Concept of Income

FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE
DEPARTMENT OF INTERNAL AUDITING AND ACCOUNTANCY

INCOME TAXATION
 Definition of Income
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Broad sense – all wealth that flows into the taxpayer’s

hand other than as a mere return of capital. It includes
the forms of income specifically described as gains and
profits including gains derived from the sale or other
disposition of capital assets.

Judicial definition – gain derived from capital, or from
labor, or from both labor and capital, including the gain
derived from the sale or exchange of capital asset.
 Definition of Income
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Judicial definition – amount of money coming to a

person or corporation within a specified time, whether as
a payment for services, interest or profit from
investment.

Economist’s definition – money value of the net
accretion to one’s economic power between two points of
time. It cannot be determined by reckoning cash
receipts; other income determining factors: inventories,
accounts receivable, property acquisition and accounts
payable for expenses incurred.
 Illustrations
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Illustration 1 – Mere return of capital

Maring lends Dulce Php 1 million. Dulce repays Php 1 million
plus Php 25,000 interest. How much is Maring’s taxable
income?

Illustration 2 – Income from whatever source
Nopelos is a big-time racketeer. In one year, he was able to
earn Php 10 billion from her illegal activities. When the BIR
discovered her income from these activities, the CIR assessed
her a deficiency tax for such income. Is the income from
illegal source taxable?
 Distinction Between Income and Other Terms
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From capital – Capital is a fund or property existing at one

distinct point of time while income denotes a flow of wealth
during a definite period of time.

From gross receipts – Gross receipts has reference to all
wealth that flows into the taxpayer, which includes returns of
capital. Income is limited only to gain derived from labor,
capital or property, excluding non-income items such as the
capital invested, cost of goods sold or those excluded by law
from taxation. Gross receipts is broader in scope than income.

From revenue – Revenue, as applied to taxation, refers to all
funds or income derived by the government, whether from tax
or any other source. On the other hand, income, for tax
purposes, is employed in its “natural and obvious sense” to
mean money or gain received, coming to a person (natural or
juridical) during a given period of time.
 Requisites for Income to be Taxable
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There must be gain

 Need not be in cash; may occur as a result of exchange of
property, payment, assumption, reduction or cancellation
of the taxpayer’s indebtedness (except gifts) or other profit
realized from the completion of a transaction.

The gain must be realized or receive
 Mere increase in the value of the property without actual
realization is not taxable.
 Realization need not take the form of actual receipt as it
may occur as where there is a constructive receipt of income
by the taxpayer.
 Constructive Receipts
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Doctrine of constructive receipt – it is not the actual receipt

but the right to receive that determines when to include an
amount in the gross income. The right to receive must be
unconditional, valid and enforceable.

There is constructive receipt of income when –
 Payment is credited to payee’s account.
 Payment is set aside for the payee, or otherwise made available so
the payee may draw upon it any time, or so the payee could have
drawn upon it during the taxable year if notice of intention to
withdraw had been give without substantial limitation or condition
upon which payment is to be made.

Doctrine of constructive receipt is designed to prevent the
taxpayer using the cash basis from deferring or postponing
the actual receipt of taxable income. Without the rule, the
taxpayer can conveniently select the year in which he will
report the income.
 Illustrative Examples
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Illustration 3 – George was informed that his check dated

December 16, 2018 is already available and he can get it
anytime. George did not get the check until January 30, 2019.

Illustration 4 – An employer issued a bonus check to an
employee on December 31, 2018 but asked to hold it for a few
days until the company could make deposits to cover the
check.
 Requisites for Income to be Taxable
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The gain must not be excluded by law from taxation

 Incomes that are exempt from the tax by law are not
considered in determining gross income.
 Philippine Income Tax
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FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE
DEPARTMENT OF INTERNAL AUDITING AND ACCOUNTANCY

INCOME TAXATION
 Income Tax
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Definition of Income Tax

 Income tax is one levied on the income from property or
an occupation.
 It is an direct tax upon the thing called income.

Meaning of Income
 Income means all wealth which flows into the taxpayer
other than mere return of capital.

Income Distinguished from Capital
 Capital is a fund, income is a flow. Capital is wealth, while
income is the service of the wealth. Capital is a tree,
income the fruit.
 Characteristics of Income Tax
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National tax – imposed and collected by the government

throughout the country

General tax – levied without a specific or a predetermined
purpose; revenue may be appropriated for general public
purpose

Excise tax – imposed on the right or privilege of a person to
receive or earn income

Direct tax – payable by the person upon whom it is directly
imposed by law; cannot be shifted or passed on to others

Progressive tax – based upon one’s ability to pay; tax rate
increases as the tax base increases (applicable to individual;
for corporation, its proportional)
 Classification of Income
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Income as to source –
 Compensation income
 Professional income
 Business income
 Other income

Income as to territorial source –
 Income within the Philippines
 Income without the Philippines
 Mixed income (partly within and without)
 Classification of Income
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Income as to taxability – taxable income

 Ordinary or regular income subject to basic/ normal tax or
schedular tax Section 24 (A) of the Tax Code
 Reportable ITR (quarterly, annually, substituted filing)
 Subject to expanded/ creditable withholding tax
 Rates based on tax tables
 Tax credits
 Catch-all or basket of other income
 Classification of Income
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Income as to taxability – taxable income

 Passive income subject to final taxes
 Subject to final taxes
 Withholding taxes constitutes final payment of income tax
 Payor is obliged to withhold and remit the corresponding
tax
 No need to include in the income tax return
 BIR will run after the withholding agent
 Applicable only to income from within
 Classification of Income
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Income as to taxability – taxable income

 Capital gains subject to capital gains taxes
 Shares of stock of domestic corporation not traded in LSE
 Real properties
 Special income subject to special rates. Subject to special
rates and rules (i.e., income of PEZA registered enterprise)

Income as to taxability – tax-exempt income
 By constitutional mandate
 By statute
 By international comity (i.e., bilateral agreements, treaties)
 Philippine Income Tax Systems
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Schedular tax system vs. global tax system

 Schedular system – the various types/ items of income (e.g.,
compensation, professional, business income) are classified
accordingly and are accorded different tax treatments, in
accordance with schedules characterized by different rates.
 Global system – all income received by the taxpayer are
grouped together, without any 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.
 Philippine Income Tax Systems
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Schedular Global
Tax treatment Income tax rules varies and Uniform tax treatment or
made to depend on the rules
kind or category of taxable
income of the taxpayer.
Characteristic – Categorizes or classifies Does not “generally”
classification of income income categorize or classify
income
Characteristic – tax rates Imposes different tax Imposes uniform tax rates
treatment and rates
Characteristic – Individual taxpayers Corporate taxpayers
applicability
Approach used in the Philippines
Partly schedular (i.e., income tax for individuals) and partly global (i.e., income tax for
corporations).
 Philippine Income Tax Systems
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Gross income taxation Net income taxation

Deductions No deductions or exemptions Allows and grants deductions and
and allowed (e.g., income subject to exemptions (e.g., returnable
Exemptions final taxes) income)
Tax Base Gross income Net income
Applicability Non-resident alien not engaged Individual taxpayers except non-
in trade or business resident alien not engaged in trade
or business
Non-resident foreign Corporate taxpayers except non-
corporations resident foreign corporations
Advantage Minimizes sources of graft and Just, fair and reasonable
corruption due to minimization Equitable relief (deductions and
of margin of discretion exemptions) to taxpayers
exercised by revenue district More revenue to the government
officers Minimizes tax evasion (subject to
Simplifies tax system counter-checking by the BIR)
 Situs of Income
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FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE
DEPARTMENT OF INTERNAL AUDITING AND ACCOUNTANCY

INCOME TAXATION
 Situs of Income
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Source – the activity, or property, or labor that gave rise

or produced the income; origin of the income

Situs – place of taxation of the income or the country
which has jurisdiction to impose the tax

Factors affecting situs of income
 Citizenship or nationality
 Residence or domicile
 Source of income
 Situs of Income
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Income Test of Source of Income

Interest
Income from services
Rent
Royalty
Gain on sale of real property
Gain on sale of personal purchased in
one country and sold in another
(except gain from the sale of shares of
stocks in a domestic corporation which shall
be treated as derived purely within the
Philippines regardless where sold)
Residence of the debtor
Place of performance
(if services are performed partly within and
partly without the Philippines, the allocation
should be based on the time rendered)
Location of the property
Place of use of the intangible
Location of the property
Place of sale
 Situs of Income
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Income Test of Source of Income

Dividend
From domestic corporation
From resident foreign corporation
(based on the ratio the gross income of
the foreign corporation for the
preceding 3 years prior to the
declaration of dividends derived from
Philippine sources)
Income purely within the Philippines
Income partly within and partly without the
Philippines – if ratio is at least 50%
Income purely without the Philippines– if
ratio is less than 50%

Phil. gross income x Dividend

Total gross income
From non-resident foreign corporation Income purely without the Philippines
 Situs of Income
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Income Test of Source of Income

Mining Place where the mine is located
Farming Place where the farm is located
Manufacturing
Produced in whole within and sold Purely within
within
Produced in whole without and sold Purely without
without
Produced within and sold without Partly within and partly without
Produced without and sold within Partly within and partly without
 Situs of Income
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Income Test of Source of Income

For the income partly within and partly without, income purely within is derived as
follows:

Net income x Value of property within = Php xxx

2 Value of property within and without

Add:

Net income x Gross sales within = Php xxx

2 Gross sales within and without

Income purely within Php xxx

Any Question?
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Quote to Ponder
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