Income Taxation Excise tax – a legislated tax on specified

Module 1: Introduction and Basic goods or services at purchases such as

Principles fuel, tobacco, and alcohol.
Income Tax – tax on all yearly profits
arising from property, profession, trade or Basic of Taxing Income
business, or a tax on person’s income,  State partnership Theory
emoluments, profits and the like. The basis of government in taxing income
- Taxes is what we paid for. emanates from the State’s partnership in
the production of income by providing
Taxation – Lifeblood of the nation protection, resources, incentives and
- Without taxes, government proper climate for such production.
cannot run
General Principles of Income Taxation
3 Fundamental Power Taxpayer Taxable Income
Police Power – the power of the state of Resident citizen All income derived
promoting public welfare by restraining from sources
and regulating the use of liberty and within and without
property. the Philippines.
- State power to regulate Non- Resident Taxable only on
Power of Taxation – the process by which citizen income derived
the state through it is law- making body from sources
within the
(Legislative Branch) raises revenue to
Philippines.
defray the necessary expenses of
Alien (whether Taxable only on
government.
resident or non- income derived
- To charge revenue, taxes for resident) from sources
all income of whatever source within the
Power of Eminent Domain – the power of Philippines.
the state to take private property for public Domestic Taxable only on
purpose upon payment of just Corporation income derived
compensation. from sources
- Taking of private property for within and outside
pubic use the Philippines.
Foreign Taxable only on
Nature of Income Tax Corporation income derived
 An income tax is generally an from sources
within and without
excise tax and not a tax on
the Philippines.
property. It is levied upon the
privilege of receiving income or
profit.
In Short…
 Only Resident Citizen and Domestic
Corporation are taxable on their
WORLDWIDE Income
 Other types of individual and
corporate taxpayers (i.e. non resident
citizen, non-resident alien, foreign
corporation) are taxable only on
income derived from sources WITHIN
the Philippines.
Animus Rivertandi – intend to return
Income
 Refers to all wealth which flows into
the taxpayer other than a mere return
of capital
 Includes the forms of income
specially described as gains and
profits; including gains derived from
the sale or disposition of capital
assets
Income
 Flow of service rendered by capital by
payment of money from it or any
benefit rendered by a fund of capital
in relation to such fund through a
period of time.
 Kapag ang Negosyo hindi nagsasara
ibig sabihin may income o kumikita at
habang tumatagal lumalaki yung tax
nila kaya yung iba nagpapalit ng
pangalan ng business.
 Take note: Mere advance in the value
of the property or of a corporation in
no sense constitutes the income
specified by law. Such advance
constitutes and can be treated merely
as an increase in capital.
What is the nature of income?
 Income is the flow of service
rendered by that capital by the
payment of money from it or any
other benefit rendered by a fund of
capital in relation to such fund
through a period of time;
 Income is the “fruit” of capital or labor
severed from the “tree”
 Kung walang capital hindi tayo
magkakaroon ng income.
Distinctions between Capital and Income
Capital Income
Constitutes the Any wealth which
investment which flows into the
is the sour e of taxpayer other
the income than a mere
return of capital
It is the wealth Is the service of
which is the wealth, the fruit of
source of income capital
Fund Flow
Not subject to tax Subject to tax
 Yung capital na nilagay mo sa
business may tax nay un dati
 That capital is prior income na natax
na
Examples
a) Loans Receivable
Receipt of payment;
Principal – mere return of capital
Interest paid on such loans –
return on capital
b) Sale of Merchandise
Receipt of payment;
Representing Cost of Sales –
return of capital
 Representing the profit(mark-up) -
return on capital
When is income taxable?
Element of Taxable Income:
 There is income, gain or profit
(existence of income)
 The income, gain or profit is not
exempt or excluded from income tax
 The income, gain or profit is
received or realized during the
taxable year (realization of income)
o Mawala lang kahit isa hindi na
sya pwede maging Income
Taxable
When is income considered received for
income tax purposes?
1. If actually or physically received by
the taxpayer (actual receipt); or
2. If constructively received by the
taxpayer (constructive receipt)
Note: Actual – hawak / nabayaran na/
nasayo na yung resibo after mo bayaran
Constructive – credited to the account/
utang / hindi actual kasi hindi pa
naibibigay or hindi mo pa nababayaran
kaya next quarter need mo siya bayaran/
ikakaltas after ng taon.
Principle of Constructive Receipt for Tax
Purposes
Income which is credited to the account of
or set apart for a taxpayer and which may
be drawn upon by him at any time is
subject to tax for the year during which
they are so credited or set apart, although
not then actually reduced to possession.
When is income realized?
Conditions:
1. The earning process is complete or
virtually complete; and
2. An exchange has taken place
Note: nagawa mo na, nakuha na at
nakahiwalay na yung capital at income mo
1989 Bar Question:
In 2000, ABC Corporation had a capital
stock of 1,000 shares without par value. At
the time of its incorporation, the value of
each no-par value share was P10. In
2011, due to its profitable operations, the
corporation earned a surplus of
P200,000.00. The Corporation’s Board of
Directors increased the stated value of
each share by P190, making each share
worth P200. The BIR, for income tax
purposes assessed each stockholder for
the P190 increase. Is the BIR correct?
Answer:
No. The stockholders have not physically
or constructively received any income
subject to tax. There was no change in the
proportion of their ownership in the
corporation considering that the shares of
stock are without par value. Furthermore,
there was no realization of the income
through the change in stated value. When
the stockholder disposes of the shares,
then the same would be subject to capital
gains taxes.
Year 2000 Capital 1000 w/o
 Stock par value
Year 2011 200k surplus
Php 200
par value
Note: No par value = no equivalent share
- Hindi pwedeng itax kasi hindi moa
lam ang par value kung magkano
ang share kaya hindi pwede.
- No parvalue kaya bawal itax
- Pag Nakita mo na yung par value
tsaka lang pwede mo siya itax
-
Tests for Income Determination:
1) Realization/ Severance Test
 There is no taxable income until
there is a separation from capital of
something of exchangeable value.
 Income is not deemed realized until
the fruit has been plucked from the
tree.
o Kapag pinagseparate na yung
capital sa income
2) Claim of Right Doctrine
 A taxable gain is conditioned upon
the presence of a claim of right to
the alleged gain and the absence of
definite unconditional obligation to
return or repay.
o Also known as Doctrine of
ownership
o May claim yung may may
Karapatan
o Kailangan iconsider yung mga
capitalist’s income kasi may claim
of right sila don
3) All Events Test
 For income or expense to accrue,
this test requires the fixing of a right
to income or liability to pay, and the
availability of the reasonable
accurate determination of such
income or liability.
o Lahat ng pwede ibawas ibabawas
na para makita talaga yung income
Taxable Periods:
1. Calendar Period or Calendar Year
 an accounting period which starts
from January 1 and ends on
December 31.
2. Fiscal Period or Fiscal Year
 an accounting period of 12 months
ending on the last day of any
month other than December 31.
3. Short Period
 an accounting period wherein
income shall be computed on the
basis of a period less than 12
months.
What is the general rule in computing the
taxpayer’s taxable income?
• The taxable income shall be
computed upon the basis of the
taxpayer’s annual accounting period,
that is, fiscal year or calendar year,
as the case may be.
Can an individual taxpayer compute his
income on the basis of fiscal year?
 No. Individual taxpayers cannot use
the fiscal period. They are required
to use the calendar year (RR 2-40).
This would include Estates and
Trusts and General Professional
Partnerships.
 Is a corporation required to use only the Method and Expense
calendar year? Cash  All items of income
Method received during the
 No. Corporations may, with the year shall be
approval of the CIR, file their returns accounted for in such
and compute their income on the taxable year (lahat ng
basis of a fiscal year income na nareceived
accounted during
When is taxable income computed on
taxable year)
the basis of calendar year?
 Only expenses
1. Taxpayer’s accounting period is actually paid shall be
other than fiscal year claimed as deductions
2. Taxpayer has no annual during the year (mga
accounting period expense na bayad
3. Taxpayer does not keep books lang ang pwede iclaim
bilang deduction sa
4. Taxpayer is an individual
loob ng taon)
5. Taxpayer is a general professional
 Dependent on inflow
partnership
or outflow of cash
6. Taxpayer is an estate or a trust
Accrual  Gains and profits are
When is taxable income computed on the Method included in gross
basis of a short period? income when earned
1. Taxpayer, other than an individual, whether received or
not, (ang mga gain
changes his accounting period
isasama sa gross
from fiscal to calendar year or
income natapos mo
from calendar year to fiscal year or na yung service kahit
from one fiscal year to another hindi pa bayad)
2. Taxpayer dies  Expenses are allowed
3. Corporation is newly-organized as deductions in the
4. Corporation is dissolved period they are
5. Tax period is terminated by the incurred, although not
CIR by authority of law (kahit yet paid. (mga
kumpletp permit pero pag madumi expense ay allowed
yung place tatanggalin sa CIR) ideduct kapag may
natamo na kahit hindi
pa nababayaran)
 It is the right to receive
and not the actual
receipt that
METHODS OF ACCOUNTING
determines the
Accounting Recognition of Income inclusion of the
 amount in the gross
income
Installment Method
• Appropriate when collections of the
proceeds of sales and incomes
extend over relatively long periods of
time and there is strong possibility
that full collection will not be paid
(Angkop kapag ang mga koleksyon
ng mga nalikom sa mga benta at kita
ay umaabot sa medyo mahabang
panahon at may malaking posibilidad
na ang buong koleksyon ay hindi
mababayaran)
• Seller recognizes the gross profit on
sale in proportion to the cash
collected during the year.
Percentage of Completion
• Applicable in the case of a building,
installation, or construction contract
covering a period in excess of one year
(Naaangkop sa kaso ng isang building,
pag-install, o kontrata sa pagtatayo na
sumasaklaw sa isang panahon na
lampas sa isang taon)
• Gross income derived from such contract
may be reported upon the basis of
percentage of completion
What are the different kinds of income tax
systems?
1. Global Tax System
 taxpayer is required to lump up all
items of income earned during a
taxable period
 pay under a single set of income
tax rates on these different types of
income
 lahat ng income iintayin muna
tsaka babayran ang tax
 sabay-sabay babayaran ito
 isusummarize lahat ng income to
set one taxable/ isang bayaran
2. Schedule tax System
 different tax treatments for different
types of income
 separate tax return is required to
be filed for each type of income
 tax is computed on per return or
per schedule basis.
 Hinahati hati ito
3. Semi-Global or Semi-Schedular tax
System
 tax system which is either (a)
global or (b) schedular or (c) both
global and schedular may be
applied depending on the nature of
the income realized by the taxpayer
during the year.
 Nakadepende sayo kung semi
global o schedular kung kaya
bayaran ng isang bultuhan okay
lang kung hindi mag schedular ka
Note: The Philippines has adopted the
semi-schedular or semi-global tax system.
What are the features of the Philippine
Income Tax systems?
1. It is a Direct Tax
  Tax burden is borne by the
income recipient upon whom
the tax is imposed
 Hindi ipapasa sa iba
2. It is a Progressive Tax
 Tax rate increases as the tax
base increases
 Tumataas yung tax kapag
tumatas din yung income
3. It is Comprehensive
 Adopts citizenship principle,
resident principle and the
source principle in imposing
income tax.
 Nakadepende yung tax based
sa source
Types of taxable Income
1. Compensation Income – derived
from rendering of services under
an employer-employee
relationship
2. Professional Income – fees
derived from engaging in an
endeavor requiring special training
as professional as a means of
livelihood.
3. Business Income – gain or profits
derived from rendering services,
selling merchandise,
manufacturing products, farming
and long-term contracts.
4. Passive Income – Income in which
the taxpayer merely waits for the
amount to come in such as
Dividend income, interest income,
royalty income, winnings and
prizes, etc.
5. Capital Gain- gain derived from
dealings in capital assets
Compensation Income
Four Fold Test (employer-emplyee
relationship )
1. Selection & Engagement
2. Payment of Wages
3. Power of dismissal
4. Power of control
DEFINITION OF COMPENSATION
FOR INCOME TAX PURPOSES
• All remuneration for services
performed by an employee for his
employer under an employer-
employee relationship unless
specifically excluded by the Tax
Code. This includes the cash value of
all remuneration paid in any medium
other than cash.
NOTE:
• The name by which the
remuneration for services is
designated is immaterial.
• The basis upon which the
remuneration is paid is immaterial.
TEST TO DETERMINE WHETHER AN
INCOME IS COMPENSATION OR NOT
• The test is whether such income is
received by virtue of an employer-
employee relationship.
Q: If the compensation is paid after
separation, will it still form part of
compensation income?
Yes. Remuneration for services • The employee should report as
constitutes compensation even if the income and pay the corresponding
employer-employee relationship no longer income taxes by allocating or
exists at the time when payment is made spreading his back wages,
between the person in whose employ the allowances and benefits thru the
services had been performed and the years from this separation up to the
individual who performed them final decision of the court awarding
the back wages.
Q: Are living allowances treated as
compensation income? Jan 1 2021 A employed
Oct 2021 File complaint
A: Generally, living allowances should be
DOLE
treated as income of the recipient.
However, if any amount thereof is paid
Backwages
directly by the employer and paid for the
Allowances
convenience of the latter, the excess of
Benefits
what the recipient employee would have
April 2022
ordinarily incurred for his own subsistence
Jan 1-Oct 2021 Short Term
is not taxable income but a business
expense of the employer. This exemplifies
Nov 1- April 2022 Short Term
the employer’s convenience rule

BACKWAGES, ALLOWANCES AND Jan 2020- March Either fiscal or

BENEFITS AWARDED IN LABOR 2021 Calendar
DISPUTE April 2021-Jan2022 Short Term

• Back wages, allowances and

benefits awarded in a labor dispute
constitute remuneration for services
that would have been performed by
the employee in the year when
actually received or during the period
of his dismissal from the service
which was subsequently ruled to be
illegal.
• Jacobe may trabaho sya sa Nissin
ng 8hours pero wala syang OT, SSS,
PAGIBIG, Hazard pay kaya
nagcomplaint sya to seek all the OT,
SSS etc and damages.
ITEMS NOT INCLUDED IN
COMPENSATION INCOME
1. For agricultural labor paid entirely in
products of the farm where the labor is
performed; (not being paid by money but
the product itself [seasonal employee])
2. For domestic service in a private home;
(kapag sa private home is 24hours yung
trabaho/ the service render is exceed or
more than the regular service/ private
home lang)
3. For casual labor not in the course of the
employer’s trade or business; (casual
labor-part time/temporary 1. No employer-
employee relationship 2. Only work
certain period of time)
4. For services by a citizen or resident of
the Philippines for a foreign government
or an international organization (NU AND
WORLDHEALTH). (the exemption of
resident/ because government cannot tax
other government)
STATUTORY MINIMUM WAGE
• Compensation income falling within
the meaning of "statutory minimum
wage" (SMW) under R.A. No. 9504
shall be exempt from income tax and
withholding tax.
• Kapag minimum wage exempted
from income tax and withholding tax
• Holiday pay, overtime pay, night shift
differential pays, and hazard pay
earned by Minimum Wage Earner
(MWE) shall likewise be covered by
the above exemption, provided that
an employee who receives/earns
additional compensation in EXCESS
of the allowable statutory amount of
P30,000 shall NOT enjoy the
privilege of being a MWE and,
therefore, his/her entire earnings are
not exempt from income tax and
withholding tax.
• Kapag yung wage mo na is 30,000
you are not exempted from tax and
withholding tax
PROFESSIONAL INCOME
DEFINITION OF PROFESSIONAL
INCOME
• Professional income refers to fees
received by a professional from the
practice of his profession provided that
there is NO employer-employee
relationship between him and his clients.
• It includes the fees derived from
engaging in an endeavor requiring
special training as a professional as a
means of livelihood, which includes, but
is not limited to, the fees of CPAs,
doctors, lawyers, engineers and the like
Q: Distinguish professional income from
compensation income.
The existence or absence of an employer-
employee relationship determines whether
the income shall be treated as
compensation income or professional
income. If there is an employer-employee
relationship, then it is considered
compensation income. Otherwise, it is
considered professional income.
 Kapag hindi nagboard or bar exam,
hindi siya professional
 Kapag may employer-employee
relationship siya ay compensational
income kapag wala naman edi
professional income pero need na
nagtake sya ng board exam or bar
INCOME FROM BUSINESS
DEFINITION OF BUSINESS INCOME
• Business income refers to gross
income derived from the sale of
goods, properties or services. It may
come from the conduct of trade or
business or the exercise of a
profession or gains from dealings in
property.
ENGAGED IN TRADE OR BUSINESS
• There is no specific criterion as to
what constitutes "doing" or
"engaging in" or "transacting"
business. Each case must be judged
in the light of its peculiar
environmental circumstances.
• The term implies continuity of
commercial dealings and
arrangements and contemplates, to
that extent, the performance of acts
or works or the exercise of some of
the functions normally incident to,
and in progressive prosecution of,
commercial gain or for the purpose
and object of the business
organization.
INCOME FROM DEALINGS IN
PROPERTY
What gains from dealings in property are
included in the “gross income”?
 Only gains derived from the sale or
exchange of property considered as
ordinary assets.
Q: What is the importance of knowing if
an asset/income is capital or ordinary
The tax treatment will vary depend on
the nature of the asset. For example, if
real property is a capital asset, the gain
from the sale thereof shall be subject to
the final capital gains tax of 6%. If it is
an ordinary asset, any gain from the
sale thereof shall form part of the
ordinary income which shall be subject
either to graduated income tax rates (if
an individual) or corporate income tax
(if a corporation).
Passive Income - Refers to income
derived from any activity on which the
taxpayer has no active participation or
involvement.
- Example: pension share of
stocks
- Walang ginagawa
- Any effort that is not passive
income
Passive Incomes subject to Final tax
under the NIRC (Section 24 (B))
1. Interests; (nilalagay sa bank)
2. Cash and/or property dividends;
(invest sa cooperative)
3. Royalties; and (out of the name
example franchising)
4. Prizes and awards (walang
mechanical act na ginagawa example
boto)
What is meant by “income subject to
final tax?” (2001 Bar)
• Income subject to final tax refers to
income wherein the tax due is fully
collected through the withholding tax
system.
 • The payor of the income withholds an overseas contract worker or a Filipino
the tax and remits it to the seaman and his/her spouse or dependent
government as a final settlement of who is a resident in the Philippines, 50%
the income tax due on said income. of the interest income from such bank
deposit shall be treated as exempt while
- Kada income na nareceive mo iba’t
the other 50% shall be subject to a FWT
iabng treatment
of 7.5%.
- Kapag hindi nakabayad – meron na
syang interest - 50% exempt at 50% Final
Withholding Tax (7.5%)
• The recipient is no longer required to
3. Interest Income from Long-term
include the item of income subjected
deposit or investment
to final tax as part of his gross
income in his income tax return. Recipient Tax rate
s
Interest Income - It is the amount of
RC/ Deposit held for:
compensation paid for the use of money NRC/ 1. Less than 3
or forbearance from such use. RA/NRA- years – 20%
- Pera lang lagi pinaguusapan ETB 2. 3 years to less
1. Interest on currency bank than 4 years –
12%
deposits, yield or other monetary
3. 4 years to less
benefits from deposit substitutes,
than 5 years –
trust funds & similar 5%
arrangements. 4. 5 years or more
Recipients Tax Rate - EXEMPT
RC/NRC/RA/NRA- 20% final tax
ETB NRA- 25% final tax
NRA-NETB 25% final tax NETB

2. Interest income under the Dividend Income - Any distribution made

Expanded Foreign Currency by corporation to its shareholders out of
Deposit System its earnings or profits and payable to its
shareholders, whether in money or other
Recipients Tax Rate property
RC/RA 7.5% final tax
NRC/NRA- Exempt - Kapag ang income galing sa share
ETB/NRA-NETB automatic dividend income na
Cash and/or property dividends may come
Note: Under Revenue Regulations No. 14- from:
2012, if a bank account that is jointly in • A domestic corporation or from a
the name of a non-resident citizen such as joint stock company, insurance or
 mutual fund companies and regional
operating headquarters of
multinational companies;
- Dito pwedeng makuha ang
dividend income ex. Mutual
funds
• Share of an individual in the
distributable net income after tax of
a partnership (except a GPP) of
which he is a partner;
• Share of an individual in the net
income after tax of an association, a
joint account, or a joint venture or
consortium taxable as a corporation
of which he is a member or co-
venturer.
- Filipino first policy – iaalok
muna sa kapwa Filipino, it
must be Filipino owner by 75%
• Tax on cash and/or property
dividends shall apply only on income
earned on or after January 1, 1998
subject to the following rates:
a. 6% beginning January 1, 1998;
b. 8% beginning January 1, 1999;
and
c. 10% beginning January 1, 2000.
Tax Rates of dividend Income
Note: Cash and/or property dividends
from a foreign corporation
• If the recipient is a resident citizen, it
shall be subject to the normal
graduated tax rates.
• If the recipient is a non-resident
citizen or a resident alien, it shall be
subjected to the graduated rates for
dividend earned from sources within
the Philippines.
Royalty Income - It is the payment for the
use and exhaustion of property such as
earnings from copyrights, patents,
trademarks, formulas and natural
resources under lease.
- You own that
- Copyright (kapag ginamit need
bayaran)
- Patent (kapag nay kapareho pwedeng
idemanda)
- Trademark or tradename (ex. Shells or
jollibee)
Tax rates of other royalties (e.g. patents
and franchises)
Tax rates of royalties on books, literary
works and musical composition
Prizes and winnings - Refers to the
amount of money in cash or in kind
received by chance or through luck and
are generally taxable except those
mentioned under Section 32 (B) of the
NIRC.
- When you won lotto (taxable)
Tax rates on prizes (exceeding
P10,000.00) and winnings
Income Taxation for General Professional
Partnership
Section 26 - A general professional
partnership as such shall not be subject to
the income tax imposed under this
Chapter. Persons engaging in business as
partners in a general professional
partnership shall be liable for income tax
only in their separate and individual
capacities.
For purposes of computing the distributive
share of the partners, the net income of
the partnership shall be computed in the
same manner as a corporation.
Each partner shall report as gross income
his distributive share, actually or
constructively received, in the income of
the partnership.
- Itatax on their individual capacities
- Iba binabayaran ng firm at iba ang
binabayaran ng individual
- Individual -PTR
- Firm - - business tax
- Pagkatapos ng huli, tinitignan kung
magkano hahatiin, tapos yung hinati
yun ang icocompute mo sa gross
income
What is General Professional
Partnership?
- a partnership formed by professionals for
the sole purpose of exercising their
common profession, no part of the income
of which is derived from engaging in any
trade or business.
- sole purpose is practice of profession
- Wala ng iba, yun lang
-Exercise of common profession
-Magkakasama
-In the same field of profession
General Professional Partnership are
NOT subject to income tax
- but they are required to file returns of
their income for the purpose of furnishing
information as to the share in the gains or
profits which each partner shall include in
his individual return
• The distributive shares of individual
partners in the net profit of a GPP is
taxable in the hands of the partners
• It is the individual partners who shall
be subject to income tax, and
consequently, to withholding tax, in
their separate and individual
capacities
• Since the taxable income is in the
hands of the partner, the individual
partner may still claim deductions
apart from the expenses claimed by
the GPP.

ILLUSTRATION:
A and B formed a General Professional
Partnership under the style of A, B and
Associates engaged in the practice of
architectural design. Their profit and loss
sharing ratios are: A, 70% and B, 30%.
During the year, the partnership made a
net income of P100, 000.
Question No.1:
Is the partnership subject to income tax?
Why?
Answer:
No. Under the Tax Code, a general
professional partnership is exempt from
income tax.
Question No.2:
Is the partnership required to file an
income tax return?
Answer:
Yes. Even if a general professional
partnership is exempt from income tax, it
is required under the Tax Code to file an
ITR because it serves as a check on the
partner’s share in the net income of the
partnership as reported by them in their
individual ITR and as a basis in the
examination by the BIR to determine the
correctness of such share as declared by
the partners.
Question No.3:
How much should be reported by the
partners in their individual ITR assuming
no profits were distributed to them?
Answer:
Their respective shares in the net income
of P100, 000.
To A: 70%of P100, 000= P70, 000
To B, 30% of P100, 000 = P30, 000
Question No.4:
How much should the partners report in
their individual ITR assuming A received
P5,000 and B P5,000 as partial
distribution of their shares in the net
income of the partnership of P100, 000?
Answer:
The answer is the same in 3rd because
the partners in a general professional
partnership are required to declare in their
ITR their respective shares whether
distributed or not in the net income of the
partnership.
[ Ang format sa pagsasagot sa tanong ni
Atty dito is “Yes/No. Legal basis (ex. Yung
tax code), because………”]