4 Sources of Income

SOURCES OF
INCOME
WHAT IS AN
INCOME?
THE CONCEPT OF INCOME
▪ INCOME - “best measure of taxpayers’ ability to pay tax”
▪ Income is an excellent object of taxation in the allocation of government costs.
▪ The tax concept of income is simply referred to as “gross income” under the NIRC.
▪ A taxable item of income is referred to as an “item of gross income” or “inclusion in gross
income”.
SITUS OF INCOME VS. SOURCE OF
INCOME
▪ Situs of income- place of taxation of income
▪ Source of income- activity or property that produces the income
INCOME SITUS RULES OTHER INCOME SITUS RULES

Types of Situs
income Gain on sale of properties
1. Personal property
Domestic securities- presumed earned within the Philippines
1. Interest Debtor’s residence Other personal properties- earned in the place where the property is sold
income
2. Real property- earned where the property is located
2. Royalties Where the intangible is Dividend income from:
employed 1. Domestic corporation- presumed earned within
2. Foreign corporation- depends on predominance test (RFC)
3. Rent Location of the property - earned abroad (NRFC)
income Merchandising income- earned where the property is sold
4. Service Place where the service is Manufacturing income- earned where the goods aremanufactured and sold
income rendered
INCOME TAXATION SCHEMES
▪ Final Income Taxation
Note:
▪ Capital Gains Taxation The tax schemes are
mutually exclusive.
▪ Regular Income Taxation
Item of gross income
Taxable to anyone of
Final Income Capital Gains Regular

Taxation Taxation Income Taxation
WHAT ARE THE
SOURCES OF INCOME
SUBJECT TO THESE TAX
SCHEMES?
FINAL INCOME TAXATION
▪ Characterized by final taxes wherein full taxes are withheld by the income payor at source
▪ Recipient income taxpayer receives the income net of taxes
Payor remits the tax to the government
▪ Final taxation is applicable only on certain passive income listed by law.
earned with very minimal or even without active involvement of the taxpayer in the earning process
SOURCES OF INCOME…
▪ Passive income subject to final tax
1) Interest or yield from bank deposits or deposit substitutes
2) Domestic dividends, in general
▪ Cash dividends
▪ Property dividends
▪ Scrip dividends
3) Dividend income from a Real Estate Investment Trust
4) Share in the net income of a business partnership, taxable associations, joint ventures,
joint accounts, or co-ownership
5) Royalties, in general
6) Prizes exceeding P10,000
7) Winnings
8) Informer’s tax reward
9) Interest income on tax-free corporate covenant bonds
CAPITAL GAINS TAXATION
▪ Imposed on the gain realized on the sale, exchange and other dispositions of certain capital
assets (domestic stocks and real property)
assets not used in business, trade, or profession
▪ NOT ALL capital gains are subject to capital gains tax (most of them are subject to regular
income tax)
▪ Capital gains subject to capital gains tax
1) Capital gains on the sale of domestic stocks sold directly to buyer

✔ Preferred stocks
✔ Common stocks
✔ Stock rights
✔ Stock options
✔ Stock warrants
✔ Unit of participation in any association, recreation or amusement club (golf, polo or similar clubs)
Notes:
⮚ The capital gains tax covers not only sales of domestic stocks for cash but also exchange of domestic stocks in kind
and other dispositions such as: foreclosure of property in settlement of debt, pacto de retro sales, conditional sales,
and voluntary buy back of shares by the issuing corporation.
⮚ The sale of domestic stocks classified as capital assets through the PSE is not subject to capital gains tax. It is subject
to stock transaction tax of 60% of 1% of the selling price effective Jan. 1, 2018.
2) Capital gains on the sale or real properties not used in business

Gains on dealings on capital assets Tax Rates
❖ Gain on the sale, exchange, and other disposition of 15% capital gains
domestic stocks directly to buyer tax
❖ Sale, exchange, and other disposition of real property in 6% capital gains

the Philippines tax
❖ Gains from other capital assets Regular income

tax
REGULAR INCOME TAXATION
▪ The regular income tax is the general rule in income taxation and covers all other income
such as:
1) ACTIVE INCOME
- arises from transactions requiring a considerable degree of effort or
undertaking from the taxpayer
2) OTHER INCOME
✔Gains from dealings in properties, not subject to capital gains tax
✔ Other passive income not subject to final tax
▪ Items of gross income subject to regular tax
Gross income includes, but is not limited to the following items:
1) Compensation for services in whatever form paid
2) Gross income from the conduct of trade, business, or exercise of a profession
3) Gains derived from dealings in properties
4) Interest
5) Rents
6) Royalties
7) Dividends
8) Annuities
9) Prizes and winnings
10)Pensions
11)Partners’ distributive share from the net income of general professional
partnership
REFERENCE
▪ INCOME TAXATION Laws, Principles and Applications OBE Edition by Rex B.
Banggawan, CPA, MBA
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4 Sources of Income

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4 Sources of Income

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SOURCES OF

INCOME SITUS RULES OTHER INCOME SITUS RULES

Final Income Capital Gains Regular

1) Capital gains on the sale of domestic stocks sold directly to buyer

2) Capital gains on the sale or real properties not used in business

❖ Sale, exchange, and other disposition of real property in 6% capital gains

❖ Gains from other capital assets Regular income

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