Introduction To Income Taxation

INTRODUCTION TO INCOME TAXATION
THE CONCEPT OF INCOME
The tax concept of income is referred to as “gross income”. Gross income means taxable income. It refers
to certain items of gross income less deductions and personal exemptions allowable by law. It is any
inflow of wealth to the taxpayer from whatever source, legal or illegal, that increases net worth. It
includes 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

1. It is a return on capital that increases net worth.
2. It is a realized benefit.
3. It is not exempted by law, contract or treaty.
MODE OF RECEIPT/REALIZATION BENEFITS

1. Actual receipt- it involves actual physical taking of the income in the form of cash or property.
2. Constructive receipt- involves no actual physical taking of the income but the taxpayer is
effectively benefited.
EXEMPTED GROSS INCOME
1. Income of qualified employee trust fund

2. Revenues of non profit non stock educational institutions
3. SSS, GSIS, Pagibig or PHILHEALTH benefits
4. Salaries and wages of minimum wage earners and qualified senior citizens.
5. Regular income of Barangay Micro business Enterprises
6. Income of foreign governments and foreign government owned controlled corporations.
7. Income of international missions and organizations with income tax immunity.
Types of Income Taxpayers
A. Individuals
1. Citizen
a. Resident Citizen
b. Non resident citizen
2. Alien
a. Resident alien
b. Non resident alien
a. Engaged in trade or business
b. Not engaged in trade or business
3. Taxable estates and trusts
B. Corporations
1. Domestic corporation
2. Foreign corporation
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 who elected Filipino citizenship upon
reaching the age of majority
d. Those who are naturalized in accordance with law.
Classification of citizens:
A. Resident citizens- A Filipino citizen residing in the Philippines.
B. Non resident citizen includes:
1. A resident residing abroad with a definite intention to reside therein
2. A resident who leaves the Philippines during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis
3. A resident who works and derives income from abroad whose employment requires him to be
physically present abroad most of the time during the taxable year.
4. A citizen who was previously considered as non resident citizen and who arrives in the
Philippines at anytime during the taxable year to reside permanently in the Philippines shall
likewise be treated as a non resident citizen for 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.
Alien
A. Resident Alien- an individual who is residing in the Philippines but it is not a citizen thereof such
as :
1. An alien who lives in th Philippines without definite intention as to his stay or
2. 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, although it may
be his intention at all times to return to his domicile abroad.
B. Nonresident alien- an individual who is not residing in the Philippines and who is not a citizen
thereof.
1. Non resident aliens engaged in business- aliens who stayed in the Philippines for an
aggregate period of more than 180 during the year.
2. Non resident aliens not engaged in business- include:
a. Aliens who come to the Philippines for a definite purpose which in nature maybe
promptly accomplished.
b. Aliens who shall come to the Philippines and stay there for an aggregate period of not
more than 180 days during the year.
CORPORATE INCOME TAXPAYERS

The term corporation shall include partnerships, no matter how created or organized, joint stock
companies, joint accounts, association or insurance companies except general professional partnerships
and a joint venture or consortium formed for the purpose of undertaking construction project.
Domestic Corporations
- Organized inaccordance with Philippine laws.
Foreign Corporation
- One organized under foreign law.
Types of foreign corporations
1. Resident foreign corporations- operates and conduct business in the Philippines through a
permanent establishment.
2. Nonresident foreign corporation-does not operate or conduct in the Philippines
Special corporations- domestic or foreign corporations which are subject to special tax rules or
preferential tax rates.
Other Corporate Taxpayers

1. Partnerships- business organization owned by two or more persons who contribute their industry
or resources to a common fund for the purpose of dividing the profits from the venture.
Types of partnerships
a. General professional partnership
-formed for the exercise of common profession.
b. Business partnership
- Formed for profit and taxable as a corporation.
2. Joint venture- business undertaking for a particular purpose. It is organized as a partnership or a
corporation.
a. Exempt joint ventures

Formed for the purposed of construction projects. They are tax exempt and not treated as a
corporation.
b. Taxable joint ventures

- Taxable as corporations
3. Co ownership
joint ownership of a property formed for the purpose of preserving the same and or dividing its
income.
A co-ownership that is limited to property preservation or income is not taxable but co owners are
taxable individually.
A co ownership that reinvests the income of the owned property to other income producing
properties or ventures will be considered taxable as corporation.
Taxpayers who are residents and citizens of the Philippines such as resident citizen and domestic
corporations are taxable on all income from sources within and without the Philippines.
OTHER INCOME SITUS RULES

A. GAIN ON SALE OF PROPERTIES
1. PERSONAL PROPERTY
 Domestic securities- presumed earned within the Philippines
 Other personal properties- earned in the place where the property is sold.
2. REAL PROPERTY- earned where the property is located.
B. Dividend income
1. Domestic corporation- presumed earned within
2. Foreign corporation
a. Resident foreign corporation- depends on the predominance 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%, portion of dividend corresponding to the Philippine gross income ratio is
earned within.
 Less than 50%, the entire dividends received is earned abroad.
b. Non resident foreign corporation0 earned abroad
C. Merchandising income- earned where the property is sold

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INTRODUCTION TO INCOME TAXATION

THE CONCEPT OF INCOME

ELEMENTS OF GROSS INCOME

MODE OF RECEIPT/REALIZATION BENEFITS

EXEMPTED GROSS INCOME

1. Income of qualified employee trust fund

INDIVIDUAL INCOME TAXPAYERS

CORPORATE INCOME TAXPAYERS

Other Corporate Taxpayers

a. Exempt joint ventures

b. Taxable joint ventures

OTHER INCOME SITUS RULES

b. Non resident foreign corporation0 earned abroad

C. Merchandising income- earned where the property is sold

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