TAX 101: Income Tax Principles and Concepts

Comprehensive vocabulary flashcards covering the core legal doctrines, taxpayer classifications, income definitions, and deduction rules from TAX 101: Income Tax.

Taxes

Enforced proportional and pecuniary contributions from persons and property levied by the law-making body of the State who has jurisdiction over the subjects of the burden for the support of the government and all public needs.

Taxation

The process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government.

Income

The gain derived from capital, from labor, or from both combined, including profits gained from dealings in property or any asset clearly realized whether earned or not.

Income Tax

A tax imposed on the gains or profits arising from property, professions, trades, and offices.

Gross Income

All income of whatever kind and derived by a taxpayer from whatever source, but not including exempt income and items of gross income subject to final income tax.

Compensation Income

All remunerations for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Tax Code.

Lifeblood Doctrine

The doctrine stating that without revenue raised from taxation, the government will not survive, resulting in detriment to society, and would be paralyzed for lack of motive power to activate and operate it.

Necessity Theory

The theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; and that for these means it has a right to compel all its citizens and property within its limits to contribute.

Symbiotic Relationship Theory

The doctrine establishing that the basis of taxation is found in the reciprocal duties of protection and support between the State and its inhabitants/taxpayers.

Territoriality Principle

The principle that the power to tax can only be exercised within the territorial jurisdiction of a taxing authority, meaning the State may not tax property lying outside its borders or tax privileges derived from another state's laws.

Levy or Imposition

The tax stage referring to the act of imposition by the legislature of tax on person, property, or excises in terms of discretion as to purpose, subject, rate, and manner or means of collection.

Assessment and Collection

The tax administration stage involving the implementation and enforcement of tax laws by the executive branch through its administrative agencies.

Tax Refund

The recovery of any tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum excessively or wrongfully collected.

Situs of Taxation

The place or authority that has the right to impose and collect taxes, also referred to as the place of taxation.

Fiscal Adequacy

A principle of a sound tax system requiring that sources of government revenue must be sufficient to meet government expenditures and other public needs.

Administrative Feasibility

A principle of a sound tax system requiring that tax law should be capable of convenient, just, and effective administration, as well as easy compliance by the taxpayer.

Theoretical Justice

A principle of a sound tax system requiring that the tax burden should be proportionate to the taxpayer's ability to pay.

Global Tax System

A tax system which views indifferently the tax base and generally treats in common all categories of income, except certain passive incomes and capital gains.

Schedular Tax System

A tax system where the income tax treatment varies and depends on the kind or category of taxable income, itemizing different incomes and providing varied tax percentages for each.

Semi-Schedular or Semi-Global Tax System

A tax system where taxable income is subjected to a single set of graduated rates or regular corporate rates (global), while passive investment income and specific capital gains remain subject to separate rates and returns (schedular).

Resident Citizen (Taxability)

A Filipino citizen residing in the Philippines who is subject to Philippine income tax on income derived from sources both within and without the Philippines.

Domestic Corporation (Taxability)

A corporation organized under Philippine laws that is taxable on all income derived from sources both within and without the Philippines.

General Professional Partnership (GPP)

A partnership formed by persons for the sole purpose of exercising their common professions, no part of the income of which is derived from engaging in any trade or business, and which is not itself subject to income tax.

General Co-Partnership

A business partnership organized to engage in trade or business that is treated as a corporation for income tax purposes.

Estate

All the property, rights, and obligations of a person which are not extinguished by their death, including those which have accrued thereto since the opening of the succession.

Trust

An arrangement created by will, agreement, or law under which title to property is held by one person (trustee) for the benefit of another (beneficiary), established by a trustor or grantor.

Permanent Employee (Non-Resident Citizen Status)

A Filipino citizen who leaves the Philippines to reside abroad on a more or less permanent basis, whether or not their stay abroad is less than $183\,\text{days}$.

Contractual Employee (Non-Resident Citizen Status)

A Filipino citizen who leaves the Philippines on an employment contract renewed periodically, requiring physical presence abroad most of the time, defined as staying abroad for not less than $183\,\text{days}$ during the taxable year.

Non-Resident Alien Engaged in Trade or Business (NRA-ETB)

An alien individual whose residence is not within the Philippines but whose aggregate period of stay in the Philippines exceeds $180\,\text{days}$ during any calendar year.

Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB)

An alien individual whose residence is not within the Philippines and whose aggregate period of stay does not exceed $180\,\text{days}$ for each calendar year, subject to a $25\%$ tax on gross income.

Professional Income

Income derived purely from the practice of a profession and not under an employer-employee relationship.

Business Income

Income arising from habitual engagement in any commercial activity involving regular sales of goods or services by an individual or a corporation.

Rental Income

Amount or compensation paid for the use or enjoyment of a thing or a right, implying a fixed sum or property amounting to a fixed sum to be paid at a stated time.

Royalty Income

Payment for the use and exhaustion of property, including earnings from copyrights, patents, trademarks, formulas, and natural resources under lease.

Dividends

Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or other property, taxable at the time of declaration.

Annuity

Periodic installment payments of income or pension paid by insurance companies during the life of a person or for a guaranteed fixed period, in consideration of capital paid.

Prizes

Gains or receipts obtained specifically as a result of effort, distinguished from winnings.

Winnings

Receipts or rewards that are the products of chance or luck, rather than effort.

Pension

The amount of money received in lump sum or on a staggered basis in consideration of services rendered, provided after an individual reaches the age of retirement.

Deductions

Items or amounts which the law allows to be deducted under certain conditions from gross income in order to arrive at taxable income.

Matching Concept

The principle that statutory deductions are, in general, expenditures other than capital expenditures connected with the production of income.

Substantiation Rule

The rule requiring claimed tax deductions to be supported by adequate receipts or invoices, placing the burden of proof on the taxpayer.

Itemized Deductions

Ordinary and necessary business deductions based on actual expenditures, which must be substantiated with official receipts or other adequate records.

Optional Standard Deduction (OSD)

A fixed percentage deduction taken without regard to actual expenditure and without substantiation requirements ($40\%$ of gross sales or gross receipts for individuals; $40\%$ of gross income for corporations).