CHAPTER IV: GROSS INCOME

3. Creditor, owner of the patent and other

A. GROSS INCOME
Gross Income income, gain or profit subject to
income tax
- includes:
o Compensation Income
o Business Income
o Profits
o Income derviced from any source
whatever, unless exempted by law or

intellectual property, or owner of the shares of

stocks passive investment incomes arising from the
use or lease of certain properties or property rights
(i.e. interest, royalty, and dividend)
B. SOURCES OF INCOME
1.

Interests-Residence of the debtor if the

subject to final withholding income tax

obligor or debtor is a resident of the PH, the

in

interest income is treated as income from within

accordance

with

semi-

global/schedular tax system

2.

the PH
Dividends-Residence of the corporation paying

Gross Sales for sellers of goods

dividend dividends received from a domestic

Gross Revenue for sellers of services

corporation or from a froeign corporation are

treated as income from sources within the PH,

NOTE: The above definition of GI is used for

unless less than 50% of the GI of the foreign

purposes of computing the regular corporate income

corp. for the 3-year period preceding the

tax (RCIT)

declartation of such dividends was derived from

the sources within the PH, in which case, only the

Minimum Corporate Income Tax (MCIT) gross

amount which bears the same ratiion for such

sales less sales returns, disxounts, and allowances and

period derived from sources within the PH bears

cost of good sold

to its GI from all sources shall be treated as

Gross Income Earned of an enterprses registered

with economic and freeport authorties

3.

service is perfromed in the PH, the income shall

- gross

income less certain limited deductions authorized

under the law creating such special economic or

4.

property or interest is located or used in the pH,

the gain or income is treated as income from

Net Income gross income less statutory deductions

-

5.

property if the property sold is located within

taxable year (i.e. calendar year or fiscal year for

the PH, the gain is considered as income from the

6.

To Whom Income, Gain or Profit is Taxable:

Owner-seller or lessor of the goos or properties
income from sale or lease of goods or properties
2.

sources within the PH

Sale of real property Location of real

must computed with respet to a fixed period or

corporations)

1.

treated as from the sources within the PH

Rentals and royalties Location of the
property or interest in such property - if the

freeport zones

and exemptions

income from sources within the PH

Services-Performance of the service if the

PH
Sale of personal property:
a. Personal property produced by the
taxpayer within the PH and sold
without the PH, or produced by the
taxpayer without and soled within the

Person who renders services income from sale

PH derived partly from sources within

of services,

the PH and partly from sources without

PH

b. Purchases of personal property within

5.

and its sale without the PH, or

purchases

of

personal

derived entirely from sources within the

c.

country in which sold

Shares of stock or

another foreign currency are not receipts derived

property

withouth and its sale within the PH

Dollar earnings that are not converted into

6.
7.
8.

from foreign exchange transactions

Security deposits paid to a lessor
Award of certain damages
Contributions by lot owners for the memorial
park care fund

domestic

corporation derived entirely from

Distinctions between Capital and Income

sources within the PH, regardless of

where the said shaeres are sold and who

CAPITAL

INCOME

is the seller thereof

- however, gain from sale of shares of

A fund (e.g. savings

A flow (e.g. interest

bank deposit)

on

stocks of a foreign corporation shall be

savings

bank

deposit)

taxed in the palce of residence of

domicile of the owner-seller, following

A fund of property

A flow of services

the principle of mobilia sequuntur

(e.g.

rendered

by

that

capital

by

the

payment

of

personam
C. TYPES OF INCOME, GRAIN OR PROFIT

building

lease)

existing

for
at

instant of time

money

Income an amount of money coming to a person or

from it or any other

corporation within a specified time, whether as

benefit rendered by a

payment for services, interest or profit from

fund of capial (e.g.

investment
- flow of service rendered by capital by the

rental

income)

in

relation to such fund

payment of money from it or any other benefit

though a period of

rendered by a fund of capital in relation to such

time

fund through a period of time

includes earnings, lawfully

or

unlawfully

acquired, without consensual recognition

Considered income:

Wealth

Service of wealth

Tree

Fruit

Not subject to income

Subject to tax

tax on the part of the

1.
2.

Increase in inventory
Transfer of appreciated property to employee for

3.
4.

services rendered
Sale of goodwill
Just compensation for expropriated property

creditor
Test in Determining Income
1.

Severance or realization test there is no

taxable income until there is a separation from

Not considered income:

capital of something of exchangeable value,

1.

Deposit of property that does not increase

2.

networth of taxpayer
Increase in networth due to correction of errors in

3.

book entries
Voluntary assessments by a corporation paid by

4.

its shareholders
Stock divdend

thereby supplying the realization of transmutation

2.

which would result in the receipt of income

Doctrine of command or control of income
the power to dispose of income is the equivalent
of ownership of it
-the dominant purpose of the revenue laws is tha
taxation of income to those who earn or

3.

4.

otherwise create the right to receive it and ejoy

4.

Determine the period such income must be

the benefit of it when paid

Claim of right doctrine

5.

reported for income tax purposes

To use the proper income tax return and file it

- a taxable gain is

conditioned upon the presence of a claim of right

wihin the time specified by law or the regulations

to the alleged gain and the absence of definite

and to pay the correct type of income tax due

unconditional obligation to return or repay that

thereon

which would otherwise constitute a gain

Income from whatever source all income not

Kinds of Income

expressly excluded or exempted from the class of

taxable income, irrespective of the voluntary or

5.

1.

Compensation Income

involuntary action of the taxpayer in producing

Compensation all remuneration for services

the income, and regardless of the source of

performed by an employee for his employer

income, is taxable
Equivalent of cash doctrine any economic

under an EER, unless specifically excluded by

the Tax Code or special law

benefit that increases the networth of a taxpayer,

whatever may have been the mode by which it is

Ex: A lawyer who is employed by a domestic

effected, is taxable

corporation as its chief of legal division

Significance of Knowing the Type or Character of

Compensation paid in promissory notes

Income

promissory

notes

or

other

evidence

of

indebtedness received in payment for services,

In general, it is important to know the types of

and not as security for such payment, constitute

income realized by the taxpayer, since the PH has

income to the amount of their fair market value

adopted the semi-global or semi-schedular tax system

Compensation Income all remuneration for
In particular, the type or character of income is

services performed by an EE for his ER,

necessary for the following reasons:

including cash value of all remuneration paid in

any medium other than cash

1.

Determine whether the income is ocnsidered as

active business or professional income, or capital

except: (a) agricultural labor paid entirely in

gain or passive income not subject to final tax at

products of the farm where the labor is

preferential rates, or other income subject to the

performed; or (b) for domestic service in a

graduated income tax rates (individual) or normal

private home; or (c) for casual labor not in the

corporatie income tax (corporation) for which

course of the ERs trade or business; or (d) for

deductions from gross income are allowed, or as

services by a citizen or resident of the PH for a

passive income or capital gain subject to final tax

foreign

or compesation income, for which no deductions

organization

2.

from gross income are authorized

Know the particular schedular income tax system

3.

that will apply to the income

To evaluate the legal ways by which the
investments of the investor may be recovered in a
tax-efficient manner wihtout violating any Tax
Code provisions

government

or

an

international

BUSINESS INCOME
A. NATIONAL INTERNAL REVENUE CODE
(NIRC)
Business Income - relate to sale of goods,
properties, or services

may come from the conduct of trade or

investments and from incidental or outside

business or the exercise of a profession, or

operations or sources

gain dervied from dealings in property

Gross income from insurance companies
Professional Income

- fees received by a

total revenue from the operation of the business

professional from the practice of his profession,

and otheir incomes from all other sources whithin

provided that there is no EER between him and

the taxable year, except as otherwise provided by

his clients

the statute

the existence or absence of EER determines

- includes net premiums (gross premium less

whether the income shall be treated as

returned premiums on policies cancelled/policies

compensation income or professional fee. It

not taken)

is material for purposes of taxation because

there is no deduction allowed against

B. TAX TREATIES
Under that tax treaties of the PH with other

compensation income, whereas allowable

countries, business or trade income, gain or

deductions may be made from professional

profit, although it is derived from sources within

income

the PH, is still exempt from the PH income tax

Engaged in Trade or Business no specific

and withholding tax. Provided, that the foreign

criterion as to what constitutes doing or

corporation has no permanent establishment in

engaging in or transacting business.

the PH

Each case must be judged in the light ot its

-

Three (3) General Types of Capital Assets:

a. Shares of stock of a domestic corporation
b. Real property (of individuals) or land/or

peculiar environmental circumstances

the term implies a continuity of commercial
dealings and arrangements and contemplates

c.

to that extent, the performance of acts or

stock of a foreign corporation

works or the exercise of some of the

functions normally incident to, and in
progressinve prosecution oc commercial gain
or for the purpose and object of the business
-

organization
To engage- embark I a business or to

employ oneself therein

Engage connotes more than a single act

Shares of Stock of a Domestic Corporations

-

in transactions involving sale or exchange of

shares of stock or a domestic corpation, the tax status

of the seller or transferor is not material
The transaction is either subject to:
a) of 1% stock trasaction tax, if the ale
of listed shares takes palce through a

or a single transaction; it involves some

-

stockbroker of a local stock exhange

b) 5% or 10% capital gains tax, if the

continuity of action
To engage in business is uniformly

shares are unlisted of they are listed

construed as signifying to follow the

shares but raded outside of the locak

employment or occupation which occupies

the time, attention, and labor for the purpose
of livelihood or profit
Gross Income from Business total sales, less
the cost of goods sold, plus any income from

building (of corporations)

Other types of assets including shares of

stock exhange
Rules on sale of exchange of shares of stock of
a domestic corporation:
1.

If the seller or transferor is a dealer in

securites the sahres of stock shall be

2.

trated as ordinary assets and the ordinary

realized during the year, if any,

gains, if any, from the ale or transfer thereof

shall be subject to to the final

shall be subject to the graduated income taxs

capital gains tax equivalent to 5%

(individuals) or normal corporate income

of

tax (corporation)
If the seller of transferor is not a dealer in

exceeding P100,000 and 10% on

the

net

capital

gains

not

any amount in excess of P100,000

securites the shares of stock are regarded

as capital assets
a. If the shares of stock are listed
and traded in the local stock
exhange
b.

the

transaction

is

exempt from income tax

If the shares of stock are not

NOTE: In case the sellor or transferor

is a non-residen alient individual not
engaged in trade or business in the PH,
its capital gain shall be taxed at 25% of
his gross income

listed or they are listed but not

traded

in

the

local

stock

exchange the net capital gains