INTRODUCTION TO INCOME TAX

Concept of Income Tax

An income tax is one levied on the income from property or an occupation. It is a direct tax upon the thing called
income.

Basic Definitions:

Gross Income – refers to what is income for taxation purposes

Taxable Income – as the pertinent items of gross income that are subject to tax after allowable deductions
Tax Base – the value of a certain goods, or property for taxation purposes

Characteristics of Gross Income:

1. Return on capital and resulted increased net worth at the moment of its generation
2. Realized benefit by the taxpayer (realization means actual or constructive receipt of in cash)
Example of constructive receipts of income:
1. credit to an account own by the taxpayer
2. declaration of a share of the profits of a general professional partnership
3. offsetting debt with right to receive dividends
4. cancellation of debt in payment of service

Which do not constitute gross income?

1. Receipts representing returns of capital
Examples:
a. Proceeds of life insurance policy (upon death of the insured)
b. Proceeds received by the insured (still living) representing return of premium

2. Unrealized income
Examples:
a. Appreciation of value of properties
b. Unrealized gains on investments

3. Those exempted by the Constitution, statues or treaty or contract with taxpayers

Examples:
a. Receipt of non-profit institutions from their main activities
b. Contributions to GSIS, SSS, PhilHealth, Pag-Ibig and
c. Retirement and separation benefits under certain circumstances
d. Tax holiday for entities registered pursuant to the Omnibus Investment Code
e. Income of foreign government or corporations owned or controlled by them

Income Tax

Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of
trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended,
less the allowable deductions, authorized for such types of income, by the Tax Code, as amended, or other special laws.

A person means an individual, a trust, estate or corporation. (Sec. 22[A] of the Tax Code)

Purpose of Income Tax

The imposition of the income tax is intended:

1. To raise revenue to defray the expenses of the government; and
2. To mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation which
places the burden on those best able to pay.

Characteristic of Philippine Income Tax

Philippine income tax has the following characteristics:

1. A national tax - It is imposed and collected by the National Government throughout the country.
2. A general tax – It is levied without a specific or predetermined purpose. Thus, the revenue from income tax
may be appropriated for general public purposes.
3. An excise tax – It is imposed on the right or privilege of a person to receive or earn income.

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 4. A direct tax – It is payable by the person upon whom it is directly imposed by law. It cannot be shifted or
passed on to others.
5. In general, a progressive tax for individual taxpayers – It is based upon one’s ability to pay. The higher
the taxable net income of the individual, the higher the marginal tax rate.
6. The income tax system is a comprehensive system – It adopts the citizen principle, the residence principle,
and the source principle.
7. Semi-global or semi-schedular system – Some types of taxable income are compounded or grouped together
without distinction, and after deducting expenses and other allowable deductions therefrom, are then subjected
to the same set of tax rate(s). This is known as the global tax system (or net income tax system).

However, there are some types of taxable income like passive income and certain capital gains which are
classified into different categories, and are accorded different tax treatments. Each category of income has its
own schedule of tax rates. This is known as the schedular tax system (or gross income tax system).

Schedular Tax System Global Tax System

Tax Treatment Income tax rules varies and made to Uniform tax treatment or rules
depend on the kind or category of
taxable income of the taxpayer
Characteristics:
1. Classification of income Categories or classifies income Does not categorize income
2. Tax rates Imposes different tax treatment and Imposes uniform tax rates
rates

Income Distinguished from “Capital”

 Capital is a fund; income is a flow. Capital is wealth, while income is the service (or fruit) of wealth. Capital is
the tree, income is the fruit.
 Amounts received as a return of capital are not income.

Theory of Separability or Severance Test of Income

Under the doctrine of severance test of income, in order that income may exist, it is necessary that there be a
separation from capital of something of exchangeable value.

The concept of income requires a realization of gain.

The following are examples which do not give rise to income nor to a realization of gain, and therefore no income tax
shall be imposed:
1. Stock dividends;
2. Mere increase in the value of property.

Requisites of Taxability of Income

1. There must be a gain or profit whether in cash or its equivalent;
2. The gain must be realized or received; and
3. The gain must not be excluded by law or international treaty from taxation.

Types of Transfers

1. 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

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 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.

3. Complex transactions
Complex transactions are partly gratuitous and partly onerous. These are commonly referred to as “transfer 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.

The excess of fair value over selling price is a gratuity or gift whereas the excess of the selling price over the cost is
an item of gross income.

What is meant by another entity?

Every person, natural or juridical, is an entity. Natural persons are living persons while juridical persons are those
created by law such as partnerships and corporations. An entity may be a taxable entity or an exempt entity. A
taxable item of gross income arises from transactions which involve another natural or juridical entity.

Gains or income derived between relatives, corporations, and between a partner and the partnership are taxable since
it is made between separate entities. Likewise, the income between affiliated companies such as between a holding or
parent company and its subsidiaries and between sister companies are taxable because each corporation is a separate
entity. This applies regardless of the underlying economic relationship.

However, the sales of a home office to its branch office are not taxable because they pertain to one and the same
taxable entity. Furthermore, the income between businesses of a proprietor should not be taxed since proprietorship
businesses are taxable upon the same owner. Note that a proprietorship business is not a juridical entity.

Benefits in the absence of transfers

The increase in wealth of the taxpayer in the form of appreciation or increase in the value of his properties or decrease
in the value of his obligations in the absence of a sale or barter transaction is not taxable.

These are referred to as unrealized gains or holding gains because they have not yet materialized in an exchange
transaction.

Examples of unrealized gains or holding gains:

1. Increase in value of investment in equity or debt securities
2. Increase in value of real properties held (revaluation increment)
3. Increase in value of foreign currencies held or receivable
4. Decrease in value of foreign currency denominated debt by virtue of favorable fluctuation in exchange rates
5. Birth of animal offspring, accruals of fruits in an orchard or growth of farm vegetables
6. Increase in value of land due to the discovery of mineral reserves.

Rendering of services
The rendering of services for a consideration is an exchange but does not cause a loss of capital. Hence, the entire
consideration received from rendering of services such as compensation income or service fees is an item of gross
income.

Income
All wealth which flows into the taxpayer other than a mere return of capital and includes gains. Income is a gain derived
from:
1. The use or employment of labor or capital, or both labor and capital; and/or
2. From the sale or other disposition of assets or property (both ordinary and capital)

Why is income taxed?

Income is the best measure of a taxpayer’s ability to pay.

Taxation of Gross Income under the NIRC:

A. Passive Income Tax
1. Capital gains tax – few final tax is imposed on certain gains on dealings on properties
Examples include final tax on:
a. Final tax on gain on sale of domestic stocks directly to buyer (withheld at source)

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 b. Final tax on sale of real property located in the Philippines classified as capital asset
2. Other withheld final tax – these are groups of passive income that are subject to withholding by the income
payor.
Examples include final tax on:
a. Interest on deposits with banks d. Winnings
b. Royalties e. Prizes
c. Dividends received from domestic corporation

B. Regular (Active) Income Tax – applies to all items of gross income that are generated by the taxpayer in the
ordinary course of business or to those items of passive income that are not covered by final taxes.

Examples active income:

1. Compensation income
2. Professional income
3. Business income
4. Those items of income that are excluded from capital gains tax
a. Gain on sale of properties located abroad
b. Gain on sale of properties located in the Philippines by non-residents
c. Gain on sale of other non-domestic stocks and non-real property capital assets
5. Those items of income that are excluded from other final taxes
a. Interest income on notes receivable (not deposit)
b. Prizes where the taxpayer has no intention or active effort to compete (Nobel Prize, cash awards to
“Most Outstanding Citizens of Manila”)
c. Dividends from foreign corporations
6. Others
a. Certain tax benefits (example: items of deductions claimed in the past that are subsequently recovered)
b. Obligations waived by the creditors in consideration of service

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Classification of Income According to Source

For income tax purposes,

the word “source” refers
to the activity, or
property, or labor that
gave rise or produced the
income.

Based on source, income

is classified as follows:
1. Income from
sources within
the Philippines;
2. Income from
sources without
the Philippines;
and
3. Income from
sources partly
within and partly
without the
Philippines.

Rules on Situs (whether earned within or outside the Philippines):

Situs – Place of taxation. It

is the state or political unit
which has jurisdiction to
impose a particular tax. The
state where the subject to
be taxed has a situs may
rightfully levy and collect the
tax. The situs is necessarily
in the state which has
jurisdiction or which
exercises dominion over the
subject in question.

Factors to Consider in
Determining Situs of
Taxation
1. Subject matter
(person, property,
or activity)
2. Nature of tax
3. Citizenship
4. Residence of the
taxpayer
5. Sources of income
6. Place of exercise,
business or
occupation being
taxed

How to determine income within and income without

Sources of Income Test of Source of Income

1. Income from services Place of performance
No. of days of performance in RP_________ x Compensation Received
No. of days of performance in RP and outside RP
2. Rent Location of property
3. Royalties Place of use of intangible

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4. Gain on sale of real property Location of property
5. Gain on sale of personal property
purchased in one country and sold in another Place of sale
6. Gain on sale of foreign shares of stock Place of sale
Income within (shares of domestic corporation treated as derived entirely from sources
7. Gain on sale of domestic shares of stock within the Philippines regardless of where the said shares are sold)
8. Interest Residence of debtor
9. Mining Place where mine is located
10. Farming Place where farm is located
Source of income
Produced and sold within Within
Produced and sold without Without
Produced in whole/part within and sold Partly within and without
without
Produced in whole/part without and Partly within and without
11. Manufacturing business*** sold within

12. Dividend
a. From domestic company
b. From Resident foreign company
Income within
The Pre-dominance test. If ratio is:
(< 50%) Less than 50%, the entire dividend purely without the Philippines
( > 50%) At least 50%, the dividend income partly within and partly without the
Philippines
From foreign corporation (based on the ratio of the gross income of the foreign
corporation for the preceding 3 years prior to declaration of dividends derived
from Philippine sources):
Philippine Gross income (3 years) x Dividend
Income within = Total Gross income (3 years)

c. Non-resident foreign corporation Income abroad

Deductions of Taxpayer Whose Taxable Income is From Philippine Sources Only

Gross income within Xxx
Less: Expenses, interest, losses and other deductions properly allocated to income within
Ratably portion of unallocated expenses, interest, etc
Phil. Gross income x Unallocated
expenses
Total Gross income (xxx)
Net Income xxx

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Computation of income within when independent factory or production price has not been established

Situs of Income

The situs of the income is the place of taxation of the income or the country which has jurisdiction to impose the tax.
For income tax purposes, income may be taxed in one or more or all of the following places or countries –
1. The place where the taxpayer is a citizen;
2. The place where the taxpayer is a resident; and
3. The place where the income is earned or derived.

Note:

Income Situs Rules

1. Interest income – Debtor’s residence
2. Royalties – Where the intangible is employed
3. Rent income – Location on the property
4. Service income- Place where the service is rendered
5. Gain on sale of properties
 Personal property
 Domestic securities – presumed earned within the Philippines
 Other personal properties – earned in the place where the property is sold

 Real property – earned where the property is located

6. Dividend income from”

 Domestic corporation – presumed earned within
 Foreign corporation
 Resident foreign corporation – depends on the pre-dominance test.

The predominance 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 dividend received is earned abroad

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  Non-resident foreign corporation – earned abroad

7. Merchandising
income – earned
where the property
is sold
8. Manufacturing –
earned where the
goods are
manufactured and
sold

Income Tax System of the Philippines

The income tax system of the Philippines may be characterized under two general categories, namely:
1. Gross income taxation, whereby a final tax is imposed on the gross amount of specified types of income, such
as interest income, royalty, prizes, dividends, and capital gains. This is also known as the schedular system
of taxation.
2. Net income taxation, whereby certain deductions are allowed and subtracted from the aggregate of incomes
not subject to final tax, and the tax computed is based on the resulting net income therefrom. This is also
known as the global system of taxation.

CONCEPT OF INCOME TAX

Problem 1: (Return of capital and Return on capital) Indicate the amount representing return of capital or return
on capital:
Consideration For the loss of Return of Capital Return on Capital
1 P1,000,000 Health
2 P500,000 P400,000 car
3 P300,000 P350,000 building
4 P600,000 Income
5 P1,200,000 Life

Consideration For the loss of Return of Capital Return on Capital

1 P1,000,000 Health P1,000,000 P0
2 P500,000 P400,000 car P400,000 P100,000
3 P300,000 P350,000 building P300,000 P0
4 P600,000 Income P0 P600,000
5 P1,200,000 Life P1,200,000 P0

Problem 2: (Income tax and Transfer tax) Check the box where each of the following items is taxable:
Transaction Income tax Transfer tax
1 Barter of properties
2 Sale of goods
3 Rendering of services
4 Donation of properties
5 Transfer of properties from a decedent to the heirs
upon death
6 Transfer for less than full and adequate
consideration

Problem 2: (Income tax and Transfer tax) Check the box where each of the following items is taxable:
Transaction Income tax Transfer tax
1 Barter of properties √
2 Sale of goods √
3 Rendering of services √
4 Donation of properties √
5 Transfer of properties from a decedent to the heirs √
upon death

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6 Transfer for less than full and adequate √ √
consideration

Problem 3: (The Concept of income) Check the appropriate box whether the following are exempt or taxable:
Item Taxable Exempt
1 Winnings from gambling
2 Income from swindling
3 Indemnity for moral damages
4 Harvested fruits from an orchard
5 Compensation income
6 Interest income
7 Amount received by the insured in excess of
insurance premium paid
8 Proceeds of life insurance received by the heirs of
the insured
9 Gain on sale of goods by the home office to its
branch
10 Gain on sale of goods and services between
relatives
11 Gain on sale of goods by a parent corporation to a
subsidiary corporation
12 Appreciation in the value of land
13 Birth of animal offspring
14 Income of a registered Barangay Micro-Business
Enterprise
15 Cancellation of debt out of gratuity of the creditor
16 Cancellation of debt by the creditor in exchange of
services rendered by the debtor
17 Matured interest from coupon bonds
18 Receipt a bank loan
19 Salaries of a minimum wage earner
20 PCSO or lotto winnings
21 Benefits from GSIS, SSS, Pag-ibig or Philhealth
22 Discovery of hidden treasure

Item Taxable Exempt

1 Winnings from gambling √
2 Income from swindling √
3 Indemnity for moral damages √
4 Harvested fruits from an orchard √*
5 Compensation income √
6 Interest income √
7 Amount received by the insured in excess of √
insurance premium paid
8 Proceeds of life insurance received by the heirs of √
the insured
9 Gain on sale of goods by the home office to tis √
branch
10 Gain on sale of goods and services between √
relatives
11 Gain on sale of goods by a parent corporation to a √
subsidiary corporation
12 Appreciation in the value of land √
13 Birth of animal offspring √*
14 Income of a registered Barangay Micro-Business √
Enterprise
15 Cancellation of debt out of gratuity of the creditor √
16 Cancellation of debt by the creditor in exchange of √
services rendered by the debtor
17 Matured interest from coupon bonds √
18 Receipt a bank loan √
19 Salaries of a minimum wage earner √
20 PCSO or lotto winnings √
21 Benefits from GSIS, SSS, Pag-ibig or Philhealth √
22 Discovery of hidden treasure √**
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*These are unrealized income taxable upon realization by sale or disposition.
**Taxable only when sold

CLASSIFICATION OF TAXPAYERS

Problem 1: (Income taxpayer classification) Indicate the appropriate classification for each of the following
taxpayers:

DC Domestic corporation
RFC Resident foreign corporation
NRFC Non-resident foreign corporation
RC Resident citizen
NRC Non-resident citizen
RA Resident alien
NRA-ETB Non-resident alien engaged in trade or business
NRA-NETB Non-resident alien not engaged in trade or business
NT Not a taxpayer

Person or Entity Classification

1 A fat Mexican tourist
2 A hardworking overseas Filipino worker
3 An expatriate employee (assuming filipino)
4 A Filipino who is privately employed in the Philippines
5 An unemployed Filipino residing in the Philippines
6 A Chinese businessman who has his domicile in the Philippines for 6 months
7 A Japanese who married a beautiful Filipina and has been residing in the Philippines for 2
years
8 A 2nd year Korean college student studying in the Philippines
9 A corporation incorporated under Philippine law
10 A foreign corporation doing business in the Philippines
11 Trust designated by the donor as irrevocable
12 Trust designated by the donor as revocable
13 A business partnership
14 A joint venture organized under a foreign law and is not operating in the Philippines
15 An estate of a Filipino citizen judicially administered in Japan
16 An estate of a Filipino citizen extra-judicially administered in the Philippines
17 A taxable joint venture organized in the Philippines
18 A non-profit corporation organized in the Philippines

Person or Entity Classification

1 A fat Mexican tourist NRA-NETB
2 A hardworking overseas Filipino worker NRC
3 An expatriate employee NRC
4 A Filipino who is privately employed in the Philippines RC
5 An unemployed Filipino residing in the Philippines RC
6 A Chinese businessman who has his domicile in the Philippines for 6 months NRA-ETB
7 A Japanese who married a beautiful Filipina and has been residing in the Philippines for 2 RA
years
8 A 2nd year Korean college student studying in the Philippines RA
9 A corporation incorporated under Philippine law DC
10 A foreign corporation doing business in the Philippines RFC
11 Trust designated by the donor as irrevocable RC*
12 Trust designated by the donor as revocable NT
13 A business partnership DC
14 A joint venture organized under a foreign law and is not operating in the Philippines NRFC
15 An estate of a Filipino citizen judicially administered in Japan NRC*
16 An estate of a Filipino citizen extra-judicially administered in the Philippines NT
17 A taxable joint venture organized in the Philippines DC
18 A non-profit corporation organized in the Philippines DC

*Treated as individual income taxpayers by the law

Expatriate -a person who lives outside their native country.

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 Taxpayer Length of Stay Tax Base Tax rate
Resident Citizen Taxable income – Sec. 24 (A)(2)
World
Non-resident citizen A citizen staying abroad for at least 183 Taxable income – Sec. 24 (A)(2)
days (365 days/2) Philippines
Resident alien An alien staying in the Philippines for more Taxable income – Sec. 24 (A)(2)
than one year Philippines
Non-resident alien engaged in An alien who stays in the Philippines for more Taxable income – Sec. 24 (A)(2)
trade or business than 180 days in any calendar year. Philippines
Non-resident alien not engaged An alien who stays in the Philippines for an Gross income – 25%(Sec.25(B))
in trade or business aggregate period at least 180 days in any Philippines
calendar year. (360 days /2)
Taxable estate – estate under judicial settlement. Taxable income – Sec. 24 (A)(2)
Taxable trust – trust irrevocably designated by the grantor. World

CLASSIFICATION OF INCOME ACCORDING TO SOURCE

Problem 1: (General Income Tax Rule) Check the box that properly corresponds to the taxability of the following
taxpayers:
Taxpayer World income Philippine income
1 Non-resident citizen
2 Resident alien
3 Non-resident alien engaged in trade or business
4 Resident foreign corporation
5 Resident citizen
6 Non-resident alien not engaged in business
7 Non-resident foreign corporation
8 Domestic corporation
9 Taxable trust established by a Filipino citizen in the Philippines
10 Taxable estate of a non-resident citizen judicially administered abroad

Taxpayer World income Philippine income

1 Non-resident citizen √
2 Resident alien √
3 Non-resident alien engaged in trade or business √
4 Resident foreign corporation √
5 Resident citizen √
6 Non-resident alien not engaged in business √
7 Non-resident foreign corporation √
8 Domestic corporation √
9 Taxable trust established by a Filipino citizen in the Philippines √
10 Taxable estate of a non-resident citizen judicially administered abroad √

Problem 2: (Location and Situs of Income) Mr. X has the following income in 20x7:
Within Without
P10,000 interest income from a non-resident Japanese friend
P40,000 interest income from Philippine residents
P500,000 rent income from a commercial complex located in the USA which is
leased to resident Filipinos
P200,000 rent income from a boarding house in Baguio City, Philippines
P200,000 professional fees rendered to Chinese clients in Hong Kong
P300,000 salary from a resident employer
P100,000 gain from sale of merchandise imported and sold to Filipino residents
P50,000 gain on sale of merchandise purchased locally and sold during her
business travel in Hong Kong.
P400,000 gain on sale of the boarding house located in Baguio City to a non-
resident buyer.
Total

Required: Compute the total income earned from sources

1. Within the Philippines
2. Outside the Philippines

Within Without

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P10,000 interest income from a non-resident Japanese friend P10,000
P40,000 interest income from Philippine residents P40,000
P500,000 rent income from a commercial complex located in the USA which is 500,000
leased to resident Filipinos
P200,000 rent income from a boarding house in Baguio City, Philippines 200,000
P200,000 professional fees rendered to Chinese clients in Hong Kong 200,000
P300,000 salary from a resident employer 300,000
P100,000 gain from sale of merchandise imported and sold to Filipino residents 100,000
P50,000 gain on sale of merchandise purchased locally and sold during her 50,000
business travel in Hong Kong.
P400,000 gain on sale of the boarding house located in Baguio City to a non- 400,000
resident buyer.
Total P1,040,000 P760,000

Problem 3: (Location and Situs of Income) Joy earns franchise fees from his Hot Burger franchise. She also deals in
properties. Joy realized the following gains in 20x7:
Within Without
P500,000 royalty fees from local Hot Burger outlets
P200,000 royalty fees from foreign Hot Burger outlets
P100,000 gain from sales of equipment to foreign franchisees
P200,000 gain from sale of equipment to local franchisees
P50,000 gains from sale of investment in domestic stocks to foreign investors
P40,000 gains from sale of investments in foreign stocks to Filipino inventors.
(The stock is presumed stocks of a non-resident foreign corporation)
Total
Required: Compute the total income earned from sources
1. Within the Philippines
2. Outside the Philippines

Within Without
P500,000 royalty fees from local Hot Burger outlets P500,000
P200,000 royalty fees from foreign Hot Burger outlets P200,000
P100,000 gain from sales of equipment to foreign franchisees 100,000
P200,000 gain from sale of equipment to local franchisees 200,000
P50,000 gains from sale of investment in domestic stocks to foreign investors 50,000
P40,000 gains from sale of investments in foreign stocks to Filipino inventors. 40,000
(The stock is presumed stocks of a non-resident foreign corporation)
Total P950,000 P340,000

Problem 4: (Location and situs of income) Compute how much is earned within and earned outside the Philippines
from each of the following independent cases:
Income Description Within Without
1. Allan earned P100,000 interest income. 40% of these were from non-resident P60,000 P40,000
debtors
2. A finance company earned P1,000,000 royalties from a franchise; 40% of these P600,000 P400,000
were derived abroad
3. Batan earned P100,000 rent from OFWs in his apartment in the US. He also P40,000 P100,000
earned P40,000 rent from his Philippine condominium unit.
4. Carlo, a resident citizen, works home online and submits his output to clients. P120,000 (situs P0
He collected P100,000 service fee from foreign clients and P20,000 from resident is where
clients rendered)
5. Enchon rendered audit services to client in Afghanistan for P500,000. The P0 P500,000
services were paid in Afghanistan
6. Jun has a store in a tourist park in Cebu City, Philippines. He earned a total of P40,000 (situs P0
P40,000 gain from selling souvenir items, 40% were from foreign tourist. its place of sale)
7. Mariano sold to his friend abroad a commercial building located in Quezon City, P2M (situs is P0
Philippines at a gain of P2,000,000 location)
8. John sold his stocks in a domestic corporation to a foreign investor at a gain of P50,000 P0
P50,000.
9. Mario received P20,000 dividends from a domestic corporation and P30,000 P20,000 P30,000
dividend income from a non-resident foreign corporation
10. Andrew received P40,000 dividend from a resident foreign corporation 60% of its P24,000 (60% x P16,000
historical income is from the Philippines. P40,000) (40% x
P40,000)
11. ABC, Inc. manufactures in the Philippines and sells to unaffiliated export clients. P100,000 P0 Income

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 Income Description Within Without
A total of P100,000 gross income were earned during a period. is
presumed
within*
12. ABC manufactures abroad and sells to its Philippines branch at market prices. P150,000 P100,000
Production cost abroad were P200,000. Billings to branch totaled P300,000 while
branch sales totaled P450,000
13. Caloy received P100,000 dividend from a resident foreign corporation which P0 P100,000
realized 40% of its income from the Philippines. (fails
dominance
test)
14. Eloy received P20,000 dividend from a non-resident foreign corporation P0 P20,000
15. Davao plant manufactures tables and sells to resident clients. A total of P400,000 P0
P400,000 gross income were realized during a period.
*Since manufacturing activity is within, the sale is presumed agreed within. Hence, the entire gain is earned within.

Problem 5: (Situs of taxation) An individual taxpayer has the following data on income and expenses in 20x11:
Gross income, Philippines P220,000
Rent on building, Philippines, net of 5% withholding tax 95,000
Rent on commercial building, USA 160,000
Interest income, debtor resides in Hongkong 10,000
Dividends from Ford Motors, foreign company, declared in 20x11: 50,000
Note: Gross income of Ford Motors follows:
Within Without
20x8 P300,000 P500,000
20x9 400,000 100,000
20x10 500,000 200,000
20x11 350,000 150,000
Royalties received from Ford Motors for use patents in USA 30,000
Dividends received from Walmart Corp. USA declared in 20x11 80,000

Note: Gross income of Walmart for the preceding 2 years prior to declaration of dividend follow:
Within Without
20x9 P400,000 P600,000
20x10 400,000 400,000
Gain on sale, Philippines, Land located in Japan 300,000
Gain on sale, Philippines, car purchased in Japan 50,000
Expenses:
Business expenses, Philippines 100,000
Depreciation building in Philippines 20,000
Depreciation building in USA 10,000
Expenses, sale of car in the Philippines 10,000
Expenses, sale of land in the Philippines 50,000
Unallocated expenses 60,000
Required:

1. How much is the income from sources within?

A. P630,000 B. P600,000 C. P450,000 D. P400,000

2. How much is the income from sources without?

A. P630,000 B. P600,000 C. P450,000 D. P400,000

3. Determine the taxable income assuming the individual taxpayer is NRA-ETB. (His country allows P30,000 personal
exemption to single Filipinos not residing in his country).

A. P246,000 B. P216,000 C. P196,000 D. P290,000

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 Within Without
Gross income 220,000
Rent income (P95,000 / 95%) 100,000
Rent income 160,000
Interest income 10,000
Dividends 30,000 20,000 Within Without
Royalties 30,000 20x8 300,000 500,000
Dividends 80,000 20x9 400,000 100,000
Gain on sale (Land located in Japan) 300,000 20x10 500,000 200,000
Gain on sale (Car - Philippines) 50,000 1,200,000 800,000
Gross income 400,000 600,000
1,200,000
Expenses 2,000,000
Business expenses, Philippines 100,000 60%
Depreciation building, Philippines 20,000
Expenses, sale of car - Philippines 10,000 400,000
Unallocated expenses 24,000 36,000 1,000,000
Expenses 154,000 36,000 40%

Taxable Net Income 246,000

4. Determine the taxable income assuming the individual taxpayer is NRA-NETB.

A. P400,000 B. P600,000 C. P810,000 D. P1,00,0000

5. Determine the taxable income assuming the individual taxpayer is resident citizen.
A. P400,000 B. P600,000 C. P810,000 D. P1,00,0000

(1,000,000 – 154,000 – 36,000) = P810,000

Problem 6: A corporation manufactures goods in the Philippines, which are sold exclusively in foreign countries. The
following data are taken from the records of the corporation:
Gross sales, without P5,000,000
Gross income from sales, without 3,000,000
Operating expenses 2,100,000
Value of properties, Philippines 300,000
Value of properties, wihout 600,000

Required: Determine the taxable income within and without

(900,000/2 x 300K/900K) + (900,000/2 x 0/5M)

P150,000 within

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