CHAPTER 3: INTRODUCTION TO INCOME TAX
ITEMS THAT ARE TAXABLE INCOME:
1. Return on Capital
2. Recovery of Lost Profits
 Proceeds of Crop or Livestock Insurance
 Guarantee Payments
 Indemnity received from Patent Infringement Suit
3. Bilateral/Onerous Transactions (Sale and Barter)
4. Gains/Income derived between relatives, corporations and between a partner and the partnership.
5. Income between affiliated companies such as between a holding or a parent company and its subsidiaries and
between sister companies
6. Rendering of Services
7. Gains from Gamblings
8. Income received in Non-cash Properties
9. Embezzlement of Swindling
*Any LOSS PROFITS that is recovered in any way is an income and therefore TAXABLE
ITEMS THAT ARE INCOME TAX EXEMPT:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Life
Health
Human Reputation (Defame, alienation, breach)
Return of Lost Capital
Not Benefits
 Receipt of a Loan
 Discovery of Lost Properties
 Receipt of Money or Property
Gratuitous/Unilateral Transactions (Succession,Donation, Transfer of Property) - *Only subject to TRANSFER TAX
Sales of Home Office to its Branch Office
Income of Proprietorship Business
Unrealized Gains or Holding Gains
CLASSIFICATION RULES FOR INDIVIDUALS
1. Intention
 Documents for Short Term (Tourist Visa) – shall not result in reclassification
 Documents for Long Term (Immigration Visa and Working Visa) – automatic reclassification
INDIVIDUAL
Alien
Citizen
Alien
Citizen
INTENTION
Came to the Philippines with a Tourist Visa
Went to abroad with Tourist Visa
Came to the Philippines with an Immigration Visa
Went to abroad with a 2-year Working Visa
CLASSIFICATION/TAXPAYER
Non-Resident Alien
Resident Citizen
Resident Alien (upon arrival)
Non-resident Citizen (upon departure)
2. Length of Stay – (applicable if documents are absent)
INDIVIDUAL
LENGTH OF STAY
Citizen
Staying in the Philippines
Citizen
At least 183 days abroad
CLASSIFICATION
Resident
Non-Resident
TAXPAYER
Resident Citizen
Non-Resident Citizen
Alien
Alien
Alien
More than 1 year in the Philippines as to the Resident
Resident Alien
end of the taxable year.
Not more than 1 year but more than 180 days Non-Resident
Alien Non-Resident Engaged in
in the Philippines
Engaged in Trade or Trade or Business (NRABusiness
NETB)
Not more than 180 days in the Philippines
Non-Resident Alien Not Non-Resident Not Engaged
Engaged in Trade or in Trade or Business (NRABusiness
NETB)
TAXABLE ESTATES AND TRUST
1. ESTATES
 Under Judicial Settlement – taxable on the income of the properties
 Under Extrajudicial Settlement – tax exempt entities - *only taxable to the heirs*
2. TRUST
 Revocably Designated – taxable to the trust
 Irrevocably Designated – tax exempt entities - *only taxable to the grantor/trustor*
CORPOARATE INCOME TAXPAYERS
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Partnerships (no matter how created or organized)
Joint Stock Companies
Joint Associations
Joint Account
Insurance Companies
*However, the term doe NOT included General Professional Partnerships and 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 operating consortium agreement under a service contract with the government*
1. Domestic Corporation – organized in accordance with Philippine Laws
2. Foreign Corporations – is one organized under a foreign law
 Resident Foreign Corporations (RFC) – operates in the PH
 Non-Resident Foreign Corporations (RFC) – does not operate in PH
OTHER CORPOARATE INCOME TAXPAYERS
1. One-Person Corporation (OPC) – with a single stockholder who may be a natural person
2. Partnership
 General Professional Partnership (GPP) – tax exempt from corporate income - *partners are tax
individually based share in income of the partnership.
 Business Partnership – taxable as a corporation
3. Joint Venture
 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 - – tax exempt from corporate income - *venturers are tax
individually based share in income of the venture
 All other joint ventures - taxable as a corporation
4. Co-ownership
 Limited to property preservation or income collection - – tax exempt from corporate income - *co-owners
are tax individually based share in income of the co-owned property*
 Reinvests the income of the co-owned property to other income producing properties or ventures taxable as a corporation
IMPORTANT NOTE!!!
*Resident Citizen and Domestic Corporation are taxable on all income within and without the Philippines*
OTHER INCOME SITUS RULES
A. GAIN ON SALE ON PROPERTIES
1. Personal Property
 Domestic Securities – presumed earned within the Philippines
 Other Personal Properties – earned in the place where the property is sold.
2. Real Property – earned where the property is located.
B. DIVIDEND INCOME
1. Domestic Corporation -presumed earned within
2. Foreign Corporation
 Resident Corporation – depends on the pre-dominance test.
o At least 50% - earned within
o Less than 50% - earned abroad
 Non-Resident Corporation – earned abroad
C. MERCHANDISING INCOME – earned where the property is sold
D. MANUFACTURING INCOME – earned where the goods are manufactured and sold
PRODUCTION
DISTRIBUTION
Within
Within
Earned within PH
Without
Without
Earned without PH
Within
Without
P. Income – within PH
Without
Within
P. Income – without PH
D. Income – without PH
D. Income – within PH
CHAPTER 4: INCOME TAX SCHEMES, ACCOUNTING PERIODS, METHODS AND REPORTING
INCOME TAX SCHEMES
1. Final Income Taxation – final taxes wherein full taxes are withheld by the income payor at source; not all items
of passive income are subject to final tax, only certain that is listed by the law
2. Capital Gains Tax – imposed on the gain realized on the sale, exchanged and other dispositions of certain capital
assets
a. Capital Asset – not used in business, trade or profession
b. Ordinary Asset – used in business like inventory and PPE
3. Regular Income Tax – general rule in income taxation
ACCOUNTING PERIOD
1. Calendar Year – starts from January 1 to December 31
2. Fiscal Year – any 12-month periods that ends on any day other than December 31; not allowed to individual Tax
Payers
IMPORTANT NOTE!!!
*the return is due for filing on the 15th day of the fourth month (Ex: January 1 to Dec 31; the filing is April 15)*
FILING OF INCOME TAX RETURN IN SHORT ACCOUNTING PERIOD
1. Newly Commenced Business = start of the business – designated year-end business
2. Dissolution of the Business = start of the current year – date of dissolution
3. Change of Accounting Period = start of the previous accounting period – designated year end of the new
accounting period.
4. Death of the Taxpayer = start of the calendar year – death of the taxpayer; should be filed on the usual deadline
April 15.
5. Termination of the Accounting Period = start of the current year – termination date; payable immediately
TYPES OF ACCOUNTING METHODS
1. General Methods
a. Cash Basis – income is recognized when received
b. Accrual Basis – income is recognized when earned regardless of when paid
2. Installment and Deferred Payment Method
3. Percentage of Completion Method
4. Outright and Spread out Method
5. Crop Year Basis
PENALTIES FOR LATE FILING OR PAYMENT OF TAX
1. Surcharge
a. 25% - basic tax for failure to file or pay deficiency tax on time
b. 50% - for willful neglect to file and pay taxes; when an individual receives a notice before filing
2. Interest
a. January 2018 – 12% interest penalty
b. During 2017 – 20% penalty
IMPORTANT NOTE!!!
*leap year is 366 days. A year divisible by 4 without decimal is a leap year*
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January - 31
February – 28 or 29
March - 31
April - 30
May - 31
June - 30
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July - 31
August - 31
September - 30
October - 31
November - 30
December - 31