Introduction To Income Taxation PDF

INTRODUCTION TO INCOME TAXATION CHAPTER 3 BA 1 0 3| INCOME TAXATION 1  WHY IS INCOME SUBJECT TO TAX? Income is regarded as the best measure of taxpayer’s ability to pay tax. It is an excellent object of taxation in the allocation of governme...

INTRODUCTION TO INCOME TAXATION CHAPTER 3 BA 1 0 3| INCOME TAXATION 1  WHY IS INCOME SUBJECT TO TAX? Income is regarded as the best measure of taxpayer’s ability to pay tax. It is an excellent object of taxation in the allocation of government costs. | INCOME 2TAXATION  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 the income is referred to as an “item of gross income” or “inclusion in gross income”. | INCOME T 3 AXATION ELEMENTS OF GROSS INCOME 1. It is a return on capital that increases net worth. 2. It is a realized benefit. 3. It is not exempted by law, contract, or treaty. | INCOME 4TAXATION  Return on Capital Capital means any wealth or property. Gross income is a return on wealth or property that increases the taxpayer’s net worth. The return on capital that increases net worth is income subject to income tax. Return of capital merely maintains net worth; hence it is not taxable. | INCOME T 5 AXATION  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. | INCOME 6TAXATION  Realized Benefit 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. | INCOME T 7 AXATION  Realized Benefit Types of transfers: 1. Bilateral transfers or exchanges, such as sale or barter. These are referred to as “onerous transactions”. 2. Unilateral transfers, such as succession (transfer of property upon death) and donation. These are referred to as “gratuitous transactions”. 3. Complex transactions which are partly gratuitous and partly onerous. These are commonly referred to as “transfers for less than full and adequate consideration”.  Not Exempted by Law An item of gross income is not exempted by the Constitution, law, contracts or treaties from taxation | INCOME T 7 AXATION  Not Exempted by Law, Contract or Treaty Items of income exempted by law from taxation, thus not considered items of gross income: 1. Income of qualified employee trust fund 2. Revenue 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 citizens 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 | INCOME10TAXATION  TYPES OF INCOME A. Individuals TAXPAYERS 1. Citizen 1. Alien a. Resident a. Resident b. Non-resident b. Non-resident  Engaged in trade or business  Not engaged in trade or business 3. Taxable estates and trusts | INCOME1T 1 AXATION  TYPES OF INCOME B. TAXPAYERS Corporations 1. Domestic corporations 2. Foreign corporations a. Resident foreign corporation b. Non-resident foreign corporations | INCOME12TAXATION  Individual Income Taxpayers Citizen The following shall be considered citizens of the Philippines under the Constitution: a. Those who are citizens of the Philippines at the time of the adoption of the Feb., 2, 1987 Constitution; b. Those whose fathers or mothers are citizens of the Philippines; c. Those born before Jan. 17, 1973, the date of the adoption of the 1973 Constitution, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and d. Those who are naturalized in accordance with law. INCOME1T 3 AXATION  Individual Income Taxpayers Classification of Citizens: A. Resident Citizen – is a Filipino citizen who permanently resides in the Philippines. B. Non-resident Citizen means: a. 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. b. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. | INCOME14TAXATION  Individual Income Taxpayers c. 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. o “ Most of the time” is interpreted to mean presence abroad for at least 183 days during the taxable year. d. A citizen who has been previously considered as non-resident citizen who arrives in the Philippines at any tome 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. | INCOME1T 5 AXATION  Individual Income Taxpayers e. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines, as the case may be. | INCOME16TAXATION  Individual Income Taxpayers 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; | INCOME1T 7 AXATION  Individual Income Taxpayers Alien B. Non-resident Alien – an individual who is not residing in the Philippines and who is not a citizen thereof 1. Non-Resident Alien Engaged in Trade and Business (NRAETB) – a non-resident alien who shall come to the Philippines and stay for an aggregate period of more than one hundred eighty (180) days during any calendar year. 2. Non-Resident Alien NOT Engaged in Trade and Business (NRANETB) – include:  Individual Income Taxpayers Alien 2. Non-Resident Alien NOT Engaged in Trade and Business (NRANETB) – include: a) Alien who comes to the Philippines for a definite purpose which is 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 year |  Individual Income Taxpayers The General Classification Rule for Individuals Intention – the intention of the taxpayer regarding the nature of his stay within and outside the Philippines shall determine his appropriate residence classification.  Individual Income Taxpayers The General Classification Rule for Individuals Length of Stay – the length of stay of the taxpayer is considered in default of such documentary proof: a. Citizen staying abroad for at least 183 days – Non-Resident b. Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable year – Resident c. Aliens who are staying in the Philippines for not more than 1 year but more than180 days – NRA-ETB d. Aliens who stayed in the Philippines for not more than 180 days – NRA-NETB Illustrations: IndividualTaxpayers 21  A British computer expert was hired by a Philippine corporation to assist in its computer system installation for which he had to stay in the Philippines for 6 months. Is he a resident alien? Yes. 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, becomes a resident, though it may be his intention at all time to return to his domicile (place of habitual or permanent residence) abroad when the purpose for which he came has been accomplished.  A Korean cultural performer was engaged to perform in the Philippines for two weeks after which he return to his country. Is he a resident alien? No. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. An alien owns a shares of stock in the Philippines. Is he considered as engaged in business or trade in the Philippines? No, mere ownership of shares of stock in the Philippines is not enough to constitute as engaging in trade or business in the Philippines. An alien temporarily serves as executive manager of an airline in Manila. Is he considered engaged in trade or business in the Philippines? Yes, because he is performing the function of a public office.  A resident alien left the Philippines and abandoned residency thereof without any intention of returning. May he still be considered as a resident alien? No, because he has no intention at all to return to the Philippines.  A resident alien left the Philippines with a re-entry permit. Is he still a resident alien? Yes, his re-entry permit proves that he has not abandoned his residence in the Philippines.  A non-resident citizen went to Manila under the Balikbayan Program. Does his return to Manila interrupt his residence abroad? No, his trip to Manila did not interrupt his residence abroad. The phrase “uninterrupted period” should not be interpreted literally. His trip to Manila did not affect the continuity of his residence abroad.  Individual Income Taxpayers Taxable Estates and Trusts A. Estate – refers to the properties, rights, and obligations of a deceased person not extinguished by his death. o Estates under judicial settlement are treated as individual taxpayers. It is taxable on the income of the properties left by the decedent. o Income under extrajudicial settlement are exempt entities. The income of which is taxable to the heirs.  Individual Income Taxpayers Taxable Estates and Trusts B. Trust – A trust is an arrangement whereby one person (grantor or trustor) transfers (i.e., donates) property to another person (beneficiary), which will be under the management of third party (trustee or fiduciary). o A trust that is irrevocably designated by the grantor is treated in taxation as if it is an individual taxpayer. The income held in trust is taxable to the trust. o Trust that are designated as revocable are not taxable entities and are not considered as individual taxpayers. The income is taxable to the grantor and not the trust.  Corporate Income Taxpayers Corporation – this shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts, association, or insurance companies. Except: o general professional partnerships, and o joint venture, or o consortium formed for the purpose of undertaking construction projects engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium agreement under a service contract with the government. INCOME3T 1 AXATION  Corporate Income Taxpayers A. Domestic corporation – is a corporation that is organized in accordance with Philippine laws. B. Foreign corporation – is one organized under a foreign law. 1. Resident corporation (RFC) – a foreign corporation which operates and conducts business in the Philippines through a permanent establishment (i.e., a branch) 2. Nonresident foreign corporation (NRFC) – a foreign corporation which does not operate or conduct business in the Philippines. C. Special corporations – are domestic or foreign corporations which are subject to special tax rules or preferential tax rates. | INCOME32TAXATION  Other Corporate Income Taxpayers A. Partnership a. General Professional Partnership (GPP) – formed for the exercise of a common profession b. Business Partnership – formed for profit and is taxable as a corporation B. Joint ventures a. Exempt joint ventures b. Taxable joint ventures C. Co-ownership – joint ownership of a property formed for the purpose of preserving the same and/or dividing its income. | INCOME3T 3 AXATION  GENERAL RULES IN INCOME TAXATION Source of Income Within the Without the IndividualTaxpayers Philippines Philippines Resident Citizen / / Non-resident Citizen / Resident Alien / Non-resident Alien / | INCOME34TAXATION  GENERAL RULES IN INCOME TAXATION Source of Income Within the Without the CorporateTaxpayers Philippines Philippines Domestic corporation / / Resident foreign corporation / Non-resident foreign corporation / | INCOME3T 5 AXATION  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. vs. Source of income – pertains to the activity or property that produces the income. | INCOME36TAXATION  SITUS OF INCOME 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 | INCOME3T 7 AXATION  SITUS OF INCOME Other Income Situs Rules: Types of Income Place of taxation (situs) 1. Gain on sale of properties: a. Personal property- domestic securities Presumed earned in the Philippines b. Other personal property Where the property is sold c. Real property Where the property is located 2. Dividend income from: a. Domestic Presumed earned in the Philippines b. Resident foreign corporation Depends on pre-dominance test c. Non-resident foreign corporation Earned abroad (without the Philippines)  SITUS OF INCOME Other Income Situs Rules: Types of Income Place of taxation (situs) 3. Merchandising income Earned where the property is sold 4. Manufacturing income Earned where the goods are manufactured and sold Production Distribution Remarks 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 income is earned within, Distribution is earned without Without Within Distribution income is earned within, Production is earned without  TASK References: Banggawan, 2021. Income Taxation Laws Principles and Applications.Chapter 3 Ballada & Ballada, 2022.Income Taxation Made Easy.Chapter 2 | INCOME4T0 AXATION