12 TAXATION 1 NOTES

INCOME, TAXABLE INCOME AND INCOME TAX

Income2 – for purposes of income taxation, refers to any wealth which flows into the taxpayer other than
a mere return of capital. The term has been variously interpreted to mean:
• cash received or its equivalent,
• the amount of money coming to a person within specific time or
• something distinct from principal or capital

Taxable Income3 – refers to the gross income subject to tax, less the deductions, whether itemized or
optional standard deductions and/or personal and additional exemptions, if any, authorized for such type
of income. This term also refers to tax base.

Elements of Taxable Income - Income, gain or profit is subject to income tax when the following
conditions are present:

1. There is income, gain or profit (existence of income). – for tax purposes, income does
not refer only to the money a taxpayer receives but includes anything of value.
2. The income, gain or profit is received or realized during the taxable year (realization of
income) - Even if there is material gain, not excluded by law, if the material gain is not yet realized
by the taxpayer, then there is no income to speak of.
3. The income, gain or profit is not exempt from income tax. - An income may have other
elements but the law may specifically exclude the same from income for tax purposes i.e. certain
passive incomes excluded from income as they are already subject to final taxes.

Income Tax4 – a tax based on income, gross or net. Refers to the tax on the earnings derived by a
taxpayer for each taxable year arising from: (S.T.E.P.)
• Employment, or
• for Services rendered, or
• for engaging in Trade or business or
• for exercising a Professions

Test in Income Determination

a. Realization/Severance Test –There is no taxable income until there is a separation from
capital of something of exchange value, thereby supplying the realization or transmutation which
would result in the receipt of income. Also known as Macomber Test.

The court analogized “capital” as being separate from “income” in the way that a tree is separate
from its fruit. It requires the presence of a “tax event” which is an event which triggers a transfer
of ownership to property.

Under this principle, income is generally recognized when both of the following conditions are
met:
i. The earning process is complete or virtually complete
ii. An exchange has taken place

b. Claim of Right Doctrine – a taxable gain is conditioned upon the presence of a claim of right
to the alleged gain and the absence of a definite unconditional obligation to return or repay. This
is also called the Doctrine of Ownership, Command and Control.

2 Casasola, 76.
3 Casasola,198.
4 Casasola, 76.

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12
 13 TAXATION 1 NOTES

c. Economic Benefit Test – states that any economic benefit to the employee that increases
his net worth, whatever may have been the mode by which it is effected, is taxable. This is also
called the Doctrine of Proprietary Interest.

d. All Events Test – for income or expense to accrue, this test requires the fixing of a right to
income or liability to pay, and the availability of the reasonable accurate determination of such
income or liability. The amount of liability does not have to be determined exactly; it must be
determined with “reasonable accuracy”

e. Flow of Wealth Test – the test of taxability is the source (i.e., the property activity or service
that produced the income determine whether any gain was derived from the transaction.)

CRITERIA USED IN IMPOSING PHILIPPINE INCOME TAX5 - The criteria used by our Congress
in imposing the Philippine income tax under the NIRC of 1997 are as follows:

• Citizenship Principle – Under this principle the basis of the imposition of income tax is the
taxpayers’ citizenship. All citizens of the Philippines, whether residents or non-residents, are subject
to our income tax law. In the case of resident citizens, they are subject to the income tax on
income derived from within and without the Philippines, while non residents are only subject to the
income tax on the income derived from within the Philippines.

Principle of Mobilia Sequuntur Personam. (Income follows the income earner). The
income is thus taxed in the place where the owner (income earner) is located and not in the
place where the income is earned or where the income originated. This applies only to
resident citizens on their incomes derived from sources without the Philippines.

• Resident Principle – Follows the territoriality principle. The basis of the imposition of income tax
in this case is the residence of the taxpayer. All income derived by persons residing in the
Philippines, whether citizens or aliens, whether domestic corporation or foreign corporations, shall
be subject to income tax on the income derived from sources within the Philippines.

Rationale why corporations are subject to tax. Corporations owe their existence and the
privilege to do business to the government. It is therefore fair for the government to require
them to make reasonable contributions to the public expenses

• Source Principle - Follows the territoriality principle. The basis of the imposition of income tax
under this principle is the source of income. All income derived forms sources within the Philippines
shall be subject to income tax. Thus, nonresident citizens or aliens and foreign corporations who
derived income from within the Philippines shall also be liable for income tax on all income derived
within the country.

FEATURES OF INCOME TAX6

Our present income tax system can be said to have the following basic features:
1. Individual Income Tax system is progressive in nature by providing for graduated rates of income
tax. The tax rates increases as the ta base increases. However, final taxes are impose such as
those on passive investment income.
2. The law has adopted the most comprehensive tax situs by using all possible legal criteria in the
determination of its tax base.

5 Casasola, 77.
6 Vitug,61

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13
 14 TAXATION 1 NOTES

3. Income tax is a direct tax because tax burden is borne by the income recipient upon whom the tax
imposed.
4. The Philippines follows the semi-schedular or semi-global system of income taxation. The present
income tax law is now more schedular than global in the case if individual but it has maintained
much of its global treatment on corporations.

KINDS OF TAXPAYERS AND RULES ON THE TAXATION OF INCOME

INDIVIDUAL TAXPAYERS
f. Citizens – The following are citizens of the Philippines.
1. Those who are citizens of the Philippines at the time of the adoption of the 1987 Philippine
Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973 of Filipino mothers, who elect Philippine citizenship
upon reaching the age of majority; and
4. Those who are naturalized in accordance with law (Sec. 1, Art IV, 1987 Phil. Constitution)

i. Resident Citizens – is a citizen of the Philippines residing therein, unless he qualifies as a

nonresident citizen under Section 22 (E) of the NIRC of 1997, as amended.7

-Citizen of the Philippines who stay in the Philippines without the

intention of transferring their physical presence abroad whether to stay permanently or
temporarily as an overseas contact worker.8

ii. Non-Resident Citizens9 - for purposes of income taxation, nonresident citizens means:
1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
3. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physical present abroad most of the time during
the taxable year.
4. A citizen who has been previously considered as nonresident citizen and who arrives
in the Philippines at any time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a nonresident citizen for the taxable year in which
he arrives in the Philippines with respect to his income derived from sources abroad until
the date of his arrival in the Philippines

Note that Section 2, RR No. 01-79 [January 8,1979] enumerates who are deemed “non-
resident citizens:”
1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for which
a foreign visa has been secured.
2. Permanent employee – one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis
3. Contract worker – one who leaves the Philippines on account of a contract of
employment which is renew from time to time under such circumstance as to require
him to be physically present abroad most of the time (not less than 183 days)

Resident Citizen distinguished from non-resident citizen.

1. A resident citizen is physically present in the Philippines most of the time, WHILE a

7 Casasola,84.
8 Domondon.
9 Sec. 22 (E), NIRC, Casasola,84

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14
 15 TAXATION 1 NOTES

nonresident citizen is physical absent from the Philippines most of the time;
2. A resident citizen is taxable on all income derived from sources within and without the
Philippines, WHILE a nonresident citizen is taxable only on income derived from sources
within the Philippines.

Q: Should a non-resident citizen file an income tax return or information return

covering his income earned abroad?
A. No. Previously, under RR No. 01-79, non-resident citizens were required to do so. In
RR No. 9-99, non- resident citizens were required to file an information return. However,
under RR 05-01 [July 31, 2001], non-resident citizens are no longer required to file
the same on their income derived from sources outside the Philippines.

Q: What is meant by the phrase “most of the time” as used in determining whether a
citizen who derives income from abroad and is physically present abroad is a non-
resident?
A. RR No. 01-79 states that to be physically present abroad most of the time during the
taxable year, a contract worker must have been outside the Philippines for not less
than 183 days during such taxable year.

Q: If a natural-born Philippine citizen who became a citizen of the United States is

later on granted Philippine dual citizenship under RA 9225, is he required to pay
taxes for income earned in the United States?
A. No. In BIR Ruling DA-095-05 [March 29, 2005], the CIR held that such a person
would be a non-resident citizen, and hence, will not be required to pay Philippine tax
for income earned in the United States.

iii. Overseas Contract Workers (OCW/OFW) – refers to a Filipino citizen employed in

foreign country, who is physically present in a foreign country as a consequence of his
employment thereat. His salaries and wages are paid by an employer abroad and not borne by
any entity or person in the Philippines.10
To be considered as an OCW or OFW:
1. They must be duly registered as such with POEA, and
2. Must have a valid Overseas Employment Contract. 11

iv. Seaman or Seafarers – a seaman or seafarer is considered as an OCW provided the

following requirement are met:
1. A citizen of the Philippines;
2. Received compensation for services rendered abroad as a member of complement of a
vessel; and
3. Such vessel is engaged EXCLUSIVELY in international trade.
4. They must be duly registered as such with POEA, and
5. Must have a valid Seafarer’s Identification Record Book (SIRB) or Seaman’s Books
issued by the Maritime Industry Authority (MARINA)s12

v. Minimum Wage Earners (MWE) – refers to a worker in the private sector who is paid the
statutory minimum wage, or to an employee in the public sector with compensation income of
not more than the statutory minimum wage in the non-agricultural sector where he is assigned.13

MWE shall not cover household or domestic helpers; persons in the personal service of another,
including family drivers, and workers of duly registered Barangay Micro Business Enterprise
(BMBEs) with Certificate of Authority pursuant to RA 9178.

10 Section 2, Revenue Regulations No. 1-2011

11 Casasola,85.
12 Casasola,85.
13 Section 22 (HH), NIRC, Casasola,75.

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15
 16 TAXATION 1 NOTES

Statutory minimum wage (SMW) -refers to the rate fixed by the Regional Tripartite Wage
and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment. 14

SMW shall apply to all minimum wage earners in the private sector in the Region, regardless
of their position, designation or status of employment and irrespective of the method by which
they are paid.

a. Aliens – individuals who are not citizens of the Philippines

i. Resident Alien – an individual whose residence is within the Philippines and who is not a
citizen thereof. (Sec.22 (F), NIRC).
Revenue Regulations provide an interpretation of who may be considered as resident aliens:
1. An alien actually present in the Philippines who is not a mere transients or
sojourner.
2. Whether he is a transient or not is determined by his intentions with regards to the
length and nature of his stay.
3. A mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute such alien as a transient. If he lives in the Philippines and has
no definite intention as to stay, he is a resident.
4. One who comes to the Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient, but if his purpose is of such a nature that an
extended stay may be necessary for its accomplishment, and to that end the alien
makes his home temporarily in the Philippines, he becomes a resident though it may
be his intention at all times to return to his domicile abroad when the purpose for which
he came has been consummated or abandoned.15

When is residency lost?

An alien who has acquired residence in the Philippines retains his status as a resident until he
abandons the same and actually departs from the Philippines. An intention to change his
residence does not change his status as a resident as a resident alien to that of a non-resident
alien. Thus, an alien who has acquired a residence in the Philippines is taxable as a
resident alien for the remainder of his stay in the Philippines.16

i. Non-resident Alien – an individual whose residence is not within the Philippines and who
is not a citizen thereof. (Sec.22 (G), NIRC)
1. Non-Resident Alien Engaged in Trade or Business – a nonresident alien
individual who shall come to the Philippine and stay therein for an aggregate period of
MORE THAN 180 days during any calendar year. (Sec.25 (A) (1), NIRC)

2. Non-Resident Alien Not Engaged in Trade or Business – a nonresident alien

individual who stays in the Philippines for 180 days or LESS during a calendar year.

Q. X, a non-resident alien stays in the country for 100 days in 2011 and for another 100
days in 2012. Is he considered a non-resident alien engaged in trade or business?
A. No. The aggregate period of 180 days provided under Section 25 (A) (1) of the NIRC must
be within the same calendar year for an alien to be considered engaged in trade or
business.

14 Section 22 (GG), NIRC, Casasola,75

15 Casasola,86.
16 Casasola,86.

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16
 17 TAXATION 1 NOTES

RULES ON TAXATION OF INCOME ON INDIVIDUALS

Rules on the Taxation of Income of Resident Citizen17
Resident citizen is taxable on ALL income derived from ALL SOURCES WITHIN AND
WITHOUT the Philippines subject to the following tax rates:
1. His REGULAR TAXABLE INCOME shall be subject to the schedular tax rates of 5% to
32% as provided for under Section 24 (A) (2) of the NIRC of 1997, as amended.
CHOO-CHOO NOTES: Tax Schedule under TRAIN is 0% to 35% depending on a bracket. Section
24 was amended by Section 5 of TRAIN.

2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding
taxes depending on the kind of passive income received by him.
CHOO-CHOO NOTES: There are certain changes in TRAIN LAW regarding tax rates of
passive incomes.

Rules on the Taxation of Income of NonResident Citizen18

Resident citizen is taxable on ALL income derived from ALL SOURCES WITHIN AND
WITHOUT the Philippines subject to the following tax rates:
1. His REGULAR TAXABLE INCOME shall be subject to the schedular tax rates of 5% to
32% as provided for under Section 24 (A) (2) of the NIRC of 1997, as amended.

2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding
taxes depending on the kind of passive income received by him.

Rules on the Taxation of Income of OFW/OCW/Seaman/Seafarer

1. Taxable only on income derived from ALL sources WITHIN the Philippines.
2. His REGULAR TAXABLE INCOME shall be subject to the schedular tax rates of 5% to
32% as provided for under Section 24 (A) (2) of the NIRC of 1997, as amended.
3. However, his PASSIVE INCOMES shall be subject to the applicable final withholding
taxes depending on the kind of passive income received by him.
4. Income arising out of his overseas employment is exempt from income tax. 19

Rules on the Taxation of Income of Married Individuals20

1. They shall compute separately their individual income tax on their income from
employment based on their respective total taxable income, but must file a
consolidated income tax return.
2. If they have income derived from business, or there is any income which cannot be
definitely attributed to or identified as income exclusively earned or realize by either of
the spouses, the same shall be equally divided between the spouses for purposes of
determining their respective table income.

Rules on the Taxation of Income of Minimum Wage Earners21

1. Compensation income of MWE being paid the SMW applicable to the place where
he/she is assigned shall be exempted from income tax.
2. Holiday pay, overtime pay, night shift differential pay and hazard pay shall be exempt
from withholding tax only, but said income shall be included in the gross income for
purposes of computing his income tax.
3. Additional compensation such as commissions, honoraria, fringe benefits, benefits in
excess of the allowable statutory amount of P30,000, taxable allowances and other
taxable income other than those exempt, are not exempt from income tax and
withholding tax.
4. Other income, such as income from the conduct of trade, business or practice of
profession, except income subject to final tax, in addition to compensation income are
not exempted from income tax on their entire income earned during the taxable year.

17 Casasola,84.
18 Casasola,85.
19 Casasola,85.
20 Casasola,87
21 Casasola,87-88.

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17
 18 TAXATION 1 NOTES

Rules on the Taxation of Income of Senior Citizens

Generally, qualified senior citizens deriving returnable income during the taxable year,
whether from compensation or otherwise, are required to file their income tax return and pay
the tax.

However, he shall be exempt under the following cases:

a. The returnable income is in the nature of compensation income but he qualifies as
a minimum wage earner; and
b. If the aggregate amount of gross income earned by the Senior Citizen during the
taxable year does not exceed the amount of his personal exemptions (basic
and additional)

Note that the exemption of senior citizens from income tax does not extend to all types of
income earned during the taxable year such as those subject to final taxes. (RR No. 007-10,
July 20, 2010)

Rules on the Taxation of Income of Resident Aliens22

The income of a resident alien individual derived during the taxable year from ALL sources
WITHIN the Philippines shall be subject to the following tax rates:
1. His REGULAR TAXABLE INCOME shall be subject to the schedular tax rates of 5% to
32% as provided for under Section 24 (A) (2) of the NIRC of 1997, as amended
2. However, his PASSIVE INCOMES shall be subject to the applicable final withholding
taxes depending on the kind of passive income received by him.

Rules on the Taxation of Income of NonResident Aliens EiTB23

1. In the case of regular income, a nonresident alien individual engaged in trade or
business in the Philippines shall be subject to the schedular rates of 5% to 32% under
Section 24 (A) (2) of the NIRC of 1997, as amended, in the same manner as an
individual; citizen and a resident alien individual based only on the taxable income
derived from all sources WITHIN the Philippines
2. In the case of passive investment incomes derived from sources within the Philippines
the same shall be subject to the following final withholding tax rates.
3. NRAEiTB shall be entitled to a personal exemption in the amount equal to the
exemptions allowed in the income tax law in the country of which he is a subject or
citizen, to citizen of the Philippines not residing in such country, not to exceed the
amount fixed in Section 35 as exemption for citizens or residents of the
Philippines; Provided, That said nonresident alien should file a true and accurate
return of the total income received by him from all sources in the Philippines.
CHOO-CHOO NOTES: Section 35 was amended by Section 12 of TRAIN.

Rules on the Taxation of Income of NonResident Aliens NEiTB24

The following shall be subject to the final withholding tax rates as follows:
1. 25% - Gross amount of interest, cash and/or property dividends, rents salaries, wages,
premiums, annuities, compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits and income and capital gains.
2. 5%- if less 100k; 10% in excess of 100k- On net capital gains from sale of shares of
stock of a domestic corporation not listed and traded in the stock engage , held as
capital assets by individuals.
3. 6% - on the presumed capital gains from sale of real property situated in the
Philippines considered as capital assets.

22 Casasola,86.
23 Casasola,104-105
24 Casasola,106

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 19 TAXATION 1 NOTES

CORPORATIONS25
The term corporation shall:
a. Include
i. Partnership, no matter how created or organized
ii. Joint Stock Companies
iii. Joint Accounts (cuentas en participation)
iv. Associations or insurance companies.
b. But does not include:
i. General Professional partnerships and
ii. A joint venture or consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal geothermal, and other energy operations, pursuant to an
operation or consortium agreement under a service contract with the government.26

a. Domestic Corporations – created or organized in the Philippines or under its laws.

Classification of Domestic Corporations for income tax purposes27:

i. Domestic Corporations in general, including partnerships other than general professional
partnership.

Partnership -
a. Taxable partnership – these are partnerships which rae by law assimilated to be
within the context of, and so legally contemplated as, corporations.

These are business partnerships or partnerships which are organized for the
purpose of engaging in trade or business. They are subject to income tax as if they
are corporations whether or not registered with the SEC as a partnership.

b. Exempt partnership – These are partnerships which are not similarly identified as
corporations nor even considered as independent taxable entities for income tax
purposes.
i. General Professional Partnership are partnerships formed by persons for
the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business.

i. Proprietary Educational Institutions and Non-profit Hospitals – any private

school maintained and administered by private individuals or groups with an issued permit to
operate from the Department of Education (DepEd) or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case
may be, in accordance with existing laws and regulations.28
ii. Government-owned or -controlled corporation – Government-owned or controlled
corporation refers to any agency organized as a stock or non-stock corporation, vested with
functions relating to public needs whether governmental or proprietary in nature, and owned
by the Government directly or through its instrumentalities either wholly, or, where applicable
as in the case of stock corporations, to the extent of at least fifty-one (51) per cent of its capital
stock: Provided, That government-owned or controlled corporations may be further
categorized by the Department of the Budget, the Civil Service Commission, and the
Commission on Audit for purposes of the exercise and discharge of their respective powers,
functions and responsibilities with respect to such corporations . (Administrative Code of 1987)
a. Agency of the government - refers to any of the various units of the Government,
including a department, bureau, office, instrumentality, or government-owned or
controlled corporations, or a local government or a distinct unit therein.
b. Instrumentality - refers to any agency of the National Government, not

25 BARCODE, Subject of BEQ in 1971.

26 Section 22 (B) NIRC, Casasola,68.
27 Domondon.
28 Section 27 (B) last sentence, NIRC. Casasola,123.

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19
 20 TAXATION 1 NOTES

integrated within the department framework vested within special functions or

jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. This
term includes regulatory agencies, chartered institutions and government-owned
or controlled corporations.

b. Foreign Corporations –one formed, organized or existing under any laws other than those of
the Philippines.29 The term foreign when applied to corporation, means a corporation which is not
domestic.30
i. Resident Foreign Corporation – applies to foreign corporation engaged in trade or
business within the Philippines.31

Classification of Resident Foreign Corporations for income tax purposes32:

• Resident Foreign Corporation in general;
• International Carriers
• International Air Carriers
• Offshore banking units
• Regional or are headquarters and regional operating headquarters of multinational
companies.

ii. Non-Resident Foreign Corporation - applies to a foreign corporation not engaged in

trade or business within the Philippines33

Classification of Resident Foreign Corporations for income tax purposes 34:

• Non-resident foreign corporation in general;
• Non-resident cinematographic film owners, lessors or distributors
• Non-resident owners of vessels chartered by Philippine nationals; and
• Non-resident lessors of aircraft, machineries and other equipment.

c. Joint Ventures and Consortium35 – it is generally understood to mean an organization

formed for some temporary purpose.36

Essential factors to constitute a joint venture (CS-JMS)

a. Each party making a contribution, not necessary of capital but by way of services, skill,
knowledge, material or money
b. Profits must be shared among the parties
c. Profits must be a joint proprietary interest
d. Right of mutual control over the subject matter of the enterprise; and
e. Usually there is a single business transaction.

Tax Exempt Joint Ventures

a. Those formed for the purpose of undertaking construction projects; or
b. Those formed for the purpose of engaging in petroleum, coal geothermal, and other energy
operations, pursuant to an operation or consortium agreement under a service contract with
the government.37

Note: The tax exemption of the joint venture is valid ONLY up to the completion of the

29 Section 123, Corporation Code.

30 Section 22 (D), NIRC. Casasola,69.
31 Section 22 (H), NIRC. Casasola,70.
32 Domondon.
33 Section 22 (i), NIRCS, Casasola,168
34 Domondon.
35 BARCODE. Subject of a BEQ in 2007.
36 Philex Mining Corp v. CIR citing Aubarch v. Sanitary Wares
37 Section 22 (B) NIRC, Casasola,68.

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 21 TAXATION 1 NOTES

construction project and does not extend to the subsequent sale or lease of the developed
condominium floor or units to customers.38

Taxable Joint Ventures

a. A domestic corporation jointly owned by individuals and by two or more existing domestic
corporations and/or foreign corporations or duly registered with or licensed by the SEC is
a taxable partnership even if it is engaged in the business of construction or energy related
activity.
b. If the unincorporated joint venture or consortium is engaged in any other line of business
than construction or energy related activity with operating contract with the government.

d. Estate – refers to the mas of properties and assets left behind by the deceased. It may also refer
to all assets and liabilities of the decedent existing at the time of his death. 39

The status of the estate is determined by the status of the decedent at the time of his death, so an
estate, as an income taxpayer can be a citizen or an alien.

The income that is subject to income taxation is the “income received by estates of deceased
person during the period of administration or settlement of the estate.

Example: Alex died leaving as his solitary property a 25-door apartment. The rentals derived from
this rental property prior to the settlement of the estate would be subject to income taxes.

Rule on the taxability of estate

When a person who owns property dies, the fowling taxes are payable under the provisions of the
income tax law.
a. Income tax for individuals under Section 24 and 25 of the NIRC (to cover the period
beginning January to the time of death)
b. Estate income tax under Section 60 of the NIRC if the estate is under administration or
judicial settlement.

e. Trust40 - in its technical term, a trust is a right of property, real or personal, held by one party for
the benefit of another.41

When is a trust taxable?

a. Trust income to be accumulated.
i. For the benefit of unborn or unascertained person or persons with contingent interest;
ii. Income accumulated or held for future distribution under the terms of the will or trust;
b. Income which is to be distributed currently by the fiduciary to the beneficiaries
c. Income collected by a guardian of an infant which is to be held or distributed as the court
may direct;
d. Income which in the discretion of the fiduciary, may be either distributed to the beneficiaries
or accumulated.42

PASSIVE INCOME OF INDIVIDUAL TAXPAYERS

Passive income - is income derived from any activity in which the taxpayer does not materially
participate.

Tax Treatment of Passive Income - Passive income may be subject to:

1. Schedular rates (e.g. dividend income received by a domestic corporation from a foreign
corporation)

38 Mamalateo.
39 Domondon. No Definition in NIRC.
40 BARCODE. Subject of BEQS in 1974, 1980 and 2009.
41 Gayondato v. Treasurer of P.I.
42 Section 60, NIRC. Casasola,557-558.

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 22 TAXATION 1 NOTES

2. Final tax (e.g. interest income from foreign currency bank deposits by a resident citizen)
3. Passive incomes which do not meet the conditions for them to be subject to final tax shall be
included in gross income of the taxpayer and shall be subject to the graduated income tax rates.

Types of Passive Income

1. Passive Income subject to the final tax – refers to an income which ta due is fully
collected through withholding tax system in the form of final withholding tax.

Under this procedure, the payor of the income withholds the tax and remits it to the government
thru the AABs of the BIR as final settlement of the income tasx due on the said income

The recipient is NO longer required to include the item of income subjected to “final tax” as
aprt of his gross income in his income tax returns.

Example: Interest income derived from his ban deposits should no longer be included in the
determination of his gross income, the same having been subjected to the 20%final withholding tax.

2. Passive Income NOT subject to the final tax – these should be included in the
determination of the gross income which will be subject to the regular income tax rates.

Example: Sale of the Government of real property which is considered as capital asset where the
seller has opted to subject it either to the regular income rather than to pay final capital gains.43

Different kinds of Passive Income and their Rates

20% On interest income from ANY CURRENT bank deposit in regular domestic banks, and yields or
any other monetary benefit from deposit substitutes, and trust and similar arrangements.
7.5% Interest income derived from a depositary bank under the expanded foreign currency deposit
system (EXCEPT those received by nonresident individuals)
Exempt Interest income from a 5-year long-term deposit or investment in the form of savings, common
or individual trust funds, deposit substitutes, investment management accounts and other
investment certificates prescribed by the BSP.

In case of pre-termination of said long-term deposit before the 5th year, rates are based on the
remaining maturity, viz:
5% 4 years to less than 5 years
12% 3 years to less than 4 years
20% Less than 3 years
10% Royalties on books as well as other literary works and musical compositions
20% Regular royalties
20% Prizes (EXCEPT prizes amounting to P10,000 or less which are subject to tax under Section 24
(A) (2) of the Tax Code
20% Other winnings (EXCEPT PCSO and lotto winnings which are exempt from income tax)
10% Cash and property dividends from a domestic corporations; or from an ROHQ of an multinational
company; or on the share of an individual in the distributable net income AFTER TAX of a
partnership (EXCEPT from a GPP) of which he is a partner; or his share in the net income
AFTER TAX in a joint venture or consortium of which he is a co-venturer.

Remaining maturity – means holding period

Royalties – refers to either sum either in cash or property equivalent, to be paid at a definite period for the
use or enjoyment of a thing or right.
Prize – is the result of an effort made
Winnings - are the result of a transaction where the outcome depends upon luck or chance.
Dividends – refers to the distributions made by a corporation to its shareholders out ofS its unrestricted
retained earnings.

43 Casasola,88-89.

#supernotes
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