INTRODUCTION TO

INCOME TAXATION
and

TAX SCHEMES, PERIODS,

METHODS AND REPORTING

DE VERA, MARC WILSON D.

FADRILAN, ALYSSA KATHERINE M.
FENOL, SHAINE ALEXIS C.
GASPAR, MA. CIELO D.
HUBILLA, RINA G.
JAGONOY, CRISTINE JOY D.
 INTRODUCTION TO INCOME TAXATION
CONCEPTS AND ELEMENTS OF INCOME

Why is income subject to tax?

• Income is the best measure of taxpayers’ ability to pay tax.

Ability to pay theory – states that taxpayers should be required to contribute based on their
relative capacity to sacrifice for the support of the government.

• Those who have more should be taxed more.

• Those who have less should contribute less.

For taxation purposes, what is income?

• Under the NIRC, the tax concept of income is referred to as “gross income”. A taxable item
of income is referred to as an “item of gross income” or “inclusion in gross income”. • Gross
income is any inflow of wealth to the taxpayer from whatever source, legal or illegal, that
increases net worth. These are:
o Income from employment, trade, business or exercise of profession
o Income from properties

Elements of Gross Income:

1. It is a return on capital that increases net worth.

2. It is a realized benefit.
3. It is not exempted by law, contract, or treaty.

Capital Items deemed with Infinite Value (or incapable of estimation and valuation):

1. Life – value of life is immeasurable

2. Health – compensations are deemed as return of capital
3. Human Reputation – cannot be measured financially

Concept of Return on Capital – increases the net worth

Recovery of Lost Capital Recovery of Lost Profit

• The loss of capital results in decrease • The loss of profits does not decrease
in net worth in net worth
• The recovery of lost capital only • The recovery of lost profits increases
maintains net worth net worth
• Return of capital • Return on capital
• Not taxable • Taxable

Examples of Recovery of Lost Profit:

1. Proceeds of crop insurance or livestock

2. Guarantee payments
3. Indemnity from patent infringement suit

Concept of Realized Benefits – should be an actual income

Requisites of a Realized Benefit:

1. Exchange or transaction
2. Transaction with another entity
3. Increase in net worth

Types of Transfer:

1. Bilateral or Exchange
a. Sale
b. Barter
2. Unilateral
a. Succession
b. Donation
3. Complex transactions

The following are not considered benefits: (not taxable)

1. Receipt of a loan – properties increase but liability also increases

2. Discovery of Lost property – the finder is obliged to return the property to the owner 3.
Receipt of money or property to be held in trust for or to be remitter to another person – the
beneficiary is the entitled one to receive the claim amount from the trustee

A taxable item of gross income arises from transactions which involve another natural or juridical
entity.

What is meant by another entity?

• Natural Entity – refers to living persons

• Juridical Entity – refers to an entity created by law such as partnerships and corporations
Taxable Not Taxable

• Gains or income derived between • The sales of a home office to its

relatives, corporation, and between branch office
a partner and partnership • The income between businesses of a
• The income between affiliated proprietor
companies

Mode of Receipt/Realization of benefits:

1. Actual receipt – Actual physical taking of the income in the form of cash or property. 2.
Constructive – No actual physical taking of the income but the taxpayer is effectively
benefitted.

Exemption
Income Exempted by Law:

1. Income of qualified employee trust fund

2. Revenues of non-stock educational institution
3. SSS, GSIS, Pag-ibig or PhilHealth benefits
4. Regular Income of Barangay Micro-business Enterprise
5. Salaries of and minimum wage earners and qualifying senior citizen 6. Income of foreign
government and foreign government-owned and controlled corporation

TYPES OF INCOME TAXPAYERS:

A. Individual – the Code directs that a tax shall be imposed on the taxable income of every
individual
1. Citizens
i. Resident Citizen (RC)
• Those who are citizens of the Philippines.
• A Filipino who is privately employed in the Philippines.
ii. Non-resident Citizen (NRC)
• 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.
• A citizen who leaves the Philippines during the taxable year to
reside abroad either as an immigrant or for employment on a
permanent basis.
• 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.
2. Alien
i. Resident Alien (RA)
• An individual who is residing in the Philippines but is not a citizen
thereof.
• An alien who comes to the Philippines for the purpose that requires
extended stay for its accomplishment, so he makes his home
temporarily in the Philippines.
ii. Non-resident Alien (NRA)
• An individual whose residence is not within the Philippines and who
is not a citizen thereof.
• Non-resident alien engaged in trade or business (NRA-ETB)
a. An alien who stayed in the Philippines for an aggregate
period of more than 180 days during the year.
• Non-resident alien not engaged in trade or business (NRA-NETB)
a. An alien who comes to the Philippines for a definite purpose
which in its nature may be promptly accomplished;
b. An alien who shall come to the Philippines and stay therein
for an aggregate period of not more than 180 days during a
year.

The General Classification for Individuals:

• Intention
o The intention shall determine his appropriate residency classification.
 • Length of Stay
o Citizens staying abroad for a period of at least 183 days are considered non
resident.
o Aliens who stayed in the Philippines for more than 1 year as of the end of the
taxable year are considered resident.
o Aliens who stayed for more than 1 year, but more than 180 days are deemed NRA
ET.
o Aliens who stayed in the Philippines for not more than 180 days are considered
not-resident aliens engaged in trade or business.

3. Taxable Estates and Trusts

i. Estate – Properties, rights and obligation of a decedent.
• Estate under judicial settlement
a. Judicial settlement
b. the ESTATE is taxable on the income of properties left by
the decedent
• Estate under extra-judicial settlement
a. Extra-Judicial settlement
b. The income of the properties of the state under extra-judicial
settlement is taxable to the HEIRS.
ii. Trust – An agreement whereby one-person transfer property to another
person, which will be held under management of a third party.
- The person who transfers property is the GRANTOR or TRUSTOR
- The person whom the property is transferred is the BENEFICIARY.
- The third party is the TRUSTEE or FIDUCIARY.
• A trust that is irrevocably designated by the grantor
a. Treated as an individual taxpayer in taxation
b. the income of property held in trust is taxable to the TRUST
• A trust that is designated as revocable by the grantor
a. Is not an individual taxpayer
b. the income of property held in trust is taxable to the GRANTOR.
B. Corporation – Profit-oriented institutions and Non-profit institutions such as charitable
institutions, cooperatives, government agencies and instrumentalities.
1. Domestic Corporation – Corporation that is organized in accordance with
Philippine laws.
2. Foreign Corporation – Corporation that is organized in accordance with foreign
laws.
i. Resident Foreign Corporation (RFC)
• A foreign corporation which operates and conducts business in the
Philippines through a permanent establishment.
ii. Non-resident Foreign Corporation (NRFC)
• A foreign corporation which does not operate or conduct business
in the Philippines.

Which taxpayer is taxable on income earned within the Philippines and outside the
Philippines?
Taxpayer Taxable Source
 RC Within & Without

NRC Within Only

RA Within Only

NRA Within Only

Domestic Corporation Within & Without

Resident Foreign Corp. Within Only

Non-resident Foreign Corp. Within Only

TAX SCHEMES, PERIODS, METHODS AND REPORTING

There are 3 INCOME TAXATION SCHEMES under the NIRC:

1. Final Income Taxation

• Characterized by final taxes wherein full taxes are withheld by the income payor at
source.
• The recipient income taxpayer receives the Income Net of Taxes
• The payor is the one required by law to remit the tax to the government. •
Consequently, the recipient income taxpayer does not need to file income tax returns
because the withheld tax constitutes the full tax due and are therefore deemed final
payments
• Applicable only on a certain passive income listed by the law.
• Not all items of passive income are subject to final tax.
Passive Income Active Income

Earned with very minimal or even Arises from the transactions requiring
without active involvement of the a considerable degree of effort from
taxpayer in the earning process. the taxpayer.

Example: Example:
Interest income from the banks Compensation income, business income

2. Capital Gains Taxation

• imposed on the gain realized on the sale, exchange, and other dispositions of
certain capital assets
o Ordinary assets – used in business, trade, or profession such as
inventory, supply, PPE
o Capital Assets – assets not used in business, trade, or profession such
as compensation income, business income.; opposites of ordinary assets
• applies only to two types of financial assets: domestic stocks and real property

3. Regular Income Taxation

 • general rule in income taxation and covers all other income such as:
o Active income
o Other income:
o Gains from dealings in properties, not subject to capital gains tax
o Other passive income not subject t final tax
• Items of gross income from these sources are valued or measured using an
accounting method, accumulated over an accounting period, and reported to the
government through an income tax return.

Note:

• An item of gross income is TAXABLE to any of these tax schemes

• An item of gross income that is subject to tax in one scheme will not be taxed by the other
schemes.
• An item of income that is exempted in one scheme is not be taxed by the other schemes.
Classifications of Items In Gross Income:

1. Gross income subject to final tax

2. Gross income subject to capital tax
3. Gross income subject to regular tax

TYPES OF ACCOUNTING PERIODS:

1. Regular Accounting Period – 12 months in length

• Calendar Year – starts from January 1 and ends December 31. This is available to
both individual and corporate taxpayers.
o Under the NIRC, the calendar year shall be used when:
▪ Taxpayer is an individual
▪ Taxpayer’s annual accounting period is other than a fiscal year
▪ Taxpayer has no annual accounting period
▪ Taxpayer does not keep books
• Fiscal Year – any 12-month period that ends on any day other than December 31. This
is available only to corporate income taxpayers and is not allowed to individual tax
payers.

2. Short accounting period – less than 12 months

• Instances of Short accounting Period
o Newly commenced business – covers the date of start of business until the
year-end of the business.
▪ Example: CraftyKath started business operation on July 1, 2020 and
opted to use calendar year. CraftyKath should file its first income tax
return for July 1-December 31, 2020 on or before April 15, 2021.
o Dissolution of business – covers the start of the current year until the date of
dissolution.
▪ Example: Star Bucks is on the fiscal year of accounting period ending
every May 31. It ceased operation on August 15, 2020. Star Bucks
should file its last income tax return covering April 1 to August 15, 2020
on or before September 15, 2020.
o Change of Accounting Period – covers the start of the previous period up to
the designated year- end of the new accounting period.
 ▪ Example: Effective February 2019, Macho Corporation changed its
calendar accounting period to a fiscal year ending every June 30.
Macho Corporation shall file an adjustment return covering the income
from January 1 to June 30, 2019 on or before October 15, 2019.
o Death of the taxpayer - covers the start of the calendar year until the death of
the taxpayer.
▪ Allan Rickman died on November 1, 2016.
- Start of the calendar year: January 1, 2016
- Date of death of the taxpayer: November 1, 2016

ACCOUNTING METHODS

Types of Accounting Methods:

The financial accounting concept of accrual basis and cash basis are similar to their tax
counterparts except only for the following tax rules:

• Advance income is taxable upon receipt – applicable on the sale of services not on goods •
Prepaid expense is non-deductible
• Special tax accounting requirement must be followed

1. Cash Basis – income is recognized when received and expense is recognized when paid
TAX CASH BASIS – GROSS INCOME

Cash Income (Collections of Accounts Receivable + Cash from Accrued Income) XX

Advance Income – Sales of services XX Total Gross Income – Tax Cash Basis XX

TAX CASH BASIS – EXPENSES

Cash Expense (Payment from Accrued Expenses + Cash Expense) XX Amortization or

Prepayments XX Depreciation Expense XX Total Expenses – Tax Cash Basis XX

2. Accrual Basis – income is recognized when earned regardless of when received.

Expense is recognized when incurred regardless of when paid

TAX ACCRUAL BASIS – GROSS INCOME

Cash Income (Collections of Accounts Receivable + Cash from Accrued Income) XX

Accrual Income XX Advance Income – Sales of services XX Total Gross Income – Tax
Accrual Basis XX

TAX ACCRUAL BASIS – EXPENSES

Cash Expense XX Accrual Expense XX Amortization or Prepayments XX

Depreciation Expense XX Total Expenses – Tax Accrual Basis XX

3. Installment Method – a method considered appropriate when collections extend over

relatively long periods of time and there is a strong possibility that full collection will not
be made.
• the gross income is recognized and reported in proportion to the collection form the
 installment sales. Available to the following taxpayers:
o Dealers of personal property on the sale of properties they regularly sell o
Dealers of real properties, only if their initial payment does not exceed 25% of
the selling price
o Casual sale of non-dealers in property, real or personal, when their selling
price exceed 1000 and their initial payment does exceed 25% of the
selling price
• Initial Payment – total payment by the buyer in cash, or in property, in taxable year
of the sale is made. This term is a broader than down payment and includes the
installment payments in the year of sale. DP + installment payments in the year of
sale
• Selling Price – means the entire amount for which the buyer is obligated to the
seller

Selling Price
Cash Downpayment XX
Notes Receivable XX XX
Tax Basis of the Sold Item (XX) Gross Profit XX

Gross Income = Total Gross Profit x (Amount of Collection/Selling Price)

4. Deferred Payment Method – it is a variant of the accrual basis and is used in reporting
income when a non-interest-bearing note is received as consideration in a sale. •
Applicable if the initial payment exceeded 25%
• Gross income is computed based on the present value of a note receivable from a
contract.
• The following rules will apply:
▪ The note evidencing the obligation shall be converted to its discounted
value
▪ Interest pertaining to the amortization of the loan or obligation shall be
reported as income in the year of collection
Cash Downpayment XX Discounted Value of the Note (Equal Serial Payment x
Present Value Factor) XX Total Revenue XX
Cost of Property Sold (XX) Gross Profit XX

5. Lump or Outright Method – income from leasehold improvement shall be recognized

when the improvement is completed at its fair market value.

6. Spread-out Method – the estimated book value of the leasehold improvement at the end
of the leases spread over the term of the lease and is reported as income for each year
of the lease until the lease is over

7. Percentage of Completion Method – this method recognizes revenues an expense in

proportion to the completeness of the contracted project. This is commonly measured
through the cost-to-cost method.

8. Crop year basis – which expenses in the production of crops are deducted in the year in
which the gross income from the crop has been realized.
TAX REPORTING

The process of reporting taxes in the Philippines consists of five steps:

1. Registration
2. Filing’
3. Payment
4. Audit
5. Collection of Enforcement

Step 1. A person subject to any internal revenue tax shall register once with the appropriate
revenue office. Any person required filing a return; statement or document shall be registered
and assigned a Tax Identification Number (TIN). Only one TIN shall be assigned to a taxpayer.
Any person who shall secure more than one TIN shall be criminally liable.

• Registration Period. Every person subject to any internal revenue tax shall register once
with the appropriate Revenue District Officer (RDO).
• Annual Registration. The annual registration fee is P500 for every separate or distinct
establishment or place of business. It shall be paid upon registration and every year
thereafter on or before January 31.

Step 2-3. Every person who is required to register with the BIR shall file a return and pay such
taxes for each type of internal revenue tax for which he is obligated.

Types of Returns to the Government:

• Income tax returns – details of the taxpayer’s income, expense, tax due. tax credit and tax
still due to the government.
• Withholding tax returns – provide reports of income payments subjected to withholding tax
by the taxpayer-withholding agent.
• Information Returns – which do not involve any payment or withholding of tax but are
essential to the government in its tax mapping efforts and in its evaluation of tax
compliance.

Step 4-5. Compliance matters. A taxpayer must not forget to do the steps 1-3 on time;
moreover, completeness and accuracy of records must be always available as support in case
subjected for audit. Failure to comply means the BIR can enforce collection of tax dues plus
penalties and interest due to non-compliance.