Introduction to Taxation

P R E S E N T E D B Y:

A R Z E L L T. AT E R R A D O
How could taxes
contribute to a
better tomorrow?
 Taxation
Taxation is a term for when a taxing authority, usually a government,
levies or imposes a financial obligation on its citizens or residents.

It is the system by which a government takes money from people and

spends it on things such as education, health, and defense.
 Inherent Powers of the State

Taxation Eminent Domain Police Power

 Eminent Domain
Eminent domain, also called condemnation or expropriation, is the
power of government to take private property for public use without
the owner's consent, upon payment of just compensation.
 Inherent Powers of the State

Taxation Eminent Domain Police Power

 Police Power
Police power is the power inherent in the state to prescribe
reasonable regulations necessary to preserve the public order,
health, comfort, general welfare, safety, and morals.
 Inherent Powers of the State

Taxation Eminent Domain Police Power

 Definition of Taxation
Taxation may be defined as a State power, a legislative
process and a mode of cost distribution:
◦ As a State power - Taxation is an inherent power of
the state to enforce proportional contribution from its
subjects for public purpose.
◦ As a process - Taxation is a process of laying taxes
by the legislature of the state to enforce proportional
contribution from its subjects for public purpose.
◦ As a mode of cost distribution - Taxation is a mode
by which the state allocates its costs or burden to its
subjects who are benefited by its spending.
 Theory of Taxation
A system of government is indispensable to every society. Without it, the people will not
relish the benefits of a civilized and orderly society. However, a government cannot exist
without a system of funding. The government's necessity for funding is the theory of
taxation.
 Basis of Taxation
The government provides benefit to the people in the form of public services and the
people provide the funds that finances the government. The mutuality of support
between the people and the government is referred as the basis of taxation.
 The Life Blood Doctrine
• Taxes are essential and indispensable to the continued
subsistence of the government. Without taxes, the
government would be paralyzed for lack of motive
power to activate or operate it. (CIR vs. Algue)
• Taxes are the lifeblood of the government and their
prompt and certain availability are imperious need.
Upon taxation depends the Government's ability to
serve the people for whose benefit taxes are collected.
(Vera vs. Fernandez)
Nature and
Limitations of
Taxation
 Nature of Taxation

Subject to
Inherent in Legislative in inherent and
sovereignty character constitutional
limitations
 Nature of Taxation
1. Inherent in sovereignty – The power to tax is essential to the existence of every
government.
2. Legislative in character – The power to tax is peculiarly and exclusively legislative and
cannot be exercised by the executive or judicial branch of the government.
3. Subject to inherent and constitutional limitations – The scope of taxation is widely
regarded as comprehensive, plenary, unlimited and supreme, subject only to inherent and
constitutional limitations. This means that the government can tax anything or anyone
within its jurisdiction.
 Inherent Limitations of Taxation

Situs /
Public Internationa
Territorialit
Purpose l Comity
y

Non-
Exemption
delegation of
of the
the Power to
Government
Tax
 Situs/Territoriality – A State can only impose taxes within the
Inherent bounds of its territory. To illustrate, the Philippines cannot
Limitations impose taxes on income made by an American in the USA

of Taxation simply because this subject is outside the territory of the

Philippines.
Inherent Public Purpose – Taxes imposed and collected by the
government must be utilized to benefit the public. Taxes can
Limitations never be used for the benefit of a specific group of people only
of Taxation
Inherent International Comity – This involves complying to the
international tax agreements and treaties entered between
Limitations nations, to which the State is a party in.
of Taxation
 Non-delegation of the Power to Tax – The power to tax is
Inherent delegated by the people to the Legislative branch of the
Limitations government. This power cannot be further delegated to other
branches of the government.
of Taxation
 Exemption of the Government – The government is exempt
from paying taxes since no benefit will be gained from this
Inherent while incurring more costs. To illustrate, taxing the government
Limitations can be visualized as simply moving your money from one
pocket to another, since the tax paid by the government will be
of Taxation remitted to the same government.
Constitutional Limitations of Taxation

Equal
Due process of Uniformity rule
protection of
law in taxation
law

Non-
Non-
Progressive imprisonment
impairment of
system of for non-
obligation and
taxation payment of debt
contract
or poll tax
Constitutional Limitations of Taxation
Exemption of
religious or
Non appropriation
charitable entities,
of public funds for
non-profit
Free worship rule the benefit of any
cemeteries,
church, sect or
churches or mosque
system of religion.
from property
taxes. Concurrence of a
Exemption from
majority of all
taxes of revenues
members of
and assets of non-
Congress for the
profit, non-stock
passage of law
educational
granting tax
institutions.
exemption
Constitutional Limitations of Taxation
Non-impairment of
Non-diversification of Non-delegation of the the jurisdiction of the
tax collection power of taxes Supreme Court to
review tax cases.

The requirement that

appropriations,
revenues or tariff bills The delegation of
shall originate taxing power in local
exclusively in the government units.
House of
Representatives
Theories of
Cost
Allocation
Theories of Cost Allocation

Taxation is a mode of allocating government costs or burden to the people. In distributing the
costs or burden, the government regards the following general considerations in the exercise
of its taxation power:
1. Benefit received theory
2. Ability to pay theory
Benefit
This theory states that taxes should be
allocated based on the benefits received
Received by the people. Under this theory, if you are

Theory receiving more benefits from the

government, you should be taxed more.
 This theory states that taxes should be
allocated based on the taxpayer’s ability to
pay, meaning if you have more resources
or wealth, you should pay more tax since
Ability to Pay you are more capable of paying than those
Theory with less wealth than you. Under this
theory, the rich will be taxed more than the
poor (for example, a taxpayer with a higher
income will pay more tax compared to a
taxpayer with a lower income).
Stages of Exercise
of Taxation Power
 This process involves the enactment of a
Levy or tax law by Congress and is called impact
Imposition of taxation. It is also referred to as the
legislative act in taxation.
 The tax law is implemented by the

Assessment
Executive branch of the government.
Implementation involves assessment or
and the determination of tax liabilities of

Collection taxpayers and collection. This stage is

referred to as incidence of taxation or
administrative act of taxation.
Taxation
Laws
 Extent of the Legislative Power to Tax
The legislature has discretion to determine:
1. The subjects to be taxed
a. The person, property or occupation to be taxed
b. The kind of tax to be collected
c. The apportionment or coverage of the tax

2. The purpose of the tax so long as it is a public purpose

3. The amount or rate of the tax
4. The manner of collection of the tax
5. The situs of taxation or place of taxation
 Types of Taxation Laws
1. Tax Laws - laws that provide for the assessment and collection of taxes.
a. National Internal Revenue Code of 1997
i. income taxes (individual and corporate);
ii. estate and donor’s taxes;
iii. value-added tax;
iv. other percentage taxes;
v. excise tax; and
vi. documentary stamp tax

b. Tax Reform for Acceleration and Inclusion (TRAIN) Law or R.A. 10963
c. Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law or R.A. 11534
Types of Taxation Laws
b. Local Government Code of 1991
i. real property tax;
ii. business taxes, fees and charges;
iii. professional tax;
iv. community tax; and
v. tax on banks and other financial institutions.

c. Tariff and Customs Code of 1978

i. import duties; and
ii. export duties
Types of Taxation Laws
d. Special Laws
i. professional tax;
ii. Motor Vehicle Law (R.A. 4136) – motor vehicle fees.
iii. Private Motor Vehicle Tax Law (P.D. 1958) – private motor vehicle tax
iv. Philippine Immigrate Act of 1940 (C.A. 613 as amended) Immigration tax; and
v. Travel Tax Law (P.D. 1183, as amended) – travel tax
Types of Taxation Laws
2. Tax Exemption Laws - laws that grant immunity from taxation
a. The Minimum Wage Law
b. The Omnibus Investment Code of 1987 (E.O. 226)
c. Barangay Micro Business Enterprise Law
d. Cooperative Development Act
 Sources of Taxation Laws
1. Constitution

2. Statutes and Presidential Decrees

3. Judicial Decisions or case laws

4. Executive Orders and Batas Pambansa

5. Administrative Issuances

6. Local Ordinances

7. Tax Treaties and Conventions with foreign countries.

8. Revenue Regulations
 Double Taxation
Double taxation occurs when the same taxpayer is taxed twice by the same tax jurisdiction
for the same thing.

Elements of Double Taxation:

1. Primary element: same object

2. Secondary elements:
a. Same type of tax
b. Same purpose of tax
c. Same taxing jurisdiction
d. Same tax period
 Types of Double Taxation
1. Direct Double Taxation – same subject is taxed twice by the same taxing authority,
within the same jurisdiction or taxing district, for the same taxable period and for
the same kind or character of tax.

2. Indirect Double Taxation – is other than double taxation. This occurs when at least
one of the secondary elements of double taxation is not common for both
impositions. (Example: Income and community tax)
Introduction to
Income Taxation
Presented by: Arzell T. Aterrado, CPA, MBA
The
Concept of
Income
The Concept of Income

• 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.
 • The tax concept of income is simply
referred as gro s s inc o m e under the
The Concept National Internal Revenue Code.
of Income • A taxable item of income is referred to
as an item of gross income or
inclusion in gross income.
Gross Income
• Gross income is broadly defined as
any inflow of wealth to the taxpayer
that increases net worth from
whatever source. It includes
income from employment, trade,
business or exercise of profession,
income from properties and other
sources such as dealing in
properties and other regular
transactions.
Elements of Gross Income

1. It is a return on capital that increases net worth.

• Capital means any wealth or property.
• Return on capital that increases net worth is income subject to income tax.
• Return of capital merely maintains net worth hence, not taxable.
Capital items deemed with infinite value
There are capital items that have infinite value and are incapable of valuation. Anything
received as compensation for their loss is deemed a return of capital.
a. Life
b. Health
c. Human reputation
Elements of Gross Income

2. It is a realized benefit.
• The term “realized” means earned, meaning, there is a degree of undertaking or sacrifice from
the taxpayer to be entitled of the benefit. The term “benefit” means any form of advantage
derived by the taxpayer.
• Requisites of a realized benefits:
a. There must be an exchange transaction
b. The transaction involves another entity
c. It increases the net work of the recipient
Elements of Gross Income

3. It is not exempted by law, contract or treaty.

Transfers
• Bilateral transfers or exchanges
(onerous transactions)
• Sale – occurs when one
exchanges goods or services for
money or its equivalent
• Barter – occurs when one
exchanges goods for goods,
goods for services or services for
services.
Transfers
• Unilateral transfers
(gratuitous transactions)
• Succ es s io n – gratuitous
transfer of property mortis
causa (upon death)
• Donatio n – gratuitous
transfer of property inter
vivos (during life)
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 sale or barter is not
taxable. These are referred to as unrealized gains
because they have not yet materialized in an
exchange transaction.
Mode of
Receipt/Realization Benefit
• Taxable items of income may be
realized by the taxpayer in two ways:
• Actual rec eipt – involves actual physical
taking of the income in the form of cash or
property.
• Construc tive rec eipt – involves no
actual physical taking of the income but
the taxpayer is effectively benefited.
Exemptions

• Items of income exempted by law from taxation:

1. Income of qualified employee trust fund
2. Revenues of non-profit non-stock educational institution
3. PCSO or lotto winnings*
4. SSS, GSIS, PAG-IBIG or Philhealth Benefits
5. Salaries and wages of minimum wage earners and qualifying senior citizens.
6. Regular Income of Barangay Micro Business Enterprises
7. Income of foreign governments and foreign government controlled corporations
8. Income of international missions and organizations with income tax immunity.
Income
Taxpayers
Types of Income Taxpayers

A. Individuals B. Corporations
1. Citizens • Domestic Corporation
a.Resident Citizen • Foreign corporation
b.Non-resident citizen a.Resident foreign corporation
2. Alien b.Non-resident foreign corporation
a.Resident Alien
b.Non-resident alien
i. Engaged in trade or business
ii. Not engaged in trade or business
3. Taxable estates and trusts
Individual
Taxpayers
 Under the Constitutions, citizens are:
1. Those who are citizens of the
Philippines at the time of adoption of the
Constitution on February 2, 1987
2. Those whose fathers or mothers are
citizens of the Philippines
Citizens 3. Those born before January 17, 1973
of Filipino mothers who elected Filipino
citizenship upon reaching the age of
majority
4. Those who are naturalized in
accordance with the law.
Citizens

A. Resident Citizen – a Filipino citizen residing in the Philippines

Citizens

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 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.
Aliens

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 but without definite intention as to his stay;
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
Aliens

B. Non-resident Alien – individuals who is not residing in the Philippines

and 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) – includes:
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
Taxable Estate and Trusts

A. Estate
Estate refers to the properties, rights and obligations of a deceased
person not extinguished by his death.
B. Trust
A trust is an arrangement whereby one person (grantor or trustor)
transfers property to another person (beneficiary) which will be held
under the management of a third party (trustee or fiduciary)
The General Classification Rules for
Individuals
1. Intention – if the intention of the taxpayer is to reside in the Philippines, then he will
be considered a resident. Otherwise, he will be considered a non-resident.
2. Length of stay – in the absence of a clear intention, the classification will be based
on the length of stay, as follows:
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 is
considered resident.
c. Aliens who are staying in the Philippines for less 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.
Corporate
Taxpayers
Domestic Corporations

A domestic corporation is a corporation that is organized in accordance

with Philippine laws.
Foreign Corporations

A foreign corporation is one organized in a foreign law.

1. Resident foreign corporation (RFC)
a foreign corporation which operates and conducts business in the Philippines
through a permanent establishment.
2. Non-resident foreign corporation (NRFC)
a foreign corporation which does not operate or conduct business in the
Philippines.
Other Corporate Taxpayers

1. Partnerships
A business owned by two or more persons who bind themselves together to contribute
money, property or industry to a common fund, with the intention of dividing the profit among
themselves.
Types of partnership
a. General professional partnership
Partnership formed for the exercise of a common profession.
b. Business partnership
Partnership formed for profit, hence, taxable as a corporation.
Other Corporate Taxpayers

2. Joint Venture
Business undertaking for a particular purpose, which may be organized as a partnership or a
corporation
Types of Joint Ventures:
a. Exempt joint venture
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 service contract with the government.
b. Taxable joint venture
all other joint ventures are taxable as a corporation.
Other Corporate Taxpayers

3. Co-ownership
A co-ownership is a joint ownership of a property formed for the purpose of
preserving the same and/or dividing its income.
a. A co-ownership that is limited to property preservation or income
collection is not a taxable entity and is exempt but co-owners are taxable to
their share on the income of the co-owned property.
b. 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.
INCOME TAXPAYERS

ILLUSTRATIONS
 Illustration
Mr. Saladin lists the following possible items of gross income:
Compensation income 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 creditor in
consideration for services he rendered to them 150,000
Debt of Saladin cancelled by his creditors out
of affection 250,000
Loan received from a bank 400,000
 Solution

The items of Gross Income are:

Compensation income P200,000
Winnings from gambling 100,000
Debt of Saladin forgiven in consideration 150,000
for services endered to his creditors
 Illustration

Luiz Mario Aresmendi, a Mexican actor is contracted

by a Philippine television company to do a project in the
Philippines. He arrived in the country on February 2019 and
returned to Mexico three weeks later upon completion of the
project.
 Illustration

Mamoud Jibril, a Libyan national, arrived in the country

on November 4, 2018. Mr. Jibril stayed in the Philippines
since then without any working visa or work permit.
 Illustration

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, 2018 to April 1, 2019
before returning to the Philippines.
INCOME TAX SITUS

ILLUSTRATIONS
 General Rules in Income Taxation

Taxpayers Within Without

Individual
Resident Citizen a a
Non-Resident Citizen a
Resident Alien a
Non-Resident Alien a
Corporation
Domestic a a
Resident Foreign a
Non-Resident Foreign a
 Situs of Income

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 is important in determining whether or not an
income is taxable in the Philippines.
 Income Situs Rules

Types of Income Place of Taxation (Situs)

Interest Income Debtor's residence
Royalties Where the intangible is employed
Rent Income Location of the property
Service Income Place where the service is rendered
 Illustration:

A tax payer had the following income:

Interest income from deposits in foreign bank P300K
Interest from domestic bonds 50K
Royalties from books published in the Philippines 100K
Rent income from properties abroad 150K
Professional fees for services rendered in the Phil. 400K

Compute the income within and without the Philippines.

 Solution:

Income Within Without

Interest on foreign deposits P - P 300,000
Interest from domestic bonds 50,000
Royalties from books in the Philippines 100,000
Rent income on foreign properties 150,000
Professional fees 400,000
TOTAL P550,000 P450,0000
 Other Income Situs Rules
A. Gain on Sale of Properties
1. Personal Properties
a. Tangible - place where the property is sold
b. Intangible (Domestic securities) - presumed within the Philippines
2. Real Properties - where the property is located
B. Dividend Income from
1. Domestic corporation - presumed within
2. Resident foreign corporation - depends on predominance test
3. Non-resident foreign corporation - earned abroad
C. Merchandising Income - where the property is sold
D. Manufacturing Income - where the goods are manufactured and
sold
 Pre-dominance Test
If the ratio of the Philippine gross income over the world gross
income of the resident forn corporation in the three-year period
preceding the year of dividend declaration is:
➢At least 50% - the portion of the dividend corresponding to the
Philippine gross income ratio is earned within
➢Less than 50% - the entire dividend received is earned abroad

𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 𝑌1−𝑌3

𝑅𝑎𝑡𝑖𝑜 = 𝑊𝑜𝑟𝑙𝑑 𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 𝑌1−𝑌3
 RMC 62-2021
The tax treatment of dividends received by a domestic
corporation from RFC will depend on the sources of income of the
RFC. Under Section 42(A)(2)(b) of the Tax Code, as amended,
"dividend received from a foreign corporation shall be treated as
income derived from sources within the Philippines, unless less than
fifty percent (50%) of the gross income of the foreign corporation for
the three-year period ending with the close of its taxable yeor
preceding the declaration of such dividends (or for such part of the
period as the corporation has been in existence) was derived from
sources within the Philippines xxx xxx"
 Illustration (RMC 62-2021)

Corporation X, an RFC, has gross income for the

three-year period of P500,000,000 from sources within the
Philippines. However, it also derived gross income from
outside of the Philippines, amounting to P300,000,000. In
2021, it declared dividend amounting to Ten Million pesos
(P10,000,000.00). Five Million pesos (P5,000,000.00) of
which was paid to Corporation Z, a domestic Corporation.
 Solution
To determine the tax treatment of the dividend received by the
domestic corporation, there is a need to determine if the dividend paid
by the RFC is sourced within the Philippines or not.
In this scenario, it qualified as sourced within the Philippines
since the gross income of Corporation X from within is more than fifty
percent (50%) of its total gross income. Hence, it is exempt from
income tax sans compliance with the conditions imposed under
Section 5 of RR No. 5-2021.
Conversely, if the gross income of Corporation X from within is
less than 50% of its total gross income, then, the dividend received
shall be considered as sourced without and, therefore, must comply
with the conditions imposed under Section 5 of RR No. 5-2021 to
warrant its income tax exemption.
 Illustration - Properties

A tax payer 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 500,000
Gain on sale of car in Ontario, Canada 200,000
Gain on sale of machineries in Pampanga 250,000
Interest income on foreign bonds 50,000
Dividends on domestic stocks 150,000
 Solution:

Income Within Without

Gain on sale of domestic stocks P 100,000 P -
Gain on sale of foreign bonds 100,000
Gain on sale of a commercial lot in Baguio 500,000
Gain on sale of car in Ontario, Canada 200,000
Gain on sale of machineries in Pampanga 250,000
Interest income on foreign bonds 50,000
Dividends on domestic stocks 150,000
TOTAL P 1,100,000 P 350,000
 Illustration - Dividends

In 2020, Sarah received a P400,000 dividend income from

ABC Corporation. ABC Corporation had the following gross
income in 2017 through 2019:

2017 2018 2019 Total

Philippines P100,000 P200,000 P300,000 P 600,000
Abroad 200,000 100,000 100,000 400,000
Total P300,000 P300,000 P400,000 P1,000,000
 Solution
If ABC Corporation is a:
1. Domestic Corporation - the entire P400,000 is earned within
2. Non-resident foreign corp - the entire P400,000 is earned abroad
3. Resident foreign corp - the P400,000 dividend shall be split
Gross income ratio = P600,000/P1,000,000 = 60%
Earned within the Philippines (60% x P400,000) - P240,000
Earned without the Philippines (40% x P400,000) - P160,000
Total dividends P400,000

Supposing that the ratio is 40%, the entire P400,000 will be deemed
earned outside the Philippines.
 Illustration - Merchandising

A tax payer had the following transactions during the year:

Particulars 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
 Solution

Source of Gross Income Within Without

Goods purchased and sold within P 200,000
Goods purchased within and sold abroad P 100,000
Goods purchased abroad and sold within 150,000
Goods purchased and sold abroad 350,000
TOTAL P 350,000 P 450,000
 Illustration - Manufacturing

Assuming production is conducted by a parent corporation

and distribution is conducted by its subsidiary corporation:
Parent Subsidiary Total
Sales P4,000,000 P2,000,000 P6,000,000
Cost of goods sold 2,400,000 1,200,000 3,600,000
Gross income P1,600,000 P 800,000 P2,400,000
 Solution
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.

Source of Income (Parent) Within Without

➢ Philippines P1,600,000
➢ Abroad P1,600,000

Source of Income (Subsidiary) Within Without

➢ Philippines P800,000
➢ Abroad P800,000
There are three income taxation schemes under NIRC:
a. Final Income Taxation
b. Capital Gains Taxation
c. Regular Income Taxation
▪ Tax schemes are mutually exclusive
▪ An item of gross income that is subject to tax in one scheme will not be taxed to
other schemes
▪ Items of income that are exempted in one scheme are not taxable to the other
schemes.
▪ Final income taxation is characterized by final taxes.
▪ Final taxes are withheld at source.
▪ The income received by the taxpayer under this system is net of tax.
▪ The tax withheld at source is final and there would be no need to file an income tax
return to report the income to the government.
▪ Final taxation is applicable only to certain passive income.
➢Passive incomes are earned with very minimal or even without
active involvement from the taxpayer in the earning process.
Examples:
Interest income from banks
Dividends from domestic corporations
Royalties

➢Active or regular income arises from transactions requiring

considerable degree of effort or undertaking from the taxpayer.
Examples:
Compensation income
Business income
Professional income
▪ A capital gains tax is imposed on the capital gain on the sale, exchange and other
disposition of certain capital assets.
▪ Capital assets include all other assets other than ordinary assets.
▪ Ordinary assets are assets diretly used in the business, trade or profession of the
taxpayer such as inventory, supplies and items of property, plant and equipment.
▪ Capital gains taxation applies only to two types of capital assets: domestic stocks
and real properties.
The regular income taxation is te general rule in income taxation and covers all
other income such as:
1. Active income
2. Gains from dealings in properties
a. Dealings in ordinary assets
b. Dealings in other capital asset not subject to CGT

3. Other income, active or passive, not subject to final tax

Gross Income P xxx
Less: Allowable deductions xxx
Taxable Income P xxx
Characteristics of the Regular Income Tax
1. General in coverage
2. A net income tax
3. An annual tax
4. Creditable withholding tax
Exclusions from Gross Income
➢These pertains to items that are excluded, hence, exempt from income
taxation.
➢Excluded income is also exempt income. Both are not included in gross
income but differ only as to source. (excluded income - NIRC; exempt
income - NIRC or special laws)
Allowable Deductions
➢Simply “deductions”, are expenses in the conduct of business or exercise
of profession.
➢Can be claimed “itemized” wherein the taxpayer supports every item of
deduction, or “standardized” throughte Optional Standard Deductions
wherein the deductions is simply presumed as a percentage of gross
sales, gross receipts or gross income.
▪ Pertain to costs or expenses of earning item of gross income.
▪ Allowable deductions are generally deductible by corporations.
▪ For individual taxpayer, only self-employed individuals or those
engaged in business or excercise of profession can claim
deductions.
▪ No deduction is allowed to individuals who are purely
employed.
▪ Allowable deductions are considered in the determination of
net income from business or profession.
Types of Gross Income Subject to RIT
1. Compensation income
2. Business or professional income
3. Other income - non-business and non-compensation income such as:
a. gains from dealings in properties
b. other active or passive income, not subject to final taxes
▪ The term “compensation income” generally compromises all remunerations under
an employer-employee relationship, such as the regular pay of employees every
payroll period and other benefits and incentives.
▪ Compensation income is presented in the income tax return as:
Gross compensation income P xxx
Less: Non-taxable compensation xxx
Taxable compensation income P xxx
▪ Business incom arises from habitual engagement in any commercial activity
involving regular sales of goods or services by an individual or a corporation. The
income from business, legal or illegal, registered or unregistered is taxable.
▪ The business gross income from the sale of goods is computed as:
Sales P xxx
Less: COGS(or COS) xxx
Gross income P xxx
▪ The gross income from excercise of a profession or business gross income from the
sale of services is measure as:
Revenues or gross receipts P xxx
Less: Cost of services xxx
Gross income P xxx
The computation of the taxable income of an individual taxpayer depends on
whether he is a:
1. Pure compensation income earner
2. Pure business income or pure professional income earner
3. Mixed income earner
 Case 1 Case 2 Case 3
Compensation income 400,000 400,000
Gross business income 400,000 200,000
Deductions 280,000 280,000
Other gross income 20,000 20,000 20,000
▪ The progressive tax covers all individuals, including
taxable estates and trust, except those subject to FIT:
a. NRA-NETB - subject to 25% final tax on gross income
b. Special aliens - subject to 15% final tax on gross income

▪ The individual income tax or progressive income tax is

determined in reference to a tax table of progressive tax
rates.
Over But not over Basic Tax Additional
P0 P 250,000 P- -
250,000 400,000 - 20%
400,000 800,000 30,000 25%
800,000 2,000,000 130,000 30%
2,000,000 8,000,000 490,000 32%
8,000,000 - 2,410,000 35%
The corporate income tax, commonly referred to as the regular corporate income
tax (RCIT), is a proportional or flat tax at a rate of 20% to 25% on taxable income. The
RCIT applies to any corporations other than those:
a. Subject to final tax, such as non-resident foreign corporation.
b. Special corporations or those subject to special tax regimes, such as PEZA
and TIEZA-registered enterprises
c. Exempt corporations on their exempt income
 A corporation has a net income of P1,200,000 in the Philippines and P800,000
from abroad. Assume a 20% tax rate.

If the corporation is domestic corporation,

Taxable income P2,000,000
Multiply by: tax rate 20%
Income tax due P400,000
If the corporation is resident foreign corporation,
Taxable income P1,200,000
Multiply by: tax rate 20%
Income tax due P240,000
Individual Taxpayers:
➢ BIR Form 1700 - Employed individuals with other income outside employment
➢ BIR Form 1701 - Self-employed individuals, estate and trusts, and mixed income earners

Corporate Taxpayers:
➢ BIR Form 1702 RT - corporations subject only to RIT
➢ BIR Form 1702 EX - exempt corporations under NIRC and special laws with no other
taxable income
➢ BIR Form 1702 MX - corporations with ine subject to multiple income tax rates or with
income subject to special or preferential rate
 The annual ITR is due for filing on the 15th day of the fourth month following
the taxable year of the taxpayer. The income tax due shall be paid upon filing.

Quarterly Filing of ITR

Corporations and individuals engaged in business and those engaged in the
practice of a profession are required to file three quarterly returns aside from the
annual consolidated ITR.
BIR Form 1701Q - for individuals
BIR Form 1702Q - for corporations
Income Tax Returns Individual Taxpayers Corporate Taxpayers
1st Quarter ITR April 15, same year 60 days end of 1st quarter
2nd Quarter ITR August 15, same year 60 days end of 2nd quarter
3rd Quarter ITR November 15, same year 60 days end of 3rd quarter