, whether Individual or Corporate
If the obligor is a resident of the Philippines, payment made by
him is source within the Philippines.
Dividends issued by a DC are always income derived within, without
qualifications
GR: Deemed as Income derived from sources within.
Requisites:
1. At least 50% of the Gross Income of such FC is from sources
within the Philippines; and
2. Such gross income must be for the 3-year period ending with
the close of the taxable year preceding the declaration of such
dividends.
Exception: Absent of one of the requisites, shall be deemed as income
derived from sources without the Philippines.

3.

4.
5.
6.

Services (SECTION 42 [A][3])

Compensation of labor or personal services performed in the
Philippines
Rentals & Royalties (SECTION 42 [A][4])
Sale of Real Property (SECTION 42 [A][5])
Sale of Personal Property (SECTION 42 [A][6]) in relation to section
42[E]

The place of performance

Location of the property
Location of the Property
Guidelines:
1. For personal property produced, in whole or in part, by the
taxpayer WITHIN and SOLD Without the Philippines OR
produced, in whole or in part, by the taxpayer WITHOUT and
SOLD WITHIN the Philippines income shall be treated as
derived PARTLY WITHIN & PARTLY WITHOUT from sources
within the Philippines and partly from sources without the
Philippines;
2.
For personal property purchased WITHIN & sold WITHOUT the
Philippines, OR for purchase of personal property WITHOUT &
SOLD WITHOUT - the gains, profits or income shall be treated
as derived entirely from sources WITHIN THE COUNTRY
WHERE THE PROPERTY IS SOLD; EXCEPT - gains from the
sale of shares of stock in a domestic corporation shall be
treated as derived entirely from sources within the Philippines,
REGARDLESS OF THE PLACE WHERE THE SHARES WERE
SOLD

B.

GROSS INCOME FROM SOURCES WITHOUT THE PHILIPPINES (SECTION 42 [C])

-

C.

Enumeration under this section is the opposite of those enumerated under Section 42[A]
INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT THE Philippines (SECTION 42[E])

Taxable income may be computed by first deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable
part of any expenses, losses or other deductions which cannot be allocated to some items or classes of gross income; and the portion of such
income attributable to sources within the Philippines.

Formula :
Gross income Philippines
Gross Income World
= Rate x Expenses World
= Expenses to be Allowed

CHAPTER 6 TAX ON INDIVIDUALS

1.

Resident Citizen, Nonresident Citizen, OCW & Seamen, and Resident Alien
TYPE OF TAX
Net Income Tax (Sec. 24[a])
Taxable Income = Gross income less deductions &/or
Personal Exemptions
Note: H & W shall compute separately their
Only kind of income tax that admits deductions & Personal
individual income tax. Applicable only Married Exemptions
Individuals earning purely compensation income
Final Income Tax (sec. 24[b])
a. Interest, Royalties, Prizes and other winnings
Must be derived from sources within the Philippines.
-

Generally, rate is 20%

RATE
5% TO 32%

For Interest Generally

20%
EFCDS 7.5%
LT depo/Inv.
5 yrs above exempt
>4 but <5 5%;
>3 but <4 12%;
<3 yrs 20%

b.

c.

Cash &/or Property Dividends

Except Stock dividends because are only a transfer of
the surplus profit from retained earnings to authorized
capital stock.
However, it may be subject to tax if the issuing
corporation cancels or redeems the stock issued as
dividends essentially equivalent to the distribution of
taxable dividends
Must be issued by a Domestic Corporation

Capital Gains from Sale of Shares of Stocks NOT Traded

in the Stock Exchange
Rule on holding period does not apply
Elements:
1. The shares are shares in a domestic corporation (if not,

For Royalties
General 20%
Books, literary works,
musical compositions
10%
10%

1st 100K of net capital gain

5%
In excess of 100K 10%

2.
3.
4.
d.

place of sale is material);

Classified as capital asset ( if not, tax liability depend on the
taxpayers status);
Not listed in the local stock exchange (if not, subject to of
1% stock transaction tax or percentage tax);
There must net capital gain
Capital Gains from Sale of Real Property (sec. 24 [d])

Elements:
1. The property sold is a real property, ( seller is Indiv or
Trust/Estate Art. 415 CC; Seller is Corp only Land &/or
Buildings)
2. Must be located in the Philippines, (if not final tax is
inapplicable);
3. Must be classified as Capital asset (if not, it depends on the
status of the taxpayer);
4. There must be a net capital gain
Holding period is not applicable
Option given to TP:
1. To pay by way of NIT; or
2. By way of FIT
PROVIDED:
The sale or other disposition is in favor of the government or any
of its political subdivisions or agencies or GOCCs
In case of Mortgage Properties
Under RR No. 4-99,
1. Buyer is Other that Financial Institution, sale shall be subject
to FIT, even though the right of redemption exist;
2. Buyer is a Financial Institution or Bank, sale is NOT
immediately subject to FIT since there is no change in the
ownership yet. It is only after the lapse of the redemption
period and the mortgagor-seller did not redeem the property
that the sale is subject to FIT.
EXEMPT from FIT:
Capital gains presumed to have been realized in the Sale of
PRINCIPAL RESIDENCE by NATURAL PERSONS.
ELEMENTS:
1. The property sold/disposed of is the principal residence of the
TP;
2. Proceeds is fully utilized in the acquisition or construction of
new PR;
3. Acquisition / construction of the new PR is w/in 18 mos from
the date of sale or disposition;
4. Historical cost or adjusted basis of the sold PR should be
carried to the cost of the new PR;
5. TP should inform the BIR of its intention within 30 days from
sale to avail the exemption; and
6. Exemption can only be availed every ten (10) years
No Full Utilization of the Proceeds to build New PR:
The portion of the gain presumed to have been realized
from the sale or disposition shall be subjected to FIT
FIT= FMV/GSP x UA/GSP

6%

2.

NRAETB in the Philippines (Section 25[A])

Net Income Tax (sec. 25[a][1])

Final Income Tax (sec. 25[a][2])
SOURCES WITHIN THE PHILIPPINES

SOURCES WITHIN THE Philippines

a. Cash &/or Property Dividends
[Domestic Corporation or Joint Stock Company, or Insurance or
Mutual Fund Company or Regional Operating Headquarters or
Multinational Company, or Share in the Distributable Net Income of
a Partnership (Except a General Professional Partnership), Joint
Account, Joint Venture Taxable as a Corporation or Association.,
Interests, Royalties, Prizes, and Other Winnings.]

32%
Generally - 20%
LT depo/Inv.
5 yrs above exempt
>4 but <5 5%;
>3 but <4 12%;
<3 yrs 20%
For Royalties
General 20%
Books, literary works,
musical compositions
10%

Exemption:
Prizes amounting to Php10,000.00 or less tax
applicable is NIT
Prizes from PCSO and Lotto
3.

NRANETB in the Philippines (Section 25[B])

Gross Income Tax based on Gross Income

entire income received from all sources within the Philippines

by every nonresident alien individual not engaged in trade or
business within the Philippines as interest, cash and/or
property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other
fixed or determinable annual or periodic or casual gains,
profits, and income, and capital gains

25%

Final Income Tax

sale of shares of stock in any domestic corporation and

1st 100K of net capital gain

5%
In excess of 100K 10%

real property shall be subject to the income tax prescribed

under subsections (C) and (D) of Section 24

4. Alien Individual Employed by Regional or Area Headquarters and Regional Operating

Headquarters of Multinational Companies
Final Income Tax on Gross Income
Applicable also to Filipinos employed and occupying the
[salaries, wages, annuities, compensation,
same position as the aliens employed therein.
remuneration and other emoluments, such as honoraria
Under RR No. 2-98:
and allowances]
ONLY alien individuals occupying managerial and technical
positions in these companies and Filipinos employed in the
same positions as those aliens are subject to FIT.
Does not apply to rank-and-file employees

6%

15%

Under RR no. 12-2201

Filipinos employed in these companies have option to pay
either FIT or NIT.
For Filipinos employed to Multinational Companies, the ONLY
requirement is that the Filipino is holding a Managerial or
Supervisory position though there are no aliens holding the
same position.
Filipinos employed in OBUs & Petroleum Service Contractors
or Subcontractors
Requirements:
1. Filipino must be holding managerial or supervisory
position;
2. There are aliens holding the same position
Any income earned from all other sources within the
Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the
pertinent income tax, as the case may be, imposed under this
Code

Income Tax on Other Income

Depends
on
their
classification of status

CHAPTER 7 TAX ON CORPORATIONS

DOMESTIC CORPORATIONS (SECTION 27)
Type of Tax
NIT
Taxable Income
EXCEPTION:
1. Proprietary Educational Institutions and Hospitals

Rate
30%

10%

Requisites:
1. It must a stock and non-profit institution;
2. the gross income from unrelated trade, business or other activity should not
exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources; and,
3. with an issued permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education (CHED), or
the Technical Education and Skills Development Authority (TESDA)
2.

GO CCs, Agencies or Instrumentalities

-

all corporations, agencies, or instrumentalities owned or controlled by

the Government shall pay such rate of tax upon their taxable income

1.
2.
3.
4.

except:
Government Service Insurance System (GSIS),
Social Security System (SSS),
Philippine Health Insurance Corporation (PHIC),
Philippine Charity Sweepstakes Office (PCSO)

SUBJECT
TO
APPLICABLE TAX

Can the Government can Tax itself?

1. If the taxing authority is the National Govt. YES
2. In the taxing authority is LGU it cannot tax:
2.1. Natl. Govt.
2.2. Its Agencies & Instr.;
2.3. Other LGU
EXEMPT

OCIT

On Gross Income

15%

REQUISITES:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms
whose ratio of cost of sales to gross sales or receipts from all sources does not
exceed fifty-five percent (55%).

FIT

The election of the gross income tax option by the corporation shall be
irrevocable for three (3) consecutive taxable years during which the corporation
is qualified under the scheme.
1. Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes and from Trust Funds and Similar Arrangements,
and
MUST be derived from sources within the Philippines
Bank must be located in the Philippines
DC are not exempt from long-term deposits
2.

20%

Royalties.
All royalties derived by DC from sources within the Philippines

NOTE:

20%

If interest and royalties are earned WITHOUT the Philippines, applicable

tax is NIT (30%)

3.

4.

Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange
imposed on net capital gains realized during the taxable year from
the sale, exchange or other disposition of shares of stock in a
domestic corporation
Tax on Income Derived under the Expanded Foreign Currency Deposit
System
Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with local
commercial banks, including branches of foreign banks that may
be authorized by the Bangko Sentral ng Pilipinas (BSP), & other
depository banks

Not over
P100,000..... 5%
Amount in excess of
P100,000.. 10%

10%

5.

Any income of nonresidents, whether individuals or corporations,

from transactions with depository banks under the expanded system
shall be exempt from income tax.
Intercorporate Dividends

EXEMPT

6.

Dividends received by a domestic corporation from another domestic

corporation
Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings
Basis: Gross Selling Price or FMV whichever is HIGHER
CAPITAL Asset
Only Land and/or Building
There must be net gain
MCIT

7.
RESIDENT FOREIGN CORPORATION (RFC)
NIT
Income derived only from sources within the Philippines
OCIT
Income derived only from sources within the Philippines
MCIT
Income derived only from sources within the Philippines

6%

2% of Gross Income
30% on Taxable Income
15% on Gross Income
2% of Gross Inccome

FIT
International Carrier

Transshipment

International Shipping

OBUs

Based on Gross Philippine Billing

Requisites:
1. derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines
2. in a continuous and uninterrupted flight,
3. irrespective of the place of sale or issue and the place of payment of
the ticket or passage document
Requisites:
1. That for a flight which originates from the Philippines,
2. But transshipment of passenger takes place at any port outside the
Philippines on another airline,
Only the aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.
"Gross Philippine Billings" means gross revenue
1. whether for passenger, cargo or mail originating from the Philippines
up to final destination,
2. Regardless of the place of sale or payments of the passage or freight
documents.
Income derived by the OBUs

2%

2%

2 %

10%

EXCEPTION:
Transactions Exempt from Final Tax
1. Nonresidents;
2. Other OBUs
3. Local Comml. Banks
4. BSP authorized Foreign banks to transact with OBUs
FC Loans:
Any interest Derived from the ff. are exempt:
1.
residents other than OBUs
2. Local Comml. Banks
3. BSP authorized branches of Comml. Banks
Tax on Branch Remittances

Based on the total profits

applied or earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered with the
Philippine Economic Zone
Authority)

15%

Only branch offices in the Philippines of foreign corporations are liable

Regional or Area Headquarters and

Regional Operating Headquarters of
Multinational Companies

Interest from Deposits and Yield or any

other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar
Arrangements and Royalties
Income Derived under the Expanded
Foreign Currency Deposit System

Does not apply to local subsidiaries of foreign corporations

Regional or area headquarters not taxable
Not taxable
Regional operating headquarters
Gen. Admin. & planning
Bus. Planning and coordination;
Sourcing and procurement of raw materials;
Corporate finance advisory services;
Mktg control and sales promotion;
Logistic services
Same as Domestic Corporations

10%

Generally 20%

Interest income derived by a resident foreign corporation from a depository bank

under the expanded foreign currency deposit
Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with local commercial banks
including branches of foreign banks that may be authorized by the Bangko

EFCDS 7 %
10%

Capital Gains from Sale of Shares of

Stock Not Traded in the Stock
Exchange.

Intercorporate Dividends

Nonresident Foreign Corporation

Gross Income Tax

Nonresident Cinematographic Film

Owner, Lessor or Distributor
Nonresident Owner or Lessor of Vessels
Chartered by Philippine Nationals
Nonresident Owner or Lessor of Aircraft,
Machineries and Other Equipment
Interest on Foreign Loans
Intercorporate Dividends

Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit

system units, including interest income from foreign currency loans granted by
such depository banks under said expanded foreign currency deposit system to
residents
net capital gains realized during the taxable year from the sale, barter, exchange
or other disposition of shares of stock in a domestic corporation except shares
sold or disposed of through the stock exchange

Dividends received by a resident foreign corporation from a domestic

corporation liable to tax

Not over
P100,000..... 5%
On any amount in
excess of
P100,000. 10%
Not Taxable

gross income received during each taxable year from all sources within the Philippines,
such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits and income, and capital gains, except capital gains subject to tax
under subparagraphs (C) and (d)
gross income from all sources within the Philippines

35%

gross rentals, lease or charter fees from leases or charters to

Filipino citizens or corporations, as approved by the Maritime Industry Authority
Rentals, charters and other fees derived by a nonresident lessor of aircraft,
machineries and other equipment
Lender NRFC
Borrower DC
on the amount of cash and/or property
dividends received from a domestic corporation

4%

25%

7%
20%