TAXN 1016

Intro to
Income
Taxation
Adrian Anthony Contillo
Code 581, 582, 583
Today’s Agenda
What constitutes gross income?
Different types of taxpayers
Rules in taxing the taxpayers
Schemes of Taxation
Accounting Period and Methods
Tax Reporting

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Gross Income

What constitutes gross

income?
Gross Income
It is an inflow of wealth to a taxpayer
from 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.

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What constitutes
Gross Income?

An item of gross income is

considered “gross income” for tax
purposes if it meets the following
tests:

1. “Return on Capital” test

2. “Realized Benefits” test
3. “Non-Exemption” test

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What constitutes
Gross Income?

An item of gross income is

considered “gross income” for tax
purposes if it meets the following
tests:

1. “Return on Capital” test

2. “Realized Benefits” test
3. “Non-Exemption” test

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What constitutes a
return ON capital?

It is a return on wealth that “increases

net worth.” Meaning, it is an added value
to the total equity of an individual or a
taxpayer. Hence, it must constitute gross
income.

It is different from “return OF capital”

where it is just a mere “restitution” or
return of any capital given up, basically a
“break-even.”

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 Return on Capital
Suppose SwitchingPositions Company purchased goods worth P450, and
subsequently sold the goods for P600. This transaction can be analyzed as
follows:

Selling price (Consideration Received) 600 TOTAL return

Cost (Value of Inventory Forgone) (450) Return OF capital
Mark-up (Gross Income) 150 Return ON capital - taxable

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Capital of
INFINITE Value

1. LIFE
2. HEALTH
3. HUMAN REPUTATION

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 Recovery of Lost Capital vs. Lost Profit
Mareng Ariana insured her strawberry farm in a $69,000 crop insurance
coverage against calamities. The crop was eventually destroyed by
strong rains caused by people singing 34+35 (just kidding, the rain was
due to natural causes). Mareng Ariana was given $69,000 from the
insurance company as a result of the event.

The $ 69,000 is a recovery of a FUTURE BENEFIT from a future

crop. Thus, it becomes an item of gross income.

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What constitutes
Gross Income?

An item of gross income is

considered “gross income” for tax
purposes if it meets the following
tests:

1. “Return on Capital” test

2. “Realized Benefits” test
3. “Non-Exemption” test

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When is an item of
income “realized?”

1. There must be an
exchange transaction
2. The transaction involves
another entity
3. It increases the net worth
of the recipient

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Mode of receipt

1. Actual Receipt
2. Constructive Receipt

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 Other Concepts
1. Benefits WITHOUT
transfers (aka
UNREALIZED GAINS)
2. Inflows of wealth WITHOUT
increase in net worth

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 Realized Benefits
VaklangTwo Company listed the following possible items Total “Gross
of income:
Income”:
Compensation Income: 200,000
Winnings from Gambling: 100,000 _____________
Increase in the fair value of FVPL Investments: 50,000
Appreciation of Value of Land: 300,000
Debt of Vakla cancelled in exchange for services: 150,000
Debt of Vakla cancelled because of mercy: 250,000
Loan received from a bank: 400,000

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What constitutes
Gross Income?

An item of gross income is

considered “gross income” for tax
purposes if it meets the following
tests:

1. “Return on Capital” test

2. “Realized Benefits” test
3. “Non-Exemption” test

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“Non-Exemption”

An item of gross income is NOT a

gross income for taxation if it was
exempted by the constitution, by
law, a contract or treaty.

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If ALL the three tests were met,
then congratulations! You now
have a “taxable” gross income.

Now, onto the next topic. Who is

the taxpayer? But before that,
let’s discuss a comprehensive
problem.

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 Comprehensive: Gross Income
Determination
Ha Eun Byul has the following items of possible gross
income: Total “Gross
Income from renting the penthouse: 300,000 Income”:
Income from theft: 250,000
Tuition revenue from Cheong-a Arts school, a non-stock, _____________
nonprofit educational institution: 400,000
Proceeds from a mental anguish case, moral damages for
loss of sanity: 230,000
Increase in the value of Cheong-A Construction Group
Shares, at Fair Value: 450,000
Winnings from a musical competition: 200,000
Loan from JDT Bank: 300,000
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Types of
Taxpayers

What are the types of

Taxpayers?
Individual
Taxpayers
CITIZEN Taxpayers
Resident Citizen (RC)
Non-resident Citizen (NRC)
ALIEN Taxpayers
Resident Alien (RA)
Non-Resident Alien (NRA)

Taxable Estates and Trusts

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Situs Rules

Who has jurisdiction over

taxes?
Situs of Income
Situs talks about “jurisdiction.” It
simply answers the question “who
has the power to tax?”

It is different from “source” of

income, in a sense that the source
only pertain to where the actual
activity took place, not the
jurisdiction of income is.

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Situs Rules, Specific
(RU RIL, SIR? ID)
Type of Place/Situs (a.k.a
Income where shall it be
taxed?)
Interest Income Where the
(ID) debtor/deposit resides
Royalty Where the intangible is
Income used/employed
(RU)
Rent Income Where the property is
(RIL) located
Service Income Where the services are
(SIR) rendered
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 Situs Rules, will it be income “within”
or income “outside/without?”
Oh Yeon Hee had the following income items:
Interest income from a deposit in Bank of Korea: 300,000
Interest income from Philippine Gov’t Bonds: 100,000
Royalties from books published in the Philippines: 150,000
Rent income from properties located in Incheon and
Jeju, but the rent agreement was made in Manila: 200,000
Professional fees for services rendered to American
nationals in Ortigas Center, Pasig City: 400,000

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 Situs Rules, will it be income “within”
or income “outside/without?”
The Situs is as follows:
WITHIN WITHOUT
Interest on deposits 300,000
Interest on Bonds: 100,000
Royalties from books: 150,000
Rent income: 200,000
Professional fees: 400,000
TOTAL: 650,000 500,000

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 Situs Rules, will it be income “within”
or income “outside/without?”
If Oh Yeon Hee is... Then she is taxable… Total Reportable income of…
Resident Citizen (RC) Within and Outside 1,150,000
Non-Resident Citizen Within only 650,000
Resident Alien Within only 650,000
Non-Resident Alien - ETB Within only 650,000
Non-Resident Alien - NETB Within only 650,000

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Situs of Income
For Gain on Sale of Properties, the
following situs rules apply:
1. For personal property, domestic
securities, it is assumed to be
earned within the Philippines.
2. For OTHER personal
properties, it is earned
WHEHEVER the property is
SOLD.
3. For real property, it is earned
wherever it is located.

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Situs of Income

Mnemonic:
1. Para mas “secure” ka, stay ka
WITHIN.
2. Ang bagay na nagagalaw,
pwedeng dalhin around the
world.
3. And hindi nagagalaw,
nakatirik sa LOKASYON.

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Situs of Income
For dividends received by an
individual, it depends on where it was
received.

Rule #01: If it is received from a

DOMESTIC CORPORATION,
then it is assumed to be earned
WITHIN. (LOOB)

Rule #02: If it is received from a

NON-RESIDENT FOREIGN
CORPORATION, it is earned
OUTSIDE. (LABAS)
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 Situs Rules for Sale of Property and
Dividend Income
Oh Yeon Hee had the following income items:
Gain on sale of a Philippine Corporation Shares: 200,000
Gain on sale of South Korean Bonds: 300,000
Gain on sale of a piece of land in Baguio City: 150,000
Gain on sale of car located in LA, California: 100,000
Gain on sale of machineries in Pampanga: 250,000
Dividend income from BPI Shares, a domestic corp: 400,000

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 Situs Rules, will it be income “within”
or income “outside/without?”
The Situs is as follows:
WITHIN WITHOUT
Gain on domestic shares: 200,000
Gain on foreign bonds: 300,000
Gain on sale of land: 150,000
Gain on sale of car: 100,000
Gain on sale of machinery: 250,000
Dividend income: 400,000
TOTAL: 1,000,000 400,000

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 Situs Rules, will it be income “within”
or income “outside/without?”
If Oh Yeon Hee is... Then she is taxable… Total Reportable income of…
Resident Citizen (RC) Within and Outside 1,400,000
Non-Resident Citizen Within only 1,000,000
Resident Alien Within only 1,000,000
Non-Resident Alien - ETB Within only 1,000,000
Non-Resident Alien - NETB Within only 1,000,000

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Situs of Income
The situs rules for a “resident
foreign corporation” is different.

A resident foreign corporation (RFC)

is a corporation which is established
under a foreign law and foreign land,
but has its operations in the
Philippines.

For dividends received by an

individual, the PRE-DOMINANCE
TEST applies.
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Pre-dominance test
This test identifies both:
1. 3-year cumulative “Philippine
income” of the corporation, and
2. 3-year cumulative “Worldwide
income” of the corporation.
Note: the three year should be the
years BEFORE the dividends was
declared.

The ratio of Philippine income to

world income is then computed.

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Pre-dominance test

If X is at MORE THAN or EQUAL

TO 50%, the dividend is PARTLY
WITHIN
  and PARTLY WITHOUT
(Using the actual ratio of Philippine
to World Income)

If X is LESS THAN 50%, then the

dividend is earned WITHOUT.

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 Situs Rules: Pre-dominance Test
During summer of 2019, Shim Su Ryeon received a 500,000-dividend income
from Cheong-a Foundation, a renowned culture and arts company in Korea,
with operations in many parts of the world, including the Philippines. Cheong-
a had the following income schedule for the past three years:
2016 2017 2018 TOTAL
Philippines 100,000 200,000 300,000 600,000
Abroad 200,000 100,000 100,000 400,000
WORLDWI 300,000 300,000 400,000 1,000,000
DE

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 Situs Rules: Pre-dominance Test
During summer of 2019, Shim Su Ryeon received a 500,000-dividend income
from Cheong-a Foundation, a renowned culture and arts company in Korea,
with operations in many parts of the world, including the Philippines. Cheong-
a had the following income schedule for the past three years:
2016 2017 2018 TOTAL
Philippines 100,000 200,000 300,000 600,000
Abroad 200,000 100,000 100,000 400,000
WORLDWI 300,000 300,000 400,000 1,000,000
DE

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 Situs Rules: Pre-dominance Test
•The
  ratio is computed as follows:
X is therefore 60%. It passed the ratio test.

This means that the 500,000 shall become a dividend partly

WITHIN and WITHOUT, in accordance with the ratio, as
follows:
WITHIN: 500,000 x 60% = 300,000
WITHOUT: 500,000 x 40% = 200,000

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Situs of Income

For merchandising income (buy-and-

sell), the situs is where the goods are
SOLD, regardless of where they are
purchased.

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Thank you!
Any questions?

Adrian Anthony Bilag Contillo,

CTT, RCA
acontillo@usl.edu.ph

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