INTRODUCTION TO

INCOME TAXATION
Module 3
 LEARNING OBJECTIVES
After completing the lesson, the students will be able to…..
 Understand the concept of income and enumerate the elements
of gross income.
 Identify the types of income taxpayers, and classify the types of
citizens and alien.
 Discuss the general classification rule for individuals and corporate
taxpayers.
 Discuss the general rules in income taxation and situs of income.
 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?
Gross income is defined as any inflow of
wealth to the taxpayer fro, 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
a. Return on capital that in
creases net worth
b. Realized profit
c. Not exempted by law, co
ntract or treaty

Return on Capital
that Increases Net
Worth
Recovery of lost capital vs.
recovery of lost profit
The recovery of loss capital
covers the decrease in net worth
while the recovery of loss profits
does not cover the decrease in net
worth.
Capital items deemed
with infinite value
a. Life
b. Health
c. Human Reputation
The following are taxable
return on capital from
insurance policies:
 Any excess amount received
over premiums paid by the
insured upon surrender or
maturity of the policy.
 Gain realized by the insured
from the assignment or sale of
his policy.
 Interest income from the unpaid
balance of the proceeds of the
policy.
 Any excess of the proceeds
received over the acquisition
costs and premium payments by
an assignee of a life insurance
policy.
 Realized Profit
Types of Transfer
Realized Benefit  Bilateral transfer of exchanges
Benefit means any form of  Unilateral transfers
advantage derived by the  Complex transactions
taxpayer. Realized means earned. Benefits in the absence of
transfers can be realized through:
Requisites:  Actual Receipt
Concepts of
 There must be an exchange  Constructive Receipt
Realized
transaction. Benefit
 The transaction involves
What is meant by another entity?
another entity.
 It increases the net worth of Every person, natural or
the recipient. juridical, is an entity. An entity
maybe taxable or an exempt
entity.
Types of Income Taxpayers
Individuals
Citizen
01 a. Resident citizen
b. Non-resident resident
Alien
a. Resident alien
02 b. Non-resident alien
Non-Resident Alien
 Engaged in trade or business
 Not engaged in trade or business
03
Taxable Estates and Trusts
Types of Income Taxpayers
Corporations

01 Domestic Corporation

Foreign Corporation
02
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 Philippines at the time of adoption of the Constitution on
February 2, 1987.
b. Those whose fathers or mothers are citizens of the Philippines.
c. Those born before January 17, 1973 of Filipino mothers elected Filipino Citizenship
upon reaching the age of majority.
d. Those who are naturalized in accordance with the law.
 Individual Income Taxpayers
Classification of citizens
a. Resident citizen – a Filipino citizen residing in the Philippines and those Filipinos who are
working in Philippine embassies or Philippine consulate offices.
b. Nonresident citizen includes:
 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 of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for an employment on a permanent basis.
 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;
 A citizen who has been previously considered as non-resident citizen and who arrives
in the Philippines at any time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident citizen for the taxable year in
which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
 Individual Income Taxpayers
Alien
a. Resident Alien – an individual who is residing in the Philippines but not a citizen thereof, such as:
 An alien who lives in the Philippines without definite intention as to his stay; or
 One who comes to the Philippines for a definite purpose which in its nature would require an
extended stay and to that end makes his home temporarily in the Philippines, it may be his intention
at all times to return to his domicile abroad;
b. Non-resident Alien – an individual who is not residing in the Philippines and who is not a citizen thereof;
 Non-resident aliens engaged in business (NRA-ETB) - Aliens who are staying in the Philippines for
more than 180 days but less than 1 year
 Non-resident aliens not engaged in business (NRA-NETB) –
 Aliens who come to the Philippines for a definite purpose which in its nature may be promptly
accomplished
 Aliens who stayed in the Philippines for less than 180 days
 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 classification.

2. Length of Stay
In default of such documentary proof, the length of stay of the taxpayer is considered:
a. Citizens staying abroad for a period of at least 183 days (6 months) are considered non-resident.
b. Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable year is
considered resident.
c. Aliens who are staying in the Philippines for less than 1 year, but more than 180 days are deemed
non-resident alien engaged in business.
d. Aliens who stayed in the Philippines for less than 180 days are considered nonresident alien not
engaged in trade or business.
 Taxable Estates and Trusts
a. Estate
Estate refers to the properties, rights and obligations of a deceased person not extinguished
by his death. The income of the properties left by the decedent under judicial settlement is
taxable to the estate while the income of the estate under extrajudicial settlement is taxable
to the heirs.

b. Trusts
A trust is an arrangement whereby one person (grantor or trustor) transfers property to
another person (beneficiary), which will be held under the management of a third party
(trustee or fiduciary). The income of the properties held in irrevocable trust is taxable to
the trust (considered an individual taxpayer). The income of the properties held in revocable
trust is taxable to the granted (not considered an individual taxpayer). When the trust
agreement is silent as to revocability of the trust, the trust is presumed revocable.
 Corporate Income Taxpayers
Corporations shall include partnerships, no matter how created or organized, joint stock
companies, joint accounts, association, or insurance companies, except general professiona
l partnerships and a joint venture-consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal, and other energy
operations to an operating consortium agreement under a service contract with the
government. This means that corporation includes both profit-oriented and non-profit
institutions such as charitable institutions, cooperatives, government agencies and
instrumentalities, associations, league, civic or religious and other organizations.
 Corporate Income Taxpayers
Domestic Foreign Special
Corporation Corporation Corporation
Corporations organized
under foreign law.
Domestic or foreign
Corporations
corporations which are
organized in 2 Types
subject to special tax
accordance with the  Resident Foreign
rules or preferential
Philippine laws. Corporation
tax rates.
 Non-resident
Foreign Corporation
 Other Corporate Taxpayers

Partnership Joint Ventures Co-ownership

A business undertaking
Types for a particular purpose.
It is a joint ownership
 General
of a property for the
Professional Types
purpose of preserving
Partnership  Exempt Joint
the same and/or
 Business Ventures
dividing its income.
Partnership  Taxable Joint
Ventures
 The General Rules for Income Taxation

Taxpayers Taxable on Income Earned

Within Without
Individual taxpayers
Resident citizen X X
Non-resident citizen X
Resident alien X
Non-resident alien X
Corporate taxpayers
Domestic corporation X X
Resident foreign corporation X
Non-resident foreign corporation X
 Situs of Income
Situs of Income vs. Interest income 01
Source of Income Debtor’s residence
Source of income
pertains to the activity or Royalties 02
property that produces Where the intangible is
the income while situs employed
of income is the place of
Rent income 03
where income is taxable. Location of the property

Service income 04
Place where the service is
rendered
 Other Income Situs Rule
Gain on Sale of Dividend Merchandising Manufacturing
Properties Income income income

 Domestic
Corporation Earned where the
 Personal  Foreign Corporation Earned where the goods are
Property Resident Foreign
Corporation property is sold manufactured
Non-resident
 Real Property Foreign Corporation
and sold
 Questions to Ponder
1. What are the characteristics of gross income?
2. What are capital items considered with infinite value? Enumerate and
explain briefly.
3. When is income considered realized?
4. What are the classifications of income taxpayers? Briefly explain each
class.
5. What is situs of income? How does it differ from source of income?
6. What are the income situs rules? Classify the situs of each income
discussed in this module.
 Required Readings and Other
Learning Resources
1. Chapters 3, pp.63 – 78: Banggawan, Rex B. 2019. INCOME
TAXATION LAWS, PRINCIPLES, AND APPLICATIONS.
Real Excellence Publishing., Pasay Default Barangay, Pasay
City, Philippines.

2. https://www.bir.gov.ph/index.php/taxinformation/withholdin
g-tax.html
 Learning Activities/Self-Tests
Chapters 3, pp.83 – 99: Banggawan, Rex B. 2019. INCOME TAXATION
LAWS, PRINCIPLES, AND APPLICATIONS. Real Excellence Publishing.,
Pasay Default Barangay, Pasay City, Philippines.
 Appendix: Course Materials Evaluation
Adopted: BEST PRACTICES AND SAMPLE QUESTIONS FOR COURSE EVALUATION SURVEYS. Retrieved from
https://assessment.provost.wisc.edu/best-practices-and-sample-questions-for-courseevaluation-surveys//.