►ii!Z?Ss:;Jtaw-lli-i!

llE:::---=an:=---·-
------1:i.':1,&&mt:mccQ

7
Introduction to Gross Inc om e

income Defined .
me from wha teve r
Gross inco me mea ns, in its broa d sens e all inco
l or illegal. The
ed withi n o_r ~ith~ ut the Phili ppi.n es, 'whe ther lega
source, deriv
l inco me. Proc eeds of
tax code .doe s not . di~tm gu1s h lega l and illega
inco me beca·u se emb ezzl er or
embezzlement or swin dling , for insta nce, are
and can use such for his
swindler alrea dy has com plete dom inion over them
economic bene fit. In the case of Jam es vs. Unite
d State s, the Supr eme Cou rt
me, lega lly or illeg ally, with out
of the U.S. held that '1f a taxp ayer rece ives inco
that inco me is auto mati cally
consensual reco gniti on of oblig ation to repa y,
taxable".

taxp ayer , othe r than retur n

"Inco me" me ans all w e alth whic h flows into the
ipal or capit al. On the othe r
of capital. It impo rts som ethin g distin ct from princ
h is the sour ce of inco me.
hand, "Cap ital" cons titute s the inves tmen t whic
flow. Capi tal is wea lth, while
Therefore, capi ta l is fund while incom e is the
tree while inco me is the. fruit
income is the serv ice of weal th . Capi tal is the
414) .
(Vicente Mad rigaf et al v . J ame s Rqffe rty, 38 Phil.

RCE
ILLUSTRATIVE CASE- INCOME FROM WHATEVER SOU
P1 ,000,000 from his swind ling
Clifford is a big-time swindler. In one year, he was able to earn
discovered his income from
activities. When the Commissioner of Internal Revenue
e tax for such income. Clifford
swind ling, the Commissioner assessed him a deficiency incom
protested the assessment on the following grounds:
e;
1) The income tax applies only to legal income, riot to illegal incom
e because he was under
2) Clifford's receipts from his swindling did not constitute incom
receipt from swindling was
obligation to return the amount he had swindled, hence , his
peso borrowed, he has a
simila r to a loan, which is not income, because for every
corresponding liability to pay one peso; and
will be hardly anything left
3) If he has to pay the deficiency income tax assessment, there
to return to the victims of the swindling.
t?
How will ·ou rule on each of the three rounds for the rotes

353
 ANSWER:
1) The contention that the income tax applies ~o .
legal in<:°~e and no~ to illegal in
not correct. section 32(A) of the Tax Code inclu
des w1th1n the purview of gr c_orne is .
all Income from whatever so~rce derived. Henc
e, the illegality of the inco~~ 1n~rne
preclude the imposition of the income tax there
on. . Will not
2) The contention that the receipts from hi~ swin
~lin~ did_ not constitute income becau
his obligation to return the amount swindled
1s likewise not co~ect. When a ta se 01
acquires earnings, lawfully or unlawfully, witho
ut the consensual recognition, e Xpayer
implied, of an obligation ·to repay and ~ithout
re_striction ~s to their disposiuo:;~:ss or
received taxable income, even though 1t m~y
~till be cl~1med that he_is not ent1t1~as
retain the money and even though he may
still be adJudged to restore its eq . to
(James vs. u.s.:366 U.~. _21~, 1961). _T~ treat
the embezzled funds not as :~n t
income would perpetuate iniustlce by relieving
embezzlers of the duty of paying in ble
taxes on the money they enrich themselves
with through embezzlement, While hcome
people pay Jhe1r. taxes on every conce1va
. ble type f .
o income. . onest
3) The ·deficiency ·income tax assessment is a direc
t tax imposed on the owner which is
excise on the privilege to earn an. income. It will
not necessarily be paid out of the sa an
income that was subjected to the tax. Clifford's
liability to pay the tax is based on~
having realized a taxable income from his swin
dling activities and will not affect h;s
obligation to make "restitution". Payment of the
tax is a civil obligation imposed by la;
while restitution is acivil liability arising from a
crime.

ILLUSTRATIVE FLOW OF WEALTH

CASE
Deposit with no interest does not produce
income for the depositor
because there is no flow of wealth.

MERE RETURN OF CAPITAL

Leclec lends Gore P1 ,000,000 . Gore repays
P1 ,000 ,000 plus P25,000
interest. The P1 ,000,000 is not an income as
this is merely a return o!
ca ital. Onl the P25,000 re resentin interest
is considered income.

Examples .of Return of capital and OTHER

THAN Return of Capital:

Mere return of capital

• Collection of loans receivable Receipt other than mere return of capital
• Liquidating dividend • Interest paid on loans receivable
\ • Amere increase ip the value of • Condonation of debt for services rendered
I • Excess of selling price over the cost of an asset
property (merely an unrealized
increase in ca ital sold

354
 f income
r111s o
ay be "realized in any ~
fO
corne rn . orrn, whether in money, prop erty.
fitting taxpayers are
!n indirect econor:111c benefit. Items indirectly bene
5ervtce;; from wos s m~m e. . Incom
e includes the forms of inco me
r disposition of capital
e)(cl~dcallY descnbed as38gam~ denved from sale or othe
5peC'~ al vs. Rafferty, Phil. 41 4). It also refers toified the amount of mon ey
spec time, whe ther as
(r.Aa~ ng to a person_ or corporation within a
1 st tment. (Fisher vs. Trinidad,
c0t11 nint of services , intere , or profits from inves
~;~i . 973) .
·on of Income
yalU3t I
the value received or
The amo unt of incom~ recogniz~d is generally
ces were rendered at a
. h the taxpayer has a right to receive. If the servi
rary, such price
w~'~i ated price , in the absenc~ of any evidence to the cont
st1 compensation rece1~ed.
~11 be presumed to be the fair market value of the
in payment of serv ices
sh fer of land made by a person to another
considered as part of the
Tra~!red in the form of attorney's fees shall be
market value or the zona l
ren s income of the latter valued at either the fair
received (BIR Ruling #017 -
~;~~ation, whichever is higher, in the taxable year
2003) .

CLASSIFICATION OF INCO ME
1 Income as to source
· a. Compensation income
b. Professional income
c. Business income
d. Other income

2. Income as to territorial source

a. Inco me within the Philippines
b. Income without the Philippines
c. Mixed income (partly within and without)

3. As to taxability
❖ Taxable income
or normal tax such
a. Ordinary or Regular income subject to basic
Tax Code, as
as the scheduler tax under Section 24(A) of the
amended
g)
• Reportable in the ITR (Quarte_rly and ~nnua_lly, Filin
e
• Subject to expanded withholding tax, 1f applicabl
• Tax credits
• Catch-all or basket of other income
355
 Co/
be -1
fo r in c o m e to
5 .
a1.11site s t b e gam.
ftB u
n o t be i
111ere ~ n n e e d. \t may
1) -rtie gO~ ' a
ss e ts
g e o f property , ,
531e 8 cance\\ati
..
e)(.ch ~ n o r (except
• Q t axes inc.orne ta x reduct1odness ·
ve Inco
ti
mIes ithholdin
al pa ym en t of \ t·
ta in Pa S~ I a. w cons titut es fin ·t th correspond; ng de. ,b ted fr o m comp e 1<
b· Cer ., SubJect to. ginta xe·s ho ld
·
and rem, · e, . if1
• WithhoId 1n . ed to V:'
'th . rea\1ze
• Payor is oblig ta x·return ain m u s t tie ~
. de in the income ag ent crease \11
tax
clu th withhold
ing from b} ffJB 9 re in l realizJ
• N o ne ~d to ,n
a in .p as si ve inc?me derived on P.. rneut a ct u a
erto :e rt interest income ·t·
■ BIR ~•II run a~ n Yth P hi lip pines such as .a 1,thOth e r dispos1 101
.,..
• Appllc able _ ho_ .
e
sources w,t rnand r~yalt1es . f in corr
or ~ ta ti o n oce
bank deposi t ipt- o1
specifically:
. . rea •ct u aI re
s ta xe s, ation of a u
. . . ,
ga in
·ect to capital of stock o f a do m es tic corp or it m a y occ
ar es
~~nstructive rece
,~s subJ of sh .
c. ·Capita■l ga
Gain-on sa Ie a buyer. .· . ted
ct ly to ca pital assets loca
sold dire op er tie s cl as si fie d as tax.payer.
• Sale of real pr ·
in the .Philippine
s.
T h e d o ct ri n e
. -
ial rates. . .
Pt:.ZA and as_ a _ti
su bj ec t to ~p ec tc o m e _of actual re ce ip t
Special incomespecial rates and ~ules (1.e., l corporate e n .'\ . ,~
Subject to su bJ ec t to 51/o sp ec ia . received w h
d. pani es en de d by stnc1.1c
registered · com de r th e T a x C od e, as a~ substantial re
801 provided un
income tax as
tr u1
CREATE Act). There is c o n s
► Paym e n t
is c1
me .
❖ Tax exempt inco nal mandate . . or
io
a. . By constitut ial~ . s) ► P a y m e n t is !
(general ~r s~ec ements eatie
, tr
b. By statute nal comrty (1.e. , bilateral agre otherwise m
c. By internatio ma y d ra w u
paye e c o u \c
ME the ta x a b le
TAXABLE INCO le income· with d ra w
de d , pr ov ides th a t "Taxab
am en e, less
ec tion 31 o f the Tax Code , as e sp e ci fie d in the T a x Cod subst a nti a l
S oss incom Tax Code or
nent items o f gr co m e by th e c o n s tr u c fo
means ttie perti su ch type o f in
hich are
ctio ns , if an y, authorized for m e e xc l u d e d by law, or w • C
dedu t include inco bject to final
other special la
ws. It does no
C od e) a s w el l as in co m e su itable s
fro m inco me tax (Sec. 32
,
s.u b je ct to b a si c and cred • f
exem pt all incom e derived from
, . it pertains to and in co m e
taxes. Hence ga ins, pr of its ,
s. It includes
withholding 'taxe ther legal o r illegal. •
so ur ce , w he
whatever

356
 cfyte;. 7_ l w ~ - ~, ,,. A
' :fs /lu. -v11te-
r.:rt}
Zdtv f rJ-, 'Y
to be Ta
,.....•~;sites tor Income . · >cable
~e
rhere must be gain. .
ga in ne ed no t be in cash d .
a) The enved from
of as se ts . It m ay occur Doctrine of
sale lt of
~g e o f pr op er ty , paymen:s a resu Constructive Receipt
e.xcha mption l
du ctio n or ca nc ellation of th' assu It is not the actua
re e taxpayer·~
ept gifts) rece!pt but the right to
indebtedness (exc r profit receive that determines
m co m pl et io n of a t or othe
realized fro ransaction. when to include an
. ~mount in the gross
e gain must lie realized OR income (Filipinas
the vaiui!ce,vecl
b) Th .
A mere increase in ty Synthetic Fiber rp. vs
Co
n, either of proper
izatio The right to
without act~al real not
th
t rough sale
CA).
must be
os iti on , is receive
or other disp . The
me need not ~x~bleth unconditional, valid dan
realization of inco form
property by ~he e enforceable.
of actual receipt or where the tax~ayer
m _a y oc cu r as
as it a·
lve re ce ip t of the .incomer~b is
constru cf e Y the
taxpayer.

constructive rec tp.t ~ of

Th e do ct rin e of
ion of in co mplements _the doctrin ely
test of realizat iv
actual receipt as a set aside and d omeai.. laAn amountta1s constru· ct·th t
a
· received when it
is ma e av ble to xpayer w1 ou
n s.
substantial restrictio
n:
cons tr uctive re ceipt of income whe
There is to payee's account;
d ctrine
► Payment is credite Importance of the Do
ce ip t of
or or of Constructive Re
ide for the payee,
► Payment is set as pa ye e Income:
rw ise m ad e av ailable so the It prevents a cash
-basis
ot he the
at any time, or so taxpayer from delib
erately
may draw upon it n upon it during ome
payee co uld ha ve draw turning his back on inc
n to g the
e taxa ble ye ar if notice of intentio and thereby selectin
th out rts it.
been given with year in which he repo
withdraw had no the
ns . Hence , there is Not recognizing
substantial limitatio ome
t of income when: construcfive receipt of inc
constructive receip ceipt is subject to as realized income
dearly
• Constructive re would open the door
to tax
ns .
substantial limitatio have funds avoidance and, poss ibly, tax
n9 t
• Payor does.
payment. th evasion .
necessary to make
• The amount is
n~r available to e
taxpayer/payee . .

357
 c/41-e,-1- ln.ir~llflv ttJ- 9rtJss;, .
'/'
~,-,,u-s-tra-ti-on--c-=-o-n--=
Case 1
st-ru~ct;-;:-lv=-=- '
e,:;Re=c=ei;:pt;-:o-:,fan1n~co~m;;;e~:- - -
·
.
- ,,-
'
George was informed that his check dated. December 16, 2020 is
available and he can get it anytime. Georg~ did not ~et th_e check until J~ready
30 , 2021. In this case, George con~truct1vely received income in Decenua~
2020 and is taxable in that taxable penod. · · rtlber

Case2
~An employer issued a bonus check to _an employee on Decem,ber 31,
2020
asked her to hold it for few days .until the comp~ny could. make dep0sitsbut
cover the check". The income was not co~struct,vely. r~ceIved on Decern to
31 2020 since the issuer did not have sufficient funds In its account to Pa ber
debt as of the issua·nce of th~ check. Ythe

Case 3 - Other examples of income·constructively realized

■ Cash or Property dividend received by individual taxpayers
■ Share of a partner in the net inc~me of a general professional partnership
or from a taxable partnership .
■ Rent income deposited in court by a lessee of the property in view of the
unjustified refusal of lessor (Limpian Investment Corp. vs Commissioner)
Art. 1261 Civil Code. ·'

c) The gain must not be excluded by law from taxation.

· Incomes that are exempt from tax by law or treaty are not considered
1n determining gross income. Income is recognized in the year it is
actually or constructively received in cash or cash equivalent.

Characteristics of Philippine Income Tax

1. National tax. It is imposed and collected by the National Government
throughout the country.
2. General tax. It is levied without specific or a predetermined purpose.
Hence, the revenue from income tax may be appropriated for general
purposes. '

3. Excise tax. It is imposed on the right or privilege of a person to receive or

earn an income.
4.- Direct tax. It is payable .by the person upon whom it is directly imposed
by law. It cannot be shifted or passed on to others.
5. Progressive tax. lt ·is based upon one's ability to pay. The rate of income
tax increases as.the tax base increases.

358
 C~er 7- Jw /_.,.
J 'tlt:/,tlt a _.()jv t()-, 9rrJ..r.; lttct)-1,u,
ME TAX SYSTEMS
1NCO
hedular Tax System vs. Global Tax System
1) SC
Un der a "Schedular System" th • . .
. . . . , e various types/items of income
(compensation, bus~nesslprofess,onal income) are classified accordingly
rd
and are ~cco ed different tax treatments, in accordance with schedules
characterized by ~raduated tax rates. Since these types of income are
treated separately, the allowable deductions shall likewise vary for each
type of income. On the other hand, all income received by a taxpayer
under the "Global Tax System" are g~ouped together, without ~ny
distinction as to the type or nature of the income, and after deducting
therefrom expenses and other allowable deductions, are subjected to tax
at a fixed rate . The distinctions of the two income tax systems are
summarized as follows:

TABLE 7-1-: Schedular vs. Global Tax System

SCHEDULAR GLOBAL
Tax Treatment: • Income tax rules varies ■ Uniform tax
and made to depend on treatment or rules
the kind or ·category of
taxable income of the ·
taxpayer
(Tan vs. del Rosario)
Characteristics: • Does not "generally"
1. Classification • Categorizes or classifies
income categorize or classify
of income income

• Imposes different tax • Imposes uniform tax

2. Tax rates rates
treatment and rates
• NRFC, NRA-NETS
• Individual taxpayers
3. Applicability
(example)
Approach used in_the _P~il_ippi~s~~nd partly global (i.e., corporations).
Partly scheduler (1.e., md1v1dua

. . s Net income ta~ation be characteri'zed under

2) Gross income taxation v . of the Philippmes m~y r and Net income
The income tax srste~he Gross incom~ taxa~~~r tax purpose~ are
two general categories, mponents of gross incor:mended .
taxation . The different ton 32 of the Tax Code, as
enumerated under Sec '0

359
 Net income taxation
Gross income taxation
• No deductions or • A/lows deductions/ exemption
Deductions ► Example: · s
exemptions allowed
and Returnable income
► Example:
Exemptions
· . Income subject to final
taxes
• Net income
Tax Base • Gross income
■ Individual taxpayers except
Applicability • NRA-NETS . ,
Nonresident corporations
NRANET ·
■
• Corporate taxpayers except
nonresident forei n co orations
• Minimizes source of graft ■ Just, fair and reasonable
Advantages
~nd corruption due to · ■ Equitable relief (deductions and
minimization of margin of exemptions) to taxpayers
· discretion exercised by ■ .More revenue to the government
revenue district officers ■ Minimizes tax evasion (subject
• Simplifies tax system to counterchecking by the BIR)
_

BASIC FEATURES OF PHILIPPINE INCOME TAXATION

. '

1) It has adopted a comprehensive tax situs

by using the nationality,
and resident aliens
· residence , and source rules .. This makes citizens
non-resident aliens
taxable on their income derived from all sources wh ile
in the Philippines.
are taxed only on their .income derived from with
income while foreign
Domestic corporations are also taxed on universa l
·corporations are taxed only on income from within.

2) T~e individual income tax system is mainly prog

ressive in nature in that
ions in general are
·- it provides a graduated rates of income tax. Corporat
ATE Act.
taxed at a flat rate of either 20%, or 25% under the CRE

3) !t ~~s retained more scheduler than global features with respect to

individual taxpayers but has· maintained a more global treatment on
corporations. · i

360
 cf er 7- I ntrutaimt, tff, {jr{/5J I /WJlttl',
SlfUS (S0~.RCE/~LACE} OF INCOME
·1· · may be · derived entine/y from sources
Gross income
within ~he Ph I ippmes, ent,re/y from sources without the

Philippines, or ~~o~ sources partly within and partly The

ithout the Ph1hppmes. For income tax p . general rule is
w " f rs to th . t· ·t urposes,
~source re e I
e ac iv, Y,'- or property or labor th t that the ~xing
gave ~se or produ~ed the i~come. Sour~. therefore, fs power cannot
the ~ngtn of the _income. Situs" means the place of go beyond the
taxatI?n. of t~e income or the country which has territorial limits
jurisdiction tq impose th~ tax (CIR v.. Marubeni Corp). of the taxing
The State where the subJect to be taxed has a situs may authority
rightfully levy an~ collect the tax. The situs is necessarily
in the State which has jurisdiction or which exercises
dominion over the subject in question.

Knowledge of the "situs" of a particular income is vital in determining the

taxable income as some , taxpayers are taxable on their income from all
sources (income _within and without such as in the case of resident citizens
and.domestic corporations) while others -are taxable only on their income from
sources within the Philippines only. Knowledge· of "situs" also avoids a
taxpayer's risk of failing to declare income which are taxa~le in the Philippines ·
and likewise ensure that only income taxable in the Philippines is assessed by
the regulatory bodies, specifically the Bureau of Internal Revenue (BIR).
Factors affecting Situs of income are as follows:
• Residence or domicile of the taxpayer
" Nationality '
• Source of income

RULES in determining the "situs" of ,income:

.
1· Interestt · ome refers to income derived from ·interest on bon ds,
lnteres inc · · • · f 'd t orate or
notes or other interest-bearing obhg~t1ons o. ret~ en s:dco~e of the
otherwise. The test of source of income is e res1 en
debtor. I

e from services . for labor or persona 1

rvices refers to compensation
2· Incom
lnco~e from se d The test of source of income is the place or
services perfo~~~ ·service rendered. When services are performed
perform~n~e ~h ~hilippines and partly without tl:le Philippines, the
partly ~ 1th;oul~ be based on ·'time" rendered within and without the
on s computed as follows:
allocat1_
Philippine · .

361
 cfter 7- /,dr;£ditfn, tu, t;jruss / ~
. f rformance in RP
No. of days o pe ce in RP & outside x Compensation
- No. of days ofperforman received
· ofRP

3 Rentals and Roya/tie~ . me is t.he location of the pr~perty or place

· The test o~ sour~e of_rnco~d. Rentals and r<?yal!ies refer to rentals
where the ,ntang1ble is urtys r from any interest ,n such property,
and royalties from prope .o . . .
including rentals and royalties for. .. .

•ght or privilege to use ·in the Philipp ines any

The use th e n · I
of ort t design or · model, pan, secre ,ormula ort ~
a. .
copyright, pad e~ , trademark .trade brand or other like property or
process, goo w1 , ' . •
right;

T he use of, or the ·right to use in the Philip pines any · industrial, .
b. t
commercial or scientific equipmen ; · .

c. ·The supply · of scientific, technical, industrial or commercial

knowledge or information;

d. The supply of any assistance that is ancillary and subsidiary to,

and is furnished as a means of enabling the application or
·enjoyment •of, any such property or right as is mentioned in
' paragraph (a), any such equipment as is mentioned irr paragraph
(b) or any such knowledge or information as is mentioned in
·paragraph (c);

e. ' The supply of services by a nonresident person or his employee

. in connection with the use of property or ·rights belonging to, or
the installation or operation of any brand , machinery or other
apparatus purchased from such nonresident person; .

f. Technical advice, assistance or services rendered in connection

.with t~chnical management or administration of any scientific,
industna/ or commercial undertaking, venture, project or scheme;
and the use of or the right to use:
• Motion picture films; ·
• Films or video tapes for use in connection with television;
and
• Tapes for use in connection with radio broadcasting.

362
 cfar 7- InLr~ u u frJ, 9r()$J JllCtJltt£
perty.. th I .
Gain on sale o f realf~ro e 1s ,e ocat,on of th
e rea_l property.
o incom
4. The test of source
al property.
Gain on sale o f person the
Th e test of so urce of income is
5. . Gain from the sale of
"place of sale" exce
pt sale .of shares of
tic corporation . shares of stock in a
stocks of a domes
come derived from domestic corporation
.Gains, profits and in
onal property within shall be treated as
the·purchase of pers
the Philippines1 or derived entirely from
and its sale without
fro m the pu rc hase of personal property sources within .the
without and its
sale within the Philippines regardless
Philippines shall be
treated as derived of where the said
within the country shares are sold.
entir~ly form sources
in which it is sold.
'th' pu.rely
· . · e w, ,~ or
come ly incom
6. Dividend In be considered as pure
Dividend income may pines or partly income within and without.
ilip
income without the Ph l be observed:
al
The follow ing rules sh
vidend Income
TABLE ·i-3· · Situs of Di ND SOURCE OF INCOME
OURCE OF DIVIDE ilippine sources
Income is purely from Ph
.. ·s·
oration
FR OM Dom estic corp

ation
FROM Foreign corpor
Gross .
• Based on the ratio of the
n c?rporat,on
Income (GI) of the foreig
for the preceding 3 years
pr!or to
nds denved from
declaration of divide
Philippine sources.
If Ratio is:
ated as entirely
Ratio: • < 50% : Income is tre tside of the
. x Dividend derived from sources ou
GI-Phils.
·GI-world Philippines
derived entirely
• ~ 50%: Income is Philippines
from sources within the
(RMC 62-2021 )

363
 FROM
SITUS OF DIVIDEND INCOME
coRPPORAr10NS
(Sec. 42 of the Tax code, as ame nded)
.
.
The tax treatment of dividends received
by a d
corporation trom a toreign corporation Will dep
end on the soilllestic
income of the foreign corporation. ·Under Se
ction 42(A)(2)(b)ces Of
Tax Code, as amended, dividend from a fore
ign corporation sh :Ithe
treated as income derived from sources Wl~
HIN THE PHILIPPI be
!JNLESS less thari 50% of the_ gross.
inc
corporation tor the three-year penod ending ome Of the forN~s
wi\h the .close ei~n ·
taxable year preceding the ·declaration of suc
h dividends (or fo Of its
part of the period as the corporation has bee
n in existenc:i such
derived trom sources within the Philippines.
• · Was

7. The
Mining
test of source of income is the place where min
e is located

8. Farming
The test of source of income ~s the place wh
I
ere
•
farm is located

9. Manu(flcturing Business
Source of Income
• Produced and sold within Within
• Produced and sold without Without
• Produced in whole/part within and Partly within and without -
sold without · ·
• Produced in whole/part without Partly within and without
and sold within

Theracterm
ext "prces
odused
ced" cur
inc
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