TAXABLE INCOME

REQUISITES FOR INCOME TO BE TAXABLE:

1) There must be a gain or addition to net worth
2) The gain must be realized or received, actually or
constructively; recipient must have complete
dominion
3) The gain must not be excluded by law or treaty
from taxation
Note:
Not recognized as income - when funds
were merely entrusted/held money in trust (with
obligation to return) to taxpayer because
taxpayer acquires no control and does not
receive economic benefit from it.
Proceeds of embezzlement/swindling are
income because embezzler/swindler already
has complete dominion over them and can use
such for his economic benefit.
Increase in the value of property is not
recognized as income; this only constitutes
an unrealized increase which becomes taxable
income only upon disposition and realization of
gains. Same situation for stocks and stock
dividends.
Deposit with no interest does not produce
income for the depositary; there is no flow of
wealth.
In a debt/loan situation it is important to
determine whether there was an original
intention to pay/consensual recognition of an
obligation to repay.
If yes, then the liability that
results just offsets the increase in
assets of the taxpayer borrower;
therefore, no increase in net worth
and no income derived from the
debt/loan.
If no (as in the case of a
swindler/estafa), the proceeds will
be considered as income and
therefore taxable in the hands of
the borrower swindler.
Income can be realized actually and
constructively.
Assignment of Income Doctrine Ex: A is
entitled to his salary of P10m but assigns it to B
for unknown reasons. In this case, both A and
B realize income. A constructively received
income (because he was able to assign thus
has complete control/dominion over it) and B
actually received it. The income is taxable in
the hands of both A and B.
Doctrine of Constructive Receipt Ex: A was
informed that his check dated December 16 is
already available and he can get it anytime. A

did not get the check until January 30. In this

case, A constructively received income in
December and is taxable in that taxable period.
Not recognized as income if proceeds are
merely a return of capital. Ex. Creditor lends
debtor x amount. Debtor repays x amount plus
y interest. Creditor does not have income on x
amount as this is merely return on capital; he
has income only with respect to the amount of
y interest.
COMPUTATION OF TAXABLE INCOME
1) Taxpayer earning purely compensatory
income
Gross Compensation
less : Personal Exemption
premium payments on health and/or
hospital insurance amounting to P2,400
per year
equals: Taxable income
2) Taxpayer doing business, whether individual
or corporation (domestic or FC doing
business)
Gross Revenue/Sales
less: Cost of Sales
equals: Gross Income
less : Allowable Deductions
equals: Taxable Income
for individuals, an additional deduction for
personal exemptions is allowed
Situs of Taxation is the place or authority that has the
right to impose and collect taxes (CIR v. Marubeni
Corp). The state where the subject to be taxed has a
situs may rightfully levy and collect the tax. The situs
is necessarily in the state which has jurisdiction or
which exercises dominion over the subject in
question.
SOURCES OF INCOME

Taxation Law Summer Reviewer

ATENEO CENTRAL BAR OPERATIONS 2007
Page 13 of 145

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ITEM SOURCE
Interest Residence of the debtor
Compensation for
personal services
Place of performance
Rent and royalty Location of property
Gain from sale of
real property
Location of property
Gain from sale of
personal property
Place of sale
Gain from sale of

shares of stock of
domestic
corporation
Philippine source
Dividend income (a) From a domestic corp.
deemed income from within
Phil.
(b) From a foreign corp.
deemed income from without
provided more than 50% of the
corp.s worldwide income is not
derived from Phil. sources
Allocation of Unallocated Deductions (partly Phil.
partly foreign)
GI,
GI,
GI,
GI,

Philippines x Unallocated = Phil deductions

Worldwide deductions
Outside Phil x Unallocated = Foreign
Worldwide deductions deductions

Income from sale of personal property derived from

sources partly within and partly without the Phils.
Gain from sale of personal property produced in
whole or in part in one country and sold in another
country, where one of the countries is the Philippines
is income derived from sources partly within and
partly outside the Philippines.
Gains from the purchase of personal property within
and sold without the Philippines or the purchase of
personal property without and its sale within the
Philippines shall be treated as derived entirely from
sources within the country in which it was sold.
GENERAL PRINCIPLES OF INCOME TAXATION
IN THE PHILIPPINES
Taxpayer Tax Base Taxable on
income
Resident Citizen Taxable
Income
Within and
without the
Philippines
Nonresident Citizen Taxable
Income
Within the
Philippines
Resident Alien Taxable
Income
Within the
Philippines
Nonresident Alien
engaged in trade or
business
Taxable
Income
Within the
Philippines
Nonresident Alien not
engaged in trade or

business
Gross
Income
Within the
Philippines
General Professional
Partnership
Taxable
Income
Within
or/and
without the
Philippines
(depending
on
classification
of individual
partner)
Estate and Trust Taxable
Income
Same basis
as an
individual
(depending
on
classification
of decedent,
if estate,
trustor, if
trust)
Domestic Corporation Taxable
Income
Within and
Without the
Philippines
Resident Foreign
Corporation
Taxable
Income
Within the
Philippines
Non-resident Foreign
corporation
Gross
Income
Within the
Philippines
*Taxable Income = Gross income (less) Deductions
(less) Personal and additional exemptions
*Gross Income = all income derived from whatever
source
TYPES OF INCOME TAXATION UNDER THE NIRC
1) Net Income Tax/Taxable Income (GI
Deductions Exemptions)
2) Gross Income Tax (All income from whatever

source)
3) Final Income Tax (On passive income and capital