NOTES ON INCOME TAXATION

A. Income Taxation
1. Income Tax Systems
Global Tax System
It does not matter whether the income received by
the taxpayer is classified as compensation income,
business or professional income, passive investment
income, capital gain, or other income. All items of
gross income, deductions, and personal and
additional exemptions, if any, are reported in one
income tax return, and one set of tax rates are
applied on the tax base.

A. Schedular Tax System

Different types of incomes are subject to different
sets of graduated or flat income tax rates. The
applicable tax rate(s) will depend on the
classification of the taxable income and the basis
could be gross income or net income.

Semi-schedular or semi-global tax system

The compensation income, business or professional
income, capital gain and passive income not subject
to final tax, and other income are added together to
arrive at the gross income, and after deducting the
sum of allowable deductions, the taxable income is
subjected to one set of graduated tax rates or
normal corporate income tax.
NOTE: The Philippines, under EO 37 (1986) and RA
8424 (1998), follows a semi-schedular and semiglobal
tax system.

2. Features of the Philippine Income Tax

Law
Direct tax
The tax burden is upon the income recipient upon
whom the tax is imposed. It is a tax demanded from
the very person who, it is intended or desired,
should pay it.

Progressive
The tax rate increases as the tax base increases. It is
founded on the ability to pay principle and is
consistent with Sec. 28, Art. VI, 1987 Consti.

Comprehensive
The Philippines has adopted the most comprehensive
system of imposing income tax by adopting the
citizenship principle, the residence principle, and
the source principle. Any of the three principles is
enough to justify the imposition of income tax on
the income of the income of a resident citizen and
domestic corporation that are taxed on a worldwide
income.

Semi-schedular or semi-global tax system

The Philippines follows the semi-schedular or semiglobal
system of income taxation, although certain
passive investment incomes and capital gains from
sale of capital assets, namely: (a) shares of stock of
domestic corporations and (b) real property are
subject to final taxes at preferential tax rates.

Of American Origin
Thus, the authoritative decision of the US Courts and
officials charged with enforcing US tax laws have
peculiar force and persuasive effect for the
Philippines. [Madrigal v. Rafferty]

3. Criteria in Imposing Philippine Income

Tax
a. Citizenship or Nationality Principle
A citizen of the Philippines is subject to Philippine
income tax
(a) on his worldwide income, if he resides in the
Philippines; or
(b) only on his income from sources within the
Philippines, if he qualifies as a nonresident citizen.

b. Residence Principle
A resident alien is liable to pay Philippine income tax
on his income from sources within the Philippines
but exempt from tax on his income from sources
outside the Philippines.

c. Source of Income Principle

An alien is subject to Philippine income tax because
he derives income from sources within the
Philippines, despite the fact that he has not set foot
A. in the Philippines.

4. Types of Philippine Income Tax

1. graduated income tax on individuals
2. normal corporate income tax on
corporations
3. minimum corporate income tax on
corporations
4. special income tax on certain corporations
5. capital gains tax on sale or exchange of
shares of stock of a domestic corp.
classified as capital assets
6. capital gains tax on sale or exchange of real
property classified as capital asset
7. final withholding tax on certain passive
investment income paid to residents
8. final withholding tax on income payments
made to non-residents
9. fringe benefits tax on fringe benefits of
supervisory or managerial employees
10. branch profit remittance tax
11. tax on improperly accumulated earnings of
corporations

A. 5. Taxable Period
4. Types of Philippine Income Tax
1. graduated income tax on individuals
2. normal corporate income tax on
corporations
3. minimum corporate income tax on
corporations
4. special income tax on certain corporations
5. capital gains tax on sale or exchange of
shares of stock of a domestic corp.
classified as capital assets
6. capital gains tax on sale or exchange of real
property classified as capital asset
7. final withholding tax on certain passive
investment income paid to residents
8. final withholding tax on income payments
made to non-residents
9. fringe benefits tax on fringe benefits of
supervisory or managerial employees
10. branch profit remittance tax
11. tax on improperly accumulated earnings of
corporations

A. 5. Taxable Period
a. Calendar Period
accounting period from January 1 to December

31

b. Fiscal Period
accounting period of 12 months ending on the
last day of any month other than December

A. c. Short Period