TAXATION

CHAPTER 3 INTRODUCTION TO TAXATION
Chapter Overview and Objectives

This chapter discusses the concept of tax income, the situs of income, and the types of taxpayers,
After this chapter, readers are expected to comprehend and demonstrate knowledge on the
following:
1. The concept of gross income
2. The types of income taxpayers
3. The general rules in income taxation
4. The income tax situs rules
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?

The tax concept of income is simply referred to as “gross income” under the NIRC. A taxable
item of income is referred to as an “item of gross income” or “inclusion in gross income”.
Gross income simply means taxable income in layman’s term. Under the NIRC however, the
term “taxable income” refers to certain items of gross income less deduction and personal
exemptions allowable by law. Technically, gross income is broader to pertain that can be
subjected to income tax.
Gross income is broadly defined as any inflow of wealth to the 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.
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 traety.
RETURN ON CAPITAL
Capital means any wealth or property. Gross income is a return oc wealth or property that
increases the taxpayer’ net worth.
Illustration
ABC purchased goods for P300 and sold them for P500. The P500 considearton can be analyzed
as follows:
Selling price (total consideration received) P 500 Total return
Cost (value of inventory forgone) 300 Return of capital
Mark-up (gross income) P 200 Return on
capital
The return on capital that increases net worth is income subject to income tax. Return of capital
merely maintains net worth; hrence, it is not taxable. An improvement in net worth indicates the
ability to pay tax.
Capital items deemed with infinite value

There are capital items that have infinite value and are incapable of pecuniary valuation.
Anything received as compensation for their loss is deemed a return of capital.
Examples:
1. Life
2. Health
3. Human reputation
Life
The value of life is immeasurable by money. Under Sec. 32 of the NIRC, the proceeds of life
insurance policies paid to the heirs or beneficiaries upon death of the insured, whether in a single
sum or otherwise, are exempt from income tax.
The proceeds of life insurance contract collected by an employer as a beneficiary from life
insurance of an officer or any person directly interested with his trade are likewise exempt.
These proceeds are viewed as advanced recovery of future loss.
However, the following are taxable return on capital from insurance policies:
a. Any excess amount received over premiums paid by the insured upon surrender or maturity
of the policy (I.e., the insured outlives the policy)
b. Gain realized by the insured from the assignment or sale of his insurance policy
c. Interest income from the unpaid balance of the proceeds of the policy
d. Any excess of the proceeds received over the acquisition costs and premium payments by an
assignee of a life insurance policy
Health
Any compensation received in consideration for the loss of health such as compensation for
personal injuries or tortuous acts is deemed a return of capital.
Human reputation
The value of one’s reputation cannot be measured financially. Any indemnity received as
compensation for its impairment is deemed a return of capital exempt from income tax.
Examples include moral damage received from:

a. Oral defamation or slander
b. Alienation of affection
c. Breach of promise to marry
Recovery of lost capital vs. Recovery of lost profits

The lost of capital results in decrease in net worth while the lost of profits does not decrease net
worth. The recovery of lost capital merely maintains net worth while the recovery of lost profits
increases net worth, therefore, the recovery of lost profits is a return on capital.
Taxable recovery of lost profits

The recovery of lost profits through insurance, indemnity contracts, or legal suits constitutes a
taxable return on capital.
The following recoveries of lost profits:

a. Proceeds of crop or livestock insurance
b. Guarantee payments
c. Indemnity received from patent infringement suit
Illustration 1
Mang Tomas insured his strawberry crop in a P200,000 crop insurance coverage against
calamities. The crop was eventually destroyed by an unusual frost. Mang Tomas was paid the
P200,000 insurance proceeds.
The P200,000 proceeds which is a reimbursement for the lost value of the future harvest, is an
item of gross income. The value of the lost crops is, in effect, realized not though actual harvest
but through the insurance contract.
Illustration 2
Mr. Santiago purchased a franchise. The franchisor guaranteed an annual franchise income of
P100,000 to Mr. Santiago. In the first year of operation, Mr. Santiago’s outlet only earned
P60,000. The franchisor paid the P40,000 difference to Mr. Santiago.
The P40,000 guarantee payment is not a gratuity but a recovery of lost profit for Mr. Santiago;
hence, subject to income tax. Mr. Santiago shall report P100,000 as franchise income.
Illustration 3
Mindoro Inc. Experienced an unusual decline in its income after a competitor copied its patented
invention. Mindoro sued the competitor for patent infringement and was awarded an indemnity
of P3,000,000.
The P3,000,000 indemnity is a compensation for the income not realized by Mindoro due to the
patent infringement. The same is an item of gross income.
The recovery of lost income or profits is not intended to compensate for the loss of capital. It is
as good as realization of income; hence, it is an item of gross income.
REALIZED BENEFIT
What is meant by realized benefit?
The “benefit” concept

The term “benefit” means any form of advantage derived by the taxpayer. There is benefit when
there is an increase in the net worth of the taxpayer. An increase in net worth occurs when one
receives income, donation or inheritance.
The following are not benefits, hence, not taxable:

a. Receipt of a loan – properties increase but obligations also increase resulting in an
offsetting effect in net worth.
b. Discovery of lost properties – under the law, the finder has an obligation to return to the
same owner
c. Receipt of money or property to be held in trust for, or to be remitted to, another person
If the taxpayer is entitled to keep for his account portion of a receipt, inly that portion is a
benefit.
Illustration
1. An employee was granted P20,000 transportation advance. He liquidated P18,000
transportation expenses and was allowed by his employer to keep the P2,000. Only the
P2,000 retained by the employee is considered income since this was the extent he was
benefited. (RR2-98)
2. A security agency receives P120,000 from clients, P100,000 of which is for the salaries
of security guards. Under RMC 39-2007, only the P20,000 attributable to the agency is
considered income of the agency since it is the extent it is benefited. The P100,000
pertaining to salaries of security guards is recognized by the agency as a liability upon
receipt.
The “realized” concept

The term realized means earned. It requires that there is a degree of undertaking or sacrifice
from the taxpayer to be entitled of the benefit.
Requisites of a realized benefit:

1. There must be an exchange transaction.
2. The transaction involves another entity.
3. It increases the net worth of the recipient.
Types of Transfers
1. Bilateral transfers or exchanges, such as:
a. Sale
b. Barter
These are referred to as "onerous transactions".
2. Unilateral transfers, such as:

a. Succession - transfer of property upon death
b. Donation
These are also referred to as "gratuitous transactions".
Under current usage, unilateral transfers are simply referred to as "transfers" while bilateral
transfers are called "exchanges." Benefits derived from onerous transactions are "earned or
realized"; hence, they are subject to income tax. Benefits derived from gratuitous transactions are
not realized because of the absence of an earning process. Benefits derived from gratuitous
transactions are subject to transfer tax, not income tax.
3. Complex transactions
Complex transactions are partly gratuitous and partly onerous. These are commonly
referred to as "transfers for less than full and adequate consideration". The gratuitous
portion of the transaction is subject to transfer tax while the benefit from the onerous
portion is subject to income tax.
Illustration
A taxpayer sold his car which was previously purchased for P100,000 and with a current fair
value of P180,000 for only P130,000.
The transaction will be analyzed as

follows: Fair value P 180,000
P50,000 - Subject to transfer tax
Selling price 130,000
P30,000 - Subject to income tax
Cost 100,000
The excess of fair value over selling price is a gratuity or gift whereas the excess of selling price
over the cost is an item of gross income.
What is meant by another entity?

Every person, natural or juridical, is an entity. Natural persons are living persons while juridical
persons are those created by law such as partnerships and corporations. An entity may be a
taxable entity or an exempt entity. A taxable item of gross income arises from transactions which
involve another natural or juridical entity.
Gains or income derived between relatives, corporations, and between a partner and the
partnership are taxable since it is made between separate entities. Likewise, the income between
affiliated companies such as between a holding or parent company and its subsidiaries and
between sister companies are taxable because each corporation is a separate entity. This applies
regardless of the underlying economic relationship.
However, the sales of a home office to its branch office are not taxable because they pertain to
one and the same taxable entity. Furthermore, the income between businesses of a proprietor
should not be taxed since proprietorship businesses are taxable upon the same owner. Note that a
proprietorship business is not a juridical entity.
Benefits in the absence of transfers

The increase in 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
is not taxable.
These are referred to as unrealized gains or holding gains because they have not yet materialized
in an exchange transaction.
Examples of unrealized gains or holding gains:

a. Increase in value of investments in equity or debt securities
b. Increase in value of real properties held (revaluation increment)
c. Increase in value of foreign currencies held or receivable f
d. Decrease in value of foreign currency denominated debt by virtue of favorable
fluctuation in exchange rates
e. Birth of animal offspring, accruals of fruits in an orchard or growth of farm vegetables
f. Increase in value of land due to the discovery of mineral reserves
Rendering of services
The rendering of services for a consideration is an exchange but does not cause a loss of capital.
Hence, the entire consideration received from rendering of services such as compensation
income or service fees is an item of gross income.
Illustration
Mr. Saladin lists the following possible items of gross income:
Compensation income P 200,000

Winnings from gambling 100,000
Increase in value of investments 50,000
Appreciation in the value of land owned 300,000
Debt of Saladin cancelled by creditors in consideration
for services he rendered to them 150,000
Debt of Saladin cancelled by his creditor out of affection 250,000
Loan received from a bank 400,000
The items of gross income are:

Compensation income P 200,000
Winnings from gambling 100,000
Debt of Saladin forgiven in consideration for
service rendered to his creditors 150,000
Note:
1. Gains from gambling and the forgiveness of debt in consideration of services or properties received are
realized gains from exchanges.
2. The forgiveness of debt out of affection or mere generosity of the creditor is a gratuitous transfer subject to
transfer tax.
3. The loan received from a bank constitutes a transfer but is not a benefit.
Basis of Exemption of Unrealized Income

Normally, taxpayers will have the ability to pay tax when their income materializes in an
exchange transaction since tax is generally payable in money.
This does not mean, however, that only income realized in cash is subject to tax. Income realized
in non-cash properties are, in effect, received in cash but the taxpayer used the same to acquire
the non-cash property. Income received in non- cash considerations is taxable at the fair value of
the property received. Moreover, exempting income realized in non-cash considerations would
open a wide avenue for tax evasion since taxpayers can easily divert their income in the form of
non-cash consideration.
Mode of Receipt/Realization Benefits

Taxable items of income may be realized by the taxpayer in two ways:
1. Actual receipt
Actual receipt involves actual physical taking of the income in the form of cash or
property.
2. Constructive receipt
Constructive receipt involves no actual physical taking of the income but the taxpayer is
effectively benefited.
Examples:
a. Offset of debt of the taxpayer in consideration for the sale of the sale of goods or
service
b. Deposit of the income to the taxpayer's checking account
c. Matured detachable interest coupons on coupon bonds not yet encashed by the
taxpayer
d. Increase in the capital of a partner from the profit of the partnership
Inflow of wealth without increase in net worth

The inflow of wealth to a person that does not increase his net worth is not income due to the
total absence of benefit.
Examples:
a. Receipt of property in trust
b. Borrowing of money under an obligation to return
In law, the proceeds of embezzlement or swindling where money is taken without an original
intention to return are considered as income because of the increase in net worth of the swindler.
NOT EXEMPTED BY LAW, CONTRACT, OR TREATY
An item of gross income is not exempted by the Constitution, law, contracts or treaties from
taxation.
The following items of income are exempted by law from taxation; hence, they are not
considered items of gross income:
1. Income of qualified employee trust fund
2. Revenues of non-profit non-stock educational institutions
3. SSS, GSIS, Pag-Ibig, or PhilHealth benefits
4. Salaries and wages of minimum wage earners and qualified senior citizen
5. Regular income of Barangay Micro-business Enterprises (BMBEs)
6. Income of foreign governments and foreign government-owned and controlled
corporations
7. Income of international missions and organizations with income tax immunity
Items of gross income that are exempted from taxation are discussed extensively under
Exclusions in Gross Income in Chapter 8.
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. not engaged in trade or business
b. 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 the law
Classification of citizens:
A. Resident citizen - A Filipino citizen residing in the Philippines
B. Non-resident citizen includes:
1. 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;
2. 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;
3. 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;
4. 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
Filipinos working in Philippine embassies or Philippine consulate offices are not considered non-
resident citizens.
Alien
A. Resident alien – an individual who is residing in the Philippines but is not a citizen thereof,
such as:
1. An alien who lives in the 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;
An alien who has acquired residence in the Philippines retains his status as such until he
abandons the same or actually departs from the Philippines.
B. Non-resident alien - an individual who is not residing in the Philippines and who is not a
citizen thereof
1. Non-resident aliens engaged in business (NRA-ETB)- aliens who stayed in the
Philippines for an aggregate period of more than 180 days during the year
2. Non-resident aliens not engaged in business (NRA-NETB) - include:
a. Aliens who come to the Philippines for a definite purpose which in its nature
may be promptly accomplished;
b. Aliens who shall come to the Philippines and stay therein for an aggregate
period of not more than 180 days during the yeara
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. The taxpayer shall submit to the CIR of
the BIR documentary proofs such as visas, work contracts and other documents indicating such
intention.
Documents purporting short term stay such as tourist visa shall not result in the reclassification
of the taxpayer's normal residency. Documents purporting a long-term stay such as immigration
visa or working visa for an extended period would result in the automatic reclassification of the
taxpayer’s residency.
Examples:
a. An alien is normally non-resident. An alien who come to the Philippines with a tourist
visa would still be classified as non-resident alien.
b. A citizen is normally resident. A citizen who would go abroad under a tourist visa would
still be considered a resident citizen.
c. An alien who come to the Philippines with an immigration visa would be reclassified as a
resident alien upon his arrival.
d. A citizen who would go abroad with a two-year working visa would be reclassified as a
non-resident citizen upon his departure.
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 are considered non-resident.
b. Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable
year are considered resident.
c. Aliens who are staying in the Philippines for not more than 1 year but more than 180
days are deemed non-resident aliens engaged in business.
d. Aliens who stayed in the Philippines for not more than 180 days are considered non-
resident aliens not engaged in trade or business.
Illustration 1
Luiz Mario Aresmendi, a Mexican actor, was contracted by a Philippine television company to
do a project in the Philippines. He arrived in the country on February 29, 2019 and returned to
Mexico three weeks later upon completion of the project.
Luiz Mario Aresmendi shall be classified as an NRA-NETB in 2019. His stay is for a definite
purpose which in its nature will be accomplished immediately.
Illustration 2
Mamoud Jibril, a Libyan national, arrived in the country on November 4, 2019. Mr. Jibril stayed
in the Philippines since then without any working visa or work permit.
For the year 2019, Mr. Jibril would be considered an NRA-NETB because he stayed in the
Philippines for less than 180 days as of December 31, 2019. If he is still within the Philippines
until December 31, 2020, he will qualify as a resident alien for 2020.
lllustration 3
Without any definite intention as to the nature of his stay, Juan Masipag, a Filipino citizen, left
the Philippines and stayed abroad from March 15, 2019 to April 1, 2020 before returning to the
Philippines.
For the year 2019, Juan is a non-resident citizen because he is absent for more than 183 days
but he will be classified as resident citizen for the year 2020 because he is absent for less than
183 days in 2020.
Taxable Estates and Trusts

1. Estate
Estate refers to the properties, rights, and obligations of a deceased person not extinguished
by his death.
Estates under judicial settlement are treated as individual taxpayers. The estate is taxable on
the income of the properties left by the decedent. Estate under extrajudicial settlement are
exempt entities. The income of the properties of the estate under extrajudicial settlement is
taxable to the heire
2. Trust
A trust is an arrangement whereby one person (grantor or trustor) transfers (i.e. donates)
property to another person (beneficiary), which will be held under the management of a third
party (trustee or fiduciary).
A trust that is irrevocably designated by the grantor is treated in taxation as if it is an

individual taxpayer. The income of the property held in trust is taxable to the trust. Trusts
that are designated as revocable by the grantor are not taxable entities and are not considered
as individual taxpayers. The income of properties held under revocable trusts is taxable to the
grantor not to the trust.
When the trust agreement is silent as to revocability of the trust, the trust is presumed to be
revocable.
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 projects or engaging in petroleum, coal, geothermal, and other energy
operations pursuant to an operating consortium agreement under a service contract with the
government.
Hence, the term corporation includes profit-oriented and non-profit institutions such as charitable
institutions, cooperatives, government agencies and instrumentalities, associations, leagues, civic
or religious and other organizations.
Domestic Corporation
A domestic corporation is a corporation that is organized in accordance with Philippine laws.
Foreign Corporation
A foreign corporation is one organized under a foreign law.
Types of foreign corporations:

1. Resident foreign corporation (RFC) - a foreign corporation which operates and conducts
business in the Philippines through a permanent establishment (i.e., a branch).
2. Non-resident foreign corporation (NREC) - a foreign corporation which does not operate or
conduct business in the Philippines
Note:
1. A corporation that incorporates in the Philippines is a domestic corporation under the
Incorporation Test even if the same is controlled by foreigners.
2. A foreign corporation that transacts business with residents through a resident branch is
taxable on such transactions as a resident foreign corporatíon through its branch. However, if it
transacts directly to residents outside its branch, it is taxable as a non-resident foreign
corporation on the direct transactions.
Special Corporations
Special corporations are domestic or foreign corporations which are subject to special tax rules
or preferential tax rates.
OTHER CORPORATE TAXPAYERS

1. Partnership
A partnership is a 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 partnership
a) General professional partnership (GPP)
A GPP is a partnership formed for the exercise of a common profession. All
partners must belong to the same profession.
A GPP is not treated as a corporation and is not a taxable entity. It is exempt from
income tax, but the partners are taxable in their individual capacity with respect to
their share in the income of the partnership.
b) Business partnership
A business partnership is one formed for profit. It is taxable as a corporation.
Examples:
a. A partnership between Andrix, a lawyer, and Mark, an accountant, to practice
in taxation advisory services would be a business partnership since the two
partners are not in the same profession.
b. A partnership between accountants Zeus and Darrell to venture into a beauty
parlor would be a business partnership since the venture is not in practice of a
common profession.
c. A partnership between accountants Dominic and Jasmine May to venture into
audit services would be a general professional partnership.
2. Joint venture
A joint venture is a business undertaking for a particular purpose. It may be organized as
a partnership or a corporation.
Types of joint ventures:

a. Exempt joint ventures
Exempt joint ventures are those formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service
contract with the Government.
Similar to a GPP, this type of joint venture is not treated as a corporation and is
tax-exempt on its regular income, but their venturers are taxable to their share in
the net income of the joint venture.
b. Taxable joint ventures
All other joint ventures are taxable as corporations.
3. Co-ownership
A co-ownership is 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 collection is not a

taxable entity and is exempt but the co-owners are taxable on their share on the income of
the co-owned property.
However, a co-ownership that reinvests the income of the co-owned property to other
income-producing properties or ventures will be considered an unregistered partnership
taxable as a corporation.
THE GENERAL RULES IN INCOME TAXATION

Taxable on income earned
Individual taxpayers Within Without
Resident citizen
Non-resident citizen
Resident alien
Non-resident alien
Corporate taxpayers
Domestic corporation
Resident foreign corporation
Non-resident foreign corporation
Note:
1. Consistent with the territoriality rule, all taxpavers, except resident citizens and domestic
corporations, are taxable only on income earned within the Philippines.
2. The NIRC uses the term "without the Philipnines" to mean outside the Philipplnes
The Residency and Citizenship Rule

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. A
corporation is a citizen of the country of incorporation. Thus, a domestic corporation is a citizen
of the Philippines.
Basis of the extraterritorial taxation

Resident citizens and domestic corporations derive most of the benefits from the Philippine
government compared to all other classes of taxpayers by virtue of their proximity to the
Philippine government.
Under our laws, resident citizens and domestic corporations enjoy preferential privileges over
aliens. Also, between resident and non-resident citizens, resident citizens have full access of the
public services of our government because they are in the country. The taxation of foreign
income of resident citizens and domestic corporations properly reflects this difference in benefits
consistent with the Benefit Received Theory.
The extra-territorial tax treatment of resident citizens and domestic corporations is also intended
as a safety net to the potential loss of tax revenues brought by situs relocation or the practice of
executing or structuring transactions such that income will be realized abroad to avoid Philippine
income taxes.
The issue of international double taxation

The rule on extraterritorial taxation on resident citizens and domestic corporations exposes these
taxpayers to double taxation. However, the NIRC allows a tax credit for taxes paid in foreign
countries. In fact, resident citizens and domestic corporations pay minimal taxes in the
Philippines on their foreign income because of the tax credit.
SITUS OF INCOME
The situs of income is the place of taxation of income. It is the jurisdiction that has the authority
to impose tax upon the income.
Situs of income vs. Source of income

Situs of income should be differentiated from the source of income. The latter pertains to the
activity or property that produces the income.
Situs is important in determining whether or not an income is taxable in the Philippines. Situs is
particularly important to taxpayers taxable only on income within. However, it is also important
to taxpayers taxable on global income for purposes of the computation of the foreign tax credit.
INCOME SITUS RULES
Types of income Place of taxation (situs)

1. Interest income Debtor’s residence
2. Royalties Where the intangible is employed
3. Rent income Location of the property
4. Service income Place where the service is rendered
Illustration
A taxpayer had the following income:
Interest income from deposits in a foreign bank P 300,000

Interest from domestic bonds 50,000
Royalties from books published in the Philippines 100,000
Rent income from properties abroad (the lease contracts
were executed in the Philippines) 150,000
Professional fees for services rendered in the
Philippines to non-resident clients (paid in US Dollars) 400,000
Applying the situs rules, the following are the situs of the aforementioned income:
Within Without World total
Interest income from deposits P - P 300,000 P 300,000
Interest from domestic bonds 50,000 50,000
Royalties from books in the Philippines 100,000 100,000
Rent income on foreign properties 150,000 150,000
Professional fees 400,000 400,000
Total P 550,000 P 450,000 P 1,000,000
Resident citizen or domestic corporation taxpayers would be tax on the world income while other
taxpayers would be taxable only on the income from within 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
Illustration
A taxpayer had the following income:
Gain on sale of domestic stocks P 200,000

Gain on sale of foreign bonds 100,000
Gain on sale of a commercial lot in Baguio City 500,000
Gain on sale of car in Ontario, California 200,000
Gain on sale of machineries in Mexico, Pampanga 250,000
Interest income on foreign bonds 50,000
Dividends on domestic stocks 150,000
The following table summarizes the situs of the foregoing income:
Within Without
Gain on sale of domestic stocks P 200,000
Gain on sale of foreign bonds P 100,000
Gain on sale of a commercial lot in Baguio City 500,000
Gain on sale of car in Ontario, California 200,000
Gain on sale of machineries in Mexico, Pampanga 250,000
Interest income on foreign bonds 50,000
Dividends on domestic stocks 150,000
Total P 1,100,000 P 350,000
B. Dividend income
1. Domestic corporation – presumed earned within
2. Foreign corporation -
a) Resident foreign corporation – depends on the pre-dominance test
The pre dominance test
If the ratio of the Philippine gross income over the world income of the
resident foreign corporation in the three-year period preceding the year of
dividend declaration is:
 At least 50%, the portion of the dividend correspomding to the Philippine
gross income ratio is earned within
 Less than 50%, the entire dividends received is earned abroad
b) Non- resident foreign corporation – earned abroad
Illustration
In 2019, Sarah received a P400,000 dividend income from ABC Corporation. ABC Corporation
had the following gross income in 2016 through 2018:
2016 2017 2018 Total
Philippines P 100,000 P 200,000 P 300,000 P 600,000
Abroad 200,000 100,000 100,000 400,000
Total P 300,000 P 300,000 P 400,000 P 1,000,000
If ABC Corporation is a :
1. Domestic corporation – the entire P400,000 is earned within
2. Non-resident foreign corporation – the entire P400,000 is earned abroad
3. Resident foreign corporation - the P400,000 dividend shall be split
Gross Income Ratio = P600,000/P1,000,000 = 60%
Earned within the Philippines (60% x P400,000) P 240,000
Earned without the Philippines (40% x 160,000
P400,000)
Total dividends P 400,000
Supposing that the ratio is 49%, the entire P400,000 will be deemed earned outside the
Philippines.
C. Merchandising income – earned where the property is sold

Illustration
Source of gross income Amount
Goods purchased and sold within P 200,000
Goods purchased within and sold abroad 100,000
Goods purchased abroad and sold within 150,000
Goods purchased and sold abroad 350,000
The income earned within and without shall be:

Within Without
Purchased and sold within P 200,000
Purchased within and sold abroad P 100,000
Purchased abroad and sold within 150,000
Purchased abroad and sold abroad 350,000
Total P 350,000 P 450,000
D. Manufacturing income - earned where the goods are manufactured and sold
Operations Remark
Production Distribution
Within Within Total income from production and
distribution is earned within the Philippines
Without Without Total income from production and
distribution is earned without the Philippines
Within Without Production is earned income within,
Distribution income is earned without
Without Within Distribution income is earned within,
Production income is earned without
Illustration 1
Butuan Inc. manufactures goods and sells them through its branch. Butuan bills its branch at
established market prices, Butuan reported the following gross income:
Home office Branch Total

Sales P 4,000,000 P 2,000,000 P 6,000,000
Cost of goods sold 2,400,000 1,200,000 3,600,000
Gross income P 1,600,000 P 800,000 P 2,400,000
The following shows the situs of the gross income of Butuan under each of the following
scenario:
Scenario Home office Branch Within Without

No. 1 Philippines Philippines P 2,400,000 P 0
No. 2 Abroad Abroad 0 2,400,000
No. 3 Philippines Abroad 1,600,000 800,000
No. 4 Abroad Philippines 800,000 1,600,000
Note:
1. Both production and distribution are conducted by the same taxable entity, Butuan Inc.
2. The branch is not a separate taxable entity but is an integral part of Butuan Inc.; hence, its
income is taxable to Butuan Inc.
Illustration 2
Assuming production is conducted by a parent corporation and the distribution is conducted by
its subsidiary corporation:
Parent Subsidiary Total

Sales P 4,000,000 P 2,000,000 P 6,000,000
Cost of goods sold 2,400,000 1,200,000 3,600,000
Gross income P 1,600,000 P 800,000 P 2,400,000
The gross income recognized by each corporation is taxable to each corporation because each
corporation is a separate taxpayer. The situs of taxation shall be the place of sale without regard
to the seller or the supplier.
The following are the situs of income for the parent corporation:
Scenario Parent Subsidiary Within Without

No. 1 Philippines Philippines P 1,600,000 P -
No. 2 Abroad Abroad - 1,600,000
No. 3 Philippines Abroad 1,600,000 -
No. 4 Abroad Philippines - 1,600,000
The following are the situs of income for the subsidiary corporation:
Scenario Parent Subsidiary Within Without

No. 1 Philippines Philippines P 800,000 P -
No. 2 Abroad Abroad - 800,000
No. 3 Philippines Abroad 800,000 -
No. 4 Abroad Philippines - 800,000
Note to readers:
Readers are advised to master the situs rules as this have a significant effect on your
comprehension of advanced tax rules to be introduced in succeeding chapters.
CHAPTER 3: SELF-TEST EXERCISES
Discussion Questions
1. Enumerate the characteristics of gross income.
2. What are capital items considered with infinite value? Enumerate.
3. When is income considered realized?
4. Distinguish exchange from transfer.
5. What is a complex transaction? How is it taxed?
6. What is holding gain? Why is it exempted from taxation?
7. Compare actual receipt with constructive receipt.
8. Enumerate and explain the classifications of individual taxpayers.
9. What constitute a taxable estate and trust?
10. Enumerate and explain the classifications of corporate taxpayers.
11. Discuss the taxability of each class of taxpayers.
12. Explain situs. Differentiate situs from source of income.
13. What is the situs of the following income?
a. Interest income
b. Service income
c. Royalty income
d. Rental income
e. Gain on sale of movable property
f. Gain on sale of immovable property
g. Dividend income from domestic corporation
h. Dividend income from resident foreign corporation
i. Merchandising income
Exercise Drill No. 1: Return of capital and Return on capital
Indicate the amount representing return of capital or return on capital:
Return OF Return ON
Consideration For the loss of Capital Capital
1. P 1,000,000 Health
2. P 500,000 P 400,000 car
3. P 300,000 P 350,000 building
4. P 600,000 Income
5. P 1,200,000 Life
Exercise Drill No. 2: Income tax and transfer tax

Check the box of each of the following items is taxable:
Transaction Income tax Transfer tax

1. Barter of properties
2. Sales of goods
3. Rendering of services
4. Donation of properties
5. Transfer of properties from a
decedent to the heirs upon death
6. Transfer for less than full and
adequate consideration
Exercise Drill No. 3: The concept of income

Check the appropriate box whether the following are exempt or taxable:
Transaction Taxable Exempt

1. Winnings from gambling
2. Income from swindling
3. Indemnity for moral damages
4. Harvested fruits from an orchard
5. Compensation income
6. Interest income
7. Amount received by the insured in excess of
insurance premiums paid
8. Proceeds of life insurance received by the heirs
of the insured
9. Gain on sale of goods by the home office to its
branch
10. Gain on sale of goods and services between
relatives
11. Gain on sale of goods by a parent corporation to
a subsidiary corporation
12. Appreciation in the value of land
13. Birth of animal offspring
14. Income of a registered Barangay Micro-
Business Enterprise
15. Cancellation of debt out of gratuity of the
creditor
16. Cancellation of debt
By the creditor in exchange of services
rendered by the debtor
17. Matured interest from coupon bonds
18. Receipt of bank loan
19. Salaries of a minimum wage earner
20. PCSO or lotto winnings
21. Benefits from GSIS, SSS, Pag-ibig or
PhilHealth
22. Discovery of hidden treasure
Exercise Drill No. 4: Income taxpayer classification

Indicate the appropriate classification for each of the following taxpayers:
DC – Domestic corporation
RFD – Resident foreign corporation
NRFD – Non-resident foreign corporation
NRA-ETB - Non-resident alien engaged in trade or business
NRA-NETB - Non-resident alien not engaged in trade or
business NT – Not a taxpayer
RC – Resident citizen
NRC – Non-resident citizen
RA – Resident Alien
Person or Entity Classification

1. A fat Mexican tourist
2. A hardworking overseas Filipino worker
3. An expatriate employee
4. A Filipino who is privately employed in the Philippines
5. An unemployed Filipino residing in the Philippines
6. A Chinese businessman who has his domicile in the
Philippines for 6 months
7. A Japanese who married a beautiful Filipina and has been
residing in the Philippines for 2 years
8. A 2nd year Korean college student studying in the
Philippines
9. A corporation incorporated under Philippine law
10. A foreign corporation doing business in the Philippines
11. Trust designated by the donor as irrevocable
12. Trust designated by the donor as revocable
13. A business partnership
14. A joint venture organized under a foreign law and is not
operating in the Philippines
15. An estate of a Filipino citizen judicially administered in
Japan
16. An estate of a Filipino citizen extra-judicially
administered in the Philippines
17 A taxable joint venture organized in the Philippines
18. A non-profit corporation organized in the Philippines
Exercise Drill No. 5: General Income Tax Rule

Check the box that properly corresponds to the taxability of the following taxpayers:
Taxpayer World income Philippine

income
1. Non-resident citizen
2. Resident alien
3. Non-resident alien engaged in trade or business
4. Resident foreign corporation
5. Resident citizen
6. Non-resident alien not engaged in business
7. Non-resident foreign corporation
8. Domestic corporation
9. Taxable trusts established by a Filipino citizen
in the Philippines
10. Taxable estate of a non-resident citizen
judicially administered abroad
Exercise Drill No. 6: Location and situs of income

Compute how much is earned within and earned outside the Philippines from each of the
following independent cases:
Income description Within Without
1. Rey earned P100,000 interest income; 40% of
these were from non-resident debtors.
2. A finance company earned P1,000,000 royalties
from a franchise; 40% of these were derived
abroad.
3. Raymond earned P100,000 rent from OFWs
from his apartment in the US. He also earned
P40,000 rent from his Philippine condominium
unit.
4. Chester, a resident citizen, works home online
and submits his output to clients. He collected
P100,000 service fee from foreign clients and
P20,000 from resident clients.
5. Mark rendered audit services to client in
Afghanistan for P500,000. The services were

paid in Afghanistan.
6. Jun has a store in a tourist park in Baguio City,
Philippines. He earned a total of P40,000 gain
from selling souvenir items. 40% were from
foreign tourists.
7. Don Mariano sold at a gain of P2,000,000 to a
client abroad a commercial building located in
Quezon City, Philippines.
8. John sold his stocks in a domestic corporation to
a foreign investor at a gain of P50,000.
9. Manso received P20,000 dividends from a
domestic corporation and P30,000 dividend
income from a non-resident foreign company.
10. Andrew received P40,000 dividends from a
resident foreign corporation; 60% of its
historical income is from the Philippines.
11. CDO, Inc. manufactures in the Philippines and
sells to unaffiliated export clients. A total of
P100,000 gross income was earned during the
period.
12. ABC manufactures abroad and sells to its
Philippines branch at market prices. Production
cost abroad were P200,000. Billings to branch
totaled P300,000 while branch sales totaled
P450,000.
13. James received P100,000 dividends from a
resident foreign corporation which realized 40%
of its income in the Philippines.
14 Ellis received P20,000 dividend from a non-
resident foreign corporation.
15. Davao plant manufactures tables and sells to
resident clients. A total of P400,000 gross
income was realized during the period.
Multiple Choice – Theory: Part 1 b. Compensation for personal

1. Which is not a requisite of gross income? injuries
a. Return on capital c. Moral damages
b. Realized benefit d. Interest on moral damages
2. Which is taxable item of income? 3. Which is not subject to income tax?
a. Increase in numbers of a herd of animals
c. Exempted by law
d. Not exempted by law
a. Donation b. Sale of service
c. Sales of goods d. Barter of goods
4. The total consideration received from the sale of service constitute
a. Return on capital c. Either a or b
b. Return of capital d. Both a and b
5. When paid for, which of the following items may involve a return on capital?
a. House and lot c. Dignity
b. Life d. Health
6. The total consideration received from the sale of goods at a gain represents
7. The total consideration received from the sale of goods at a loss represents
8. Why is income subject to taxation?
a. Income is the most prevalent source of a taxpayer's wealth.
b. Income is the best measure of taxpayers' ability to pay tax.
c. Rich people tend to have more income than the poor.
d. Any of these.
9. Which is not an item of gross income because of the absence of an undertaking from the
taxpayer?
a. Proceeds of a life insurance policy
b. Forgiveness of indebtedness as an act of gratuity
c. Revaluation surplus on properties
d. Service fees
10. Which is subject to income tax?
a. Proceeds of life insurance policy received by the family of the insured
b. Excess of proceeds over the premiums paid received by the taxpayer
c. Life insurance proceeds received by the corporation from the insurance of a deceased
officer
d. None of these
11. Which of the following is exempted from income taxation because of the absence of ability
to pay?
a. Damages received from patent infringement suit
b. Unrealized income from investments
c. Gain on sale of goods
d. Inheritance
12. Income tax may be imposed for the following purposes, except
a. To provide large amounts of revenues
b. To limit corruption
c. To offset regressive sales and consumption taxes
d. To mitigate the evils arising from the inequalities in the distribution of income and
wealth
13. Which of the following constitutes taxable income?
a. Return of premium on life insurance received by the insured
b. Moral damages received from slander
c. Proceeds of crop insurance
d. Compensation for personal injury
14. Which of the following is not a constructive receipt of income?
a. Forgiveness of indebtedness in consideration of service
b. Matured detachable interest coupons
c. Deposit of income to taxpayer's bank accounts
d. Cash salary of an employee
15. Transfers for insufficient consideration are subject to
a. Income tax c. Either a or b
b. Transfer tax d. Both a and b
16. Which is specifically exempted from income taxation by virtue of legal exemption?
a. Minimum wage
b. Gain on sale of prohibited drugs
c. Unrealized gain
d. All of these
Multiple Choice - Theory: Part 2

1. A resident alien naturalized in accordance with Philippine laws is a
a. Resident citizen
b. Resident alien
c. Non-resident alien engaged in trade or business
d. Non-resident alien not engaged in trade or business
2. Who is not a resident alien?
a. An alien who stayed in the Philippines for more than two years.
b. An alien who married and stayed in the Philippines for one year.
c. An alien who stayed in the Philippines for more than one year.
d. An alien who established his intention before the CIR to stay in the Philippines for an
extended period of time.
3. Which taxpayer is not a natural person?
a. Resident citizen
b. Taxable estate
4. A Filipino who has been abroad for more than 183 days is classified as a
a. Resident alien
c. Non-resident citizen
d. Non-resident citizen not engaged in trade or business
5. Which of the following is not an income taxpayer classification?
a. Resident citizen
c. Resident foreign corporation
d. General professional partnership
6. An American who showed proof to the satisfaction of the Commissioner of Internal Revenue
of his intention to stay in the Philippines as an immigrant is classified as a
a. Resident citizen c. NRA- ETB
b. Resident alien d. NRA - NETB
7. A Japanese who is staying in the Philippines for 183 days is a
a. Resident alien
8. A Canadian who is staying in the Philippines for more than one year is a
a. Resident alien
9. An alien who stayed less than one year in the Philippines is classified as a non-resident alien
not engaged in trade or business if he stayed herein for less than
a. 180 days c. 183 days
b. 1 year d. 2 years
10. A corporation incorporated according to Philippines laws is a
a. Domestic corporation c. Non-resident corporation
b. Resident corporation d. De jure corporation
11. A foreign corporation which is not authorized to conduct business in the Philippines is a
12. A foreign corporation which operates a branch in the Philippines is a
13. A partnership which dominantly operates business abroad is a
14. Which is required to pay income tax?
a. Revocable trusts
b. Estates under extrajudicial settlement
c. Co-ownership
d. Business partnership
15. Which is not an income taxpayer?
a. Non-resident foreign corporation
b. Non-resident alien not engaged in trade or business
c. Joint venture engaged in energy operation pursuant to a service contract with the
government
d. Irrevocable trusts
16. Which of the following taxpayers is taxable only on income earned from the Philippines?
a. Resident corporation c. Resident citizen
b. Domestic corporation d. All of these
17. All of the following are taxable only on income earned from sources within the Philippines,
except
a. Resident alien c. Non-resident corporation
b. Non-resident citizen d. Domestic corporation
18. Which is taxable on world income?
a. Resident corporation b. Non-resident citizen
c. Resident citizen d. Resident alien
Multiple Choice - Theory: Part 3

1. The place of taxation is
a. Situs rule c. Territoriality
b. Situs d. Gross income
2. Which is an incorrect statement regarding situs of income:
a. Service income is earned in the domicile of the taxpayer.
b. Interest income is earned in the residence of the debtor.
c. Royalty is earned where the intangible is employed.
d. Rent is earned in the location of the property.
3. Which statement is correct regarding situs of income?
a. The gain on the sale of real property is earned in the location of the property.
b. The gain on sale of any property is earned in the place of sale.
c. Merchandising income is earned in the residence of the proprietor.
d. Manufacturing income is earned in the place of sale
4. Pedro, a non-resident citizen, lent money to Shino, a resident Chinese. The indebtedness was
collateralized by a property located in Japan. The interest income is earned in
a. the Philippines.
b. China.
c. Japan.
d. Japan, China and the Philippines.
5. Gains on the sale of goods manufactured and sold by the taxpayer within the Philippines is
subject to tax
a. wherever sold.
b. if sold abroad only.
c. without the Philippines only.
d. within the Philippines only.
6. Yvonne, a resident alien, bought a car manufactured in the Philippines and exported the same
at a gain to Carla, a non-resident citizen. Which is correct?
a. The gain is subject to tax in the Philippines since the commodity involved is
manufactured in the Philippines.
b. The gain is subject to tax in the Philippines since the buyer is a citizen of the
Philippines.
c. The gain is both subject to tax in the Philippines and abroad since the commodity
involved is manufactured in the Philippines.
d. The gain is taxable abroad because it is sold abroad.
7. Juan, a resident alien, and Pedro, a non-resident alien, executed a contract of sale in Japan
whereby Pedro shall purchase the lot owned by Juan in the Philippines. Juan gains
P1,000,000 in the exchange.
Which is true?
a. The gain is exempt since the gain is derived outside the Philippines.
b. The gain is not subject to Philippine tax since Juan is a resident alien.
c. The gain is subject to Philippine tax because Juan is a resident alien.
d. The gain is subject to Philippine tax because the property is in the Philippines.
Multiple Choice – Problems
Problem 3-1
Beth negotiated a P1,000,000 non-interest bearing promissory note to Candy. Candy paid Beth
P950,000. On due date, Beth paid Candy P1,000,000. Which is true?
a. Beth earned P50,000 return on capital
b. Candy earned P50,000 return on capital
c. Candy received P50,000 donation
d. Candy received P1,000,000 return of capital
Problem 3-2
Andrew received a total sum of P42,000 from his employer consisting of the following:
 P5,000 reimbursements for employer's expenses paid by Andrew
 P15,000 payment of Andrew's computer set purchased by the employer
 P22,000 monthly salary
Andrew's computer set cost him P12,000. Compute the total return on capital which can be
subjected to income tax.
a. P42,000 c. P25,000
b. P37,000 d. P22,000
Problem 3-3
Betty paid P20,000 annual premium on a life insurance contract which would pay her
P1,000,000 in case of her death. After paying for 4 years, Betty assigned the policy to Carlos for
P120,000.
Compute the return on capital.

a. P120,000 c. P40,000
b. P80,000 d. P0
Problem 3-4
Becky purchased a P1,500,000 life insurance policy for P100,000. During the year, Becky died
and her heirs collected the entire proceeds. How much of the proceeds is exempt from income
tax?
a. P1,500,000 c. P100,000
b. P1,400,000 d. P0
Problem 3-5
Dan purchased the P1,000,000 life insurance policy of Ben for P120,000. Dan paid the P20,000
annual premiums on the policy for 4 years after which Ben died.
Compute the total return on capital for Dan.

a. P1,000,000 c. P800,000
b. P880,000 d. P0
Problem 3-6
Carlos paid P20,000 annual premium for a P1,000,000 life insurance policy. After 7years, Carlos
surrendered the policy and was paid by the insurance company P200,000 which represents the
cash surrender value of the policy.

a. P1,000,000 c. P60,000
b. P860,000 d. P0
Problem 3-7
Alexander Company insured the life of its president for P2,000,000. A total of P500,000 in
premiums was paid before the president died. The company collected the total proceeds.

a. P0 c. P500,000
b. P1,500,000 d. P 2,000,000
Problem 3-8
Onyoc insured his newly constructed building costing P1,000,000. Within a few days, the
building was totally destroyed by a fire. The insurance company reimbursed Onyoc P1,500,000,
which represents the fair value of the building.
Which statement is false?

a. P1,000,000 of the proceeds is a return of capital.
b. P500,000 of the proceeds is a return on capital.
c. P1,500,000 is a return of capital.
d. Only A and B
Problem 3-9
Guilbert is worried that his entire potato plantation, which is expected to yield P400,000 income
will be totally devastated by bad weather conditions. He obtained a P300,000 crop insurance
cover for P30,000. Just before harvest, a rare frost totally destroyed Guilbert's plantation. The
insurance comnpany paid the policy proceeds.
Compute the total recovery of loss profits to be recognized by Guilbert as income.

a. P0 c. P 300,000
b. P100,000 d. P370,000
Problem 3-10
Felix sells hot chili-flavored pancakes using a secret formula he patented. He sued a competing
pancake house for alleged patent infringement and claimed a total indemnity of P1,200,000:
 P1,000,000 for loss of profits from loss of sales
 P200,000 as Attorney's fee reimbursement
If Felix wins the case and is awarded the total indemnity, compute his total return of capital.
a. P1,000,000 c. P0
b. P800,000 d. P 200,000
Problem 3-11
Henson was one of the passengers of a van that fell off a ravine. Henson sued the bus company
and was awarded an indemnity of P800,000 for the following:
 P500,000 for the impairment of his health resulting to the amputation of his legs
 P200,000 for his loss of salaries during his hospitalization
 P100,000 for his Attorney's fees
Compute Henson's return on capital.

a. P800,000 c. P200,000
b. P300,000 d. P0
Problem 3-12
Jake sued an unscrupulous person for derogatory remarks which he considered to have
besmirched his reputation. The court awarded him an indemnity of P1,000,000 inclusive of
P200,000 reimbursement for Attorney's fees and P100,000 exemplary damages. Compute
Henson's total return on capital.
a. P1,000,000 c. P700,000
b. P800,000 d. P0
Problem 3-13
Kendrick received the following items during the year:
 P200,000 donation from a girlfriend
 P100,000 service fee from professional services
 P300,000 inheritance from his deceased father
 P100,000 income from illegal gambling
 P50,000 gain on sale of his personal car
 P250,000 profits from his bar restaurant
Compute the total income subject to income tax.

a. P1,050,000 c. P550,000
b. P750,000 d. P500,000
Problem 3-14
Pines Corporation has a branch in Manila and a 70%-owned subsidiary, Choco Hills, Inc. in
Davao. The following data shows Pines Corporation's sales transactions during the year:
 Pines Corporation billed the Manila branch P1,500,000 for merchandise shipped to the
latter at a mark-up of 50% above acquisition cost. The branch stored the merchandise and
did not operate during the year.
 Sold merchandise to unrelated parties at a gain of P800,000
 Sold merchandise to Darrel Asuncion, Pines Corporation's controlling stockholder, at a
gain of P100,000
 Sold various merchandise to Choco Hills, Inc. at a gain of P200,000
Compute the total income of Pines Corporation subject to income tax.

a. P1,700,000 b. P1,200,000
c. P1,100,000 d. P900,000
Problem 3-15
Denver is a supervisory employee of Atlantis Corporation. He had the following items of gross
income during the year:
 Denver was paid P800,000 salaries.
 Denver's P100,000 personal loan was paid by Atlantis Corporation as rewards for his
excellent performance.
 Denver's P50,000 advances to the company was paid by Atlantis' chief executive officer
as a gift.
 Denver is entitled to excess representation and transportation allowances. Denver
received P200,000 total allowance out of which P120,000 was disbursed by him.
Compute Denver's total income subject to income tax.

a. P980,000 c. P880,000
b. P900,000 d. P800,000
Problem 3-16
Jen is engaged in business. The following pertains to her transactions during 2014:
 Sold his personal car which was purchased at P200,000 to a friend who paid only half of
the car's P500,000 current fair value.
 Sales of merchandise was P800,000 and the cost of goods sold was P600,000.
 Jen acquired several stocks from the Philippine Stock Exchange for speculation. These
stocks have an aggregate purchase price of P400,000 but with P700,000 fair value by
December 31, 2014.
 Jen's house and lot which he acquired for P1,500,000 in 2010 now have a current fair
value of P2,500,000.
Compute Jen's total income subject to income tax.

a. P1,800,000 c. P200,000
b. P1,550, 000 d. P250,000
Problem 3-17
A condominium homeowner’s association collects dues from unit holders and remits the same to
service providers on their behalf. Such dues include electricity, water, security, and maintenance.
The association charges unit holders an additional 2% of their utility bills as service charge.
During the year, the association processed utility bills for unit holders totaling
P5,000,000. How much taxable income is realized by the association?

a. P5,000,000 c. P100,000
b. P4,900,000 d. P0
Problem 3-18
Kenny used to bet in PCS0 lotto. On June 3, 2014, he won the P20,000,000 jackpot prize from
the 6/45 lotto. One P20-ticket out of 10 bets took the prize. How much is Kenny's total income
subject to tax?
a. P20,000,000 c. P19,999,900
b. P19,999,990 d. P0
Problem 3-19
An American citizen has been staying in the Philippines since August 15, 2013. What would be
his taxpayer classification for the year 2013 and 2014, respectively?
a. Non-resident alien engaged in trade or business; resident alien
b. Non-resident alien not engaged in trade or business; resident citizen
c. Non-resident alien engaged in trade or business; resident citizen
d. Non-resident alien not engaged in trade or business; resident alien
Problem 3-20
A citizen who left the Philippines on March 1, 2013 would be classified as
a. Non-resident for the year 2013.
b. Resident citizen for the year 2013.
c. Non-resident for the year 2014.000B1.r3
d. Resident citizen for the year 2014.
Problem 3-21
An alien received P200,000 compensation income in the Philippines and P300,000 rental income
from abroad. How much will be subject to Philippine income tax?
a. None c. P300,000
b. P200,000 d. P500,000
Problem 3-22
A non-resident citizen is an international financier who earned P400,000 interest income from
resident debtors and P300,000 from foreign debtors. How much is subject to Philippine income
tax?
a. None c. P400,000
b. P300,000 d. P700,000
Problem 3-23
Sarah has the following items of income:
Philippines Abroad
Business income P 200,000 P 100,000
Professional fees 100,000 50,000
Compensation income 400,000 -
Rent income 300,000 200,000
Interest income 30,000 40,000
1. Assuming Sarah is a resident citizen, compute the total income subject to Philippine income
tax.
a. P 390,000 c. P1,030,000
b. P1,180,000 d. P1,420,000
2. Assuming Sarah is a resident alien, compute the total income subject to Philippine income
tax.
a. P1,420,000 c. P1,030,000
b. P1,180,000 d. P 390,000
3. Assuming Sarah is a resident corporation, compute the total income subject to Philippine
income tax.
a. P1,420,000 c. P1,180,000
b. P1,030,000 d. P 390,000
4. Assuming Sarah is a domestic corporation, compute the total income subject to Philippine
income tax.
a. P 390,000 c. P1,180,000
b. P1,030,000 d. P1,420,000
Case Problems
Case Problem 1
Jaypee has the following income in 2017:
 P10,000 interest income from a non-resident Japanese friend
 P40,000 interest income from Philippine residents
 P500,000 rent income from a commercial complex located in the USA which is leased to
resident Filipinos
 P200,000 rent income from a boarding house in Baguio City, Philippines
 P200,000 professional fees rendered to Chinese clients in Hong Kong
 P300,000 salary from a resident employer
 P100,000 gain from sale of merchandise imported and sold to Filipino residents
 P50,000 gain on sale of merchandise purchased locally and sold during her business
travel in Hong Kong
 P400,000 gain on sale of the boarding house located in Baguio City to a non-resident
buyer
Required:
Compute the total income earned from sources
1. Within the Philippines
2. Outside the Philippines
Case Problem 2
Joy earns franchise fees from his Hot Burger franchise. He also deals in various properties.
Johnny realized the following gains in 2017:
 P500,000 royalty fees from local Hot Burger outlets
 P200,000 royalty fees from foreign Hot Burger outlets
 P100,000 gain from sales of equipment to foreign franchisees
 P200,000 gain from sales of equipment to local franchisees
 P50,000 gains from sale of investment in domestic stocks to foreign investors
 P40,000 gains from sale of investments in foreign stocks to Filipino investors
Required:
Compute the total income earned from sources
a. Within the Philippines
b. Without the Philippines
Case Problem 3
TC Company manufactures wooden furniture for the local and export market. It has a
distribution outlet abroad which handles foreign sales. It bills all customers, including the
foreign outlet, 70% above manufacturing costs. The foreign outlet bills its customers 100%
above TC Company's billing price. TC Company reports P3,400,000 in total sales, exclusive of
sales to the foreign outlet. The foreign outlet reports P2,720,000 total sales to customers.
Compute the manufacturing income respectively earned within and earned without the
Philippines.
a. P1,960,000; P1,360,000
b. P1,400,000; P1,360,000
c. P840,000; P1,920,000
d. P840,000; P1,360,000
Chapter 3 - tax
Financial accounting (Africa University)
Studocu is not sponsored or endorsed by any college or university

Downloaded by Forcadas Rose Joy (rosejoysantiagoforcadas@gmail.com)
Chapter 3 – Introduction to Income Taxation
Multiple Choice Theory: Part 1
1. Which is not a requisite of gross income? Exempted By Law

2. Which is taxable item of income? Interest on moral damages
3. Which is not subject to income tax? Donation
4. The total consideration received from the sale of service constitute? Return ON capital
5. When paid for, which of the following items may involve a return on capital? House and Lot
6. The total consideration received from the sale of good at a gain represents? Both Return of
Capital and Return on Capital
7. The total consideration received from the sale of goods at a loss represents? Return OF Capital
8. Why is income subject to taxation? Income is the best measure of taxpayers’ ability to pay
9. Which is not an item of gross income because of the absence of an undertaking from the
taxpayer? Forgiveness of indebtedness as an act of gratuity
10. Which is subject to income tax? Excess of proceeds over the premiums paid received by the
taxpayer
11. Which of the following is exempted from income taxation because of the absence of ability to
pay? Unrealized income from investments
12. Income tax may be imposed for the following purposes except? To limit corruption
13. Which of the following constitutes taxable income? Proceeds of crop insurance
14. Which of the following is not a constructive receipt of income? Cash salary of an employee
15. Transfers for insufficient consideration are subject to? Both income tax and transfer tax
16. Which is specifically exempted from income taxation by virtue of legal exemption? Minimum
Wage
1. A resident alien naturalized in accordance with the Philippine laws is a? Resident Citizen
2. Who is not a resident alien? An alien who married and stayed in the Philippine for one year
3. Which taxpayer is not a natural person? Non-resident alien engaged in trade or business
4. A Filipino who has been broad for more than 183 days is classified as? Non-resident citizen
5. Which of the following is not an income taxpayer classification? General professional partnership
6. An American who showed proof to the satisfaction of the Commissioner of Internal Revenue of
his intention to stay in the Philippines as an immigrant is classified as a? Resident alien
7. A Japanese who is staying in the Philippines for 183 days is a? Non-resident alien engaged in
trade or business
8. A Canadian who is staying in the Philippines for more than one year is a? Resident alien
9. An alien who stayed less than one year in the Philippines is classified as a non-resident alien not
engaged in trade or business if he stayed herein for less than? 180 days
10. A corporation incorporated according to Philippines laws is a? Domestic corporation
11. A foreign corporation which is not authorized to conduct business in the Philippines is a? Non-
resident corporation
12. A foreign corporation which operates a branch in the Philippines is a? Resident Corporation

13. A partnership which dominantly operates business abroad is a? Domestic corporation
14. Which is required to pay income tax? Business partnership
15. Which is not an income taxpayer? Joint venture engaged in energy operation pursuant to a
service contract with the government
16. Which of the following taxpayers is taxable only on income earned from the Philippines?
Resident corporation
17. All of the following are taxable only on income earned from sources within the Philippines,
except? Domestic Corporation
18. Which is taxable on world income? Resident Citizen
1. The place of taxation is? Situs

2. Which is an incorrect statement regarding situs of income? Service income is earned in the
domicile of the taxpayer
3. Which statement is correct regarding situs of income? The gain on the sale of property is
earned in the location of the property
4. Pedro, a non-resident citizen, lent money to Shino, a resident Chinese. The indebtedness was
collateralized by a property located in Japan. The interest income is earned in? China
5. Gains on the sale of goods manufactured and sold by the taxpayer within the Philippines is
subject to tax? Within the Philippines only
6. Yvonne, a resident alien bought a car manufactured in the Philippines exported the same at
gain to Carla, a non-resident citizen. Which is correct? The gain is taxable abroad because it is
sold abroad
7. Juan, a resident alien, Pedro, a non-resident alien, executed a contract of sale in Japan whereby
Pedro shall purchase the lot owned by Juan in the Philippines. Juan gains P1, 000,000 in
exchange. Which is true? The gain is subject to the Philippine tax because the property is in
the Philippines
Multiple Choice – Problems
1. Beth negotiated a P1, 000,000 non-interest bearing promissory note to Candy. Candy paid Beth
P950, 000. On due date, Beth paid Candy P1, 000,000. Which is true? Candy earned P50,000
return on capital
2. Andrew received a total sum of P42,000 from his employer consisting of the following:
o P5,000 reimbursements for employer's expenses paid by Andrew
o P15,000 payment of Andrew's computer set purchased by the employer
o P22,000 monthly salary
Andrew's computer set cost him P12, 000. Compute the total return on capital which can be
subjected to income tax. P25, 000

3. Betty paid P20, 000 annual premium on a life insurance contract which would pay
herP1, 000,000 in case of her death. After paying for 4 years, Betty assigned the policy to Carlos
forP120, 000. Compute the return on capital. P 40,000
4. Becky purchased a P1, 500,000 life insurance policy for P100, 000. During the year, Becky died
and her heirs collected the entire proceeds. How much of the proceeds is exempt from income
tax? P 1,500,000
5. Dan purchased the P1, 000,000 life insurance policy of Ben for P120,000. Dan paid the P20,
000annual premiums on the policy for 4 years after which Ben died. Compute the total return
on capital for Dan. P 800,000
6. Carlos paid P20, 000 annual premium for a P1, 000,000 life insurance policy. After 7years,
Carlos surrendered the policy and was paid by the insurance company P200, 000 which
represents the cash surrender value of the policy. Compute the return on capital. P 60,000
7. Alexander Company insured the life of its president for P2, 000,000. A total of P500, 000 in
premiums was paid before the president died. The company collected the total proceeds.
Compute the return on capital. P 0
8. Onyoc insured his newly constructed building costing P1, 000,000. Within a few days, the
building was totally destroyed by a fire. The insurance company reimbursed Onyoc P1, 500,
000, which represents the fair value of the building. Which statement is false? P 1, 500, 000 is a
return of capital
9. Guilbert is worried that his entire potato plantation, which is expected to yield P400, 000
income will be totally devastated by bad weather conditions. He obtained a P300, 000 crop
insurance cover for P30, 000. Just before harvest, a rare frost totally destroyed Guilbert's
plantation. The insurance company paid the policy proceeds. Compute the total recovery of
loss profits to be recognized by Guilbert as income. P 300,000
10. Felix sells hot chili-flavored pancakes using a secret formula he patented. He sued a competing
pancake house for alleged patent infringement and claimed a total indemnity of P1,200,000:
 P1,000,000 for loss of profits from loss of sales
 P200,000 as Attorney's fee reimbursement
If Felix wins the case and is awarded the total indemnity, compute his total return of capital.
P 200, 000
11. Henson was one of the passengers of a van that fell off a ravine. Henson sued the bus company
and was awarded an indemnity of P800,000 for the following:

 P500,000 for the impairment of his health resulting to the amputation of his legs
 P200,000 for his loss of salaries during his hospitalization
 P100,000 for his Attorney's fees
Compute Henson's return on capital. P 200,
000
12. Jake sued an unscrupulous person for derogatory remarks which he considered to
have besmirched his reputation. The court awarded him an indemnity of P1, 000,000 inclusive
of P200, 000 reimbursement for Attorney's fees and P100, 000 exemplary damages.
Compute Henson’s total return on capital. P 0
13. Kendrick received the following items during the year:
 P200,000 donation from a girlfriend
 P100,000 service fee from professional services
 P300,000 inheritance from his deceased father
 P100,000 income from illegal gambling
 P50,000 gain on sale of his personal car
 P250, 000 profits from his bar restaurant.
Compute the total income subject to income tax. P 500, 000
14. Pines Corporation has a branch in Manila and a 70%-owned subsidiary, Choco Hills, Inc. in
Davao. The following data shows Pines Corporation's sales transactions during the year:
 Pines Corporation billed the Manila branch P1, 500,000 for merchandise shipped to the
latter at a mark-up of 50% above acquisition cost. The branch stored the merchandise
and did not operate during the year.
 Sold merchandise to unrelated parties at a gain of P800,000
 Sold merchandise to Darrel Asuncion, Pines Corporation's controlling stockholder, at
again of P100,000
 Sold various merchandise to Choco Hills, Inc. at a gain of P200,000
Compute the total income of Pines Corporation subject to income tax. P 1, 100,
000
15. Denver is a supervisory employee of Atlantis Corporation. He had the following items of gross
income during the year:
 Denver was paid P800, 000 salaries.
 Denver's P100, 000 personal loan was paid by Atlantis Corporation as rewards for his
excellent performance.

 Denver's P50, 000 advances to the company was paid by Atlantis' chief executive officer
as a gift.
 Denver is entitled to excess representation and transportation allowances. Denver
received P200, 000 total allowance out of which P120, 000 was disbursed by him.
Compute Denver's total income subject to income tax. P 980, 000
16. Jen is engaged in business. The following pertains to her transactions during 2014:
 Sold his personal car which was purchased at P200, 000 to a friend who paid only half
of the car's P500,000 current fair value.
 Sales of merchandise was P800, 000 and the cost of goods sold was P600, 000.
 Jen acquired several stocks from the Philippine Stock Exchange for speculation. These
stocks have an aggregate purchase price of P400, 000 but with P700, 000 fair value by
December 31, 2014.
 Jen's house and lot which he acquired for P1, 500,000 in 2010 now have a current fair
value of P2, 500,000.
Compute Jen's total income subject to income tax. P 250, 000
17. A condominium homeowner’s association collects dues from unit holders and remits the same
to service providers on their behalf. Such dues include electricity, water, security, and
maintenance. The association charges unit holders an additional 2% of their utility bills as
service charge. During the year, the association processed utility bills for unit holders totaling
P5, 000,000.How much taxable income is realized by the association? P 100, 000
18. Kenny used to bet in PCS0 lotto. On June 3, 2014, he won the P20, 000,000 jackpot prize from
the 6/45 lotto. One P20-ticket out of 10 bets took the prize. How much is Kenny's total income
subject to tax? P 0
19. An American citizen has been staying in the Philippines since August 15, 2013. What would be
his taxpayer classification for the year 2013 and 2014, respectively? Non- resident alien not
engaged in trade or business; resident alien
20. A citizen who left the Philippines on March 1, 2013 would be classified as? Non-resident for
the year 2013
21. An alien received P200, 000 compensation income in the Philippines and P300, 000 rental
income from abroad. How much will be subject to Philippine income tax? P 200, 000

22. A non-resident citizen is an international financier who earned P400, 000 interest income from
resident debtors and P300, 000 from foreign debtors. How much is subject to Philippine income
tax? P 400, 000
23. Sarah has the following items of income:
Philippines Abroad
Business Income P 200, 000 P 100,000
Professional Fees 100, 000 50,000
Compensation Income 400,000 -
Rent Income 300,000 200,000
Interest Income 30,000 40,0000
1. Assuming Sarah is a resident citizen, compute the total income subject to Philippine income
tax. P 1, 420,000
2. Assuming Sarah is a resident alien, compute the total income subject to Philippine income
tax. P 1, 030,000
3. Assuming Sarah is a resident corporation, compute the total income subject to Philippine
income tax. P 1, 030,000
4. Assuming Sarah is a domestic corporation, compute the total income subject to Philippine
income tax. P 1, 420, 000

Chapter 6 income tax by banggawan
Bs accountancy (Mindanao State University)
Studocu is not sponsored or endorsed by any college or university

Northern CPAR: Taxation – Capital Gains Taxation
NORTHERN CPA REVIEW
4 Floor Pelizloy Centrum, Lower Session Road, Baguio City,
th
Philippines Mobile Numbers: SMART 09294891758 & GLOBE

09272128204
E-mail Address: ncpar@yahoo.com
REX B. BANGGAWAN, CPA, MBA
TAXATION
CAPITAL GAINS TAXATION
The assets of the business are classified as:
1. Ordinary assets – includes:
a. stock in trade of the taxpayer, or other property of a kind which would properly be
included in an inventory of the taxpayer if on hand at the end of the taxable year
b. properties held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
c. properties used in trade or business of a character which is subject to allowance
for depreciation; and
d. real properties used in trade or business
Examples: inventories, property, plant and equipment
2. Capital assets – any other assets that does not fall under the definition of ordinary
assets
Examples: investment properties, notes receivables and investment in equity or debt
securities (for a non-security dealer taxpayer)
Gains arising from sale of ordinary assets are called “ordinary gains.” Gains arising from
sale of capital assets are called “capital gains.” All ordinary gains are taxable under
regular income taxation. Capital gains are taxable either under final tax or under regular
income tax.
CAPITAL GAINS SUBJECT TO FINAL TAX
A. Capital gains tax on sale, barter, exchange and other disposition of domestic
shares of stock directly to buyer
Requisites:
a. There is a net gain.
b. The capital asset sold is a domestic stock.
c. The sale is made directly to buyer.
Capital Gains Tax Rates:
First P100,000 of the net gain 5%
Excess of the net gain over 10%
P100,000
Note to candidates: This rule on capital gains on sale of domestic stocks directly to
buyer is uniform to all income taxpayers (individuals or corporate) regardless of
classification.
The rule do not applies to:
1. Gains on sale shares of stock is that is traded in the Philippine Stock Exchange
(PSE)
 This is subject to a transaction tax (percentage tax) of ½ of 1% of selling price.
2. Gains under similar conditions by security brokers or dealers
When to file the Capital Gains Tax Returns?
1. Per transaction basis: Within 30 days after each transactions
2. Annual basis:
a. For individuals – On or before April 15 of the following year
b. For corporations – On or before the 15th day of the fourth month following the
close of the taxable year
When to pay the capital gains tax?
1. Lump sum – Upon date of filing the return with the Bureau (within 30 days from
date of sale)
2. Installment – tax on installments is due within 30 days from receipts of each
installments
Documentary Stamp Tax
1
Driven for real excellence! TAX by Rex B. Banggawan, CPA, MBA TAX – 6 th
Batch – HQ05
 Par value stock: P0.75/P200 or fractional part of the par value of due bill,
certificate of obligation or stock
 No-par stock: 25% of the documentary stamp tax paid on the original issue of
said stock. (The documentary stock on original issue of non-par stock is based on
actual consideration for the issuance – Sec. 174 NIRC)
 Limit: Only one tax shall be collected on each sale or transfer of stock or
securities from one person to another regardless of whether or not a certificate of
stock is issued or obligation is issued, indorsed, or delivered in pursuance of such
sale or transfer.
 Deadline: Documentary stamp tax return shall be filed within 10 days after the
close of the month when the taxable document was made, signed, issued, accepted
or transferred, and the tax thereon shall be paid at the same time the return is
paid.
B. Sale, exchange or other disposition of real property in the Philippines
classified as capital asset
Requisites:
a. The real property is located in the Philippines.
b. The property is classified as capital asset.
c. The taxpayer is an individual or a domestic corporation.
d. The taxpayer is other than a foreign corporation.
Tax Rate and Tax Basis: 6% x (the higher of Gross Selling Price or Fair
Market Value)
The fair market value for purposes of the capital gains tax is whichever is higher of:
1. Zonal value as prescribed by the Commissioner of Internal Revenue
2. Assessed value as determined by the Provincial or City Assessor’s Office
Gross selling price – The amount of any money received plus the fair market value
of any property received. Interest on the selling price shall be treated separately as
Other Income taxable under regular income taxation.
Excess Mortgage Assumed
The excess of the mortgage assumed over the cost of the property is included both in
initial payment and selling since it is a constructive receipt of income; in other words,
it represents “extra consideration”.
Note to Candidates: The basis of the tax is on the gross selling price or gross fair
market value. This treatment presumes the existence of gain and is applied regardless
of the existence of actual gain.
SCOPE OF THE 6% CAPITAL GAINS TAX:
Individuals Corporation
Citizen Alien
Location of Non- NR- NR- Domest Reside Non-
Real Reside Reside Reside ETB NETB ic nt residen
Property nt nt nt t
Philippines ✓ ✓ ✓ ✓ ✓ ✓ Not Applicable
Abroad × × × × × × × ×
Note to Candidate: Regular income taxation, being the general rule, applies where the
6% final capital gains tax do not apply. Under regular taxation, the actual net gain is
subject to regular income tax.
How is the capital gains tax paid?
1. The tax is withheld at source – the seller and buyer files a joint capital gains tax return
(one return per sale or foreclosure sale).
2. Installment (one return for each installment payment receive)
The tax is withheld at source in installments when the taxpayer qualifies and opted to
be taxed on installments.
Alternative Taxation:
The actual net gain on the sale of real property may be included under progressive
income taxation.
Requisites:
a. the seller is an individual
2
Batch – HQ05

b. the buyer is the government, its political subdivisions or agencies or GOCCs
Tax Exemption:
The sale may be exempted from the payment of capital gains tax provided the following
conditions are met:
1. The seller is an individual citizen or resident alien.
2. The real property sold is his principal residence.
Principal Residence – the place where an individual person resides comprising of the
house and the lot to where it erects; in case the interest on the land component is held
by other persons, only the dwelling house is considered principal residence.
The residential address indicated in the latest income tax return immediately before
the date of sale is conclusive presumed to be the true residence. The Barangay
Captain Certification or Building Administrator Certification in the case of
condominium residences is no longer honored.
3. The full proceed of the sale is utilized in acquiring another residence.
4. A new residence must be acquired or constructed within 18 calendar months from the
date of sale.
5. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption
within 30 days from the date of sale through a prescribed return.
6. The capital gains tax thereon is held in escrow in favor of the government.
7. The exemption can only be availed once every 10 years.
8. The historical cost or adjusted basis of the real property (principal residence) sold
shall be carried over to the new principal residence built or acquired
Should there be any portion of the proceeds of sale not utilized for the reconstruction
of a new residence, the same shall be taxable. The tax on the unutilized portion shall
be determined as follows:
Gross selling price or

Unutilized portion
Fair Market Value at x
the date of sale, x 6%
Gross selling
whichever is higher
price
Tax Basis of New Principal Residence:

Tax Basis refers to the cost or adjusted cost of a property for tax purposes and hence the
amount deductible for tax purposes in determining gain or losses in disposal of the
related property if the related transaction is taxable under the progressive system of
taxation. Generally, when a property is acquired by purchase, the cost is the tax basis.
A tax basis reduction may result if the proceeds of the disposition of a principal residence
is not fully utilized in the acquisition or construction of a replacement. Likewise a tax
basis increase results when additional expenditures were incurred by the taxpayer in
securing a replacement principal residence.
Less than full utilization of proceeds:
New cost Utilized Selling

basis
= x Basis of the old
Gross Selling principal residence
Price
More than full utilization of proceeds:
New cost Basis of the old Additional expenditure

basis = principal residence + in excess of the
proceeds
Documentary Stamp Tax
 Amount:
✓ P15 – if selling price after allowance for encumbrances does not exceed P1,000
✓ P15 – for each P1,000 or fractional excess above P1,000 of such selling price
 Deadline: Documentary stamp tax return shall be filed and the tax thereon
paid within 5 days after the close of the month when the taxable document was
made, signed, issued, accepted or transferred.
DRILL PROBLEMS: ORDINARY OR CAPITAL ASSETS

3
Batch – HQ05
Realty Security Merchandiser
Developer Dealer
Vacant lot
Office supplies
Domestic stocks
Bonds
Accounts/notes receivables
Office building
Office equipments
Land where the office building stands
Personal car of the business
proprietor-taxpayer
Personal house and lot of the
proprietor-taxpayer
Jewelry of the proprietor-taxpayer
DRILL PROBLEMS: CAPITAL GAINS ON THE DISPOSAL OF DOMESTIC STOCKS

A. Transactional Capital Gains Tax
For each of the following scenarios, compute the capital gains tax:
Capital
Illustrative Cases Gains Tax
1. Andy sold domestic stocks through the PSE at a gain of P400,000
2. Andy, a security dealer, sold domestic stocks through the PSE at a gain
of P400,000
3. Andy, a security dealer, sold domestic stocks directly to a buyer at a
gain of P400,000
4. Andy, a realty dealer, sold domestic common stock to DEF, Inc. at a
gain of P300,000.
5. ABC, Inc. sold domestic stocks though the PSE at a gain of P400,000
6. ABC, Inc. issued its shares of stock at P300,000 in excess of its par
value.
7. ABC, Inc. exchanged the shares of DEF, Inc. it acquire for P1,000,000
for a lot valued at P1,400,000.
8. Andy sold his investment in domestic stocks to the issuing Company,
ABC, Inc. The transactions realized a gain of P300,000.
9. Andy sold domestic bonds through the PDEX at a gain of P100,000.
10.Andy sold domestic bonds directly to buyer at a gain of P400,000
11.Andy sold his interest in a partnership for P400,000. His interest had a
tax basis of P300,000 at the date of sale.
12.ABC, Inc. acquired DEF stock rights for P200,000. ABC subsequently
disposed this rights for P400,000.
13.Andy purchased a stock option from DEF, Inc. Subsequently, Andy sold
this options at a gain of P50,000.
14.Andy purchased domestic common stock for P100,000 and sold the
same for P180,000. At the date of sale the stock has a fair market
value of P210,000.
15.Andy purchased ordinary shares for P200,000 from DEF, Inc., a
resident corporation operating in the Philippines. After 2 years, it sold
the same directly to buyer for P300,000 when the fair market value
was P280,000.
B. Annualized Capital Gains Tax

Andrix, resident alien, taxpayer made the following dispositions of shares of stock
during 2009:
Capital
Date Security Selling Cost Mode of Gains Tax
price settlement
1/18/9 Domestic common P P120,0 Directly to
stocks 400,000 00 buyer
2/12/9 Domestic bonds 200,000 180,00 Directly to
4
Batch – HQ05

0 buyer
3/14/9 Domestic preferred 300,000 250,00 Through PSE
stocks 0
4/22/9 Resident corp. 180,000 120,00 Directly to
stocks 0 buyer
6/18/9 Domestic stock 150,000 120,00 Directly to
options 0 buyer
8/15/9 Resident corp. 200,000 240,00 Directly to
bonds 0 buyer
9/2/9 Domestic common 300,000 320,00 Through PSE
stocks 0
9/24/9 Domestic preferred 280,000 300,00 Directly to
stocks 0 buyer
10/28/9 Domestic stock 100,000 120,00 Directly to
rights 0 buyer
12/11/ Domestic preferred 400,000 380,00 Directly to
9 stocks 0 buyer
Assume all capital gains or losses are long-term and that the taxpayer has other
regular income of P300,000.
Required: Compute the following:
1. Capital gains tax payable at year-end
2. Total percentage tax paid
3. Total regular income of the taxpayer
C. Special Cases
1. ABC, Inc., a domestic non-security dealer, had the following transactions
involving the securities of non-listed domestic corporations during 2010:
Date Purchas Sale Price Security Capital Gains
e Tax
2/4/9 10,000 - P GSM common
10 stocks
3/6/9 1,000 - 1,000 PLDT bonds
4/5/9 - 10,000 21 GSM common
stocks
4/15/9 - 600 1,100 PLDT bonds
10/28/ 10,000 - 16 GSM common
9 stocks
11/15/ - 400 980 PLDT bonds
9
11/23/ - 10,000 12 GSM common
9 stocks
12/5/9 500 - 950 PLDT bonds
12/14/ 8,000 - 13 GSM common
9 stocks
ABC, Inc. had P300,000 operating income. GSM and PLDT are both domestic
corporations.
Required: Compute the following
1. Capital gains tax per transactions where applicable
2. Annual capital gains tax payable or (refundable)
3. 2010 taxable income of the taxpayer
4. Tax basis of the GSM common stocks
5. Tax basis of the PLDT bonds
2. Andy exchanged his DEF, Inc. shares which he previously acquired at P200,000
for the shares of ABC, Inc. valued at P300,000 in pursuant to a merger agreement
between DEF, Inc. and ABC, Inc. Compute the capital gains tax.
3. On July 1, 2010, Andy sold his domestic stocks with aggregate par value of
P250,000 and acquisition cost of P300,000 to Betty for P500,000. Betty made
a downpayment of P50,000 and signed a note for the balance payable in 9
semi- annual installments starting December 31, 2010.
5
Batch – HQ05

Required:
1. Compute the 2010 capital gains tax
2. Compute the documentary stamp tax on the sale
DRILL PROBLEMS: CAPTIAL GAINS TAX ON THE DISPOSAL OF REAL
PROPERTY
A. Scope of the 6% Capital Gains Tax
Capital
Illustrative Cases: Gains Tax
1. ABC, Inc. disposed a vacant lot costing P2,000,000 at a gain of
P1,000,000. The lot has a fair value of P2,500,000 at the date of
disposal.
2. ABC, Inc. disposed its old office building with a carrying amount of
P2,000,000 at a gain of P1,000,000. The lot has a fair value of
P2,500,000 at the date of disposal.
3. DEF, Inc., resident foreign corporation, disposed its headquarter with
carrying amount of P2,000,000 at a gain of P1,000,000. The
headquarter has a fair value of P4,000,000 at the date of disposal.
4. Andy sold his old residence for P4,000,000 to finance his business. His
old residence has an appraisal value of P5,000,000, assessed value of
P3,000,000 and zonal value of P4,500,000.
5. Andy, a dealer of personal property, sold a vacant lot in Baguio City at
a gain of P400,000. The lot cost him P600,000 and has an assessed
value and zonal value of P800,000 and P1,200,000, respectively.
6. Andy wishes to expand business. He sold his warehouse consisting of
a lot and building for P5,000,000. The lot and building has assessed
value of P4,000,000 and zonal value of P4,500,000.
7. Andy sold one of his house and lot in Japan at a gain of P2,000,000.
This property has an appraised value of P5,000,000 and were
acquired at P3,000,000.
8. ABC Realty Corporation sold an undeveloped lot in Pangasinan. The
lot cost P2,000,000 and were sold at its current fair value of
P3,000,000.
B. Special Cases
1. Scope of Exemption
Information for the property disposed of:
Zonal value P
3,000,000
Assessed value 2,500,000
Appraised value 3,500,000
Cost 2,000,000
For each of the following independent, indicate the capital gains tax:
Illustrative Cases: CGT
1. Andy sold his principal residence for P4,000,000. He immediately
repurchased a new residence for P4,200,000.
repurchased a new residential lot for P2,000,000.
4. Andy sold one of his residential property for P4,000,000. He
immediately repurchased a new residence for P4,200,000.
5. Andy sold his residence lot for P4,000,000. He immediately
6. DEF, Inc. sold a vacant lot for P4,000,000. Within 18 months, it
used the proceeds to purchased residential houses for its directors
and officers.
7. Andy’s house and lot was one of the several properties to be
expropriated by the government to build on an airport. The
government paid Andy P3,000,000. Andy leases his residence since
then. Andy opted to be subjected to capital gains tax.
8. Andy’s house and lot was foreclosed after his failure to pay the
6
Driven for real excellence! TAX by Rex B. Banggawan, CPA, MBA TAX – 6th
Batch – HQ05

P2,000,000 mortgage on the property. The bank paid him P500,000
for after the auction sale.
2. With mortgage
Andy sold his house and lot with fair value of P2,500,000 for P3,000,000 on July
1, 2010. The house and lot, which was subject to P2,000,000 mortgage was
acquired for P1,500,000 in 2005. The buyer assumed the mortgage on the
property and signed a note payable for the balance payable in 5 semi-annual
installments.
1. Initial payment
2. Contract price
3. Capital gains tax in 2010
3. Installment
Ms. Shiela Longboan sold her residential house under the following terms:
Cash received, January 10, 2006 P
100,000
Amount received, June 10, 2006 100,000
Installment due, June 10, 2007 600,000
Additional Information:
Cost of the land P
150,000
Mortgage assumed by the buyer 200,000
Mortgage on the land executed by the
buyer in 600,000
favor of the seller to guarantee
payment
1. Selling price
a. P 750,000 b. P 800,000 c. P 850,000 d. P1,000,000
2. Contract price
a. P 750,000 b. P 800,000 c. P 850,000 d. P1,000,000
3. Initial payments
a. P 100,000 b. P 200,000 c. P 250,000 d. P 150,000
4. Capital gains tax in 2006
a. P15,000 b. P17,647 c. P22,333 d. P 60,000
5. Documentary stamp tax
a. P12,000 b. P12,750 c. P14,325 d. P15,000
CPA EXAM DRILL PROBLEMS:
1. The term “capital assets” includes
a. Stock in trade or other property included in the taxpayer’s inventory.
b. Real property not used in the trade or business of the taxpayer.
c. Real property primarily use for sale to customers in the ordinary course of trade or
business.
d. Property used in the trade or business of the taxpayer and subject to depreciation.
2. Lots being rented when subsequently sold are classified as
a. Capital assets b. Liquid assets c. Ordinary assets d.
Fixed assets
3. Which is an ordinary asset for a realty developer?
a. Accounts receivables c. Real property held for development and
subsequent sale
b. Construction machineries d. Head office building of the developer
4. Which of the following accounting assets is not an ordinary asset?
a. Investment property c. Property, plant and equipment
b. Inventory d. Trading securities by a stock brokerage firm
5. On July 1, 2009, Crislyn Riego sold shares of stock for P200,000. The shares which
were acquired for P140,000 acquire on June 1, 2007, have a par value of P150,000,
were held as investment, and were sold to a buyer under the following terms:
Downpayment, July 1, 2009 P
7
Batch – HQ05
20,000
Installment due, October 10, 30,000
2009
2010
2011
How much was the capital gains tax due in 2009?
a. P 500.00 b. P 450.00 c. P625.00 d. P750.00
6. How much was the documental stamp tax due?
a. P 600.50 b. P 525.25 c. P 562.50 d. P 612.50
7. To facilitate the disposal of his shares, Freddie sold his shares for P360,000 at 10%
discount from its fair value. Even at discounted price, Freddie reports a gain of
P160,000. Compute the capital gains tax on the transaction.
a. P 21,000 b. P 11,000 c. P 16,000 d. P 15,000
8. Which of the following is not a requisite of installment payment of capital gains tax in
installment involving the sale of personal property?
a. Downpayment must not exceed 25% c. The item sold is not inventoriable
b. Selling price must exceed P1,000 d. Initial payment must not
exceed 25%
9. Abdul Rhamanam Ahmin, a non-resident alien disposed his stock investments in a
domestic corporations to Juan dela Cruz, a non-resident citizen, at a gain of
P300,000. Which statement is correct?
a. The sale is not subject to capital gains tax since the property involved is a personal
property is deemed located abroad.
b. The sale is not subject to capital gains tax as Juan dela Cruz, the buyer, is a non-
resident individual.
c. The sale is subject to capital gains tax even if the sale occurred outside the
Philippines.
d. None of these.
10. Meiko Acebo is a stock broker and holds 10,000 ordinary stock of San Miguel
Corporation, a domestic corporation, acquired at P100 per share. His valuation for
San Miguel Corporation indicates that San Miguel’s stocks will decline in the near
future. If Meiko sells his stock investment directly to a buyer, Zeus Millan, at P115 per
share, how much is the capital gains tax payable on the transaction?
a. P5,000 b. P10,000 c. P5,750 d. P 0
11. Mr. Acebo, a non-security broker or dealer, made the following dispositions directly
to buyer:
Date Domestic securities Gain/(Loss)
2/4/8 Abacus ordinary shares P
150,000-
5/8/8 PLDT bonds 150,000-
7/15/8 Globe preferred shares ( 80,0
00)
9/20/8 Globe common shares 50,000-
11/15/8 Metrobank ordinary 80,000-
shares
Compute the amount of capital gains tax payable (refundable) of Mr. Acebo for the
year 2008.
a. (P1,500) b. P15,000 c. P 0 d. P38,000
12. Which of the following entities is not exempt to the final capital gains tax imposed on
the sale, exchange and other disposition of real property?
a. Banks on their sale real and other assets acquired in the Philippines
b. Resident corporations on their land not used in business in the Philippines
c. Real estate developer or dealer on their sale of condo units
d. Resident citizen on his sale of one of his residence under foreclosure sale
13. The actual capital gain derived by an individual taxpayer may be included to all
income subject to progressive income tax when
8
Batch – HQ05

a. It involves sales of real property to non-residents
b. It involves sales of real property to the government
c. It involves sales of personal property to non-residents
d. It involves sale of domestic stocks directly to taxpayer
14. Ms. Janet Ranillo, a real estate dealer, sold a real property for P200,000 on October
29, 2007 in installment. The cost of the property was P150,000. The terms of the sale
agreed upon by Ms. Ranillo an the buyer were:
Downpayment P 40,000
Balance, payable in monthly installments
of P10,000 160,000
beginning November 29, 2007 until
fully paid
How much income will be reported in
2007?
a. P12,500 b. P15,000 c. P50,000 d. P75,000
15. Ms. Lyn Rosales, a real estate dealer, sold a real estate for P2,000,000 on November
29, 2007. The cost of the property was P1,500,000. The terms of the sale were as
follows:
Downpayment P
400,000
Balance, payable in monthly installments
of P100,000 1,600,00
beginning December 29, 2007 until 0
fully paid
How much was the income to be reported in 2007?
a. P100,000 b. P112,000 c. P125,000 d. P140,000
16. Compute the capital gains tax in the above case.
a. P 30,000 b. P 40,000 c. P120,000 d. P 0
The following problems relates to numbers 17 through 20:
17. Raff Escuela sold his principal residence for P5,000,000. His principal residence
was acquired at P2,000,000 and has a fair market value of P6,000,000 at the date of
sale. Within 18 months, Raff reconstructed his new principal residence for
P4,500,000.
Compute the capital gains tax to be deposited in escrow.
a. P 270,000 b. P 300,000 c. P360,000 d. P 0
18. The cost basis of the new residence is
a. P1,800,000 b. P1,500,000 c. P3,750,000 d.
P4,500,000
19. The amount of capital gains tax to be released to Raff is
a. P240,000 b. P270,000 c. P300,000 d. P324,000
20. Compute the cost basis of the new residence if it was acquired for P5,200,000.
a. P2,000,000 b. P2,200,000 c. P1,733,333 d.
P4,333,333
21. Which is not a requisite of the wash sales rule of securities?
a. The sale or other disposition of securities resulted to a loss
b. There was an acquisition or contract or option for acquisition of stock or securities
within 30 days before the sale or after the sale.
c. The stock or securities sold were substantially the same as those acquired within
the 61-day period.
d. The seller must be a dealer in securities in a short sale transaction.
22. The following are not substantially identical securities, except one
a. Common stock and preferred stock
b. Voting and non-voting common stock
c. Bonds with different interest rates or secured and unsecured bonds
d. Similar bonds with different maturity dates
23. To which of the following is the capital gains tax required to be filed? (Select the
exception.)
a. Authorized Agent Bank under the jurisdiction of the RDO where the seller is
required to register
9
Driven for real excellence! TAX by Rex B. Banggawan, CPA, MBA TAX – 6th
Batch – HQ05
b. Revenue collection officer
c. Duly authorized City or Municipal Treasurer of the RDO where the seller is
required to register
d. Office of the Commissioner of Internal Revenue
--- End of Handouts ---
10
Batch – HQ05

TAXATION

Uploaded by

Copyright:

Available Formats

TAXATION

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

TAXATION

Uploaded by

Copyright:

Available Formats

CHAPTER 3 INTRODUCTION TO TAXATION

Chapter Overview and Objectives

THE CONCEPT OF INCOME

Why is income subject to tax?

What is income for taxation purposes?

ELEMENTS OF GROSS INCOME

Capital items deemed with infinite value

Examples include moral damage received from:

Recovery of lost capital vs. Recovery of lost profits

Taxable recovery of lost profits

The following recoveries of lost profits:

The “benefit” concept

The following are not benefits, hence, not taxable:

The “realized” concept

Requisites of a realized benefit:

These are referred to as "onerous transactions".

2. Unilateral transfers, such as:

The transaction will be analyzed as

What is meant by another entity?

Benefits in the absence of transfers

Examples of unrealized gains or holding gains:

Compensation income P 200,000

The items of gross income are:

Basis of Exemption of Unrealized Income

Mode of Receipt/Realization Benefits

Inflow of wealth without increase in net worth

TYPES OF INCOME TAXPAYERS

INDIVIDUAL INCOME TAXPAYERS

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

Taxable Estates and Trusts

A trust that is irrevocably designated by the grantor is treated in taxation as if it is an

CORPORATE INCOME TAXPAYERS

Types of foreign corporations:

OTHER CORPORATE TAXPAYERS

Types of joint ventures:

A co-ownership that is limited to property preservation or income collection is not a

THE GENERAL RULES IN INCOME TAXATION

The Residency and Citizenship Rule

Basis of the extraterritorial taxation

The issue of international double taxation

Situs of income vs. Source of income

INCOME SITUS RULES

Types of income Place of taxation (situs)

Interest income from deposits in a foreign bank P 300,000

OTHER INCOME SITUS RULES

Gain on sale of domestic stocks P 200,000

The following table summarizes the situs of the foregoing income:

C. Merchandising income – earned where the property is sold

The income earned within and without shall be:

Home office Branch Total

Scenario Home office Branch Within Without

Parent Subsidiary Total

Scenario Parent Subsidiary Within Without

Scenario Parent Subsidiary Within Without

CHAPTER 3: SELF-TEST EXERCISES

Exercise Drill No. 2: Income tax and transfer tax

Transaction Income tax Transfer tax

Exercise Drill No. 3: The concept of income

Transaction Taxable Exempt