Global Tax System
 Because of its multiple rates, the tax burden of a person does
A single tax is imposed on all income received or earned by person
irrespective of the activities which produced the income.
 Based on the income of the taxpayer
 Emphasizes the burden allocation aspects
 Most equitable tax system, yet developed for distributing tax
burden. The burden of an individual is closely related to his
resources and ability to pay.
 Serves as a means for redistributing income and wealth. (Big
income earners= higher taxes), also serves as automatic
counter cyclical device to generate more revenues from
people in times of expanding economies and at the same time
to collect less from them in times of depression.
 Serves as supplementary device to accomplish nonfiscal goals
of the government such as to encourage desired activities. (ex:
promote savings or consumer s demand, encourage donations
or worthy causes)
 Administration is NOT EASY, since one has to consider all
income coming from whatever source.
Schedular
In a schedular system, income items are categorized into schedules
according to the type of activity which produced them.
Different tax rates are applied for each type of income, one set of tax
rates for salaries and wages, another set of rates for business income
and so on.
Its main thrust is the type of income than the characteristic of the
taxpayer.
 Tax is based on income producing activities
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 Emphasizes on revenue and administrative aspects.
not correspond to his income but rather fall fortuitously on the
type of his income. It is fixed and final.
 Schedular system cannot perform non-fiscal goals (in
comparison to global system) such as promotion of consumer
s demand, et al
 The administration is simple, being confined to each
transaction or activity.
Semi-Schedular or Semi Global Tax System
Under this system, compensation income, business or professional
income, capital gain and passive income not subject to FWIT (final
withholding income tax) and other income are added together to
arrive at the gross income. Obtain net taxable income by subtracting
from the gross income the sum of allowable deductions from business
or professional incom, capital gain, passive income not subject to
FWIT in the case of corporations and personal and additional
exemption in case of individuals and subject such taxable income to
one set of graduated tax rates (individual) or normal corporate
income tax rate (corporation)
Note: Passive investment income subject to FWIT, Captal gains
from sale or transfer of stocks of a domestic corp and real
properties classified as capital assets – remain subject to
different sets of tax rates and covered by differect tax returns.
Case: Sison Vs Ancheta GR No. L-59431, Jult 25 1984
a. Schedular Rates of Taxes Vs Schedular System
Schedular rates of taxes – rates of taxes that applies to
each category of income.

Features of the Philippine income tax law
a. Direct tax – burden is borne by income recipient upon
whom the tax is imposed
b. Progressive tax – tax base increases as tax rate increases
c. Comprehensive tax situs- by adopting nationality,
residence and source principle
d. Philippines has retained more schedular than global
features with respect to individual taxpayers but has
maintained a more global treatment on corporations.
e. The Philippine Income Tax System as a Semi Global or
Mixed System - Effective jan 1, 1986, Executive order No.
37 adopted the semi-global or semi-schedular tax system
by reducing the graduated rates on business and
professional income from 60% to 35% and by increasing
the preferential tax rates on capital gains and passive
investment incomes. RA 8424 (1998) retained the
semiglobal or semischedular tax system by introducing
some structural and administrative reforms and by
reducing the tax rates on corporations by 1% every year
from 35% to 32%. The same tax system was maintained
under RA 9337 in 2005 but corporate tax rate was
increased to 35% and reduced to 30% in Jan 1, 2009.
CRITERIA IN IMPOSING PHILIPPINE INCOME TAXES
1. Place where income was earned or the source
 An alien is subject to Philippine income tax because he derives
income from sources within the Philippines. Thus, a non-
resident alien is liable to pay Philippine income tax on his
income from sources within the Philippines, such as dividend,
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interest, rent, or royalty, despite the fact that he has not set
foot in the Philippines.
SOURCES OF INCOME (Section 42)
1. Services: Place of performance of the service
 If the service is performed in the Philippines, the income is
treated as from sources within the Philippines
 It includes compensation for labor or personal services
performed within the Philippines, regardless of the residence
of the payor, of the place in which the contract for service was
made, or of the place of payment
 Compensation is either in cash or in kind
Example:
Juliane a non-resident alien appointed as a commission agent by a
domestic corporation with a sales commission of 10% all sales
actually concluded and collected through her efforts. The local
company withheld the amount of P107,000 from her sales
commission and remitted the same to the BIR. She filed a claim for
refund alleging that her sales commission is not taxable because the
same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the
Philippines. Is her contention correct ?
SUGGESTED ANSWER: Yes. The important factor which determines the
source of income of personal services is not the residence of the
payor, or the place where the contract for service is entered into, or
the place of payment, but the place where the serviceswere actually
performed. Since the activity of securing the sales were in Germany,
thenthe income did not originate from sources from within the
Philippines.(Commissioner of Internal Revenue v. Baier-Nickel, G. R.
No. 153793,
August 29, 2006)
NOTE AND COMMENTS: In the above case, the SupremeCourt
reiterated the rule that “source of income” relates to the property,
activity or service that produced the income. With respect to
rendition of labor or personal service, it is the place where the labor
or service was performed that determines the source of the income.
2. Interest Income: Residence of the debtor
 If the obligor or debtor (corporation or otherwise) is a resident
of the Philippines, the interest income is treated as income
from within the Philippines. It does not matter whether the
loan agreement is signed in the Philippines or abroad or the
loan proceeds will be used in a project inside or outside the
country
3. Dividends: Residence of the corporation paying dividend
 Dividends received from a domestic corporation or from a
foreign corporation are treated as income from sources within
the Philippines, unless less than 50% of the gross income of
the foreign corporation for the three-year period preceding
the declaration of such dividends was derived from sources
within the Philippines, in which case, only the amount which
bears the same ratio to such dividends as the gross income of
the corporation for such period derived from sources within
the Philippines bears to its gross income from all sources shall
be treated as income from sources within the Philippines.
4. Rents and Royalties: Location of the property or interest in such
property
 If the property or interest is located or used in the Philippines,
the gain or income is treated as income from sources within
the Philippines
5. Sale of property
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a. Real Property: Location of real property
 If the real property sold is located within the Philippines, the
gain is considered as income from the Philippines
b. Personal Property
 Personal property produced (in whole or in part) by the
taxpayer within the Philippines and sold without the
Philippines, or produced without and sold within
 Any gain, profit or income shall be treated as derived
partly from sources within and partly from sources
without the Philippines
 Purchase of personal property within and its sale without the
Philippines, or purchase of personal property without and its
sale within the Philippines
 Any gain, profit or income shall be treated as derived
entirely from sources within the country in which sold.
Accordingly, if the goods are shipped in a foreign port
under “Free-on-Board (FOB) shipping point”
arrangement, title to the good is transferred at the
foreign port and any gain from the sale of such goods
to a Philippine importer shall be treated as income
from sources outside the Philippines.
2. Residency
Resident Alien
 An alien was subject to Philippine income tax on his worldwide
income because of his residence in the Philippines. This
principle is however discarded in R.A. 8424 (1998) in view of
the complexity in tax administration it brings. Thus, a resident
alien is now liable to pay Philippine income tax only on his
income from sources within the Philippines and is exempt
from tax on his income from sources outside the Philippines.
Nonresident Alien
  Engaged in Trade or Business in the Philippines
 If the aggregate period of his stay in the Philippines is
more than 180 days during any calendar year
 Taxed on his income from sources within the
Philippines
 At graduated income tax rate of 5% to 32%, white his
passive investment incomes shall generally be subject
to 20% final tax
 Not Engaged in Trade or Business in the Philippines
 If the aggregate period of his stay in the Philippines
does not exceed 180 days during any calendar year
 His compensation income, business or professional
income, capital gain, passive investment income, and
other income from sources within the Philippines is
taxed at the flat rate of 25%
 Capital gains from sale or exchange of shares of stocks
in a domestic corporation and from real property
located in the Philippines shall be subject to capital
gains tax or stock transaction tax, as the case may be.
3. Citizenship
A citizen of the Philippines is subject to Philippine income tax:
 Resident citizen – on his worldwide income from within and
without the Philippines
 Nonresident citizen – only on his sources within the Philippines
Types of nonresident citizen
1. Immigrants
2. Employees of a foreign entity on a permanent basis
3. Overseas contract workers
 (1) and (2) are treated as nonresidents citizens from
the time they depart from the Philippines
 (3) must be physically present abroad “most of the
time” (at least 183 days) to qualify
as nonresident citizens. His presence abroad is
however need not be continuous.
INCOME TAXATION
History of Income Taxation
(Separate paper)
General Principles
Features of Philippine Income Taxation
1) Income tax is a direct tax because the tax burden is borne by the
income recipient upon whom the tax is imposed.
2) Income tax is a progressive tax since the tax base increases as the
tax rate increases. (ability to pay principle)
3) The Philippines has adopted the most comprehensive system of
imposing income tax by adopting the citizenship principle, resident
principle and the source principle.
· renders citizens, regardless of residence, and resident aliens subject
to income tax liability on their income from all sources) and of the
generally accepted and internationally recognized income taxable
base (that can subject non-resident aliens and foreign corporations to
income tax on their income from Philippine sources.
4) The Philippines follows the semi-schedular or semi-global system of
income taxation. Under which, all compensation and other income
not subject to final tax are added together to arrive at the gross
income, and after deducting the sum of allowable deductions from
business or professional income, capital gain and passive income, and
other income not subject to final tax, in the case of corporation, as
well as personal and additional exemptions, in the case of individual
taxpayers, the taxable income (gross income less allowable
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 deductions and exemptions) is subjected to one set of graduated tax
rates (if an individual) or normal corporate income tax rate (if a
corporation).
5) The Philippine income tax law is a law of American origin. Hence the
decisions of the US courts have force and persuasive effect in the
Philippines.
Tax Situs - literally means the place of taxation, or the country that
has jurisdiction to levy a particular tax on persons, property, rights or
business.
Basis: Symbiotic relationship. The jurisdiction, state or political unit
that gives protection has the right to demand support.
The situs of taxation is determined by a number of factors
a) Subject matter- or what is being taxed. He may be a person or it may
be a property, an act or activity;
b) Nature of tax- or which tax to impose. It may be an income tax, an
import duty or a real property tax;
c) Citizenship of the taxpayer
d) Residence of the taxpayer.
Only resident citizens and domestic corporations are taxable on their
worldwide income (both income inside and outside the Philippines)
while the other types of individual and corporate taxpayers (i.e. non-
resident citizen, non-resident alien, foreign corporation) are taxable
only on income derived from sources within the Philippines.
Situs of taxation literally means place of taxation.
GR: The taxing power cannot go beyond the territorial limits of the
taxing authority. Basically, the state where the subject to be taxed
has a situs may rightfully levy and collect the tax; and the situs is
necessarily in the state which has jurisdiction or which exercises
dominion over the subject in question.
·
Resident citizens and domestic corporation are taxable on all income
derived from sources within or without the Philippines.
· A non-resident citizen is taxable on all income derived from sources
within the Philippines.
· An alien whether a resident or not of the Philippines and a foreign
corporation, whether engaged or not in trade or business in the
Philippines are also taxable only from sources within the Philippines.
The taxable situs will depend upon the nature of income as follows:
1) Interests- Interest income is treated as income from within the
Philippines if the debtor or lender whether an individual or
corporation is a resident of the Philippines.
2) Dividends
Ø Dividends received from a domestic corporation are treated as income
from sources within the Philippines.
Ø Dividends received from a foreign corporation are treated as income
from sources within the Philippines, unless 50% of the gross income
of the foreign corporation for the three-year period preceding the
declaration of such dividends was derived from sources within the
Philippines; but only in an amount which bears the same ratio to such
dividends as the gross income of the corporation for such period
derived from sources within the Philippines bears to its gross income
from all sources.
3) Services- Services performed in the Philippines shall be treated as
income from sources within the Philippines.
4) Rentals and Royalties- Gain or income from property or interest
located or used in the Philippines is treated as income from sources
within the Philippines.
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5) Sale of Real Property- Gain from sale of real property located within
the Philippines is considered as income within the Philippines.
6) Sale of Personal Property- Gain, profit or income from sale of shares
of stocks of a domestic corporation is treated as derived entirely from
sources within the Philippines, regardless of where the said shares are
sold Gains from sale of other personal property can be considered
income from within or without or partly within or partly without
depending on the rules provided in Sec. 42 E of the Tax Code.
The source of an income is the property, activity or service that
produced the income. It is the physical source where the income
came from.
 Capital – denotes original investment or fund used in order
to generate earnings which is called income
Example: Amount of money deposited is 100,000 for 5
years. Interest rate is 12% per annum. How much is
capital? How much is income per year?
Car bought for 100,000 in year 2008 was sold for 100,000
in year 2010. Depreciation rate is 5% per annum. How
much is capital? How much is income in year 2010?
 Differences Between income and capital
 Madrigal Vs Rafferty 38 Phil 414

Types of income tax: Income Capital

All wealth other Fund or property existing at an
 Personal income tax on individuals than mere return instant of time, which can be used in
 Regular corporate income tax on corporations of capital producing goods or services
 Minimum corporate income tax on corporations Flow of wealth Fund or property
 Capital gains tax on sale of shares of stocks of domestic Service of wealth Wealth
corporation by a person who is not a dealer in securities Income is subject Return of capital is not subject to tax
 Capital gains tax on sale of real property classified as a to tax
capital asset by a person who is not a real estate dealer or
 Revenue Distinguished from income:
developer; if it is classified as ordinary asset – subject to
Revenue pertains to all funds accruing to the treasury of
ordinary income tax
the government derived from tax, donation, grants and any
 Tax on passive investment income, such as interest,
other source.
dividend and royalty
Income refers to the earnings of individual persons,
 Fringe benefits tax
 Branch profit remittance tax on Philippine branches of partnership, corporation or estate and trust whethero or
foreign corporations not subject to tax.
 Tax on improperly accumulated earnings tax of
corporations Taxable Period:
 Final withholding taxes on certain income from sources
within the Philippines payable to resident or non resident Taxable Year
persons

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(P) The term 'taxable year' means the calendar year, or the fiscal year and regulations prescribed by the Secretary of Finance, upon
ending during such calendar year, upon the basis of which the net recommendation of the Commissioner, to be made for a fractional
income is computed under this Title. 'Taxable year' includes, in the part of a year, then the income shall be computed on the basis of the
case of a return made for a fractional part of a year under the period for which separate final or adjustment return is made.
provisions of this Title or under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the commissioner,
the period for which such return is made.

Fiscal Year

(Q) The term 'fiscal year' means an accounting period of twelve (12)
months ending on the last day of any month other than December.

Short Period

SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve
(12) Months. -

(A) Returns for Short Period Resulting from Change of Accounting

Period. - If a taxpayer, other than an individual, with the approval of
the Commissioner, changes the basis of computing net income from
fiscal year to calendar year, a separate final or adjustment return shall
be made for the period between the close of the last fiscal year for
which return was made and the following December 31. If the change
is from calendar year to fiscal year, a separate final or adjustment
return shall be made for the period between the close of the last
calendar year for which return was made and the date designated as
the close of the fiscal year. If the change is from one fiscal year to
another fiscal year, a separate final or adjustment return shall be
made for the period between the close of the former fiscal year and
the date designated as the close of the new fiscal year.

(B) Income Computed on Basis of Short Period. - Where a separate

final or adjustment return is made under Subsection (A) on account of
a change in the accounting period, and in all other cases where a
separate final or adjustment return is required or permitted by rules