- Conwi v.
CTA, 213 SCRA 83
PART B: INCOME TAXATION
I. Overview and General Principles
A. Income
- Sec. 36, Revenue Regulations No. 2
SECTION 36. Meaning of net income. The tax
imposed by law is upon income. In the computation of the tax,
various classes of income must be considered:
(a) Income, in the broad sense, meaning all wealth which
flows into the tax-payer other than as a mere return of
capital. It includes the forms of income specifically described
as gains and profits, including gains derived from the sale or
other disposition of capital assets. Income cannot be
determined merely by reckoning cash receipts, for the statute
recognizes as income determining factor other items, among
which are inventories, accounts receivable, property
exhaustion, and accounts payable for expenses incurred.
(b) Gross income, meaning income (in the broad sense) less
income which is by statutory provision or otherwise exempt
from the tax imposed by law.
(c) Net income, meaning gross income less statutory
deductions. The statutory deductions are, in general, though
not exclusively, expenditures other than capital expenditures,
connected with production of income.
(d) In the case of a taxpayer other than a corporation as
defined in Section 84 (b) of the Code, net income means gross
income less exemptions. Ordinarily the net income is to be
computed in accordance with the method of accounting
regularly employed in keeping the books of the taxpayer.
- CIR v. BOAC, 149 SCRA 395
- Madrigal v. Rafferty, 38 Phil 414
- International Freighting v. CIR, 1354 F 2d 310
- Anderson v. Posadas, 66 Phil 205
B. Income Tax
C. When is Income Taxable?
- Secs. 43-44, NIRC
SEC. 43. General Rule. - The taxable income shall be
computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the
case may be) in accordance with the method of
accounting regularly employed in keeping the books of
such taxpayer, but if no such method of accounting has been
so employed, or if the method employed does not clearly reflect
the income, the computation shall be made in accordance with
such method as in the opinion of the Commissioner clearly
reflects the income. If the taxpayer's annual accounting period
is other than a fiscal year, as defined in Section 22(Q), or if the
taxpayer has no annual accounting period, or does not keep
books, or if the taxpayer is an individual, the taxable income
shall be computed on the basis of the calendar year.
SEC. 44. Period in which Items of Gross Income
Included.- The amount of all items of gross income shall
be included in the gross income for the taxable year in
which received by the taxpayer, unless, under methods of
accounting permitted under Section 43, any such amounts are
to be properly accounted for as of a different period. In the case
of the death of a taxpayer, there shall be included in
computing taxable income for the taxable period in which falls
the date of his death, amounts accrued up to the date of his
death if not otherwise properly includible in respect of such
period or a prior period.
- Secs. 51-53, Revenue Regulations No. 2
SECTION 51. When income is to be reported.
Gains, profits, and income are to be included in the gross
income for the taxable year in which they are received by
the taxpayer, unless they are included when they accrue to
him in accordance with the approved method of accounting
followed by him. If a person sues in one year on a pecuniary
claim or for property, and money or property is recovered on a
judgment therefore in a later year, income is realized in that
year, assuming that the money or property would have been
income in the earlier year if then received. This is true of a
recovery for patent infringement. Bad debts or accounts
charged off subsequent to March 1, 1913, because of the fact
that they were determined to be worthless, which are
subsequently recovered, whether or not by suit, constitute
income for the year in which recovered, regardless of the
date when amounts were charged off.
SECTION 52. Income constructively received.
Income which is credited to the account of or set apart for
a taxpayer and which may be drawn upon by him at any
time is subject to tax for the year during which so
credited or set apart, although not then actually reduced to
possession. To constitute receipt in such a case the income
must be credited to the taxpayer without any substantial
limitation or restriction as to the time or manner of payment or
condition upon which payment is to be made. A book entry, if
made, should indicate an absolute transfer from one account
to another. If the income is not credited, but is set apart, such
income must be unqualifiedly subject to the demand of the
taxpayer. Where a corporation contingently credits its
employees with bonus stock, but the stock is not available to
such employees until some future date, the mere crediting on
the books of the corporation does not constitute receipt.
SECTION 53. Examples of constructive receipt.
When interest coupons have matured and are payable, but
have not been cashed, such interest payment though not
collected when due and payable, is nevertheless available to
the taxpayer and should therefore be included in his gross
income for the year during which the coupons matured. This is
true if the coupons are exchanged for other property instead of
eventually being cashed. Defaulted coupons are income for
the year in which paid. The distributive share of the profits
of a partner in a general co-partnership duly registered is
regarded as received by him, although not distributed.
Interest credited on savings bank deposits, even though the
bank nominally has a rule, seldom or never enforced, that it
may require so many days' notice in advance of cashing
depositors' checks, is income to the depositor when credited.
An amount credited to shareholders of a building and loan
association, when such credit passes without restriction to
the shareholder, has taxable status as income for the year of
the credit. When the amount of such accumulations has not
become available to the shareholder until the maturity of a
share, the amount of any share in excess of the aggregate
amount paid in by the shareholder is income for the year
of maturity of the share.
- Limpan v. CIR, 17 SCRA 703
- Republic v. Dela Rama, 18 SCRA 861
- Eisner v. Macomber, 252 US 89
- Raytheon Production v. CIR, 144 F2d 110
- BIR Ruling 91-99, July 8, 1999
CAPITAL GAINS TAX; Pacto de retro - The terms of the
agreement between CB-BOL and TMBC calling for the transfer
of its assets, although denominated as Deed of Assignment
with Right to Repurchase, is in reality an equitable mortgage
created over the said properties. Instruments covering a sale
with right to repurchase may be captioned or labeled as such.
However, when any or more of the circumstances enumerated
under Article 1602, Civil Code, obtain in the agreement, the
contract shall be presumed as an equitable mortgage. (BIR
Ruling No. 217-81 dated November 6, 1981). This is relevant in
determining whether or not the transaction had is subject to
the corresponding taxes, i.e. capital gains tax documentary
stamp tax. Insofar as corporations are concerned, its
liability to the capital gains tax imposed on the presumed
gains realized from the sale, exchange or disposition of
lands and/or buildings is governed by Section 27(D)(5) of
the Tax Code of 1997. Thus, for a corporation to be liable
to the tax, a true sale, exchange or disposition of capital
assets must have transpired. Unlike in transactions made
by individuals under Section 24(D)(1) of the Code, where all
sales of real property classified as capital assets, including
pacto de retro or other forms of conditional sales are
subject to the capital gains tax, no similar qualifications
exist for capital asset transaction of a corporation. Hence,
the latter is subject to such tax only upon a close and
completed transaction in which income is realized. Accordingly,
this Office holds that only upon the executing of the final or
absolute deed of sale covering the properties of the bank
subject of the pacto de retro, will the payment of the 6%
capital gains tax apply. By the same token, since no actual
conveyance of real property is to be made, the stamp tax on
deeds of sale and conveyances of real property imposed under
Section 196 shall not apply. However, since the transaction is
in the nature of an equitable mortgage and made
primarily as a security for the payment of a pre-existing
loan, the same is subject instead to the rate of
documentary stamp tax imposed under Section 195. (BIR
Ruling No. 091-99 dated July 8, 1999)
- CIR v. Tours Specialist, 183 SCRA 402
- RMC 39-07
- CIR v. Javier, 199 SCRA 824
- BIR Ruling No. 123-97, Nov. 10, 1997
- BIR Ruling No. 029-98, Mar. 19, 1998
INCOME TAX; Income tax paid or accrued (now incurred)
by a company within a taxable year not allowed as
deduction
(a) BIR is prohibited from issuing further comments on
Questions Nos. 1, 2, 3, 7and 8 issued by the Energy Regulatory
Board in relation to ERB Case No. 93-118 entitled "Meralco vs.
Energy Regulatory Board, et. al." in so far as the rate fixing
issue is concerned considering that the issues are all subjudice
pending before the Court of Appeals. With regard to the
question of whether the appraisal increase of property, plant
and equipment of electric utilities is taxable, the general
rule is that, mere increase in the value of property without
actual realization, either through sale or other disposition,
is not taxable. However, if by reason of appraisal, the cost
basis of property is increased and the resulting basis is used
as the new tax base for purposes of computing the allowable
depreciation expense, the net difference between the
original cost basis and new basis due to appraisal is taxable
under the economic benefit principle.
(b) BIR is not following American Laws on taxation because we
have our tax laws, including rules and regulations
implementing our tax laws. However, under the doctrine of
precedent, a court may apply American Laws or Court
Decisions.
(c) The amendments introduced by EO No. 37 to then Section
21(c)(2) of the Tax Code of 1997 provides that dividend
received by a citizen or resident alien from a domestic
corporation is subject to income tax at the rate of 15% in
1986, 10% effective January 1, 1987, 5% effective January
1, 1988 and 0% effective January 1, 1989. However, Sec.
22 (a) and (b) of the same Code provides that dividends
received by a non resident alien individual, whether
engaged or not in trade or business in the Philippines,
from a domestic corporation is subject to final withholding
tax of 30% of such dividend income.
(d) For purposes of computing the taxable income of domestic
corporation derived from within and without the Philippines,
the allowable deductions are limited to those provided under
Section 29 of the Tax Code of 1997 for taxable year 1997 and
prior years but for taxable year 1998, Section 34 of the Tax
Code of 1997governs.
(e) Pursuant to then Section 117 of the Tax Code of 1997, as
amended by RA 8241, the 2% franchise tax of electric, gas and
water utilities is based on gross receipts derived from the
business covered by the lawgranting the franchise.
D. Capital Gain; Ordinary Gain; Presumed Gain
- Capital Gain income derived from sale of assets not used in
trade or business.
- Ordinary Gain
- Business Income income derived from business or
utilization of capital, including profit or gain
derived from sale or conversion of assets
- Income from Trade/Practice of Profession value
derived from the exercise of profession
- Passive Income an income in which the taxpayer
merely waits for the amount to come in. This is
subject to final tax
- Compensation Income gain derived from labor,
especially employment (earned from ER-EE) such
as salaries and commissions and are subject to
normal tax
- Presumed Gain
- Sec. 24(D), NIRC
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B)
notwithstanding, a final tax of six percent (6%) based on
the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code,
whichever is higher, is hereby imposed upon capital gains
presumed to have been realized from the sale, exchange,
or other disposition of real property located in the
Philippines, classified as capital assets, including pacto
de retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That
the tax liability, if any, on gains from sales or other
dispositions of real property to the government or any of its
political subdivisions or agencies or to government-owned or
controlled corporations shall be determined either under
Section 24 (A) or under this Subsection, at the option of the
taxpayer;
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or
disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in
acquiring or constructing a new principal residence
within eighteen (18) calendar months from the date of
sale or disposition, shall be exempt from the capital gains
tax imposed under this Subsection: Provided, That the
historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence
built or acquired: Provided, further, That the Commissioner
shall have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a prescribed
return of his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax exemption
can only be availed of once every ten (10) years: Provided,
finally, That if there is no full utilization of the proceeds of sale
or disposition, the portion of the gain presumed to have been
realized from the sale or disposition shall be subject to capital
gains tax. For this purpose, the gross selling price or fair
market value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to
the gross selling price in order to determine the taxable portion
and the tax prescribed under paragraph (1) of this Subsection
shall be imposed thereon.
E. Income Tax Systems
F. Criteria in Imposing Philippine Income Tax
- Nationality/Citizenship
- Residence
- Source
SEC. 23. General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the
Philippines;
(B) A nonresident citizen is taxable only on income derived
from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract worker is
taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as
an overseas contract worker;
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources
within the Philippines;

- Global Tax System
- Schedular Tax System
- Sison v. Ancheta, GR L-59431, July 25, 1984
- Semi-schedular or
System
(E) A domestic corporation is taxable on all income derived
from sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived
from sources within the Philippines.
Semi-global Tax
G. Tax Treaties