Under the National Internal Revenue Code of 1997 (NIRC), as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and further supplemented by the Ease of Paying Taxes Act (Republic Act No. 11976), Income Tax is a primary category of taxation that the Bureau of Internal Revenue (BIR) imposes on both individuals and corporate taxpayers. Below, I will dissect the relevant provisions under the TRAIN Law and other pertinent amendments affecting the definition of "income" in the Philippine tax system.

Definition of Income

Income in tax law is a broad term covering various sources and forms of financial gain received by taxpayers, whether individuals or corporations, subject to Philippine income tax. Under Philippine tax law, income is generally understood as:

An accession to wealth;
Gains derived from capital, labor, or both combined;
Exclusions and inclusions within specific statutory definitions.

1. Accession to Wealth

Income represents an increase in net worth or wealth, distinct from mere recovery of capital. Under the doctrine of "realization," income is considered realized only upon the occurrence of an event that brings an economic benefit to the taxpayer.

2. Sources of Income: Capital and Labor

The source of income may stem from:

Capital: Any return on investments, assets, or property; and
Labor: Any form of compensation or earnings for services rendered.

This comprehensive definition is essential in understanding taxable and non-taxable sources, particularly distinguishing between capital recovery and gains derived from capital.

Types of Income Defined Under the NIRC and TRAIN Law

The TRAIN Law has updated tax definitions, specifically widening the scope and tax rate structure applicable to different income types. Categories include:

Compensation Income: Earned from services rendered by an employee under an employer-employee relationship. The TRAIN law introduced a more progressive tax rate on compensation income for individuals, adjusting brackets and reducing rates for lower- and middle-income earners.
Business or Professional Income: Derived from any trade, business, or profession engaged by the taxpayer. The tax law treats this income distinctly, particularly under self-employed or professional income, where simplified tax filing and optional flat tax rates may apply under certain conditions.
Passive Income: Includes interest, dividends, royalties, prizes, and other earnings derived from assets or investments rather than labor. The TRAIN Law modified the tax rates on passive income, imposing final withholding tax rates on certain types, such as 20% on interest and dividends (for individuals).
Capital Gains: Gains realized from the sale, exchange, or disposition of capital assets. The TRAIN law notably changed the tax treatment for capital gains on real property (imposing a flat 6% rate) and on the sale of shares in a domestic corporation (capital gains tax rates and exemptions clarified).

Key Amendments Under the TRAIN Law Affecting the Definition of Income

The TRAIN law amended the NIRC to redefine and adjust the tax treatment of various income sources, with significant changes that include:

Thresholds and Exemptions:
- TRAIN increased the threshold for personal income tax exemption, exempting income below PHP 250,000 from taxation. This adjustment impacts the understanding of what constitutes taxable income.
Simplification of Tax Rates and Brackets:
- Progressive Tax Rates: TRAIN introduced progressive rates to encourage compliance among individuals in the low- to mid-income brackets.
- Capital Gains and Passive Income Adjustments: TRAIN introduced uniform tax rates for capital gains on real properties (6%) and clarified passive income tax rates, thereby defining taxable income categories more distinctly.

Ease of Paying Taxes Act (R.A. No. 11976) and Its Effect on Income Definition

The Ease of Paying Taxes Act introduces reforms aimed at simplifying tax compliance for taxpayers. Although it does not redefine "income" directly, it impacts its administrative framework:

Improved Taxpayer Classification: Under the Ease of Paying Taxes Act, taxpayers are classified by size, which includes criteria based on income. This classification streamlines compliance obligations by categorizing taxpayers into Large, Medium, and Small, thus indirectly affecting how income sources are reported.
Simplified Compliance Procedures: By reducing filing requirements and simplifying procedures for self-employed individuals and professionals, R.A. No. 11976 promotes ease of reporting various income types, thereby influencing the procedural understanding of income.

Case Law and Principles in Income Taxation

The judiciary has elaborated on "income" definitions through various landmark cases:

Commissioner of Internal Revenue v. Manning: Establishes that income is not merely cash or property received but an economic gain realized from a clear event.
Conwi v. Commissioner of Internal Revenue: Reinforces that income includes compensations, business profits, gains from investments, and other accesses to wealth.
Madrigal & Co. v. Rafferty: An early case that clarified income as derived from labor or capital, integral to determining the scope of taxable income under Philippine law.

Income Exemptions

Certain types of income are exempt from taxation under specific conditions. Examples include:

Overseas Filipino Workers (OFWs): Exempt from income tax on income earned abroad.
Minimum Wage Earners: Exempt under the TRAIN law.
Gifts, Bequests, and Devises: Excluded from income, as these are generally covered under different tax categories, such as donor’s or estate taxes.

Conclusion

The comprehensive definition of "income" under the NIRC, as amended by the TRAIN Law and supplemented by the Ease of Paying Taxes Act, reflects the evolution of Philippine tax laws towards simplification, fairness, and progressivity. The term "income" encompasses various forms of economic benefits, whether derived from capital, labor, or both, with adjustments in the tax structure to cater to specific taxpayer classifications and the ease of compliance.

The intricate changes introduced by these laws underscore the importance of a meticulous understanding of income for compliance and effective tax planning, reinforcing the core principles of income taxation in the Philippines.