7

Introduction to Gross Income

/

Income Defined

Gross income means, in its broad . sense all income from whatever
source, derived within or without the Philippines,' whether legal or illegal. The
tax code does not distinguish legal and illegal income. Proc~eds of
embezzlement or swindling., for instance, are income because embezzler or
swindler already has complete dominion over them and can use such for his
economic benefit. In the case of James vs. United States, the Supreme Court
of the U.S. held that '1f a taxpayer receives income, legally or illegally, without
consensual recognition ·of obligation to repay, that income is automatically
taxable".

"Income" means all wealth which flows into the taxpayer, other than return
of capital. It imports something distinct from principal or capital. On the other
hand, "Capital" constitutes the investment which is the source of income.
Therefore, capital is fund while· income is the flow. Capital is wealth, while
income is the service of wealth. Capital is the tree while income is the fruit
(Vicente Madrigal et al v. James Rqfferty, 38 Phil. 414).

ILLUSTRATIVE CASE .. INCOME FROM WHATEVER 59URCE

I

Clifford is a big-time swindler. In one year, he was able to earn P1 ,000,000 from his swindling ·,
activities. When the Commissioner of Internal Revenue discovered his income fr ,,
swindling, the Commissioner assessed_ him a deficiency income tax for such income. Clifford ;·
1

protested the assessment on the following ~rounds: .,

1) The income tax applies only to legal income, not to illegal income;
2) Clifford's receipts from his swindling 9id ~ot constitute in~me b~cause he.wa~ under-
obligation to return the amount he had swindled, hence. his receipt from swmdltng was 1

1
similar to a loan, whiqh is not income, because for every peso borro ed he has a ,.
corresponding liability to pay one peso; and . . -. .
3) If he has to pay the deficiency i~co~e tax assessment, there w,Ube hardly anything. le
to return to the victims of the swindling.

How · ill ou rule on each of the three .rou nds for th8 rote5t?

341
 ANSWER: .. h .t th . come tax applies to legal income and not to illegal inco
1) The content~n :. a 3:il;
of the Tax Code includes within the purview of gross inme is
. notlcorrect. f ec ,onh t er sourc~ derived. Hence, the .illegality of the income w·co11 rne
all ncome rom w a ev . • 1 not
preclude the imposition of the income.tax th ereon.,

2) The contention that ,the receipts from hi~ swin~lin~ di~. not conStilute income because of
his obligation to return the amount sw1Ddled _Is likewise not correct. When a taxpay ,
acquires earnings: lawfully or unlawfully, without th~ ~onsensual r~CO~nitio~, express:
implied, of an obligation to repay and without re.stnction ~s to their d1~pos1tion, he has
received taxable income, even thou_gh it may still be claimed that he 1s not entitled to
retain the money, and ·even though he may still be adjudged _to restore its equivalent
(James vs. u.S.,366 U.S. 213, 1961). To treat the embezzled funds not as taxable
income would perpetuate injustice by relieving embezzlers of the duty of paying income
taxes on the money they enrich themselves with through embezzlement, while honest
people pay their taxes on every conceivable·type of income. · ·

. 3) . The deficiency income tax assessment is a direct .tax imposed on the owner which is an
excise on the privilege to earn an income. It will not necessarily be paid out of the same
income that was subjected to the tax. Clifford's liability to pay the tax is based on his
having realized ~ taxable income from hi_ s swindling activities and will not affect his
obligation to make "restitution". Payment of the tax is a civil obligation imposed by law
while restitution is a civil liability arising from a crime. 1

ILLUSTRATIVE FLOW OF WEALTH

CASE Deposit with no interest does not produce income for the depositor
because there is no flow.of \Yealth. .
,..
MERE RETURN OF CAPITAL .,
~eclec lends Gore P1 ,00~,000. Gore repays P-1,000,000 plus P25,000
m!e~est. The P1 ,000,000 I~ not an inc.ome as this is merely a return .of
ca ital. Onl th e P25 ,000 re resentin interest is considered income.

· Exam les of Return of ca ital and OTHER Tf'AN R t ·. · ,_

, . . n'1 e urn of Ca ital:
Mere return of capital ! • I

ReG&ipl-4,tbettban-mer~r'8tum-of capital
• · Coll~ction of loans receivable
• Liquidating dividend·
• lnterest_pa1d on loans receivable . ·
•
' . Am~re.increase in the value of •
Condonation of debt for services rendered 1·
Excess of selling price over the cost of an asse
sold ·
property (merely an unr-ealized
increase in ca ital ,
I ' :
' I • ·1

342

...
f orrns, of Income

income may be "realize(!} in a . .

· · d'rect ec · ·· ny form h
services, in ' - ono~1_c benefit. Items in, ; w ether in. money, property,_
exclude~ from ~ross . Income. Income _directly benef1tting taxpayers are
pecifically descnbed as gains derived f includes . the . forms of income.
0
{Madrigal vs. Rafferty, 38 Phil. 414 ). ~ ; sale or other disposition of capital
1
orning to a person or corporation . · ~o refers to the ·am~unt of money

~3 Phil. 973). '

7
cayment of services, interest or profit 1th in_ a specified time, whether as
s rom investment. (Fi~her vs. Trinidad,

Valuation of Income

The amount of incom~ recognized is generally the value received or

which the taxpayer has a right to receive. If the services were rendered at a
stipulated price, in the abs~nce of any evidence to the contrary, such price
shall be presumed to be the fair market value of the compensation received.
Transfer of land made by a person to another in payment of services
rendered in the. form of attorney's fees shall be co·nsidered as part of the
gross income of the latter valued at either the fair market value or ~he zonal
valuation, whichever is higher, i~ the taxable year received (B'R Ruling #017-
2003).

CLASSIFICATION OF INCOME _
·1. Income as to source
a. Compensation income
b. Professional income
c. Business ~ncome
d. Other income

2. Income as to territorial sourc~. . ·

a Incom e within the Phihppin_es
· PhT pines
b.
c.
lncom~-without the I
Mixed income (part Y w ·
'i'ihin
and witho~t)

3. As to taxability · . . . .h
❖ Taxable income . b'ect to basic ~r normal tax sue
. . ru or Regular income su Jt_ n 24(A) of tDe Tax Code as
a. 0 rd ma~ J tax under Sec 10 ..
as the scheduler . . . · AnnUany, Filing)
amended . . · ITR (Quarte_rly and . . . licable
• R eportable
. . in the . mg tax. if app .
anded w1'th·hold
• Subject to exp . ~
• Tax credits . et of other income
• Catch-aU or bask
·343
 b. Certain Passive lncf?m,ewsithholding taxes .
• Subject to ina . fi 1 •
• . h lding taxes constitutes ma pa~ment of income t
With o_ bliged to withhold and remit the correspond.ax
~ Payor 1s o · 1ng
tax d t •nclude in the income tax return
■ No nee oI Id' t
. • BIR will run after the with_ho mg _age_n . . .
• A licable only to certa,~ passive tnc?me de~1ved from .
si~rces within the Philippines such as interest income on
bank deposit and royalties.

c. Capital gains subject to capital gains taxes, specifica_lly:

• Gain on sale of shares of stock of a domestic corporation
·sold directly to a buyer. .. .
• Sale of real properties class1f1ed as capital assets located
in the Philippines.

d. Special income subject to special rates. . .

Subject to special rates and rules (1.e., income of PEZA and
801 · registered companies subject to 5% special corporate
income tax as provided under the Tax Code, as amended by
CREATE Act).

❖ Tax exempt income

a. By constitutional mandate
b. By statute (general or special)
c. By international comity (i.e., bilateral agreements, treaties)

TAXABLE INCOME

Section 31 of the Tax Code, as amended, provides that "Taxable income'

means the pertinent items of gross income specified in the Tax Code, I ·
deducti~ns, if any, authorized for such type of income by the Tax Code or
other special laws. It does not include incom·e excluded by law, or hich _are
exempt from inc~me tax_ (Sec. 32, _Code) as well as income subject to_ fin~~
ta_xes. .Hence, 1t pert~ins to au ~ncome subject to basic and .cred1tabrl1
withholding taxes. It includes gains, profits, and i,ncome derived fro
whatever source, w hether legal or illegal.

344
 quisites for Income to be T ·
~e. axable
There must be gain.
a) rtie gain need not be in
sale of assets. ·it may oc cash derived from
exchange of property,
--- cur as a result of
Payrn Doctrine of
reduction or cancellation 0
indebtedness (except gifts)
;~iassumption,
e taxpayer_'s
Constructive Receipt
It is not the actual
realized from completion of a t or oth~r · profit, eipt but the right to
rec_
ransact1on. receive that determines
when to' include an
b) The gain m·ust be realized OR . amount ' in the gross
· • . . . - received -
A mere increase in the valu f . · income . (Filipinas
without actual realization, eithe er tho prhoperty Synthetic Fiber Corp. vs.
. •. roug sale
or th ~r d 1s~os1t1on, is not taxable. The
? CA). The right to
real1zat1on of 1_ncome need .not take the form receive must . be
unconditional, valid and
of a~tual receipt or property by the taXpayer enforceable.
as 1t m~y occ~r . _as where there · is a
construcfl'(e receipt of the incorl)e by the
taxpayer.

The doctrir,e of constructive receipt ~~mplements the doctrine of

actual receipt as a test of realization of income. An amount is constructively
received when it is set aside and made available to a
taxpay~r without
substantial restrictions.

There is constructive receipt of income when:

► Payment is credited to payee'.s .account;
or . Importance of the Doctrine
► Payment is set asid~ for the payee, or of Constructive Receipt of
otherwise made ayailable so the payee · Income:
may draw upon it at any time,· ~r so !he ·1t prevents a cash-basis -
payee could have drawn up~n it ?~ring taxpayer from deliberately
the taxable year if notice ~f mtenti?n to turning his back on income
'thd raw h ad been , given h without and thereby selecting the
w1 . no year in which he . reports it.
substantial limitations. Hence, t ere 15·
Not recognizing the
constructive receipt of inc~me_ wh~~:ect to constructive receipt of income
■ Constructive receipt is 5 -1 as· realized income clearly
substantial limitations. . f ds would open the door to tax
have un
• Payor does not . . t · avoidance and, possibly, tax
necessary to make pa~m~I: ·to the evasion.
■ The amount is not ava1la I

taxpayer/payee•

345
 Illustration-Constructive Receipt of Income:
Case1 b
George was informed that his_ check dated. Decem er 16, 2020 i~ alread
available and he can get it anytime. Georg~ did not ~et th_e check until Janua y
30• 2021 . In this case , George. constructively
.d received income in Decerhbry
,,, er
2020 and is taxable in that taxable peno •

Case 2 . · .
"An.employer issued a bonus check to _an employee on December 31, 2020 but
asked her to hold it for few days until the comp~ny could_ make. deposits to
cover the check": The income was not c?~struct,vely. r~c~ived on December
31, ·2020 since the iss·uer·did not have sufficient funds in its account to pay the
debt as of the issuance of the check.

Case 3 - Other examples of income constructively realized

• Cash or Property dividena received by individual taxpayers
■ .Share of a partner in the net incom,e of a general professional partnership
or from a taxable partnership ,
Rent income deposited in court by a lessee of the property in view of the
unjustified refusal of lessor (Limpian Investment Corp. vs Commissioner) 1

Art. 1261 Civil Code .

c) The gain must not be excluded by law from tax~tion., ·

·incomes that are e~empt from tax by_law or treaty are not considered
in determining gross income. Income is recognized in -the year it is
actually or constructively received in cash or cash equivalent. .
. .
Characteristics of Philippine /,:,come Tax
1. National tax. It is imposed and collected b the National Government
· throughout the country.
2. General tax. It .is levied without sp ecific or a predetermined purpose.
1
Hence, the revenue from income tax. may be .appropriated for general
purpos_
es . .·
' '

3. Excise t~x. It is ·imposed on the right or privilege of a person to receive or

earn an income. , · . .

4. Direct tax. It is payable by the person. upo~ whom it is directly imposed

by law. It cannot be shifted or passed on to ·others. ,
5. Pro~ressive tax. _It is b~sed upon one's ability to pay. The rate of income
. tax mcreases as the tax base increases. ·

346
I coME TAX SYSTE~S
1) Schedular Tax System vs. Global Tax System
. . .

~
"_Sche?ular Syste"!", the various types/items of inco'ffie
Under .
(compensation, bus!nesslprofess,ona/ income) ·are classified accordingly
and are accorded different tax treatments in accordance with schedules
characterized by graduated tax rates. Si~ce these types of income are
treated separately, the allowable deductions shall likewise vary. for each
type of income. · On the other hand, all income received by. a taxpayer
under the ''Global Tax System·" are grouped together, _with.out any
distinction as to the type -or nature of the income, and ·after deducting
therefrom expense.s and .other allowable deductions, are subjected to tax
at a fixed rate. ·. ,T he distinctions of the two .income tax systems are
summarizeq as foll.ows: ·

SCHEDULAR GLOBAL
Tax Treatment: ■·
Income tax rules varies · ■ Uniform tax
and made to depend on treatment or rules
the kind or calegory of
taxable income of the
taxpayer •
(Tan vs. del ~osari_o)
Chara'cteristics: • Does not "generally'
1. Classification • Categorizes·or classifies
_
categorize or classify
of income income
_
income

■ Imposes uniform tax

• Imposes different tax
2. Tax rates rates
treatment and rates
• NRFC, NRA-NETS
Individual taxpayers • l
3. Applicability •
· exam le . · T ·nes .
Approach used in the_p~, ~PP~ls and . lobal i.e., .cor or~tions .
Partl scheduler i.e. mdividu

2 . N t income taxation ·be characterized under

·
) Gross income taxa tion vs. ef the Ph/IP t ation and Net ·ncome
·1· pines may 1
The income tax syste~ie Gross inco~~nc,:,Xme for tax purposes are
two general categories, mponefltS of grCos de as amended.
taxation The different ~o of the Tax O '
enumer~ted under Section 32

347
 TABLE 7-2: Gross Income Taxation vs. Net Income Taxation
Gross income t~xation Net income taxation
•
----
Allows deductions/ exemption
.. Deductions • No deductions or ► Example: s
and exemptions allo~ed
Returnable income
Exemptions ► Example:
Income subject to final
taxes
Tax Base • Gross income ■ Net income
Applicability ■ NRA-NETB ■ Individual taxpayers except
■ Nonresident corporations, NRANET
■ Corporate taxpayers except
nonresident forei n co · orations
Advantages • Minimizes source of graft • Just, fair and reasonable
and corruption due to • Equitable relief (deductions and
minimization of margin of exemptions) to taxpayers
discretion exercised by • More revenue to the government
revenue district officers • Minimizes tax evasion (subject
• Simplifies tax system to counterchecking by the BIR)

BASIC FEATURES OF PHILIPPINE INCOME TAXATION

·1) It has adopted a comprehensive tax situs by using the nationality,

residence, and source rules. This makes citizens and resident aliens
taxable on their income deriveo from air sources while non-resident aliens
are taxed only on their income derived from within the Philippines.
.Domestic corporations ar~ also taxed on universal income while foreign
corporations are taxed only on income from within.

2) The individual income tax system is mainly progressive in nature in that

it provides a graduated rates of income tax. Corporations in general are
taxed at a flat rate of either 20%, or 25% under the CREATE Act.

3) It has retained more scheduler than global features wi,th respect to

individual taxpayers but has maintained a more global treatment on
corporations.

348
s1rus (SO':'RCE/~LACE) OF INCOME
Gross income ·m ay be derived . .
.,. • ent,re/y f
within the Ph 11ppmes, entirely from so ro~ sources
Philippines, or from sources Part/ .u~c~s without the
without the Philippines. For in Y within · and . partly The
"source" refers to the activity, or P~~rne tax purposes, general rul_e is
gave rise or. produced the income ierty, or labor that that the .taxing
th e origin of the .income · "Situs'; means ource, therefore, is power cannot
the pl f . go beyond _the
taxati?n. of t~e income or the count whic~ce o
·urisd1ct1on
j t~ impose the tax (CIR v Mry b . has . territorial limits
. • aru em Corp) of the taxing
The State w h ere th e su bJect to be taxed· ha •t ·
s a s1 us may authority
rightfully levy and collect the tax. The situs is nee -
. h h . essan 1y
in th_e_ Stat e w h IC _as ~~risdiction or which exercises
dominion over the subject m question.

Kno~ledge of the "situs" of a particular income is vital in determining the

taxable income as some taxpayers are taxable on their income from all
sources (income within and without such as in the case of resident citizens
and domestic corporations) while others are taxable only on their income from
sources within the Philippines only. Knowledge of "situs" also avoids a ·
taxpayer's risk of failing to declare income which are taxable in the Philippines
and likewise ensure that only income taxable in the Philippines is assessed by
the regulatory bodies, specifically the Bureau of Internal Revenue (BIR).
Factors affecting Situs of income-are as follows:
• Residence or domicile of the ta~payer
• Nationality
■ Source of income

RULES in determining the "situs" of income:

. . ~

1. Interest_ . . f s to income derived

• t
f rom ·meres t on b on ds,
Interest mcom~ ~e er t-bearing ·obligations of residents, corporate or
notes or other 1r:, eres . of income is the residenc.e of the
otherwise. The test of source
debtor.

2. Income from servi~es · to compensation for la~or or personal.

Income from . services refers "t f source of income 1s the place or
services performed. T~e tes do d . Wheri services are performed .
performani::e of the ~~rv1_ce rennre artly without the Philip~ines, the
partly within the Ph.1h ppme~:
allocation should be based .
"tin!"
rendered within and without the

Phflippfnes cqrnputed ~s follows.

349
 ,No. of days of performance in RP .
-N-.-1:!.,~daiy~s~o,~p~ern~o~rm~a~n~ce~in~R~P~&~o~uYcts-;;;,dkle~ x Compensation
0 0
of RP received
I

3. Rentals and Royalties .. · .

The test of source of income 1s th~ location of th~ property or place
where the intangible is used. Rentals a~d royal!ies refer to rentals
and royalties from property or from any mterest m su~h property,
including renta.ls and royalties for: ·
' . . .
a. The u~e of or the right or privilege to use in the Philippines any
copyright, patent, design or model, plan, secr~t formula or
process, goodwill, tradef!lark, ·trade brand or o~her like property or
right;

b. The use of, or the. right to use in the Philippines any industrial,
commercial or.scientific equipment;

c. The supply of scientific, technical, industrial or commercial

knowledge or information;

d. The supply of any assistance that is ancillary and subsidiary to,

and is furnished as a means of enabling the ap.plication or
enjoyment of, any such property or right as is -mentioned in
paragraph (a), any such equipment as is mentioned in paragraph
·.(b) or any such knowledge or' information as is mentioned in
paragraph (c);

e. The supply of services by a nonreside~t person or his employee

in connection with the use of property or rights belonging to, or
the installation or oper~tion o_
f any brand, machinery or other
apparatus purchased from such nonresident person: .

f. Technical advice, assistance or services rendered in connection

~ith t~chnical mana~ement or administration of any s~ientific'.
industrial or commercial undertaking, venture, project or scheme,
and the .use of or the right to use:
• Motion picture films; · .
• Films .or video tapes for use in connection with television;
and
• Tapes for use in connection with radio broadcasting.

350
4. Gain onts~fe of rea/fproperty. 9rt¾s l ltCtJl!t,,b
O
The tes source _o inoorne•is the location of the real property.
5 Gain on ·sale of persona/ property.
· The test of source of incorne is the
"place of sale" except safe of shares of
stocks of a domestic corporation. Gain from the sale of
Gains, pi'ofits and incorne derived frorn shares of stock in a
the purcha,se of personal property within domestic corporation
and its sale without the Philippines, or . shall be treated as
from the purchase of persorial property derived entirely from
withciut and its sale within the sources within th e
Philippines shall be treated as derived Philippin.es regardle~s
entirely form sources Within the country of where . the said
in which it is sold. ·shares are sold.

Dividend Income . . . rel income within or purely

6. ·.Dividend income may ?.e
c_ons1deredrt~s
. me without the Philippines or pa Y , -~~o;e within and without.
tnco following rule~ sha II be ~ bserved..·
The .
.,
. . · of Dividend·Income
SOU.RCE OF DIVIDEND
FROM o·omestic cor or?tion Income 1s
FROM Foreign corporation
'

• Nonre~ident foreig·n Corporation ■

Foreign-sourced divid~:Mc 62-
(BASIS: RR 5-2021 an
2021)

• Based on the ratio . of the Gross

f ·gn corporation
GI) 0 f the ore,
Income ( . ears prior to
for the precedm_g. 3 ynds derived from
declaration of d1v1de
Philippine sources.
If Ratio is: is treated as entirely
Ratio: · x Dividend ■ < 50%: Income es outside of the
GI-Phils . . derived from sourc
Gf..world Philippines __ . derived entirely
• ~ 50%: lncom~~\ the Philippines
from sources WI ' .
RMC 62-2021 . -

351
7. Mining · . .
The test of source of incom~ is the place where mine rs located

8. Farming
The test of source of income is the place wh ere fa rm is located

9. Manufacturing Business
Source of Income
• Produced and sold within Within -
• Produced and sold without Without
• Prqduced ih whole/part within and Partly within and tiith
sold without
• Produced in whole/part without
and sold within

The ter·m "produced" includes created, fabricated, manufactured

extracted, processed, cured or aged [(Sec.42(F) of the Tax Cod~ a
amended]. '

352
 UL,IPLE CHOICE. Choose the I ft · ·
0
M income, for tax purposes: · e er '-the correct answer
1· 1. Means all income from h . ·
· 'fl II w
spec, ica Y excluded und atever so urce (legal or illegal), unless
th
11. Meaps all wealth Which tier ? Tax Code.
of capital. · ows into the taxpa'yer other than return
111. Is recognized in the ye ·t. .
1v. Refer to the amount ot%~~! actua~ly or constructively received.
within a specified time wh tt
coming to a person or corporat~on
or profits from investm'ent e er as payment of services, interest,
a. I, II and Ill only ·
b. 1·and IV only c. I, II, Ill and .IV
d. None of the above
2. The sources from which income is derived -
a. Labor
b. The use of. capital
c. Profits derived from sale or exchange of capital assets
d. All of the above . · ·

3. The sources from which income is derived

A. B. C. ' D.
Labor True True True · False
Gifts and inheritance True ·False False False
Use of capital True True False Fafse

4. Which of the followin~l is a characteristic of income? I

A. B. C. D.
Increase in taxpayer's wealth True Trw~ True False
Realization of gain True False Fals·e False
Return on taxpayer's wealth True True False False

5. Which of the following is a requisite for an income to be taxable?

a. There must be gain
b. The gain must be realized or received
c. The gain must not be excluded by l~w fro~ taxation
1

d. All of the above

6- Which of the following is not an income for income tax purposes?

a. Gain derived from lapor
b. Return on capital
c. Excess of selling price over cost of assets sold
d. Gift received

353 II/" ' 1'

 qerasa
. - ldr~ilHv
· ttf, nrtJss h 'f ,
. ome for income tax purposes?
- . · not an ,nc
7. Which of the followmfglo'asns receivable d d
a. Conection o or services ren ere ·
b condonation of deb_t i r the cost of an asset sold
c.· Excess of selling pnce ove
d. None of the above .
haracteristic of income?
8. Wh!ch of the following is not .~ ~ealth .
a · Increase in taxpayer . · · ·
· b: Realization or rece!pt of gal~- d
c. . Earnings constructively receive .
, d. Return of taxpayer's weaf th ·

9. Which is n·ot a valid definition of inco~te?,. ,·nvested , . .

a Income is the return from cap, a . .· . .
b. Income is a fund at one distinct point ~f time. ,
c.· Income means aH wealth whic~ flows into the taxpayer oth~r than
a mere return of capital· . .
d. . Income means cash or its equivalent unless otherwise specified.
' .
1 o. Which of the following is co·nsidered or construed as _an example of
"constructive receipf'? ·
· · a. Retirement benefits, pensi'ons, grqtuities
b. Fees paid to a public official . · ,·
c. Interest coupons that have·matured and are payable b'ut have not
been cashed . . ,, ·
d. Deposits for rentals to answer for dam 9 ges, restricted as to use

11·. Constructive receipt occurs when the mqney consideration or its

equivalent is placed at the control of the person who rendered the service
I
without. restrictions by the paypr. The following are examples of
• •
constructive receipts, except: -
a. A _ security deposit t9 insure the faithful performance of certain
obligations of the lessee to the lessor. ·
b. Deposit in banks which are made available to the seller of
services without' restrictions· ·
. '
c. issuance by the ,debtor of a notice to offset any debt or obligation
~nd acceptant~e thereof by the seller as payment for services
re_ndered;
d. Transfer of the amounts retained by the payor to the account of
the contractor.

12. There is constr_

uctive receipt of income wh .. .
a. Payment is credited to payeei's ac:i~nt
354
 . . -~ ¼es -Iller~- . . ·
b. Payment is set aside i _ww.,, t(f, 9rt1ss /llCtJhle,, .
so the payee may d or the Payee ·o . .
have drawn .upon it ~a~ upon it at a~y ~i~ erwise mad~ available
th
withdraw had bee · · _ur_
ing the taxable · e, _or s~ the .payee cpuld
c. Both "a" and "b'' n given Without subst~~~-r 1'f1_no_t1c~ of intent~o,:1 to
d • Nel.ther "a " nor
·
"b"
·- · ta 1m1tat1ons.

13_ When different

. d
types of inco ·
'b m.e_are sub· t
· ·
t
sys em is escn ed as ., . . Jee ed to common tax rate the tax
- a. Global ,tax system\- '
b. _S?heduler tax system
c. Final tax system
d. Mi~ed income tax system

14. Situs of t8xation on income from · 1 Of

a. Pl_a ce of the seller ·. sa e property purchased. ·
b. Place of sale
c. Place of buyer •
, d. As determined by the Commissioner

15. Which o! the foll?wing test of source of income is i.ncor~ect?

· a. Interest income - residence of the debtor
b. Income frorn services - place ·o f performance
c. · Royalties - place of use of intangible
d. Gain on sal~ -of real property - place of sale.

16. Situs of taxation on incon:ie from sale shares of a domestic torpora.tion.

a. Always ·treated as income derived from Within the Philippi_nes
b. Always treated as income derived from without the Philippines·
c. May be treated as income within or without the Phi'lippines depending
-on the place of sale. . • . · .
d. May be treated as· i_ncome Within or without ~he Phil_ip_pines depending
where the shares are kept

17'. Situs of taxation on income from sale shares ?f ~ foreign ?or~oration.

a. Always treated as income derived·from w~thm the Ptultppm_es
b. Always treated as income derived fro~ without the_f'.1hll_1ppines .
· .t t d , ·ncome within or without the .Ph11tppmes depending
c. May be rea e as 1 , . . --

on the place of sal~ . . _ · 'thout the Philippines depending

d. May be treated as income within or WI _ .
Where the shares are kept . '

355 I ••
 qerasa -lnfr~U!-lt,, t(Jv {jross 1,
. . · from a promissory note issued to h'
t
18. Pedro earned intereS _nco~e U s A Assuming that Pedro is a irn by
1

Juan ' a resident of CaJ1fornia,

• ·
· · ·
t · ome Is
. ·
nonresident citizen, the interes inc
a. Subjeqt to basic income tax
b. Subject to final tax r I

c. Not subject to income tax d rtl . b' t t0 f . 1

d. Partly subject to scheduler an pa Y su Jee . . ma tax

19. It is important to know the source of income for tax purposes (i.e., frorn
within or without the Philipp(nes) because: . · ·
a. . Some individual and corporate taxpayers are taxed on their
worldwide income while others are taxable only upon in.come from
sources within the Philippine.s
b. The Philippines imposes income tax only on income from sources
within
c. Some individual taxpayers are citizens while others are aliens
d. Export sales are not subject to income tax

20. Situ~, for taxation purposes will depend upon various factors, including
- I. The nature of the tax and the subject matter thereof.
11. The possible protection and benefit that may c;1ccrue both
to the government and t9 the taxpayer.
111. Domicile or residence
IV. Citizenship
V. Source of income
a. I and V only C. I, Ill, IV and V
b. I, Ill and IV only d. I, II, Ill, IV ~nd V

21. Which of the follo~ing is NOT true about source of income?

a. In case 0 ~ income derived froi:n labor, source is the place where
the labor Is performed. • ·
~- In case of inc~me_derived from use ~f capital source is the place
where the capital Is employed. · . ' -
c. In case _of profits from the sale or exchange of capital assets,
source Is .the place or transaction • , ·
d. . None of the above. occurs.
. '

22. All of the following are correct except O . • . . ? ·

· a. The source of interest. · _ne. Which 1s the exception.
resides. income is the country where the debtor
b. The source of interest in . · . .
resides. . come is the country where the creditor
· c. Rents or royalties ·are co ;d . re
the property is located. ' ns.1 ered c:jerived from the country whe

356
 ~cise,, ~7nb-~- . .
- . - ltHu ttJ-, ,;ro-ss / IUXJ-lrle,
d. Income from person · . ':/'
t a 1service . .
coun y Where the services w s is considered derived from .the
3; ere rendered.
23 statement 1': A gain from sale of ·h ·
· be considered derived frOrn the P~iliar~s of a domestic corporation shall
shares were sold. · PPHJes regardless of where the
statem~nt 2: A g~in from a sale of s · . .
be considered denved from the c .~ares of a foreign corporation shall
created or organized. . . oun ry where the corporation. was ·
a. Statements 1 -and 2 are fals
b. Statement 1 !s true but stateem~nt 2 is false
c. Statement 1 ts false but statement 2 is true
d. Statements 1 and 2 are true

24. W~i~h ?f the fo_llowing is not an income derived from sources within the ·
Philippines for income tax purposes? . .
a. Interests derived from bonds issued· by a. foreign corporation ·
b. Interest on nptes or other interest-bearing obligations of residents
c. J3oth "a" and "b" · ·
d. Neither "a" nor "b"

25. A cash dividend of P100,000 received by a taxpayer in 2021 from a

resident foreign corporation whose. income from Philippine sources was
40% of its total income is
Statem·ent 1: partly taxable if he is a resident citizen.
Statement 2: Partly taxable if he is .a non-resident alien
a.. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is fals·e ·but stateme,nt -2 is tru~
d. Statem~nts 1 and 2 are true

26. Using .the above data, which of the following is correct? ~he cash
dividend is · ·d t · 'f
a. - Exempt from income -tax if _he is a _res1 en c1 izen.
b Partly taxabl'e if he is a resident alien.._ . .
· . f 'f h is a nonresident c1t1zen.
c. Taxable in u 11. 1 / e t 1·the is a· nonresident alien.
d. Exempt from income ax
· _ · . . company touching Philippine. and
27. A taxpayer is employed by a s~ip~ng gross payment for his services
foreign ports. In 2020, he receive ~he vessels on board of which he
rendered of P300,000. In that ye~~~ Philippine ports of four months. His
rendered services had a tota.1st8 Y .
·1· ·nes was.
gross income from the Phi 1ppi

357
 £eret.5a -ldr~uJ/t,tlJ, 9r¾s
c: P150,000
1,
a. P300,000 ·d. P100,000
b. PO .

28. Assume the following: rty purchased in the P4oo, 000 .

· Gain on sale of personal prope .
Philippines and sol~ in Hongkong I services in the
Compensation received for pe_rsona . . · . 200,000
Philippines · . · · .
Rent income from real property m Malaysia 300,00 0
, Gain from sale in the .Philippines of shares of a 100,000
foreign corporation

Deductions identified with:

Philippine income 80,00Q
Foreign income .. .. 120,000
Deductions unidentified with any particular income · 30,000

The· Philippine net income is

a. _P220,000 c. ·P190,000
b. P211,000 d. P111,000

29. Pedro, an operator of illegal horse betting business has ttie following data
during 2021 taxable year:
. Receipts from illegal bets -P600,000
Rental expenses for the space where bets are 120,000 ·
received, gross of 5% withholding tax
Salaries of assistants 100,000
Bribe money to obtain protection from arrest and 50,000
· prosecution ·

How much is the taxable income of Pedro?

a. P380,000 c. P1 B0;000·
b. P330,poo d. P150,000

Use the f~llowin~ data for the next two (2) questions:
A res1den~ a/Jen had the following in 2021:
Gro~s income, Philippines P2 ,000,000
Business expenses 1,200,000
Dividends received:
From dom~stic ?orporation (net)
601/o of ,ts income came from th Ph·1· . 90000
· 4001c f ·t • e , 1pp1nes 72,00
o o ' s income came from the Philippines.

358
 . .

Eerciaes -/llfr.'tJtltuL~
/ ' ,, L
LV--
r; 7
J nJ:ss / ilCtJtJ'l&
From resident foreign corp f
60% of its income ~~a ion (gross) ; ..
40% of its "income me from the Philippines
. ., came fro.m the Philippines 50,000
40,000
30 _The taxpayer's.taxable income ·is
a. P830,000
.
, .'
b. P850,000 · C. P796,000 ·
. , d. P800,000
31 _The final withholding taxes qn dividends a'mount to
a. P16,200 . c. P25,200
b. P18,000 d. P26,000 ·

Use the followin? data for the next two (21 questions: . .· .
Hidilyn Corporation, ~ _do~estic corporation had the following data in 2021:
Gross Income, Philippines · P10,000,000
Allowable itemized deductions/expenses 4,000,000
Dividend income FROM:
a) Diaz Corporation, a domestic corporation . 1·,000,000
b) To~yo Corpo.ra~ion, · a resident foreign . 900,000
corporation, 80% of its gross income were
derived from the Philippines
c) Olympiad Corporation, a. resident foreign 800,000
corporation, 50% of . its gross income were .
derived from the Philippines
d) Nonresident. foreign corporation, 25%. of its gross 400,000
income were derived from the Philippines

32. The taxable income in 2021. is:

·a. P6,400,000 c. P?,700,000
b. P?,500,000 _ d. PB,200,000
. .

·· t·
·s a resident foreign corporation, how much
33. Assume Hidil~n Corp~ra ion \ , . . . ..
is the taxable income in 2021 · p7 700 000
a. µ5,400,000 ~: PB'.200',ooo
b. P ?,500 ;000
· · . ·t t (2) questions: ·
~
L
the following data for the nex wo f n has earned the following income
• corpora 10 , ·
enovo, Inc ., a resident foreign . .. . .
during 2021 taxable year: .
Dividend income·from. ·,dent corporation PS00,000
I • ft a non-res t· 400,000
M1croso , . , . t foreign corpora 10n
Intel, a res1den. . r oration 300000
\ IBM, a domestic co P
l
359
 Interest income from:
Current account, BOO
. deposit , ABN-AMRO ba~k, UK
Savings .
US dollar deposit (FCDU)- BPI M_akat1 .
Royalty income from various domestic corporations

Additional information: .
• The ratio of Microsoft's gross income in the Philippines over
worldwide income for the past three years was 40%.
■ The ratio of Intel's gross income in the Philippines over World v·d
1
income for the past three years was 60%. . e
■ The ratio of -IBM's gross income in the Philippines over worldwid
· income for the past three years was 80%. e

34. How much is the total income tax expense of Lenovo in 2021?
a. P200,000 c. P320,000
b. P400,000 d. P360,000

35. Assuming Lenqvo is a domestic corporation (assume classified as

' MSME), how much is its total i'ncome tax -expense of in 2021?
a. P300, 000 c. PS00, 000
b. P400,000 . d. P600,000

360