Chapter I: Overview of Income Taxation Revenue regulations are formal interpretations of Tax

Code provisions promulgated by the Sec. of Finance, upon
Income Tax
Fisher v. Trinidad. Income tax is defined as a tax on all
yearly profits arising from property, professions, trades or
offices, or as a tax on a persons income emoluments,
profits and the like.
Income tax is a direct tax on actual or presumed
income (gross or net) of taxpayers during the
taxable year
Fort Bonifacio Dev. Co. v. Commissioner. In case of
recommendation of the Commissioner of Internal Revenue
pursuant to Sec. 244.
As RRs are promulgated by the Sec. of Finance,
there is permanence and stability in tax laws.
RRs cannot just be changed or amended by
rulings and other administrative issuances signed
by the Commissioner.
To revoke, modify or amend existing RRs,
another RR is required.
conflict between statute and an administrative order, the
former must prevail. A contrary conclusion would mean
the Commissioner could very well moot the law or
arrogate legislative authority unto himself.
Hilado v. Collector. Regulations implementing doubtful
statutory provisions have strong persuasive force, but they
are not conclusive upon the courts.
Income Tax Systems

GR: Income tax applies only when the income, profit or BIR Rulings are less formal interpretations of the Tax Code
gain is realized or received [Sec. 39(B)]. provisions issued by the Commissioner of Internal Revenue
pursuant to Sec. 4 of the Tax Code.
XPN: When real property classified as a capital asset is sold
by a taxpayer, in which case, the law presumes that there Forms of BIR Rulings:
is a capital gain realized from the sale, and the basis of the
capital gains tax is the gross selling price or fair market a. BIR Rulings
value as determined by the Commissioner whichever is b. VAT Rulings
higher (capital gains tax of 6%) c. ITAD rulings
d. DA rulings
When listed shares of stocks of a DC are traded in a local e. Revenue Memorandum Circulars
stock exchange, the law imposes of 1% stock transaction
tax (percentage tax), which based on the gross selling price Other sources of tax laws:
without deducting cost.
1. Constitution
GR: A final income tax (FIT) may also be imposed on 2. Tax treaties
certain one-time transactions like the sale of real property 3. General and Special laws
classified as capital assets 4. Decisions of the SC and CTA
XPN: principal residence of the taxpayer which is exempt Guagua Electric Co. v. Collector. The Tax Code is a special
upon satisfaction of certain conditions law which prevails over the NCC, which is a general law.
Income Tax Law Hilado v. Collector. The Tax Code is classified as civil in
nature and not a political law, hence, it is enforced even
Philippine income tax law is embodied in Title II during enemy occupation.
of NIRC and:
Lorenzo v. Posadas. Although penalties are provided for
(a) Revenue regulations promulgated by the Sec. of violations of the Tax Code, it is not penal law
Finance upon recommendation of Commissioner
of Internal Revenue Mindanao Bus Co. v. Collector. Regulations promulgated
(b) BIR rulings and other administrative issuances in accordance with law have the force and effect of law.
signed by the Commissioner of Internal Revenue
to implement and interpret various provisions of Valerio v. Sec. of Agriculture and Natural Resources.
the tax law Administrative regulations should be given the same force
as rules of court in order to maintain the regularity of
administrative proceedings.
1. Global Tax Systems
Prevailing until 1981
The total allowable deductions as well as
personal and additional exemptions, in case of
individuals, or the total allowable deductions, in
case of corporations, are deducted from the
gross income to arrive at the net taxable income
Subject to the graduated income tax rates
ranging from 3% - 70%, in case of individuals, or
to the tiered income tax 25% and 35%, in case of
corporations.
It does not matter whether the income received
was classified as compensation income, business
or professional income, passive investment
income, capital gain, or other income.
Gross income, deductions, and personal and
additional exemptions, if any, were declared in
one income tax return, and one set of tax rates
were applied on the net taxable income.
Formula under the Global Tax System:
GROSS SALES
Less: Sales Discounts
Sales returns and disallowances
NET SALES
Less: Cost of goods sold or services
GROSS INCOME
Less: Deductions
Personal and additional exemptions (for
individual)
NET TAXABLE INCOME
INCOME TAX DUE
Less Creditable withholding tax
Quarterly Income Tax Paid
Tax Still Due and Demandable
2. Schedular Tax Systems
Adopted by virtue of B.P. 135
Different types of incomes that are subject to
different sets graduated or flat income tax rates
The applicable tax rates will depend on the
classification of the taxable income and the basis
could be gross income (w/o deductions) or net
income.
Separate ITR or capital gains tax return,
whichever is applicable, is filed by the recipient
of income for the particular types of income
received
But no ITR is filed by recipient of passive income
subject to FTW because the withholding agent is
primarily responsible for the filing of the
withholding tax return and the payment of final
tax to the BIR on such income.
Sison v. Ancheta. The SC upheld the constitutionality of
B.P. 135. There is no legal objection to a broader tax base
or taxable income by eliminating some deductible items
from business or professional income and at the same
time reducing the applicable tax rate on compensation
income.
Several ways of imposing FIT on certain incomes subject to
FWT:
a. Tax base is consideration or fair market value at
the time of the sale, whichever is higher.
b. Tax base is net capital gain. Whichever is higher,
less cost or adjusted basis.
c. Tax base is gross income (without any deduction)
3. Semi-Schedular or Semi-Global Tax System
All compensation income, business or
professional income, capital gain, passive
income, and other income not subject to final
tax are added together to arrive at the gross
income, and after deducting the sum allowable
deductions from business or professional
income, capital gain and passive income, capital
gain and other income subject to final tax, in the
case of corporations, as well as personal and
additional exemptions in the case of individual
taxpayer, the taxable income is subjected to one
set of graduated tax rates (individual) or normal
corporate income tax (corporation).
Adopted through E.O. 37 (1 January 1986)
R.A. 8424 (1 January 1988)
Features of the Philippine Income Tax Law
1. Direct tax tax burden is borne by the income
recipient upon whom the tax is imposed.
Commissioner v. Tours Specialists, Inc and CTA. Indirect
tax is a tax demanded in the first instance from one person
in the expectation and intention that he can shift the
burden to someone else.
2. Progressive tax tax base increases as the tax
rate increases.
This is founded on the ability to pay principle
and consistent with the Constitutional provision
that Congress shall evolve a progressive system
of taxation
3. Most comprehensive system of imposing
income tax by adopting the citizenship,
residence and source principle.
4. Semi-schedular or semi-global systems
although certain passive investment incomes,
capital gains on sales of shares of stock of
domestic corporations and real property located
in the Philippines, and other incomes subject to
final tax at preferential rates.
5. American origin authoritative decisions of the
U.S Courts and officials charged with enforcing
U.S. Internal Revenue Code have peculiar force
and persuasive effect for the Philippines.
Criteria in Imposing Philippine Income Tax
1. Citizenship or Nationality Principle citizen of
the Philippines is subject to income derived from
sources within and without.
2. Residence or Domicile Principle an alien is
subject to Philippine income tax because of his
residence in the Philippines.
3. Source of Income Principle an alien is subject
to Philippine income tax because he derives
income from sources within the Philippines.
Types of Philippine Income Tax
1. Graduated income tax on individuals;
2. Normal corporate income tax on corporations;
3. MCIT on corporations;
4. Special income tax on certain corporations;
5. Capital gains tax o sale or exchange of unlisted
shares of stock of a DC classified as a capital
asset;
6. Capital gains tax on sale or exchange of real
property located in the Philippines classified as a
capital asset;
7. FWT on certain passive investment income;
8. FWT on income payments made non-residents
9. Fringe benefit tax
10. Branch profit remittance tax
11. Tax on improperly accumulated earnings
When a person sells a real property classified as
capital asset located in the Philippines and pays
6% capital gains tax, he will no longer have to
declare his gain from such sale and pay the
ordinary income tax based on his net taxable
income during the year. Only one type of income
tax shall be paid on the transaction.
Western Minolco Corp. v. Commissioner. The 35%
transaction tax on money market transactions under Sec.
210 of the 1977 Tax Code as an income tax on interest
earnings of lenders and payers was considered by the SC.
Marinduque Mining and Industrial Corp. v.
Commissioner. The transaction tax, although nominally
categorized as a business tax, is in reality withholding
(income tax) as positively stated in Letter of Instructions
No. 340.
The BIR effectively considers the of 1% stock
transaction tax under Sec. 127(A), Title V of the
Tax Code as another form of income tax that
may be credited against the foreign income tax
liability of a foreign corporation.

When is Income Taxable
Requisites:
1. There is income, gain or profit
2. Income, gain, or profit is received or realized
during the taxable year
3. Income, gain or profit not exempt from income
tax
Existence of Income, Gain or Profit
Conwi v. CTA. Income tax in its broadest sense, means all
wealth that flows into the taxpayer other than a mere
capital return of capital
Income is an amount of money coming to a person or
corporation within a specified time, whether as payment
for services, interest or profit from investment
Unless otherwise specified, it means cash or its equivalent.
Income can also be thought of as flow of the fruits of
ones labor.
Payment of loan principal represents mere
return of capital which is exempt from income
tax
Realization of Receipt of Income
GR: A mere increase in the value of the property is not
income but merely an unrealized increase in capital. A
decrease in the value of the property is not allowable as a
deductible loss.
No income is derived nor a loss incurred by the
owner until after the actual sale or other
disposition of the property in excess of its cost
Limpan Investment Corp. v. Commissioner. Income is
received not only when it is actually handed to a person
but also when it is merely constructively received by him.
Commissioner v. Isabela Cultural Corp. The accrual of
income and expenses is permitted when the All Events
Test has been met because it does not demand the
amount of income or liability be known absolutely
Income, Gain or Profit is not Exempt from Tax
The income, gain or profit may be exempt from
income tax under Sec. 30(B), Constitution or tax
treaty or a special law.
GR: In case of doubt, income, gain or tax is taxable
XPN: If there is exemption from tax
Provisions of Tax Code Prevail Accounting Principles
All returns required to be filed by the Tax Code
shall be prepared in conformity with the Tax
Code
RMC No. 22-2004. In case of difference between the
provisions of the Tax Code and rules and regulations
implementing the Tax Code, on one hand, and the
generally accepted accounting principles (GAAP) and the
generally accepted auditing principles (GAAS), on the
other, the provisions of the Tax Code shall prevail.
Effects of the Application of Tax Treaties
GR: The provisions of the Tax Code (domestic law) shall
apply on the income, gain or profit of any person liable to
income tax.
XPN: Bilateral tax treaties which the Philippines had
concluded with other Contracting States that may have
different tax treatments with respect to incomes and rates
of taxes.
In case of conflict of tax treaties and domestic laws, the
former shall prevail.
XPN to XPN: Where the rate of tax imposed under the
domestic law is lower than the rate imposed under the tax
treaty, the lower tax rate under the domestic law shall
prevail.