TAXATION 4

Name and briefly describe the three income tax systems in the Philippines.

1. Global Tax System – Treats all categories of income similarly, taxing all except certain passive incomes and capital gains.

2. Schedular Tax System – Tax treatment depends on the type of income, with different rates and rules for each category.

3. Semi-schedular/Semi-global Tax System – Combination: compensation, business/professional, and other non-final-tax income are combined and taxed at regular rates; passive income and capital gains are taxed separately at special rates.

What are the three principles for imposing Philippine income tax?

1. Citizenship Principle – Citizens are taxed on worldwide income (unless non-resident citizens, then only on Philippine-sourced income).

2. Residence Principle – Resident aliens are taxed only on Philippine-sourced income.

3. Source Principle – Non-resident aliens are taxed only on income from Philippine sources.

What is "income" for tax purposes in the Philippines?

All wealth that flows into the taxpayer other than as a mere return of capital, including gains, profits, and benefits from any source, whether legal or illegal. It is the “fruit” of capital or labor, severed from the “tree.”

Differentiate gross income from taxable income.

• Gross Income: All income, gain, or profit subject to income tax under Sec. 32 of the NIRC.

• Taxable Income: Gross income minus allowable deductions and/or exemptions.

List the main items included in gross income.

C – Compensation
A – Annuities
R – Rents
D – Dividends
G – Gains from property dealings
R – Royalties
I – Interests
P – Profits from profession, trade, or business
P – Prizes and winnings
P – Pensions

• Partner’s share in net income of general professional partnership

Are illegal gains, such as embezzled funds or extortion, taxable?

Yes. Income from illegal sources is taxable if discovered, as it is considered income under the “claim of right doctrine.”

Give examples of income that are taxable regardless of source.

• Treasure found

• Punitive damages

• Amounts received by mistake

• Cancellation of indebtedness (if consideration for services)

• Usurious interest

• Illegal gains (e.g., extortion, embezzlement)

• Tax refund previously claimed as deduction

• Bad debts recovery

How is cancellation of indebtedness taxed?

• Taxable Income: If canceled as consideration for services.

• Gift: If canceled without consideration.

• Capital Transaction: If a corporation cancels a stockholder’s debt (treated as indirect dividend).

What are the three classifications of sources of income?

1. Income from sources within the Philippines

2. Income from sources without the Philippines

3. Income from sources partly within and partly without the Philippines

Name at least 3 types of income considered sourced within the Philippines.

• Interest from Philippine banks or residents

• Dividends from domestic corporations

• Compensation for services performed in the Philippines

• Rentals/royalties from properties in the Philippines

• Gains from sale of real property in the Philippines

Give examples of income sourced outside the Philippines.

• Interest from foreign banks

• Dividends from foreign corporations (less than 50% income from PH sources)

• Compensation for services performed abroad

• Rentals/royalties from foreign properties

• Gains from sale of real property outside the Philippines

Define compensation income and give examples.

All remuneration for services performed by an employee for an employer, including wages, salaries, bonuses, director’s fees (if employee), fringe benefits, separation pay (if not due to causes beyond control), and retirement benefits (if not qualified under special laws).

What are the requisites for compensation income to be taxable?

A – Personal services Actually rendered
P – Payment made for such services
R – Payment is Reasonable

How is non-cash compensation (e.g., property, stocks, living quarters) taxed?

Taxed at fair market value (FMV) of the property or benefit at the time received.

What is the test for determining if income is compensation?

Whether the income is received by virtue of an employer-employee relationship.

When are director’s fees considered compensation income?

If the director is also an employee (e.g., President-director), it is compensation income. If not an employee, it is income from trade/profession.

How are fringe benefits taxed?

• For rank-and-file: Included in the P90,000 gross benefits exclusion; excess is taxable compensation.

• For managerial/supervisory: Subject to fringe benefits tax.

When are separation pay and retirement benefits taxable?

Taxable if separation is not due to causes beyond the employee’s control or if retirement does not meet the requirements of a reasonable private benefit plan or special law.

What is the “catch-all” clause in gross income?

It includes all income from whatever source, even if not specifically enumerated, unless expressly excluded or exempted.

How is income from the sale of shares of stock in a domestic corporation sourced?
A:

Always considered sourced within the Philippines, regardless of where the sale occurred.