Introduction

to Income Tax
CHAPTER 3
 OBJECTIVES
Able to learn the following:
1. The concepts of gross income
2. Types of income taxpayers
3. General rules in income taxation
4. Income tax situs rules
 Concept of Income

Gross Income Taxable Income

01 “Taxable income”
02 Under NIRC, gross
income less deductions
and personal exemptions
- Any inflow of wealth allowed by the law.
to the taxpayer from
whatever source,
legal of illegal, that
increases net worth.
 Elements Don'

...
t forg
et

GROSS INCOME:

1. Return on capital that increases net worth

2. Realized benefit
3. Not exempted by law, contract or treaty
 01
Return on Capital
● Increases the taxpayer’s net worth.
● taxable
 02
Return of Capital
● Maintains net worth
● as compensation for their loss
● Not taxable
Return on Capital Return of Capital
Selling 500 Total
Price return ❏ Life
❏ Health
Cost 300 Return of
capital
❏ Human reputation

Mark-up 200 Return on

Capital
 ● Excess amount received over
premiums paid after maturity of

Life ●
the policy
Gain realized by the insured from
the assignment or sale of his
insurance policy
The following are taxable ● Interest income from the unpaid
return on capital from
balance of the proceeds of the
insurance policies:
policy
● Excess of the proceeds received
over the acquisition costs
 Recovery of lost capital
Vs
Recovery of lost Profits
Recovery of Recovery of Taxable
lost capital lost profits 1. Proceeds of crops or
livestock insurance
● Results to decrease ● Does not decrease
2. Guarantee payments
in net worth net worth
3. Indemnity received from
● Maintains net worth ● Increases net worth
patent infringement suit
● Return on capital
 Realized Benefit

Benefit Not benefits:

“The benefit concept” ● Receipt of a loan
● Discovery of lost
● Any form of properties
advantage derived by ● Receipt of money
the taxpayer or property to be
● There is a benefit held in trust for, or
when the net worth of to be remitted to
the taxpayer increases another person
 Realized Benefit

Realized Realized benefit

“The realized concept” requisit:
● Means earned
● There is a degree of ● Exchange transaction
undertaking or ● Transactions involves
sacrifice from the another entity
taxpayer to be entitled ● Increases the net worth of
of the benefit. the recipient
 Types of transfers
Complex
Bilateral Unilateral Transactions
- Or exchange Referred to as Referred to as
- Referred to as “gratuitous “transfers for less than
“onerous transactions” full and adequate
transactions” consideration”

a. Sale a. Succession Partly gratuitous and

b. barter b. Donation partly onerous
 Another Entity
- Every person, natural or juridical
- Natural persons - living persons
- Juridical persons - created by law
(partnerships and corporations)
- May be taxable or exempt

● Sales of a home office to its branch

office are not taxable
● Proprietorship business is not a juridical
entity
 Benefits in the absence of transfers
● The increase of 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
● This increase of wealth is not taxable
● Also known as unrealized gains or
holding gains

“Unrealized
gains or
holding gains”
Rendering of
services
 Mode of Receipt /
Realization Benefits
1. Actual receipt
2. Constructive Receipt

Inflow of wealth w/o

increase in net worth
Items exempted by law from taxation
● Income of qualified employees trust
fund
● Revenues of non-profit, non-stock
educational institutions
● SSS, GSIS, Pag-ibig or Philhealth
● Salaries of minimum wage earners /
senior citizen
● Regular income of BMBEs
● Income of foreign governments /
owned and controlled corporations
● Income of international missions and
organizations with income tax immunity
 Types of Income Taxpayers

Individuals Individuals Corporations

● Alien
○ Resident alien
● Citizen ● Domestic corporation
○ Non-Resident
○ Resident Citizen ● Foreign corporation
Alien
○ Non-Resident ○ Resident foreign corp.
■ Engaged
Citizen ○ Non-resident foreign
in trade or
corp.
business
■ Not
engaged
in trade or
business
 General Classification
rule for Individuals
Intention Length of Stay
● Regarding the nature ● Citizens - more than 183 days
of stay within or abroad are non-resident
outside the Philippines ● Aliens - more than 1 year stay
will determine his in the Phils. Are resident
residency ● Aliens - not more than 1 year
● Short term will not but more than 180 days are
result to non-resident
reclassification ● Aliens - less than 180 days are
● Long term will result to non-resident aliens
reclassification
 get
Taxable
Don't for
Estates and
ESTATES Trusts
- Under judicial settlement are treated
as individual taxpayers.
- Taxable on the income of the
properties left by the decedent
- Under juridical settlement are
exempt entities but taxable to the
heirs
 get
Taxable
Don't for
Estates and
TRUSTS
Trusts
- Irrevocably designated by the
grantor is treated an individual
taxpayer thus the opposite of the
revocable designation
- Income in property under
irrevocable is taxable to the trust
while income to the revocable is
taxable to the grantor not the trust
Includes one person corporations
(OPCs), partnerships, no matter
how-created or organized,
joint-stock companies, joint accounts,
association or insurance companies
—Corporation
Domestic
Organized in
accordance with
Philippine laws
Foreign
Organized under a
foreign law

Special
● Resident
● Non-resident

Domestic or foreign
corporations which are
subject to special tax
rules or preferential tax
rates
 Other Corporate Taxpayers
One-person
Corporation
● Business organization
● A corporation with a
single stockholder who
may be a natural person,
trust or an estate
Partnership
owned by 2 or more
persons for the purpose
of dividing the profits
○ General professional
partnership (GPP)
○ Business Partnership
 Other Corporate Taxpayers
Joint Venture
● Business undertaking for
a particular purpose
● Maybe partnership or
corporation
○ Exempt joint venture
○ Taxable joint venture
Co-ownership
● Is a joint ownership of a
property for the purpose
of preserving or dividing
the income
● Is not a taxable entity
but the co-owners are
taxable on their share on
the income
The General Rules in Income Taxation
Types of Income Place of Taxation (situs)

Interest Income Debtor’s residence

Royalties Where the intangible is employed

Rent Income Location of the property

Service Income Place where the service is

rendered

Income Situs Rules

 Other Income Situs Rules
Gain on sale of
properties Dividend Income

● Personal Property
● Domestic Corporation
○ Domestic Securities
○ Other personal
● Foreign Corporation
○ Resident
properties
○ Non-resident
● Real Property
 Other Income Situs Rules
Merchandising Manufacturing
Income Income

● Earned where the goods

● Earned where the
are manufactured and
property is sold
sold
Other Income Situs Rules
Manufacturing
Income
 02
Activities