INTRODUCTION TO INCOME
TAXATION
PEREZ,
EDZEL S.
VIZCARRA,
IMEE
ANTONETTE
PAPA,
BERMALYN
DA F.
PADUNAN,
MARJORIE
D.
BULACAN,
GABRIEL G.
ESCUDERO,
MICAIRAH
D.
VISPO,
JAMAICA
MAE P.
MARTY,
EPHREEN
GRACE R.
ELEMEN,
JOMELY P.
TALPLACID
O, JENINA
NHELLE D.
SONGCUAN,
ALMIRA P.
MANIQUIZ,
MARY
GRACE L.
GONZALES,
GINN ROSE
J.
ANGELES,
MARIELLE
ANN Q.
ANCHETA,
RONELYNN
FRANZ V.
Seat Plan – Income taxation
ROSALES,
DAN
GABRIEL D.
GALVEZ,
MARY JANE
A.
NIEVO,
LIMUEL F.
Learning Objectives
The concept of gross income
2. Types of income taxpayers
3. The general rules in income taxation
4. The income tax situs rules
1.
Learning Objective 1
The concept of gross income
Why is income subject to tax?
What is income for taxation purposes?
 the tax concept of income is simply referred to as
“gross income”
 gross income simply means taxable income
(layman’s term)
 taxable income refer to certain items of gross income
less deductions and personal exemptions allowable
by law (NIRC)
Item
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Winnings from gambling
Income from swindling
Indemnity for moral damages
Harvested fruits from an orchard
Compensation Income
Interest Income
Amount received by an insured in excess of
insurance premium paid
Proceeds of life insurance received by the
heirs of the insured
Gain on sale of goods by the home office to
its branch
Gain on sale of goods and services between
relatives
Gain on sale of goods by a parent
corporation to a subsidiaru corporation
Appreciation in the value of land
Birth of animal offspring
Income of a registed Barangay MicroBusiness Enterprise
Cancellation of debt out of gratuity of the
creditor
Matured interest from a coupon bonds
Receipt of bank loan
Salaries of a minimum wage earner
PCSO or lotto winnings
Benefits from GSIS, SSS, Pag-Ibig or
Philhealth
Discovery of hidden treasure
TAXABLE
EXEMPT
Elements of gross income
 It is a
return on capital that increases net worth
 It is a realized benefit
 It is not exempted by law, contract or treaty
Elements of gross income
 It is a
return on capital that increases net worth
Elements of gross income
Capital deemed with infinite value (return of capital)
1.
2.
3.
Life
Health
Human Reputations
Elements of gross income
Life
Under NIRC, the proceeds of life insurance policies paid to the heirs or
beneficiaries upon death of the insured, whether in single sum or
otherwise, are exempt from income tax.
But the following are taxable return on capital from insurance policies.
1. Any excess amount, received over premiums paid by the insured
upon surrender or maturity of the policy.
2. Gain realized by the insured from the assignment or sale of his
insurance policy.
3. Any excess of the proceeds received over the acquisition costs and
premium payments by an assignee of a life insurance policy.
Recovery of lost capital vs. Recovery of lost profits
Return of capital
NOT TAXABLE
Return on capital
TAXABLE
1. Recovery of lost profits through insurance, indemnity
contracts or legal suits.
2. Proceeds of crop or livestock insurance
3. Guarantee payments
4. Indemnity received from patent infringement suit
Return of capital and return on capital
Consideration
1
2
3
4
5
1,000,000.00
500,000.00
300,000.00
600,000.00
1,200,000.00
For the loss of
Health
40,000 car
350,000 building
Income
Life
Return of Capital
Return on Capital
Consideration
1
2
3
4
5
1,000,000.00
500,000.00
300,000.00
600,000.00
1,200,000.00
For the loss of
Return of Capital
Return on Capital
Health
40,000 car
350,000 building
Income
Life
1,000,000.00
400,000.00
300,000.00
1,200,000.00
100,000.00
600,000.00
-
Elements of gross income
 It is a realized benefit
BENEFIT CONCEPT
– the term benefit means any form of advantage derived by the
taxpayer
- increase in the networth of the taxpayer (income,donation of
inheritance)
Not benefits (not taxable)
1. Receipt of Loan
2. Discovery of lost properties
3. Receipt of money or property to be held in trust, to be remitted to
other person
REALIZED CONCEPT
- “realized” means earned, meaning, there is a
degree of undertaking or sacrifice from the taxpayer
to be entitled of the benefit
Requisites:
1. There must be an exhange transaction
2. The transaction involves another entity
3. It increases the net worth of the recipient.
Exchange transactions
BILATERAL TRANSFER
UNILATERAL TRANSFER
 SALE
 SUCCESSION
 BARTER
 DONATION
- These are referred to as
- Also referred to as”gratuitous
“onerous transaction”
- Subject to income tax
- Called “exchanges”
transactions”
- Subject to transfer tax
- Referred to as “transfers”
Complex transactions
- partly gratuitous and partly onerous
- transfer for less than full and adequate consideration
- Subject to income and transfer tax
Income tax and transfer tax
TRANSACTIONS
1
2
3
4
5
6
Barter of properties
Sale of Goods
Rendering of Services
Donation of Properties
Transfer of properties from a decedent
to the heirs upon death
Transfer for less than full and adequate
consideration
INCOME TAX
TRANSFER TAX
1
2
3
4
5
6
TRANSACTIONS
INCOME TAX
Barter of properties
Sale of Goods
Rendering of Services
Donation of Properties
Transfer of properties from a decedent
to the heirs upon death
Transfer for less than full and adequate
consideration
X
X
X
TRANSFER TAX
X
X
X
X
Another entity
 Natural (living persons)
 Juridical (created by law)
Notes:
 The sales of a home office to its branch office are not taxable
because they pertain to one and the same entity
 The income between businesses of a proprietor should not be
taxed since proprietorship businesses are taxable upon the
same owner.
Benefits in the absence of
transfers – Not taxable
They are referred to as unrealized gains or holding gains
because they have not yet materialized in an exchange
transactions.
1. Increase in value of investments in equity or debt securities
2. Increase in value of real properties held
3. Increase in value of foreign currencies held or receivable
4. Decrease in value of foreign currency denominated debt by
virtue of favorable fluctuation in exchange rates
5. Increase in value of land due to the discovery of mineral
reserves
Elements of gross income
 It is not exempted by law, contract or treaty
The following are the items of income exempted by law from taxation,
hence, not considered items of gross income.
1.
Income of qualified employee trust fund
2.
Revenue of non-profit non-stock educational institution
3.
SSS,GSIS, Pag-IBIG or Philhealth benefits’
4.
Salaries and wages of minimum wage earners and qualified
senior citizen
5.
Regular Income of Micro-business Enterprises (BMEs)
6.
Income of foreign governments and foreign governmentowned and controlled corporations
7.
Income of international missions and organizations with
income tax immunity
Item
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
17
18
19
20
21
Winnings from gambling
Income from swindling
Indemnity for moral damages
Harvested fruits from an orchard
Compensation Income
Interest Income
Amount received by an insured in excess of
insurance premium paid
Proceeds of life insurance received by the
heirs of the insured
Gain on sale of goods by the home office to
its branch
Gain on sale of goods and services between
relatives
Gain on sale of goods by a parent
corporation to a subsidiaru corporation
Appreciation in the value of land
Birth of animal offspring
Income of a registed Barangay MicroBusiness Enterprise
Cancellation of debt out of gratuity of the
creditor
Cancellation of debt by the creditor in
exhange of services rendered by the debtor
Matured interest from a coupon bonds
Receipt of bank loan
Salaries of a minimum wage earner
PCSO or lotto winnings
Benefits from GSIS, SSS, Pag-Ibig or
Philhealth
Discovery of hidden treasure
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
17
18
19
20
21
Item
TAXABLE
Winnings from gambling
Income from swindling
Indemnity for moral damages
Harvested fruits from an orchard
Compensation Income
Interest Income
Amount received by an insured in excess of
insurance premium paid
Proceeds of life insurance received by the
heirs of the insured
Gain on sale of goods by the home office to
its branch
Gain on sale of goods and services between
relatives
Gain on sale of goods by a parent
corporation to a subsidiaru corporation
Appreciation in the value of land
Birth of animal offspring
Income of a registed Barangay MicroBusiness Enterprise
Cancellation of debt out of gratuity of the
creditor
Cancellation of debt by the creditor in
exhange of services rendered by the debtor
Matured interest from a coupon bonds
Receipt of bank loan
Salaries of a minimum wage earner
PCSO or lotto winnings
Benefits from GSIS, SSS, Pag-Ibig or
Philhealth
Discovery of hidden treasure
x
x
EXEMPT
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Types of income taxpayers
A.
Individuals
1. Citizen
a. Resident Citizen
b. Non-resident Citizen
2. Alien
a. Resident Alien
b. Non-resident alien
a. Engaged in trade or business
b. Not engaged in trade or
business
3. Taxable estates and trusts
B. Corporations
1. Domestic corporation
2. Foreign Corporation
a. Resident foreign corporation
b. Non-resident foreign corporation
INDIVIDUAL INCOME TAXPAYERS
Citizens (under Constitution)
a. Those who are citizens of the Philippines at the time of
adoption of the Constitution on February 2, 1987.
b. Those who are fathers and mothers are citizens of the
Philippines
c. Those born before January 17, 1973 of Filipino mothers
who elected Filipino Citizenzhip upon reaching the age of
majority
d. Those who are naturalized in accordance with law
Classification of citizens:
A.
RESIDENT CITIZEN – A Filipino Citizen residing in the
Philippines
A.
NON-RESIDENT CITIZEN includes a citizen
1. With a definite intention to reside abroad.
2. Who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for an
employment on a permanent basis
3. Who works and derives income from abroad and whose
employment thereat requires him to be physically present
abroad most of the time during the taxable year.
4. Who has been previously considered as non-resident
citizen and who arrives in the Philippines at anytime
during the taxable year to reside permanently in the
Philippines shall likewise be treated as non-resident
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:
Filipino Working in Philippine embassies or Philippine
consulate offficer are not considered non-resident citizens.
Alien
A.
RESIDENT ALIEN – an individual who is residing in the
Philippines but is not citizen thereof,such as:
1. An alien who lives in the Philippines without definite
intention as to his stay.
2. One who comes to the Philippines for a definite purpose
which in its nature would require an extended stay and to
that end makes his home temporarily in the Philippines,
although it may be his intention at all times to return his
domicile abroad;
B. NON-RESIDENT ALIEN –individuals who is not residing in the
Philippines and who is not a citizen therof
1. Non-resident aliens engaged in business (NRA-ETB) –
aliens who stayed in the Philippines for an aggregate period of
more than 180 days during the year
2. Non-resident aliens not engaged in business (NRA-NETB)
a. Aliens who come to the Philippines for a definite purpose which
in its nature may be promptly accomplished.
b. Aliens who shall come to the Philippines and stay therein for an
aggregate period of not more than 180 days during the year.
THE GENERAL CLASSIFICATION RULE FOR
INDIVIDUALS
Intention
1.
1.
2.
3.
4.
An alien is normally non-resident. An alien who come to the
Philippines with a tourist visa would still be classified as nonresident alien.
A citizen is normally resident. A citizen who would go abroad
under a tourist visa would still be considered a resident
citizen.
An alien who come to the Philippine with an immigration visa
would be reclassified as a resident alien upon his arrival.
A citizen who would go abroad with a two-year working visa
would be reclassified as a non-resident citizen upon his
departure.
THE GENERAL CLASSIFICATION RULE FOR
INDIVIDUALS
Length of Stay
2.
1.
2.
3.
4.
Citizens staying abroad for a period of at least 183 days are
considered non-resident citizen.
Aliens who stayed in the Philippines for more than 1 year as
of the end of the taxable year are considered resident alien.
Aliens who are staying in the Philippines for not more than 1
year but more than 180 days are deemed non-resident aliens
engaged in business.
Aliens who stayed in the Philippines for not more than 180
days are considered non-resident alien not engaged in trade
or business.
Taxable Estates and Trusts
1. ESTATE – refers to the properties, rigths and
obligations of a deceased person not extinguished by
his death.
Estates under judicial settlement are treated as individual
taxpayer. The estate is taxable on the income of the properties
left by the decedent.
Estates under extrajudicial settlement are exempt entities. The
income of the properties of the estate under extrajudicial
settlement is taxble to the heirs.
2. TRUST – a trust is an arrangement whereby one person
(grantor or trustor) transfers (i.e.donates) property to another
person (beneficiary), which will be held under the management
of a third party (trustee or fiduciary).
Irrevocable trusts
- treated in taxation as if it is an individual taxpayer
- The income of the property held in trust is taxable to the trust
Revocable trusts
- not taxable entities and are not considered as individual
taxpayer
- The income of the property held in trust is taxable to the
grantor not to the trust
Corporate Income Taxpayers
Corporation – include partnerships, no matter how created or
organized, joint stock companies, joint accounts, association,
or insurance companies, EXCEPT
1. general professional partnerships
2. 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 operating consortium agreement under a
service contract with the Government.
DOMESTIC CORPORATION – corporation organized in
accordance with Philippine laws.
FOREIGN CORPORATION-organized in a foreign law.
TYPES:
1. Resident foreign corporation (RFC)- a foreign
corporation which operates and conducts business in the
Philippines through a permanent establishment
2. Non-resident foreign corporation (NRFC) –a foreign
corporation which does not operate or conduct business in
the Philippines.
SPECIAL CORPORATION- special corporations are domestic
or foreign corporations which are subject to special tax rules
or preferential tax rates.
OTHER CORPORATE TAXPAYERS
1. PARTNERSHIP
Types of Partnership
a. General professional partnership (GPP)
b. Business partnership
2. JOINT VENTURE – is a business undertaking for a particular
purpose. It may be organized as a partnership or a corporation.
Types of Joint Venture
a. Exempt joint ventures – formed for the purpose of
undetaking construction projects or petroleum, coal, geothermal
and other energy operations, pursuant to an operating
consortium agreement under a service contract with the
Government
b. Taxable joint ventures
3. CO-OWNERSHIP – is joint ownership of a property formed for
the purpose of preserving the same and/or dividing its income.
Note:
A co-ownership that is limited to property preservation or income
collection is not a taxable entity and is exempt but the co-owners
are taxable to their share on the income of the co-owned
property.
A co-ownership that reinvests the income of the co-owned property
to other income producing properties or ventures will be
considered an unregistered partnership as a corporation.
DC, RFC, NRFC, NRA-ETB, NRA-NETB, NT, RC, NRC, RA
PERSON OR ENTITY
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
A fat Mexican tourist
A hardworking overseas Filipino worker
An expatriate employee
A Filipino who is privately employed in the Philippines
An unemployed Filipino residing in the Philippines
A Chinese businessman who has his domicile in the
Philippines for 6 months
A Japanese who married a beautiful Filipina and has been
residing in the Philippines for 2 years
A 2nd year Korean College student studying in the
Philippines
A corporation incorporated under Philippine law
A foreign corporation doing business in the Philippines
T rust designated by the donor as irrevocable
T rust designated by the donor as revocable
A business partnership
A joint venture organized under a foreign law and is not
operating in the Philippines
An estate of a Filipino citizen judicially administered in
Japan
An estate of a Filipino citizen extra-judicially administered in
the Philippines
A taxable joint venture organized in the Philippines
A non-profit corporation organized in the Philippines
CLASSIFICATION
THE GENERAL RULES IN INCOME
TAXATION
Residency
&
Citizenship
Rule
THE GENERAL RULES IN INCOME
TAXATION
Residency
&
Citizenship
Rule
General Income Tax Rule
TAXPAYER
1
2
3
4
5
6
7
8
Non-resident citizen
Resident alien
Non-resident alien engaged in trade or business
Resident foreign corporation
Resident Citizen
Non-resident alien not engaged in business
Non-resident foreign corporation
Domestic Corporation
Taxable trusts established by a Filipino citizen in the
9 Philippines
Taxable estate of a non-resident citizen judicially
10 administered abroad
WORLD INCOME
PHILIPPINE
INCOME
SITUS OF INCOME
VS. SOURCE
Place of
taxation/jurisdiction
OF INCOME
Activity or
Property
INCOME SITUS RULES
Types of Income
Place of taxation (situs)
1. Interest Income
Debtor's Residence
2. Royalties
Where the intangible is employed
3. Rent Income
Location of the property
4. Service Income
Place where the service is rendered
Other Income Situs Rules
A. GAIN ON SALE OF PROPERTIES
 Personal Property
Domestic Securities- presumed earned within
Philippines
Other Personal Properties- earned in the place where
the property is sold
 Real Property – earned where the property is located
B. DIVIDEND INCOME
1. Domestic Corporation – presumed earned within
2. Foreign Corporation
a. Resident Foreign Corporation - depends on the predominance test
The Pre-Dominance test
If the ratio of the Philippine gross income over the world gross income
of the resident foreign corporation in the three-year period
preceding the year of dividend declaration is
- at least 50%, the portion of the dividend corresponding to the
Philippine gross income ratio is earned within
- Less than 50%, the entire dividend received is earned abroad
b. Non-resident foreign corporation – earned abroad
Example:
In 2014, Sarah received a P400,000 dividend income from ABC
Corporation . ABC Corporation had the following gross
income in 2016 through 2018.
2016
2017
2018
Philippines
100,000
200,000
300,000 600,000
Abroad
200,000
100,000
100,000 400,000
TOTAL
TOTAL
1,000,000
If ABC Corporation is a resident foreign corporation.
Earned within (60% x 400,000)
240,000
Earned without (40% x 400,000)
160,000
C. MERCHANDISING INCOME - earned where
the property is sold
D. MANUFACTURING INCOME – earned where
the goods are manufactured and sold
Income Description
Rey earned P100,000 interest income; 40% of these were
1 from non-resident debtors.
A finance company earned P1,000,000 royalties from a
2 franchise, 40% of these were derived abroad.
Raymond earned P100,000 rent from OFWs from his
apartment in the US. He also earned P40,000 rent from his
3 Philippine condominium unit.
Chester, a resident citizen, works home online and submits
his output to clients. He collected P100,000 service fee from
4 foreign clients and P20,000 from resident clients.
Mark rendered audit services to client in Afghanistan for
5 P500,000. The services were paid in Afghanistan.
Within
Without
Income Description
Jun has a store in a tourist park in baguio City, Philippines.
He earned a total of P40,000 gain from selling souvenir
6 items, 40% were from foreign tourists.
Don Maraino asold at a gain of P2,000,000 to a client
abroad a commercial builsing located in Quezon City,
7 Philippines.
John sold his stocks in a domestic corporation to a foreign
8 investor at a gain of P50,000
Manso received P20,000 dividends from a domestic
corporation and P30,000 dividend from a non-resident
9 foreign corporation.
Andrew received P40,000 dividends from a resident foreign
corporation; 60% of its historical income is from the
10 Philippines
Within
Without
END