a. General Principles

1. Income Tax

a. Nature and General Principles

i. Criteria in Imposing Philippine Income Tax

ii. Types of Philippine Income Taxes

iii. Kinds of Taxpayers – Individual, Corporations, Trusts, Estate

(a) Individual vs. Corporate Income Taxation – Schedular vs. Flat Rate

(b) Income Tax on Special Corporations

b. Income

i. Definition

ii. Realization and Recognition of Income

iii. Taxability of Income

iv. Income Sources

(a) Compensation Income

(b) Professional Income

(c) Income from Business

(1) Active vs. Passive Income

(d) Income from Dealings in Property

(1) Capital vs. Ordinary Asset

(e) Situs of Income Taxation

(f) Gross Income vs. Net Income vs. Taxable Income

(1) Tax Deductions vs. Tax Credits

(2) Optional Standard Deduction

(g) Withholding Taxes

(1) Rationale

(2) Creditable vs. Withholding Taxes

(3) Duties of a Withholding Agent

1. Income Tax

DEFINITION, NATURE, AND GENERAL PRINCIPLES

Income Tax

A tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on a person’s income, emoluments, profits and the like. Income tax is a direct tax.

i. Global

The total allowable deductions are deducted from the gross income to arrive at the net taxable income subject to the relevant income tax rate.

All items of gross income and deductions are reported in one income tax return and a single tax is imposed on all income received or earned by a person irrespective of the activities which produced the income (i.e. compensation income, net income from business, trade or profession.)

ii. Schedular

Different types of income are subjected to different sets of graduated or flat income tax rates. The applicable tax rates will depend on the classification of the taxable income and the basis could be gross income or net income (i.e. capital gains tax).

iii. Others

Semi-Schedular or Semi-Global Tax System – The compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income and after deducting the sum of allowable deductions, the taxable income is subjected to the relevant income tax rate.

With respect to the income, the computation of income is global while the schedular tax system applied to the capital gains and passive income subject to final tax at preferential tax rates.

Note: Philippine income taxation is a combination of both systems but is more schedular for individuals while more global for corporations.

Note: Another way of differentiating global and schedular is that under the global system, applicable income items are aggregated into one tax base, to which a graduated or flat rate may apply, while under the schedular system, there are different categories of taxable income.

Global treatment is usually applied to corporations, as corporations are taxed at a single rate, regardless of the tax base; while the schedular system is usually applied to individuals as they are subjected to different tax rates based on their tax bracket.

b. Features of the Philippine Income Tax Law

• Direct tax – Tax burden is borne by the income recipient upon whom the tax is imposed.
• Progressive tax – Tax rate increases as the tax base increases; progressivity is a constitutional objective, but indirect taxes are not prohibited and need not be minimized. (1987 Constitution, Art. VI, Sec. 28(1); Tolentino v. SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, G.R. No. 115455, 30 October 1995)¹
• Comprehensive system – Adopts the citizenship principle, residence principle, and the source principle.
• Semi-schedular or semi-global tax system – Certain passive incomes and capital gains are subject to final taxes at preferential rates while all other incomes are added together to arrive at the gross income. After deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates for an individual or normal corporate income tax rate for corporations.

Types of Philippine Income Taxes

• Net Income Tax/Taxable Income (GI – Deductions)
• Gross Income Tax
• Final Income Tax (on passive income and capital gains)
• Fringe Benefits Tax (tax imposed on the employer on the grossed-up monetary value of taxable fringe benefits furnished to managerial or supervisory employees under NIRC, Section 33(A))
• Capital Gains Tax (real property and shares of stock not traded in stock market)
• Corporate Income Tax
• Minimum Corporate Income Tax (2% of gross income)
• Branch Profit Remittance Tax

Taxable Period

General Rule: The accounting period of a taxpayer is a period of twelve (12) months.

(1) Calendar Year – accounting period from January 1 to December 31 which is allowed if the:

• Taxpayer is an individual
• Taxpayer is a general professional partnership
• Under Section 52(B) of the NIRC², in relation to Section 22(B)³, a “corporation” generally includes a partnership, but excludes a general professional partnership and the qualifying joint ventures or consortia specified in Section 22(B). A partnership treated as a corporation for income-tax purposes may use either a calendar year or a fiscal year, subject to the applicable rules.
• Accounting period is other than a fiscal year
• Taxpayer has no accounting period
• Taxpayer does not keep books
• Taxpayer is an estate or trust

2) Fiscal Year – Accounting period of twelve (12) months ending on the last day of any month other than December which is allowed only for corporations.

(3) Short Period – A taxpayer may have a taxable period of less than twelve (12) months when:

• Taxpayer dies
• Corporation is newly organized
• Corporation changes its accounting period
• Corporation is dissolved