Income VS.

Capital - A taxable gain is conditioned upon the

Capital Income presence of a claim of right to the
Constitutes the Any wealth which flows alleged gain and absence of a definite
investment which is into the taxpayer other unconditional obligation to return or
the source of income than a mere return on repay that which would otherwise
capital constitute a gain
It is the tree It is the fruit c. All events test
Return or recovery of Income is subject to - Any economic benefit to the employee
capital is not subject income tax that increases his net worth, whatever
to income tax may have been the mode by which it is
effect, is taxable

Income Tax Systems Accounting Period

• Global Tax System - It is the length of time over which
• Schedular Tax System income is measured and reported
• Semi-schedular or Semi Global Tax
System Types of Accounting Period
1. Calendar Year
Global Schedular PGPS - The 12 consecutive months starting
Company January 1 and ending December 31
Prof 2. Fiscal Year
Business
Other Income - It is a period of 12 months ending on the
Passive Capital last day of any month other than
-All Deductions December
15%-35% for Individuals
25% or 20% for Corporations
Individuals – Calendar
Corporation – Calendar or Fiscal Year
Characteristics of Philippine Income Tax
• National tax as to taxing authority Accounting Methods
- are accounting techniques used to
• General tax as to purpose
measure income
• Excise as to subject matter
• Progressive as to rate (except for
Types of Accounting Method
corporations – proportionate)
1. The General Methods
• Direct tax as to incident
a. Accrual Method
- Income is recognized when earned not when
Requisites of Income to be Taxable
cash is received.
- There must be gain or profit
- expense is recognized when incurred not when
- The gain must be realized or received
cash is paid
- The gain must be excluded by law or treaty
from taxation
b. Cash Method
- income is recognized when cash is received not
Accounting Periods and Methods
when earned
• Test in determining when income is taxable - expense is recognized when cash is paid not
or expenses are deductible when incurred
a. Realization Test
- There is no taxable income unless
• Installment Basis of Deporting Income
income is deemed realized. Revenue is
a. Sale of personal property by dealers
generally recognized when both
b. Casual sale of personal property
conditions are met:
c. Sale of real property
➢ The earning process is complete or
d. Sale of real property considered as
virtually complete
capital asset by individuals
➢ An exchange has taken place
b. Claim of right doctrine
Illustration:
S sold his lot to B for P3,000,000 for a P300,000 Individual Income Taxpayer
down payment, and the balance is payable Citizen
P100,000/month installment. Under the Constitution, citizens are:
If the sale happened in January 1, 2021, the initial - Those who are citizens of the PH at the
payments would be ₱1.5M (300k downpayment time of adoption of the Constitution on
and ₱1.2M installment for 2021) which would February 2, 1987
make the percentage of the initial payments 50% - Those whose fathers or mothers are
(₱1.5M/₱3M). Accordingly, since such percentage citizens of the PH
exceeds 25%, the income to be reported for 2021 - Those born before January 17, 1973 of
would be the entire gross profit for the lot. Filipino mothers who elected Filipino
citizenship upon reaching the age of
If the sale happened on October 1, 2021, the majority
initial payments would be P600,000 (P300,000 - Those who are naturalized in accordance
down payment and P300,000 installments). which with the law
would make the percentage of the initial
payments would be 20% which does nol exceed Classification of Citizens
25%. Thus, S has the option to report as income in • Resident citizen
2021, only the gross profit pertaining to the - A Filipino citizen residing in the PH
payment received during 2021, and accordingly
report on the basis of installments only in the • Non-Resident Citizen includes:
succeeding years. - A citizen of the PH who establishes to
the satisfaction of the Commissioner the
Change in Accounting Period fact of his physical presence abroad with
Requirements: a definite intention to reside therein;
a. Other than an individual - A citizen of the PH who leaves the PH
b. With approval of the commissioner during the taxable year to reside abroad,
c. Subject to the filling of final or either as an immigrant or for an
adjustment return for a period more employment on a permanent basis;
than 12 months - A citizen of the PH who works and
derives income from abroad and whose
Types of Income Taxpayers employment thereat requires him to be
A. Individuals physically present abroad most of the
1. Citizen time during the taxable year;
a. Resident Citizen (RC) - A citizen who has been previously
b. Non-Resident Citizen (NRC) considered as non-resident citizen and
2. Alien who arrives in the PH at anytime during
a. Resident Alien (RA) the taxable year to reside permanently in
b. Non-Resident Alien (NRA) the PH shall likewise be treated as a non-
i. Engaged in Trade or resident citizen for the taxable year in
Business (NRA-ETB) which he arrives in the PH with respect
ii. Not Engaged in Trade or to his income derived from sources
Business (NRA-NETB) abroad until the date of his arrival in the
PH
3. Taxable Estate and Trusts Filipinos working in PH embassies or PH consulate
officers are NOT considered non-resident citizen
B. Corporations
1. Domestic Corporation (DC) Alien
• Resident Alien
2. Foreign Corporation (FC) - an individual who is residing in the PH
a. Resident Foreign Corporation (RFC) but is not citizen thereof, such as:
b. Non-Resident Foreign Corporation - An alien who lives in the PH without
(NRFC) definite intention as to his stay; or
 - One who comes to the PH for a definite an individual taxpayer. The income of the
purpose which in its nature would property held in trust is taxable to the
require an extended stay and to that end trust. Trusts that are designated as
makes his home temporarily in the PH, revocable by the grantor are not taxable
although it may be his intention at all entities and are not considered as
times to return to his domicile abroad individual taxpayers. The income of
An alien who has acquired residence in the PH properties held under revocable trusts is
retains his status as such until he abandons the taxable to the grantor not to the trust.
same or actually departs from the PH - When the trust agreement is silent as to
revocability of the trust, the trust is
• Non-resident alien presumed to be revocable
- an individual who is not residing in the
PH and who is not a citizen thereof Corporate Income Taxpayers
a. Non-resident Aliens Engaged in Business 1. Domestic Corporation
(NRA-ETB) - it is a corporation that is organized in
- aliens who stayed in the PH for an accordance with PH lawsIt includes one-
aggregate period of more than 180 days person corporations (OPC) owned and
during the year registered by resident citizens in the PH
2. Foreign Corporation
• Non-Resident Aliens Not Engaged in Business
(NRA-NETB) include: - it is organized under foreign law

- Aliens who come to the PH for a definite Types of Foreign Corporations

purpose which in its nature may be 1. Resident Foreign Corporation
promptly accomplished;
- Aliens who shall come to the PH and stay - a foreign corporation which operates
therein for an aggregate period of not and conducts business in the PH through
more than 180 days during the year a permanent establishment
2. Non-Resident Foreign Corporation
Taxable Estates and Trusts - a foreign corporation which does not
1. Estate operate or conducts business in PH
- refers to the properties, rights, and
obligations of a deceased person not
extinguished by his death. The General Rules in Income Taxation
- Estates under judicial settlement are Taxable on Income Earned
treated as individual taxpayers. The Individual Taxpayer Within the Outside
estate is taxable on the income of the PH the PH
properties left by the decedent. Estates RC / /
under extrajudicial settlement are NRC /
exempt entities. The income of the RA /
properties of the estate under NRA-ETB /
extrajudicial settlement is taxable to the NRA-NETB /
heirs. Corporate Taxpayer
DC / /
2. Trust RFC /
- it is an arrangement whereby one person NRFC /
(grantor or trustor) transfers (donates)
property to another person (beneficiary), Criteria for imposing Philippine Income Tax
which will be held under the 1. Nationality or Citizenship Principle
management of a third party (trustee or - A citizen of the PH residing in the PH is
fiduciary). taxable on all income derived from
- A trust that is irrevocably designated by sources within and without the PH
the grantor is treated in taxation as if it is
 - non-resident citizen is taxable only on
income derived from sources within the Ex (Reverse): ABC (DC) lends ₱1M to XYZ (NRFC).
PH XYZ will need to pay ABC ₱1M plus interest?
2. Residence principle Where is the situs of the interest? PH
- All income derived by persons residing in Is the interest taxable in PH? Yes
the PH, whether citizen or aliens,
whether domestic or foreign Dividend (Example)
corporations, shall be subject to income • More than 50% from the PH
tax on the income derived from sources Total GI 100M
within the PH ABC Corp (FC) PH GI 84M
3. Place or Source of Income Other GI 16M
- All income derived from sources within
the PH shall be subject to income tax Stock- Status of Situs of Taxability
holder the the
Income Dividend
Situs of Income Earner
- it is the place of taxation of income. It is A RC Partly Taxable
the jurisdiction that has the authority to within within and
impose tax upon the income and without
partly
Income Situs Rules without
Types of Income Place of Taxation B NRC Partly Taxable
Interest Income Debtor’s residence within within only
Dividend Income If received from a DC and
- income within the partly
PH without
if received from a FC C RA Partly Taxable
• Without – less than 50% within within only
• Within – more than and
50% partly
Service Income Place where the service is without
rendered D NRA-etb Partly Taxable
Rent Income Location of the Property within within only
Royalties Place of use of the and
intangible partly
Sale of Real Location of real property without
Property E NRA- Partly Taxable
netb within within only
Sale of Personal Purchased: where the
and
Property property is sold
Produced: in the PH, partly
without
considered within
Except: sale of shares of
stock of a domestic • Less than 50% from the PH
corporation – considered Total GI 100M
entirely within the PH even ABC Corp (FC) PH GI 16M
if sold outside Other GI 84M

Interest (Examples)
Ex: ABC (DC) and XYZ (NRFC). XYZ lend ABC ₱1M.
ABC will need to pay ₱1M plus interest.
Where is the situs of the interest? PH
Is the interest taxable in PH? Yes
 Stock- Status Situs of Taxability Where is the situs? Outside the PH
holder of the the Is it taxable in the PH? Yes because the
Income Dividend taxpayer is RC which is taxble within
Earner and without the PH
A RC Without Taxable
within and
without Royalties Example:
B NRC Without Taxable If your book is distributed outside the country and
within only banned in the Philippines.
Where is the situs? Outside the PH
C RA Without Taxable Is it taxable in the Philippines? Yes
within only because the taxpayer is a RC which is
D NRA-etb Without Taxable taxable within and without the Ph
within only
E NRA- Without Taxable
Witholding Tax System
netb within only - Amount reported as income is GROSS of
creditable withholding tax: the concept of
Comprehensive Summary of Rules on Dividends a withholding tax on income obviously
Recipient Source of Dividends and necessarily implies that the amount of
taxpayer DC FC the tax withheld comes from the income
earned by the taxpayer. Since the amount
Individuals of the tax withheld constitutes income
Citizen & 10% final tax Regular Tax earned by the taxpayer, then that amount
Residents manifestly forms part the taxpayer’s gross
NRA -etb 20% final tax Regular Tax receipt. Because the amount withheld
belongs to the taxpayer, he can transfer
NRA -netb 25% final tax 25% final tax
its ownership to the government in
Corporation payment of his tax liability. The amount
DC Exempt Regular tax withheld indubitably comes from income
(subject to of the taxpayer, and thus forms part of his
conditional gross receipts
exemption)
Timing of Withholding
RFC Exempt Regular Tax - Time the income payment is accrued or
NRFC 15% final tax 25% Final Tax recorded as an expense or asset
(subject to
tax sparing
Withholding of Final Tax of Certain Income Tax
rule,
Payments
otherwise - The amount of income tax withheld by the
25%) withholding agent is constituted as a full
Services Example: and final payment of the income tax due
You are an employee of a domestic corporation. from the payee on the said income. The
As part of your training, you were given an liability for payment of the tax rests
assignment contract to be sent to your parent primarily on the payor as a withholding
company in Australia for 2 months. Therefore, agent.
service for the entire year you will be out of the
country for 2 months. So therefore, services will be Withholding of Creditable Tax at Source
performed in Australia. Thus, you were given - Taxes withheld on certain income
salary in the Philippines and allowances in payments are intended to equal or at least
Australia. approximate the tax due from the payee
Where is the situs of the income derived on said income. The income recipient is
from Australia? Australia still required to file an income tax return,
Are the allowances received in Australia as prescribed in Sec. 51 and 52 of the
subject to Philippine income tax? Yes Tax Code, to report the income and/or
because the taxpayer is a DC which is pay the difference between the tax
taxable within and without the PH withheld and the tax due on the income.
This is otherwise known as Expanded
Rentals Example: Withholding Tax (EWT) or the Creditable
If the property is rented outside of the Philippines Withholding Tax (CWT).
but is owned by a resident citizen (RC)
 A manner of collection: A withholding tax on credit/deduction
income is not a new kind of tax but simply a from IT due
manner or system by which income taxes may
be collected when the income is paid or
received. It is in the nature of advance tax Persons Constituted as Withholding
payment by a taxpayer on the annual tax
which may be due at the end of the taxable Agent (Sec. 3 of RR No. 14-2002)
year. 1. Any juridical person whether or
not engaged in trade or business;
Reason for the system: the withholding tax
system was devised for three primary reasons: 2. Any individual, with respect to
1. To provide the taxpayer a convenient payments made in connection with
manner to meet his probable income tax this trade or business. However,
liability
2. To ensure the collection of income tax insofar as taxable sale, exchange
which can otherwise be lost or or transfer of real property is
substantially reduced through failure to concerned, individual buyers who
file the corresponding returns
3. To improve the government’s cash flow are not engaged in trade or
business are also constituted as
Kinds: withholding agents
1. Creditable or Expanded Withholding Tax
(Withholding Tax at Source) 3. All government offices including
2. Withholding tax on employee’s GOCC, as well as provincial, city
compensation or wages (Withholding Tax and municipal governments and
on Compensation/Wages)
3. Withholding of value-added tax barangays.
4. Withholding of percentage tax

Withholding Tax on Compensation

Final Creditable - A method of collecting that
Witholding Witholding Tax income tax at source upon receipt
Tax
Treatment of Constituted Creditable of income.
amount as a full and against the - It applies to all employed
withheld final income tax due individual whether citizens or
payment of on said income.
the income It is more of an aliens, deriving income from
tax due on advance compensation for services
the said payment of rendered in the Philippines,
income income tax
Liability of Rest on the Payee of the - Withholding Agent: Employer
payment Payor as the income is
withholding required to Refunds or credits
agent report the Employer - overpayment, refund or credit
income and pay shall be made to the ER only to the extent
the difference that the amount of such overpayment was
on the tax not deducted and withheld by the ER
withheld and Employees - the amount deducted and
tax due withheld during any calendar year shall be
Computation Not required The income allowed as credit to the recipient of such
to file ITR for received by the income against the income tax due.
the particular payee is
Income or include in gross Witholding Tax Return
include in his income subject Form Name BIR Frequenc Deadlin
taxable to normal IT Retur y e
income and tax n
withheld is a
 Quarterly Quarterly Last Creditable the close of
Remittance Return day of Income Taxes the month
of Creditable the Withheld
Income Taxes month (Expanded)
Withheld followin Monthly Monthly 10th day
(Expanded) g the Remittance following
close of Form for Final the close of
the Income Taxes the month
quarter Withheld
Quarterly Quarterly Last Monthly Monthly 10th
Remittance Return day of Remittance day
of Final Taxes the Return of following
Withheld on Interest month Income the close of
Paid on Deposits followin Taxes the month,
and Yield on g the Withheld except for
Deposit close of On the month
Substitutes/Trusts/ the Compensation of
Etc. quarter Decembe,
Quarterly Quarterly Last January 15
Remittance Return day of is the
of Final Income the deadline
Taxes Withheld on month
Fringe Benefits followin
Paid to Employees g the
Other than Rank close of
and File the
quarter
Quarterly Quarterly Last
Remittance Return day of
of Final the
Income Taxes month
Withheld followin
g the
close of
the
quarter

End of the month following the end of the

quarter
1st Quarter, ends on March 31 - last day
of filing is April 30
2nd Quarter, ends on June 30 - last day of
fling is July 30
3rd Quarter,ends on September 30 - last
day of filing is October 31
4th Quarter, ends on December 31 - last
day of filing is on January 31 of the
following year.
Deadline of payment - same as filing of the
returns

Quarterly Alphabetical List of Payees

(QAP)
- accompanies the quarterly return
a. Name of the income payees
b. TIN
c. Amount of income paid segregated per
month with total for the quarter
d. Total amount of taxes withheld

Form Name BIR Frequency Deadline

Return
Monthly Monthly 10th day
Remittance following
Form for