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1. INTRO TO
INCOME
TAXATION

2. INCOME TAXATION
CONCEPT OF INCOME
Why is income subject to tax?
What is “income” for taxation purpose?
ELEMENTS OF GROSS INCOME
1. Return on capital that inc net worth
2. Realized benefit
3. Not exempted by law, contract or treaty

3. INCOME
TAXATION
TYPES OF INCOME TAXPAYERS
A. Individuals
a. Citizen
i. Resident
ii. Non-resident
b. Alien
i. Resident
ii. Non-resident
1. Engage in trade or business
2. Not engaged in trade or business
c. Taxable estates & trusts
B. Corporations
a. Domestic Corp
b. Foreign Corp
i. Resident
ii. Non-resident

4. INCOME
TAXATION
SITUS OF INCOME
Situs of income vs source of income
Income Situs Rules
Other income Situs Rules

5. INCOME TAXATION
CONCEPT OF INCOME
Why is income subject to tax?
- Income is the best measure of taxpayers’s ability to pay tax.
What is “income” for taxation purpose?
- The tax concept of income is simply referred to as “gross income”. Gross income is broadly defined as any inflow of
wealth to the taxpayer from whatever source, that increases net worth.

6. INCOME
TAXATION
ELEMENTS OF GROSS INCOME
1. Return on capital that inc net worth
RETURN ON CAPITAL
Capital means any wealth or property. Gross income is a return on wealth or return on wealth
property that increases the taxpayer's net worth.
Illustration
ABC purchased goods for P300 and sold them for P500. The P500 consideration can be
analyzed as follows:
Selling price (total consideration received) P 500 Total return
Cost (value of inventory forgone) 300 Return of capital
Mark-up (gross income) 200 Return on capital
The return on capital that increases net worth is income subject to income tax.
Return of capital merely maintains net worth; hence, it is not taxable. An
improvement in net worth indicates an ability to pay tax.

7. INCOME
TAXATION
Capital items deemed with infinite value
There are capital items that have infinite value and are incapable of
pecuniary valuation. Anything received as compensation for their loss is
deemed a return of capital.
Examples:
1. Life
2. Health
3. Human reputation
Recovery of lost capital vs. Recovery of lost profits
The loss of capital results in decrease in net worth while the loss of profits
does not decrease net worth. The recovery of lost capital merely maintains
net worth while the recovery of lost profits increases net worth. Therefore,
the recovery of lost profits is a return on capital.
Taxable recovery of lost profits
The recovery of lost profits through insurance, indemnity contracts, or
legal suits constitutes a taxable return on capital.
The following are taxable recoveries of lost profits:
a. Proceeds of crop or livestock insurance
b. Guarantee payments
c. Indemnity received from patent infringement suit

8. INCOME
TAXATION
REALIZED BENEFIT
What is meant by realized benefit? o
The "benefit" concept - The term "benefit" means any form of advantage derived by the
taxpayer. There is benefit when there is an increase in the net worth of the taxpayer. An
increase in net worth occurs when one receives income, donation or inheritance.
The following are not benefits, hence, not taxable:
a. Receipt of a loan properties increase but obligations also increase resulting in an
offsetting effect in net worth
b. Discovery of lost properties - under the law, the finder has an obligation to return the
same to the owner.
c. Receipt of money or property to be held in trust for, or to be remitted to, another
person.
The "realized" concept
The term realized means earned. It requires that there is a degree of undertaking or
sacrifice from the taxpayer to be entitled of the benefit.
Requisites of a realized benefit
1. There must be an exchange transaction
2. The transaction involves another entity
3. It increases the net worth of the recipient.

9. INCOME
TAXATION
Types of Transfers
Bilateral transfers or exchanges, such as:
a. Sale
b. Barter
These are referred to as "onerous transactions"
2. Unilateral transfers, such as:
a. Succession - transfer of property upon death
b. Donation
These are also referred to as "gratuitous transactions"
Under current usage, unilateral transfers are simply referred to as
"transfers" while bilateral transfers are called "exchanges." Benefits
derived from onerous transactions are "earned or realized"; hence, they
are subject to income tax. Benefits derived from gratuitous transactions
are not realized because of the absence of an earning process. Benefits
derived from gratuitous transactions are subject to transfer tax, not income
tax.

10. INCOME
TAXATION
3. Complex transactions
Complex transactions are partly gratuitous and partly onerous. These are
commonly referred to as "transfers for less than full and adequate
consideration". The gratuitous portion of the transaction is subject to
transfer tax while the benefit from the onerous portion is subject to
income tax.
Mode of Receipt/Realization Benefits
1. Actual receipt
2. Constructive receipt
Inflow of wealth w/o inc in Net worth – is not income due to the total absence
of benefit (eg loan, trust)

11. INCOME
TAXATION
INDIVIDUAL INCOME TAXPAYERS
Citizens
Under the Constitution, citizens are:
1. Those who are citizens of the Philippines at the time of adoption of the
Constitution on February 2, 1987
2. Those whose fathers or mothers are citizens of the Philippines
3. Those born before January 17, 1973 of Filipino mothers who elected Filipino
citizenship upon reaching the age of majority
4. Those who are naturalized in accordance with the law

12. INCOME
TAXATION
Classification of citizens:
A. Resident citizen - A Filipino citizen residing in the Philippines
B. Non-resident citizen includes:
1. A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein;
2. A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for an employment on a
permanent basis;
3. A citizen of the Philippines 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. A citizen who has been previously considered as non-resident citizen
and

13. INCOME
TAXATION
Classification of citizens:
A. Resident citizen - A Filipino citizen residing in the Philippines
B. Non-resident citizen includes:
1. A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein;
2. A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for an employment on a
permanent basis;
3. A citizen of the Philippines 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. A citizen 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 a 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

14. INCOME
TAXATION
Alien
A. Resident alien - an individual who is residing in the Philippines but is not a
citizen:
1. An alien who lives in the Philippines without definite intention as to his
stay; or
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 to his domicile abroad;
An alien who has acquired residence in the Philippines retains his status as
such until he abandons the same or actually departs from the Philippines.

15. INCOME
TAXATION
B. Non-resident alien - an individual who is not residing in the Philippines who
is not a citizen thereof
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) - include:
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

16. INCOME
TAXATION
OTHER CORPORATE TAXPAYERS
1. One-person corporation
A one-person corporation is a corporation with a single stockholder who may
be a natural person, trust or an estate.
Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed
companies, and non-chartered GOCCs may not incorporate as One-person
corporations. A natural person who is licensed to exercise a profession may
not organize as a One Person Corporation for the purpose of exercising such
profession except as otherwise provided under special laws.

17. INCOME
TAXATION
Partnership
A partnership is a business organization owned by two or more persons who
contribute their industry or resources to a common fund for the purpose of
dividing the profits from the venture.
Types of partnership
a) General professional partnership (GPP)
A GPP is a partnership formed by persons for the sole purpose of
exercising a common profession, no part of the income of which is derived
from engaging in any trade or business.
A GPP is not treated as a corporation and is not a taxable entity. It is
exempt from income tax, but the partners are taxable in their individual
capacity with respect to their share in the income of the partnership.
b) Business partnership
A business partnership is one formed for profit. It is taxable as a corporation.

18. INCOME
TAXATION
3. Joint venture
A joint venture is a business undertaking for a particular purpose. It may be
or organized as a partnership or a corporation.
Types of joint ventures:
A. Exempt joint ventures
Exempt joint ventures are those 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.
Similar to a GPP, this type of joint venture is not treated as a corporation
and is tax-exempt on its regular income, but their venturers are taxable
to their share in the net income of the joint venture.
B. Taxable joint ventures
All other joint ventures are taxable as corporations.

19. INCOME
TAXATION
4. Co-ownership
A co-ownership is joint ownership of a property formed for the purpose
of
preserving the same and/or dividing its income.
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 on
their
its share on the income of the co-owned property.
However, 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 taxable as a corporation.

20. INCOME
TAXATION

21. INCOME
TAXATION
The Residency and Citizenship Rule
Taxpayers who are residents and citizens of the Philippines such as resident
citizen and domestic corporations are taxable on all income from sources
within and without the Philippines. A corporation is a citizen of the country of
incorporation. Thus, a domestic corporation is a citizen of the Philippines.
Resident citizens and domestic corporations derive most of the benefits from
the Philippine government compared to all other classes of taxpayers by virtue
of their proximity to the Philippine government.

22. INCOME
TAXATION
SITUS OF INCOME
The situs of income is the place of taxation of income. It is the jurisdiction that
the authority to impose tax upon the income.
Situs of income vs. source of income
Situs of income should be differentiated from the source of income. The latter
pertains to the activity or property that produces the income.ol Ingbest-now
pie Situs is important in determining whether or not an income is taxable in
the Philippines. Situs is particularly important to taxpayers taxable only on
income within. However, it is also important to taxpayers taxable on global
income for purposes of the computation of the foreign tax credit.

23. INCOME
TAXATION
INCOME SITUS RULES
Types of income Place of taxation
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
1. Personal property
◦ a. Domestic securities - presumed earned within the Philippines
◦ b. Other personal properties - earned in the place where the property is sold
2.Real property - earned where the property is located

24. INCOME
TAXATION
B. Dividend income from:
1. Domestic corporation - presumed earned within
2. Foreign corporation
a) Resident foreign corporation - depends on the pre-dominance 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 dividends received is earned abroad
b) Non-resident foreign corporation - earned abroad

25. INCOME
TAXATION