Why is income subject to tax?

-regarded as the best measure of

taxpayers ability to pay
Chapter 3
Introduction to Income Taxation What is income for taxation
Reviewer purposes?
-referred to as gross income
under the NIRC
-gross income simply means
taxable income in laymans term
-Taxable income was defined to
refer to certain itmes of gross
income less deductions and
personal exemptions
-Gross income is any inflow of
wealth to the taxpayer that
increases net worth

Elements of Gross Income

1. It is a return on capital that
Kristel Mae N. Lobas increases net worth.
BS A II-C 2. It is a realized benefit.
3. It is not exempted by law,
contract or treaty.

Return on Capital
-the return on capital that
increases net worth is income
subject to income tax
-the return of capital merely
maintains net worth hence, not
taxable

Capital items deemed with

infinite value
Prof. Sonnie Ramos, CPA -there are capital items that have
infinite value and anythinh
received as compensation for
their loss is deemed a return of
capital

Examples:
1. Life
The Concept of Income 2. Health
3. Human Reputation
 3. Receipt of money or property
to be held in trust for, or to be
remitted to, another person
Recovery of lost capital vs
Recovery of lost profits
The realized concept
-the term realized means
Lost Capital Lost Profits earned, meaning there is a
Decrease net Does not degree of undertaking or sacrifice
worth decrease net from the taxpayer to be entitled
worth of the benefit.
Recovery of it Recovery of it
merely increases net Requisites of a realized
maintains worth, therefore benefit:
networth it is a return on 1. There must be an exchange
capital transaction
2. The transaction involves
Taxable recovery of lost profits another entity, and
-the recovery of lost profits 3. It increases the net worth of
through insurance, indemnity the recipient
contracts or legal suit constitutes
a taxable return on capital Types of Transfers

The following are taxable 1. Bilateral transfers or

recoveries of lost profit: exchange, such as:
1. Proceeds of crop or livestock a) Sale
insurance b) Barter
2. Guarantee payments *referred to as onerous
3. Indemnity received from transactions
patent infringement suit
2. Unilateral transfers, such
Realized Benefit as:
a) Succession - transfer of
The benefit concept property upon death
-the term benefit means any b) Donation
form of advantage derived by the *referred to as gratuitous
taxpayer transactions
-there is benefit when there is an
increase in net worth Under current usage, unilateral
-occurs when one receives transfers are referred to as
income, donation or inheritance transfers while bilateral
transfers are called exchanges.
The following are not benefits,
hence not taxable: Benefits derived from onerous
1. Receipt os a loan transactions are earned or
2. Discovery of lost properties realized, hence, subject to
income tax.
Benefits derived from gratuitous
transactions re subject to transfer
tax.
Complex Transactions
-partly gratuitous and partly
onerous
-the gratuitous portion is subject
to transfer tax while the benefit
from onerous transaction is
subject to income tax
What is meant by another
entity?
Natural persons - living persons
Juridical persons - those created
by law e.g partnership,
corporation
*An entity may be taxable entity
or exempt entity.
Benefits in the absence of
transfers
-the increase in the wealth of a
taxpayer in the absence of a sale
or barter transaction is not
taxable.
-referred to as unrealized gains
or holding gains
Examples:
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. Increase in value of land due to
dicovery of mineral reserves
Rendering of service
-the rendering of services for
consideration is an exchange but
do not cause a loss of capital,
hence compensation income or
service fees is an item of gross
income.
Basis of Exemption of
Unrealized Income
-income realized in non-cash
properties are, in effect received
in cash
-income received in non-cash
considerations is taxable at the
fair value of the property
received
-exempting income realized in
non-cash considerations would
open a wide avenue for tax
evasion
Mode of Receipt/Realization
Benefits
1. Actual receipt
-involves actual physical
taking of the income in the form
of cash or property
2. Constructive receipt
-involves no actual physical
taking of the income but the
taxpayer is effectively benefited
Example:
A. Offset of debt in
consideration for the sale of
goods or service
B. Deposit of the income to
the taxpayers checking account
Inflow of wealth without
increase in net worth
-the inflow of wealth to a person
that does not increase his net
worth is not income due to the
total absence of benefit
 corporations
Examples:
1. Receipt of property in trust Classification of citizens:
2. Borrowing of money under an
obligation to return A. Resident citizen - a Filipino
citizen residing in the Philippines
Not Exempted by Law, B. Non-resident citizen
Contract or Treaty
-an item of gross income is not Classification of aliens:
exempted by the Constitution,
law, contracts or treaty from A. Resident alien - an individual
taxation who is residing in the Philippines
but is not a citizen thereof
The ff items of income are B. Non-resident alien - individuals
exempted by law, hence, not who is not residing in the
considered items of gross Philippines and who is not a
income: citizen thereof
1. Income of qualified emloyee 1. Non-resident aliens
trust fund engaged in business (NRA-
2. Revenues of non-profit non- ETB) -stay in the Philippines
stock educational institution for more than 180 days
3. PCSO or lotto winnings 2. Non-resident aliens not
4. SSS, GSIS, Pag-IBIG, PhilHealth engaged in business (NRA-
benefits NEBT) -with a definite
5. Wages of minimum wage purpose; stay for not more
earners than 180 days

Types of Income Taxpayers

A. Individuals The General Classification

1. Citizen Rule for Individuals
a. Resident citizen 1. Intention
b. Non-resident citizen -the intention of the taxpaper
2. Alien regarding the nature his stay
a. Resident alien within or outside the Phil shall
b. Non-resident alien determine his appropriate
i. engaged in trade or residency classification
business 2. Lenght of stay
ii. not engaged in a) stay in abroad for atleast
trade or business 183 days - non-resident
B. Corporations citizen
1. Domestic Corporations b) aliens who stayed for more
2. Foreign Corporations than 1 year - resident alien
a) Resident foreign c) aliens who are staying for
corporations not more than 1 year but
b) Non-resident foreign more than 180 days - NRA-
 EBT -one organized in a foreign law
d) aliens who stayed for not 1. Resident foreign corporations
more than 180 days - NRA- (RFC)
NEBT -operates and conducts
business in the Philippines
Taxable Estates and Trusts through a permanent
1. Estate establishment
-refers to the properties, 2. Non-resident foreign
rights and obligations of a corporations (NRFC)
deceased person not -does not operate or conduct
extinguished by his death business in the Philippines

Under judicial Under Special Corporations

settlement extrajudicial -are domestic or foreign
settlement corporations which are subject to
treated as exempt entities special tax or preferentail tax
individual rates
taxpayer
taxable Other Corporate Taxpayers
*income of properties of the 1. Partnership
estate is taxable to the heirs a) General Professional
Partnership
2. Trust -excercise of a common
-arrangement whereby the profession, not a taxable
grantor transfers property to entity
the beneficiary, which will be b) Business Partnership
held ender the management -formed for proft, taxable
of a trustee. 2. Joint Venture -a business
Irrevocable Revocable undertaking for a particular
trusts trusts purpose, maybe organized as a
individual not taxable partnership or corporation
taxpayer entities, income a) Exempt joint ventures -
taxable on taxable to the under a service contract
income grantor with the govt, tax exempt
*when trust agreement is silent like in GPP
as to revocability, it is considered b) Taxable joint ventures - all
as revocable other joint ventures
Corporate Income Taxpayers taxable
3. Co-ownership
Domestic Corporation -joint ownership of a property
-is a corporation that is organized -a co-ownership that is limited
in accordance with Philippine to property preservation/income
laws. collection is not a taxable entity,
the one that reinvests the income
Foreign Corporation is taxable corporation.
The General Rules in
Income Taxation

Taxable on income earned

Individual
Corporate Within Witho
Withi Withou
Taxpayers
Taxpayers n t ut
The Residency and Resident citizen
Domestic

Citizenship Rule corporation
Non-resident
Resident citizen and domestic Resident
citizen foreign
corporations are taxable on all corporation
Resident alien
income within and without the Non-resident
Non-resient
Philippines. foreign
alien
corporation
Situs of Income
-the place of taxation of income,
the jurisdiction that has the
authority to impose tax upon the
income

Income Situs Rules

Types of income Place of

taxation
1. Interest Debtors
Income residence
2. Royalties Where the
intangible is
employed
3. Rent income Location of the
property
4. Service Place where the
income service is
rendered