Chapter 3 - Introduction to Income Tax CHAPTER 3 INTRODUCTION TO INCOME TAXATION Chapter Overview and Objectives This chapter discusses the concept of tax income, the situs of income, and the types of taxpayers. After this chapter, readers are expected to comprehend and demonstrate knowledge on the following: 1, The concept of gross income 2. The types of income taxpayers 3. The general rules in income taxation 4,_The income tax situs rules ‘THE CONCEPT OF INCOME Why is income subject to tax? Income is regarded as the best measure of taxpayers’ ability to pay tax. It is an excellent object of taxation in the allocation of government costs. What is income for taxation purposes? The tax concept of income is simply referred to as “gross income” under the NIRC. A taxable item of income is referred to as an “item of gross income” or “inclusion in gross income". Gross income simply means taxable income in layman's term. Under the NIRC however, the term “taxable income” refers to certain items of gross income less deductions and personal exemptions allowable by law. Technically, gross income is broader to pertain to any income that can be subjected to income tax. Gross income is broadly defined as any inflow of wealth to the taxpayer from whatever source, legal or illegal, that increases net worth. It includes income from employment, trade, business or exercise of profession, income from properties, and other sources such as dealings in properties and other regular or casual transactions. ELEMENTS OF GROSS INCOME 1. It is a return on capital that increases net worth. 2. Itisa realized benefit. 3. Itis not exempted by law, contract, or treaty. 63(Chapter 3 Introduction to income Tax RETURN ON CAPITAL Capital means any wealth or property. Gross income is a retum on weahy property that increases the taxpayer's net worth. « Mlustration {ABC purchased goods for P300 and sold them for PSOO. The PSOO consideration cay analyzed as follows: be Selling price (total consideration receved) P_ 500 Total return Cost (value of inventory forgone) 100 Return of capital Maricup (gross income) E200 Return on capital ‘The return on capital that Increases net worth is income subject to income tx Return of capital merely maintains net worth; hence, it is not taxable. 44 improvement in net worth indicates an ability to pay tax. Capital items deemed with infinite value There are capital tems that have infinite value and are incapable of pecuniay valuation, Anything received as compensation for thei los is deemed a return capital Examples: 1 Life 2. Health 3. Human reputation Life ‘The value of life is immeasurable by money. Under Sec. 32 of the NIRC, te proceeds of ance policies paid to the heirs or beneficiaries upon death {he insured, whether ina single sum or otherwise, are exempt from income tax ‘The proceeds of life insurance contract collected by an employer as a beneficiary from the life insurance of an officer or any person directly interested with his trade are likewise exempt. These proceeds are viewed as advanced recovery o ture’ However, the following are taxable return on capital from insurance policies: 2 Any excess amount received over premiums paid by the insured upon surrender or maturity ofthe policy (te. the insured outlives the policy.) Gain cealzed by the insured from the assignment or sale of his insuratet Interest income from the unpaid balance of the proceeds of the policy Any excess of the proceeds raceived over the acquisition costs and prem? payments by an assignee ofa life insurance policy, ae Chapter 3- Invoduction to Income Tax. Health ‘Any compensation received in consi ‘compensation for personal injuries orto \deration for the loss of health such as stuous acts is deemed a return of capital Human Reputation ‘The vaiue of one’s reputation cannot be measured financially. Any indemnity received as compensation for its impairment is deemed a return of capital exempt from income tax. Examples include moral damages received from: Breach of promise to marry Recovery of lost capital vs. Recovery of lost profits ‘The loss of capital results in decrease in net worth while not decrease net worth. Th while the recovery of lost pt lost profits is a return on capi Taxable recovery of lost profits ‘The recovery of lost profits through insurance, indemnity contracts, or legal sults constitutes a taxable return on capita. “The following are taxable recoveries of lost profits 18. Proceeds of crop or livestock insurance Guarantee payments c_ Indemnity received from patent infringement suit, Mlustration 1 Mang Tomas insured his strawberry crop in a P200,000 crop insurance coverage ageinst calamities. The crop was eventually destroyed by an unusual frost, Mang ‘Tomas was paid the P200,000 insurance proceeds. ‘The P200,000 proceeds whichis a reimbursement for the lost value ofthe future harvest, isan item of gross income. The value of the lost crops is, in effect, realized not through ‘ctual harvest but through the insurance contract. Mlustration 2 Mr. Santiago purchased a franchise. The franchisor Jncome of P100,000 to Mr, Santiago. in the first year of operation, Mr. Santiago's outlet ‘only earned P60,000. The franchisor paid the P40,000 difference to Mr. Santiago anteed an annual franchise 6Chapter 3 - Introduction to Income Tax i ee ec ee ee Th De 2 ee rata Mlustration 3 Mindoro Ine. experienced an unusual decline in its income after a competitor coping its patented invention. Mindoro sued the competitor for patent infringement and wee awarded an indemnity of 3,000,000. ‘The P3,000,000 indemnity is a compensation forthe income not realized by Mindor dy to che patent infringement. The sare isan item of gross income. ‘The recovery of lost income or profits is not intended to compensate for the isso capital It's as good a: realization of income; hence, it isan item of gross income. ‘REALIZED BENEFIT ‘What is meant by realized benefit? The “benefit” concept The term “benefit” means any form of advantage derived by the taxpayer. Thereis 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 taxabl ‘a Receipt of a loan - properties increase but obligations also increase resulting in an offsetting effect in networth b. Discovery of lost properties - under the law, the finder has an obligation to return the same to the owner © Receipt of money or property to be held in trust for, or to be remitted t, another person If the taxpayer is entitled to keep for his account portion of a receipt, only that portion is a benefit. Mlustration 1. An employee was granted ?20,000 transportation advance. He liquidated 10,000 fransportaion expenses and was alowed by his erployer to keep the P2008 was Only the 2,000 retained by the employee is considered income since t ‘extent he was benefited. (222-96) 2. A security agency receives P120,000 from clients, salaries of security guards, Under RMC 39-2007, 0 the agency is considered inceme of the agency since ‘The P100,000 pertaining to salaries of security guards ls recognized asallabilty upon receipt. 66 Chapter 3- Introduction to income Tax ures that there is a degree of undertaking, dof the benefit. Types of Transfers 1, Bilateral transfers or exchanges, such as: a. Sale b, Barter ‘These are referred toas “onerous transactions". 2. Unilateral transfers, such as: ‘a. Succession - transfer of property upon death b. Donation ‘These are also referred to as “gratuitous transactions”. transactions are 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. 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 1s subject to mcome tax. Mlustration Taxpayer sold his car which was previously purchased for P100.000 and with a ‘current fair value of P180,000 for only P130.060. “The transaction will be analyzed as follows. rasan > 180m roost nen Fanon sictoncme 7Chapter 3 - Introduction to Income Tax “The excess of fae value over selling price isa gratuity or gift whereas the selling price over the cost is an item of gross income. MOSS of, What is meantby another entity? Every person, natural or juridical isan entity. Natural persons ae living pe ‘a persons are those created by law such as partnershipy at corstons An entity may be a taxable ently oF an exempt entity. A taxa seert gross income arises from transactions which involve another natu) juridical en a Gains or income derived between relatives, corporations, and between rare wash partnership are taxable since it is made between separate eatne ikeunse the income between affliated companies such as between a holding parent company and is subsidiaries and between sister companies are tae Eecause each corporation is a separate entity. This apples regardless of ty underlying economic relationship. However, the sales of a home office to its branch office are not taxable because one and the same taxable entity. Furthermore, the income betwer they perta ‘businesses of a proprietor should not be taxed since proprietorship businesses ae taxable upon the same owner. Note that a proprietorship business is not: Juridical entity. Benefits in the absence of transfers ‘The increase in wealth of the taxpayer in the form of appreciation or increaseit the value properties or decrease in the value of his obligations in th absence of a sale or barter transaction is not taxable. ‘These are referred to as unreolized gains or holding gains because they have ta sn exchange transaction, yet materialized ins oF holding gains investrients in equity or debt securities of real properties held (revaluation increment) held or receivable ign currency denominated debt by virtue of favorsbe fluctuation n exchange rates ¢. Birth of animal offspring, accruals of fruts in an orchard or growth of fm vegetables Increase in value of land due to the discovery of mineral reserves Rendering of services ‘The rendering of services for 1 consideration is an exchange but does not cause? Joss of capital Hence, the entice consideration received from rendering of seme such as compensation income or service fes is an item of gross income 68 Chapter 3- Introduction to Income Tax s the following possible items of gross income: P 200,000 100,000 50,000 300,000 150,000 250,000 400,000 3 out of affection. P 200,000 100,000 Saladin forgiven in consideration srnce rendered tohis creditors 150,000 ees “fection or mere generosty ofthe creditor i a gratuitous a ansferbut snot a benefit iption of Unrealized Income hhave the ability to pay tax when their income mnsaction since tax is generally payable in money. ized in cash is subject to tax operti . received in cash but the the non-cash property. Income received in non. the fair value ofthe property received. Moreover, .sh considerations would open a wide avenue ly divert their income in the form of non- taxpayer cash considerations is taxable for tax evasion since taxpayers can easil cash consideration. Mode of Receipt/Realtzation Benefits ‘Taxable items of income niay be realized by the taxpayer in two ways: 1. Actual recelpt ‘Actual receipt wn ‘or property: 2 Constructive receipt Constructive receipt involves no actual physical taking of the income but the taxpayer is afectively benefited. wolves actual physical aking of the income in the form of cash csChapter 3 - Introduction to income Tax Examples: Offset of debt of the taxpayer in consideration for the sale of goods service b. Deposit ofthe income to the taxpayer's checking account Matured detachable interest coupons on coupon bonds not yet encasy by the taxpayer Increase in the capital ofa parter from the profit ofthe partnership Inflow of wealth without increase Ia net worth at does not increase his net worth 1s ny absence of benefit. income due to the to Examples: a. Receipt of property in trust b. Borrowing of money under an obligation to return In law, the proceeds of embezzlement or swindling where money is taken withog tention to return are considered as income because of the increase net worth of the swindler. NOT EXEMPTED BY LAW, CONTRACT, OR TREATY ‘An item of gross income is not exempted by the Constitution, law, contracts treaties from taxation, sms of income are exempted by law from taxation; hence, they are es and wages of minimum wage earners and qualified senior citizen Regular income of Barangay Micro-business Enterprises (BMBEs) Income of foreign governments and foreign government-owned asd controlled corporations 7. Income of international missions and organizations with income tax immunity ems of gross income that are exempted from taxation are discussed extensively under Exclusions in Gross Income in Chapter 8. ‘TYPES OF INCOME TAXPAYERS. 7” chapter 3- Introduction to Income Tax 2. Alien 3, Resident alien b. Non-restdentalien a engaged in trade or business b. notengaged in trade or business 3. Taxoble 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 the Constitution, citizens are: a, Those who are citizens of the Phi mon February 2. 1987 se fathers or mothers are citizens ofthe Philippines ‘Those born before January 17, 1973 of Filipino mothers who elected Filipino citizenship upon reaching the age of majority . ‘Those who are naturalized im accordance with the law pines at the time of adoption of the b. (Classification of citizens: ines who establishes to the sa his physical presence abroad -s who leaves the Philippines during the taxable F for an employment on a perman ‘A citizen of the Philippines who works and derives income from abroad. land whose employment thereat requires him to be physically present me during the taxable year: taxable year in which be arrives yme derived from sources abroad until the n‘chapter 3-Invoducton to neome Ta Jes or Philippine consulate off nas working in Priipine embassies oF PRIKPP! 8g ved non-resident citizens: Alten ‘A. Resident alfen- 29 ize thereat, suchas “an alien who lives nthe sayior snes to the Phibppines fora definite PUTDOSE which sed stay and to that end makes his hot ual who is residing in the Philippines but i ae ines without definite intention a5 9 ar et he sbandons the same or actually departs from the Philippines “ who is not residing in the Philippines ang B. Non-resident alten - an individual who is nota citizen thereof 1. Non-resident allens engaged in business (NRA-ETB)- aliens who stayeg nike Philippines for an aggregate period of more than 180 days during the year 2. Nonresident aliens not engaged in business (NRA-NETB) - include: se eanens who come to the Philippines for a definite purpose which in ity nature may be promptly accomplis by. Allens who shall come to the Philippines and stay therein for n agregate period of not more than 180 days during the year ‘THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS 1. Intention ‘The intention of the taxpayer regarding the nature of his stay within or outside the Philippines shall determine his appropriate residency lassification. The taxpayer shall submit to the CIR of the BIR docurmentary proofs such as visas, work contracts and other documents indicating such intention Documents purporting short term stay such as tourist visa shall not result in ‘the reclassification of the taxpayer's normal residency. Documents purporting 4 long term stay such as immigration visa or working visa for an extended period would result in the automatic reclassification of the taxpayer's residency n chapter 3 - Introduction to Income Tax the Philippines with a is normally non-resident. An alien who co jffed as non-residen igo abroad under a tourist ines with an immigration visa would De who Feclasifed asa resident alien upon his ari Jretizen who would go abroad with a two- A Aisetfied asa non-resident citizen upon his departure. year working visa would be 4 ength of 2 Length of ch documentary proot the length of stay ofthe taxpayers oreitysens staying abroad for a period of at least 183 days are considered non-resident. bb, Aliens who stayed in the Philippines for more than 1 year 1e taxable year are considered resident, Viens who are staying in the Philippines for not more than 1 year but vore than 10 days are deemed non-resident aliens engaged in business. 4. Aliens who stayed in the Philippines for not more than 180 days are considered non-resident aliens not engaged in trade or business. as of the end of or ‘Aresmendi, a Mexican actor, was contracted by a Philippine television ca pany to do-a project in the Philippines. He arrived in the country on February 29, Jord and returned to Mexico three weeks later upon completion of the project. I be classified as an NRA-NETB in 2019. His stay is for @ nature will be accomplished immediately. Luiz Mario Aresmen definite purpose which Libyan national, arrived in the country on November 4, 2019. Mr. spines since then without any working visa or work permit. would be considered an NRA-NETB because he stayed in the in 180 days as of December 31, 2019. If he is still within the jecember 34, 2020, he wil qualify as a resident alien for 2020. tion as to the nature of his stay, Juan Masipag, a Filipino ‘and stayed abroad from March 15, 2019 to April 1, 2020 {sa non-resident citizen because he is absent for more than 183 ified as resident citizen for the year 2020 because he is absent for B‘Chapter 9 Introduction to Income Tax ‘Taxable Estates and Trusts 1 state saat exw the proper rhs, and OBEBLONS Of & decease py otentingshed by hs death _. iy | setement are treated as indvidvaltaxpa cont of the properties It bythe decedent fT thier extrjuceal ts f properties ofthe estate under extrajudicial Settlement i taxable tothe vente Estates under 2 whereby one person (97antor or trustor) isan arrangement ane person (grantor or trustor) trang a gery co anather person (beneficiary), which will we seh fa third party (trustee or fiduciary). sruthare weve designated by the grt i tented in ation a ye mea fe propery held n rats ea ian na ger ie cesgated we revo bythe grantor ath Be Ta Tt contre arin payers The acre at ne de ovcble ust abe tothe grantor nox el es ‘When he es arene slant 8 to reocablyof Uh ust. the ru preruned bers ‘CORPORATE INCOME TAXPAYERS ‘The term ‘corporation’ shail include partnerships, no matter how created or organized, tack com it accounts, association, or insurance ‘companies, except 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 ts fan operating consortium agreement under a service contract with the ‘government. Hence, the term corpor:tion includes profit-oriented and non-prof such ‘as charitable institutions, cooperatives, government instrumentalites associations, leagues, civic or religious and other organizations. Domestic Corporati A domestic corporation is a corporation that is organized in accordance with Philippine laws. Foreign Corporation A foreign corporation is one organized under a foreign law. % chapter 3 - Introduction to Income Tax “ctkcam cepts eae ere crn cxorton wich operes snd poacts business in the Philppines through a permanent establishment (Ie. a branch). ‘2. Non-resident foreign corporation (NRC) - a foreign corporation which does fot operate or conduct business in the Philippines Note: 14 corporation that ine Incorporation T ‘orporation on dhe dret transactions Spectal Corporations ‘Special corporations are domestic or foreign corporations which are subject to special tax rules or preferential tax rates. OTHER CORPORATE TAXPAYERS 4, Partnership A partnership is a business organization owned by two or more persons who try oF resources to a common fund for the purpose of dividing the profits from the venture. ‘Types of partnership 4). General professional partnership (GPP) AGPP isa partnership formed for the exercise of a common profession. All partners must belong to the same profession. not treated as a corporation and is not a entity. fom income tax, but the partners are taxable in their individual ‘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. Examples: A partnership between Andrix, lawyer, and Mark, an accountant, to practice in taxation advisory services would be a business partnership since the two the same profession, fen accountants Zeus and Darrell to venture into a beauty be a business partnership since the venture is notin practic of ‘2 common profession. 78to income Tax ease Ange a ‘Chapter 3 introduction verry 2, Joint venture “Ayoint venture is a business ‘organized as a partnership oF @COrPOF s undertaking for a particular purpose, jy ration. 7 RY by ype ofl ventures: a Brempt ole ventares romp ain ventures are tose formed for the PATPOsE of und Bet ners oF en4s68 In PETOIAM: COal geothermal St rarer meng eperations pursvant to a8 Operating CONSOTtIUM agree Gndera service contract with the Government. etme treated as a co ed as 8 Corporati, Similar to a GPP, this type of jint venture i Venturers are taxable and is tax-exempt on its regular in their share in the net income ofthe j 1b Taxable joint ventures ‘Alother joint ventures are taxable as corporations. 3. Co-owmership ‘A co-ownershp is joint owmership of a property formed for the purpose of preserving the sameand/or dwviding its income. ‘A-co-ownership that is limited to property preservation or income collection fs not a taxable entity and is exempt but the co-owners are taxable on ther ‘share on the income of the co-owned property However, aco-ownership that reinvests the income of the co-owned propery to other income:producmg properties or ventures will be considered an “unregistered partnership taxable as a corporation. “THE GENERAL RULES IN INCOME TAXATION ‘Taxable on income camned Individual taxpayers ‘Wichin Without 7 [Resident citizen chapter 3- ltroducton to Income Tax 7 dent orig corporal z — sors, cet resent cstens ond dome otal rue ll taxp ns 3 iy on income earned vain te 3 TPR es the term widow the Pipes teen out he PIPINES ‘the Residency and Citizenship Rule rs who are residents and citizens of es such as resident ‘Taxpayer TiNton and domestic corporations are taxable or yme from sources within and fe Philippines. A corporation jen_of the country of ippines. incorporation. Thus,a domestic corporation is a pasts of the extraterritortal taxation Resident citizens and domestic corporations rnment compared to all other classes of tax (othe Philippine government. ident citizens and dom: ‘enjoy preferential 5. Also, between resident and non itizens, resident ‘government because they are tuzens and domestic consistent with the derive most of the benefits from the cpayers by virtue of cess of the public services of our ountry. The taxation of foreign income of Gorporavions. properly reflects this difference in be ‘Benofie Received Theory. ins and domestic corporations of tax revenues brought by turing transactions such that ion or the practice of exe fe realized abroad to avoid Philippine income taxes double taxation ‘rial taxation on resident citizens and domestic ation, Hower NIRC ras and foreign ‘The Issue of intern The rule on ext corporations exposes income because of the tax credit ‘SITUS OF INCOME “The situs of income isthe place of taxation of income. Itis the jurisdiction that has the authority to impose tax upon the income. n‘Chapter 3- neduction to income Tax Situs of tcome rs sure fn Situs of income should be aifferer Dm pertains tothe acity oF property that produces 1d from the source of income, he income. The tay, an ancoMe 15 taxahy ning whether oF le oy imporant to taxpayers taxable ony op Ue important to taxpayers taxable on global ggg 4 of he foreign ax credit fe 4 Serve income Place where the service is rendered iosraton ‘A anpayer had the folowing income P 300.000 50,000 Royalies trom books published nthe Philppines 100,000 150,000 US Dollars) 400,000, ‘poling the situs rules he following are the situs ofthe aforementioned income Within without _Word sta P P 300.000 300,006 50,000 ped 100,000 ioe 150,000 150,000 Rosauowe b 450009 ELogo.e Resident citizen or domestic corporation taxpayers would be tax on the word te Pag ng tte UzEayers would be taxable oly on the income from witha ‘Chapler 3 - Introduction to Income Tax OTHER INCOME SITUS RULES ‘A. Galn on sale of properties 1. Personal property - ¥ Domestic securities - presumed earned within the Philippines | Y Other personal properties - earned in the place where the property sold 2. Real property - earned where the property is located Ilustration ‘taxpayer had the following income: P 200,000 100,000 500,000 200,000 ‘ofmachineries in Mexico, Pampanga 250,000 income on foreign bonds 50.000 Dividends on domestic stocks 150,000 ‘The following table summarizes the situs of the foregoing income: Within _ _Without Gain onsale of domestic stocks 200,000 Gain on sale of 100.000 Gain on sale 500,000 Gain on sale of car in Canak 200,000 ‘on the sale of machineries 250,000 on foreign bonds 50,000 lends on domestic stocks 50.004 Rat0v09 B 350.000 B. Dividend income from: 1. Domestic corporation - presumed earned within 2. Foreign corporation 4) Resident foreign corporation - depends on the pre-dominance test income over the world gross income of in the three-year period preceding the “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 ) Non resident foreign corporation - earned abroad 8Chapter 3 Introduction to Income Tax Poagunes Paeo.o0d b.400,000 P1.000,000 the entire 400,000 is earned within ‘ation - the entire P600,000 Is earned abroad 1es(60% x P400,000) P 240,000 ipines (40% 400,000) _160.009 B_ao0.009 that the ratio is 49%, the entire P400,000 will be deemed Iippines. amet sup: ‘outside che C. Merchandising income - earned where the property is sold Amount. 200,000 100,000 150,000 350,000 Within _Withour 200,000, 100,000 150.000 350.000 PEIN Mae) D. Manufacturing income - earned where the goods are manufactured and sol ‘Operations Remark Production | Distribution within [Within ‘rom production and distribution thin the Pilippines _ 80 chapler 3 Iniroduction to Income Tax "Total income from production and distribution Without Without Within ells them through its brat ices. Butuan reported the following gross income: Philippines P 2,400,000 P 0 Abroad 0 2,400,000 Abroad 1,600,000 "800,000 Philippines 800,000 1,600,000 Mustration 2 Assuming productions conducted by 2 parent corporation and the distribution is, conducted by its subsidiary corporation: Parent Subsidiary, —_Total__ 7.000.000 2,000,000 6.000.000 {sa separate taxpayer. The situs of taxation shall be the ‘The following are the situs of income forthe parent corporation:-Tetoliowing ae the stu of comer the subsidiary corporation “subsitiany. —uhin— Without Philipines 600000 : Horan mater the ss rls 5s have aig Sead wae ened nTaesta be nodvd nose | ccady craper 3 Inrodueton to Income Tax (HAPTER 3: SELF-TEST EXERCISES piscussion Questions finite valve? Enumerate 4; Return of capital and Return on capital recurn on capital Return OF [Return ON Capital Capitalchapter 3 - noducton to Income Tax ‘Exercise Drill No.2: Income tax and transfer tax Check the box where each ofthe following tems is taxable: "Transaction 7, | Barter of properties 2._| Sale of goods 3. | Rendering of services 4 5. Income tax Transfer tax a & [Transfer for less than full and {| adequate consideration ‘Exercise Drill No, 3: The tax concept of income ‘Check the appropriate box whether the following are exempt or taxable; ‘chapter 3 Introduction to Income Tax mings en 15, SSS, Page lbig or Philealch covery of hidden treasure come taxpayer classification Indicate 1pC- Domestic corporat RFC - Resident foreign corporation fe classification for each of the following taxpayer: RC- Resident citizen INRFC-- Non-resident foreign corporation RA - Resident alien NRA-ETR - Non-resid mn engaged n trade or business = Non-resident alien not engaged in trade or business Person or Enuty Classification Mexican tourist Te Taxable [a inom ean = 2. lacome from swindling 3 [Indemnity for moral damages: 4. | Harvested fruits from an orchard Cs. 6 7 5 {Compensation income lerestincome imount received by the insured in excess of {insurance premiums paid fe insurance received by the heirs 3, | Gain on sale of goods by the home office tos ‘Alapanese whe marti been residing in the Philippines for 2 years % | A 2% year Korean college student studying in the 3,_| A corporation incorporated under 0. {branch 7 orporation doing busin 1 Paes eso ves Dewees rated bye Jona as noob TE | Gain on sale of gods bya parent corporation to ated bythe donor as revocable 72. Appreciation in the value ofland 13. [ Birth of animal fspring busines parnership ‘under a foreigniawandis Income of registered Barangay Micro-Business judicially administered 15. on of debt out of ratary ofthe cn extra judidally 16 tion of debt by the creditor in exchany ganized in he Plippines spr peseoss rendered bythe detor . exten Sygate in 18. 19.Chapter 3 - Introducton to income Tax (Chapter 3- Introduction to Income Tax Exereise Drill No: General Income Tax Rule _ —— , ithout ‘Check the box that propery corresponds othe trabilty of the olowing Meithin | Wu Sm % Tampayer World income | Non-resident czen 3 2] Resident al i aclient abroad a commer 3. Non-resident alien engaged in trade or eoereaiescnn |} business__ ——— ‘8. | John sold his stocks im adomestic Resident frei corporation corporation oa foreign investor ata ganofP50,000, 3 7. | Non-resident foreign corporation aaa] 8. [ Domestic corporatio 9: | Taxable ru 7a citizen in the Philippines 76 estate ofa non-resident eigen {judicially administered abroad | ir ren the Pili ated export clients. Exercise Drill No.6: Location and situs of income total of P100,000 gros Compute how much earned within and earned outside the Philippines em xg the following independent cases: 12. Income description Within Without ss to branch totaled P300,000 while 1. | Rey earned 100,000 interest incomes ra naied tee 40% ofthese were fom non-resident T3-| James received P100,000 dividends From z ce company earned P1,000.000 roma franchise; 40% ofthese were derived abroad. is 3 | Raymond earned P100,000 rent rom ‘OFWs from his apartment inthe US He iE also earned P40,000 rent from his, Philippine condominium unit, 400,000 gross income was realized 4 | Chester a resident citizen, worka Romie uring the period ‘online and submits his output to clients, ~~ oo +4 7300,000 service fe from Multiple Choice - Theory: Part 1 1. Which is nota requisite of grossincome? 5. | Mark rendered audit services to cl in & Return on capital c Exempted by law Afghanistan for PS00,000, The services _were paid in Afghanistan 86 b. Realized benefit 87 4. Not exempted by law‘Chapter 3 Introduction to Income Tax chapter 3- Introduction to income Tax Tor personal injuries ing is exempted from income taxation because of the absence Compensation or personal inju Moral damay dd. Interest on me red from patent infringement sult 3. Which isnot subject to income tax? se 2. Donation ‘Sales of goods 1B Sale of service Barter of goods 4. The total consideration received from the sale of service constitute a Return on capital c.Eithera orb BL Return of capital 4.Bothaandb 5. When paid for, which ofthe following items may involve a return on captaly 2 House and lot «Dignity D Life 4. Health 6 The otal consideration received from the sale of goods ata gain represents a Returnoncapital —c.Eitheraorb Return of capital d.Bothaandb 7. The total consideration received from the sale of goods at a loss represents @ Returnon capital ——c.Eitheraor b 1B. Return of capital Both aandb 8. Why is income subject to taxation? source ofa taxpayer's wealth. taxpayers’ ability to pay tax income than the poor. 4.Bothaorb ally exempted from income taxation by virtue of legal exemption? 9. Which is not an item of gross income because of the absence of an undertaiy, from the taxpayer? tubject to income tax? seeds of life insurance policy received by the fami ‘of proceeds over the premiums paid recelved ance proceeds received by the corporation fro officer talien engaged in trade or business not engaged in trade or burtness% b Taubiees € Noneside 4. Non-teside’ _Aptipina whe hasbeen abroad for TE fa Residentalien 1B Non-resident alien fe Non-tesdentftizen | aan ent etien not ngage in rade or business lowing isnot an income taxpayer classification? aleen nc Resident foreign corporation o femetdent alien & General professional partnership engaged in rade or Business a an not engaged in crade or BUSINESS than 103 days is classified as a An American who showed prof c the satstaction of the Commission, A a ae is neti to stay i the PRiipines as an immigran clasied asa « f Residentctizen NRA ETB be. Residentalien 2.NRA-NETE 1. Alapanese who staying in the Philippines for 183 days is @ a Resdent 1b. Non-sesvdent alien Non-resident alien engaged in trade or business 44. Nor-resident alien not engaged in trade or business 8 Acanadanwtaissyigate Plipiofor more than one year isa 1b Non-resident alien Noten ate engaged in rade or busines on len not engaged in trade or business 9. An alien who stayed less ‘one year in the Philippines is classified as a nox resident lien not en "eet sen not eogaged intrade rbsiness fhe aye hee or less than b tyear 10. Acorpraton in ‘expo np cordog ips aw i b. Resdentcorporaion Dey corperaten % er 3 nroduction 19 Income Tax ation which {snot aut oi ict business 10 the whortzed to condu Corpor Philippines is 3 Pe pomestic corporation E.resident corporation which operates a branch in the Philippines |S 2 ‘c.Non-resident corporation 4 De jure corporation ‘foreign corporation " ‘a. Domestic ‘corporation © Non-resident corporation a Dorent corporation De jure corporation artneship which dominanty operates business abroad 6 @ poration c, Non: resident corporation a Domestic 3 Rendent corporation. Dejure corporation 14. Which is required to pay income tax? 2 Revocable crusts i Estates under extrajudicial settlement c Co-ownership 4. Business partnership 15, Which is not an income taxpayer? 4. Non-resident foreign corporation 2. Nonresident alien not engaged in trade or business onc enture engaged in energy operation pursuant to a service contract with the government 4. Irrevocable trusts 16, Which of the fol Philippines? ‘a. Resident corporation . Domestic corporation caxpayers is taxable only on income earned from the Resident citizen @.allofthese the following are taxable only on income earned from sources within the € Non-resident corporation 4d. Domestic corporation 18. Which stnabe on world income? 2 estent corporaton "Resident cizen B Nonvesientecten’ @.Resdenalien ‘Multiple Choice - Theory: Part 3 1. The place of taxation is a Situsrute — «-Territoriality 4.Gross income OLJntoducton noe T ring sos of income? et Ee a he apa st income is earned. the residence of the seem: / ‘a Interest meirmed where the intangible is employs : Steers Sonate proper? Chapter 3- 2. Which san incorrect st 2 Service incorme i ed nthe 103 4. which statements comet rearing sits of nem Which satmetpe sale of el property seared ate of any property is eared Beiter dena pogo & Meceareng income earved i the lace of sale dent citer, lent money t0 SHINO, 2 resident Chinese ten saved by 2 property located in Japan. The cg 4. Pedro, a non-resi indebtedness was Japan, 4 Japan. China and the Philippines. ‘on the sale of goods manufactured and sold by the taxpayer within gy! yess subject to tax erever sold «without the Philippines only. E ncritrcadonty, — dowithin he Philippines only 6 fon, bought a cat manufactured in the Philippines ay’ rome Sam ago carla non-resident tizen. Which The gam is subyect to tax in the Philippines since the commodity involved manufactured inthe Philippines 'b. The gam is subject to tax inthe Philippines since the buyer is a citizen oft Philippines e The gain is both subject to tax in the ‘commodity involved is manufactured in the 4. The gam s taxable abroad because its sold 7, Joan, a resident allen, and Pedro, a noa-resident alien, executed a contr fapan whereby Pedro shall purchase the lot owned by Juan in the Phi 71,000,000 in the exchange. ; me tax since Juan isa resident alien. 4 Thegain is subjectto Philippine tac because the property isin the Phil 92 chapler 3- Introduction to Income Tax Multiple Choice - Problems ed # P1,000.000 non-interest bearing promissory note to Candy. Candy (00. On due date. Beth paid Candy P1,000,000. Which is true? 'P50,000 return on capital 2 Beth 2 Candy earned P50,000 return on capital f. Candy received P50,000 donation 4 Gandy received P1,000,000 return of capital Problem 3-2 Jadreu received a total sum of P42,000 from his employer consisting ofthe following: ts for employer's expenses paid by Andrew wndrew’s computer set purchased by the employer + P22,000 monthly salary Andrew's computer set cost him P12,000. Compute the total return on capital which fan be subjected to income tax. a. P4200 b. P37,000 Problem 3-3 Berry paid P20,000 annual premium on a life insurance contract which would pay her 1,000,000 in case of her death. After paying for 4 years, Betty assigned the policy t0 Carlos for P120,000. Compute the return on capital. €.P25,000 6. P22,000 a 120,000 6.40000 . P30,000 apo Problem 3-4 Becky purchased 2 P1,500,000 life insurance policy for P100,000. During the year, Becky died and her heirs collected the entire proceeds. How much of the proceeds is, ‘exempt from income tax? a P1500,000 .P100,000 b. Pt.400,000 Po Problem 3-5 Dan purchased the 7,000 000 life insurance pole of Ben for ®120,000 Dan pal 2000 annual premtumson the poiy for 4 yeas ater which Ben ded. the total return on capital for Dan. ‘< P800,000 apoChapter 3 Introduchon to income T= Problem 3-6 aries paid F20.000 annual premium ears, Carlos surrendered the POUCH 2m 200,000 which represents the cash s! for 2 7.000.000 ie insurance poly ‘nd was paid by the insurance cite > mee \der value of the policy. Compute the return on capital a. P1,000,000 vb P860,000 «.P60,000 4Po Problem 3-7 ‘Alexander Company insu 500,000 in premiums was Pa total proceeds. red the life of its president for P2,000,000. 9 id before the president died. The company colle 7 sae Compute the return on capital. apo b P1,s00.000 «500,000 4.?2.000,000 me Tem, ce ui sng 7020009 irate oe en atroyed bya fre. The MSUraNce Company reimin Boo whe eresns ther aiueo the bling nel the Onyoe PLS Which statements false? ‘2 P1,000,000 of the proceeds sa return of capital ‘6. 500,000.of the proceeds is areturn on capi ‘© 1,500,000 isa return of capital Only Aand 8 Problem 3-9 Guibert is worried that his entire potato plantation which is expected to yield 400,000 meome wil be totally devastated by bad weather conditions. He obtained» 300,000 erop insurance cover for 30.000 Just before harvest, a rare frost totaly destroyed Guiber’s plantation, The nsurance company paid the policy proceeds. Compute the total recovery of loss profits to be recognized by Guilbert as income. apo -P 300,009 b P1000 .P370,000 Problem 3-10 Felix sells hot chil-lavored pancakes using a secret fornvula he patented, He sued competing pancake house for alleged patent infringement and claimed a tot Indemnity of 000: ee me sine ‘+ P1.000,000 or loss of profits from loss of sales © P200,000 as Atcorney’s fee reimbursement 4 ‘chapter 3- Introduction to Income Tax .ns the case and fs awarded the total indemnity, compute his total return of Po 4.P 200,000 problem 3-11 Henson as one company and Was ‘of the passengers of a van that fell off ravine. Henson sued the bus 3 7100,000 for Compute Henson's return en capita "00.000 © €200,000 E Paoo.v00 490 Problem 3-12 Jake sued an unscrupulous person for derogatory remarks which he considered to fave besmirched his reputation, The court awarded him an indemnity of P1,000,000 inclusive of P200,000 reimbursement for Attorney's fees and P100,000 exemplary damages. Compute Henson's total return on capital. ‘2 1,000,000 < P700,000 800,000 4p0 Problem 3-13 Kendrick received the following tems during the year: 200,000 donation from a girlfriend 100,000 service fee from professional services 'P300,000 inheritance from his deceased father 100,000 income fro gambling 50,000 gain on sale of his personal car 'P250,000 profits from his bar restaurant Compute the total income subject to income tax. a P1,050,000 ©. P5S0,000 bh P750,000 4 P500,000 Problem 3-14 Pines Corporation has a branch tn Manila and a 70%-owned subsidiary, Choco Hills, Inc in Davao, The following data shows Pines Corporation's sales transactions during, Pines Corporation billed the Manila branch 1,500,000 for merchandise shipped inthe aver aa markp of 30% above acqulaton cos The branch se merchandise and did not operate during the year. eathe Sold merchandise to unrelated parties ata gain of P800,000 95! Inco Tex caper 3 -Invoducton 2 ager 3 rroauton income Tax es Corporation's OnTOng st isto Darel Asus FMM ea uty bls for unit holders totaling sold mercandi sl aaa sagnnel P1000, yocts ne ane 200.000 4 Ridranousmerchandiset© Choe s axon subject’ income tx, coalicone fie Carne g ‘ ized by the association? «-P100,000 40 1CS0 lotto. On june 3, 2014, he won the P20,000,000 jackpot et out of 16 bets took the prize. How much ts je 7800000 salaries. io pronal ian was paid Aan CTBOTatION a reyary ato mens regret sn anporiation aan, yt 120.00 war urs to income tax Compute Denver's total income subject orrse0.00 P980.000 which he acquired for P1,500,000 in 2010 now have acurrat 500,000 ota income subject to income tax «© P200,000, Problem 3-22 4.250.000 ‘A non-resident citizen is an International fancier who earned P400,000 interest ident debtors and 7.300.000 from foreign debtors. How much is ippine income tax? ,P400,000 b. P300,000 -4.P700,000 home owners association collects dues from unit holder service charge.troduction to income T2 ‘Plulippunes ‘Abroad i ar re tact 7 San ates em OM ‘ Dra itn rises eee en mtn amp 80 8 ey “it SEse Sats dssuming sarah isa domestic corporation, compute the total income subjery Philippine come tax. «.P1,190,000 ‘a 390,000 b P1.030,000 4.P2,420,000 ingncom in 2017 on neni parse end saa ret acorn Pipe reser a er merle ested nthe USA wit (Conte ret ps rar am bowing hose Bagi Cy, Piplnes Fo ace hes oa tone Pantry tometer Fann gaafom nic sfmercandse ingore nal to fpina resets fonooy gon aie of wechandaeguriae Ta : business travel in Hong Kong fea Lacy et nt OR Pepe gn ons of he bud Pp ae ring a te i ay ction to Income Tax. chapter 3 - Introd case Problem 2 ise fees from franchise. He also deals in various Hot Burger oun pains 9 2017 100,000 gal 200,000 gain from sales of equip 50.000 gains from sale ot investment 40.000 gains from sale of investment gn investors ino investors case Problem 3 cast Prowry manufactures wooden furniture forthe local and export market. fat Gistribution outlet abroad which han eluding he foreign outlet, 70% above mat ign outlet bills its price. TC Company reports P3.400,000 {ustomers 100% above TC Company fn total sales, exclusive of sales to 12.720,000 total sales to customers. Je manufacturing income respectively eat «,P840,000; P1,920,000 <4. P840,000: P1,360,000 the foreign outlet, The foreign outlet reports ned within and earned without