Reference No: KLL-FO-ACAD-000 | Effectivity Date: August 3, 2020 | Revisions No.

: 00

VISION MISSION
A center of human development committed to the pursuit of wisdom, truth, Establish and maintain an academic environment promoting the pursuit of
justice, pride, dignity, and local/global competitiveness via a quality but excellence and the total development of its students as human beings,
affordable education for all qualified clients. with fear of God and love of country and fellowmen.

GOALS
Kolehiyo ng Lungsod ng Lipa aims to:
1. foster the spiritual, intellectual, social, moral, and creative life of its client via affordable but quality tertiary education;
2. provide the clients with reach and substantial, relevant, wide range of academic disciplines, expose them to varied curricular and co-curricular
experiences which nurture and enhance their personal dedications and commitments to social, moral, cultural, and economic transformations.
3. work with the government and the community and the pursuit of achieving national developmental goals; and
4. develop deserving and qualified clients with different skills of life existence and prepare them for local and global competitiveness

MODULE
SECOND Semester, AY 2020-2021

I. COURSE CODE/TITLE : BC 104 BUSINESS TAXATION

II. SUBJECT MATTER

SUBJECT MATTER Time-Frame

INCOME TAXATION 9HRS

III. COURSE OUTCOME

A. Income Taxation
a) Comprehend and Demonstrate the Concept of Gross Income
b) Recognize the different types of Income Tax Payers.
c) Show complete understanding of the general rules in Income Taxation.
d) Understand the different Tax Situs Rules

IV. ENGAGEMENT
DIRECTIONS: Read and analyze the discussions.
1. Income Taxation
1.1. Concept of Gross Income
1.2. Types of Tax Payers
1.3. General Rules in Income Taxation
1.4. Income Tax Situs Rules

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INCOME TAXATION
What is Income Tax?

Income Tax
 is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of
trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as
amended, less the deductions if any, authorized for such types of income, by the Tax Code, as amended, or
other special laws.

Why is Income subject to Tax?

 Income is regarded as the taxpayers’ ability to pay tax. It is an excellent object of Taxation in the
allocation of government cost.

What is Income for Taxation Purposes?

 The tax concept of income simply referred to as gross income under National Internal Revenue Code. 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 National Internal Revenue Code
however, the term taxable income refers to certain items of gross income less deductions and personal
exemptions allowable by the law. Technically gross income is broader to pertain to any income that can be
subjected to income tax.

 Gross Income - 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

 Return On Capital that increases net worth
 Realized Benefit
 Not Exempted by law, contract or treaty

What is 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

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Return on capital (ROC),

 Also known as return on invested capital or return on total capital, refers to the profit on an investment in
relation to how much was invested.
 A ratio used in accounting, finance and valuation shows how effective a company has been at turning capital
into profits.

Illustration:

Lora purchased goods amounting to P300 and sold for P500. The P500 consideration analyzed as follows:
Selling price (Total Consideration Received) P500- Total Return
Cost (Value of inventory forgone) P300- Return of Capital
Mark up (Gross Income) P200- Return on Capital

The return on capital that increases the net worth is income subject to income tax.
Return of Capital merely maintains net worth, hence it is not taxable improvement in net worth indicates 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 a life insurance contract collected by
an employer as a beneficiary from the 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.

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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
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 -deemed a return of capital.

Human Reputation received

The value as of n one's reputation for its cannot be measured is deemed financially. Any indemnity received as
compensation for its impairment - deemed return of capital exempt from income tax.
Examples include moral damages 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 loss of capital results in decrease in net worth, while the loss 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 are taxable recoveries of lost profits:

a. Proceeds of crop or livestock insurance

b. Guarantee payments
c. Indemnity received from patent infringement suit

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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 ofgross income.
The value of the lost crops is, in effect, realized not through actual harvest but through the insurance contract.

Illustration 2

Mr. Santiago purchased a franchise. The franchisor guaranteed an annual franchise Income of P 100,000 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 Santiago; hence, subject to income
tax. Mr. Santiago shall report P100,000 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 awarded an indemnity of P3,000,000.

The indemnity is a compensation for the income not realized by Mindoro 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 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 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 the same to the owner
c. Receipt of money or property to be held in trust for, or to be remitted to' another person

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If the taxpayer is entitled to keep for his account portion of a receipt, only that portion is a benefit.

Illustration
1. An employee was granted P20, 000 transportation advance. He liquidated 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.

2. A security agency receives P 120,000 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 PI00,000 pertaining to salaries of security guards is
recognized by the agency

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:

 Sale
 Barter
Referred to as "onerous transactions",

2. Unilateral transfers, such as:

 Succession - transfer of property upon death

 Donation

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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.

 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 P 100,000 and with a current fair value of P 180,000 for
only PI30, 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. An Item of gross Income arises from transactions, which involve another natural 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

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 between a holding 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.

 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:

 Increase in value of investments in equity or debt securities

 Increase in value of real properties held (revaluation increment)
 Increase in value of foreign currencies held or receivable
 Decrease in value of foreign currency denominated debt by virtue of favourable fluctuation in exchange rates
 Birth of animal offspring, accruals of fruits in an orchard or growth of farm
 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

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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:
 Gains from gambling and the forgiveness of debt in consideration of services or properties received are
realized gains from exchanges.
 The forgiveness of debt out of affection or mere generosity of the creditor is a gratuitous transfer subject to
transfer tax.
 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 noncash 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 noncash consideration.

Mode of Receipt/Realization Benefits

The taxpayer in two ways may realize taxable items of income:

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.

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Examples
a) offset of debt of the in consideration for the sale of
b) Deposit of the taxpayers checking account
c) Matured interest coupons on coupon bonds not yet encashed by the tax payer
d) Increase in the capital of partner from the profit of partnership

Inflow of wealth without increase in net worth

The Inflow of to a person that does not increase his net worth is not income due to the total absence of benefit.

a, Receipt of property in trust

b Borrowing of monev 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 not exempted by the Constitution, law, contracts or treaties from taxation.

 Law from taxation exempts the following Items of Income; hence, - not considered Items of gross
Income:
 Income of qualified employee trust fund
 Revenues of non-profit non-stock educational institutions
 SSS, GSIS. Pag-lbig, or PhilHealth benefits
 Salaries and wages of minimum wage earners and qualified senior citizen
 Regular Income of Barangay Micro-business Enterprises (BMBEs)
 Income of foreign governments and foreign government-owned and controlled corporations
 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

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TYPES OF INCOME TAXPAYERS

A. Individuals

1. Citizen
a. Resident citizen
b. Non-resident Citizen

2. Alien
a. Resident alien

b. Non-resident alien
 engaged in trade or business
 not engaged in trade or business

3. Taxable estates and trusts

B. Corporations
1. Domestic corporation
2. Foreign corporation
 Resident foreign corporation
 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

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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.
Aliens

A .Resident alien - an individual who is residing in the Philippines but is n citizen thereof, such as:

1. An alien who lives in the Philippines without definite intention as to stay; or

2. One who comes to the Philippines for a definite purpose which in 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 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

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 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 year

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS

 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 as visa, work contracts and other
documents indicating such intention
Documents Purporting short term stay such as tourist visa shall not result in of the taxpayer's normal
residency. Documents purporting as immigration visa or working visa for an extended 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.

 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.

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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.

Illustration 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.

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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. Estate is taxable on the income
of the properties left by the decedent. Estate under extrajudicial settlement are exempt entities. The
income of properties of the estate under extrajudicial settlement is taxable to the heirs.
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 instrumentalities, associations,
leagues, civic or religious and other organizations.

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DOMESTIC CORPORATION

Domestic Corporation is a corporation that is organized in accordance with Philippine laws.

FOREIGN CORPORATION

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 (NRFC) - 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 foreigners control the same.
2. A foreign corporation that transacts business with residents through a resident branch is taxable on such
transactions as a resident foreign corporation 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 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.

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  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.
Examples:

 A partnership between Andrix. A lawyer and Mark an accountant to practice in taxation advisory services
would be business partnership since the two partners are not the same profession.
 A partnership between accountants Zeus and Darrel to venture into a beauty parlor would be a business
partnership since the venture is not in practice of a common profession.
 A partnership between accountants Dominic and Jasmine May to venture into audit service would be a
general professional partnership.

2. Joint venture

 A joint venture is a business undertaking for a particular purpose. It organized as a partnership or a

corporation.

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 Types of joint ventures:

Exempt joint ventures

Exempt joint ventures are those formed for the purpose of Undertaking construction projects or engaging in
petroleum, coal, geothermal 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 ventures are taxable their share in the net income of the joint venture.

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 corporation.

THE GENERAL RULES IN INCOME TAXATION

Taxable on income earned Taxable on income earned
Within Within
Individual Taxpayers
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 taxpayers, except resident citizens and domestic corporations, are
taxable only on income earned within the Philippines.
2. The NIRC uses the term "without the Philippines" to mean outside the Philippines.

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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. The jurisdiction has the authority to impose tax upon the
income.

Situs of income vs. source of income

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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 taxation (situs)

1. Interest income Debtor's residence

2. Royalties Where the intangible -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 on foreign P P 300,000.00 P 300,000.00
deposits
Interest from domestic 50,000 50,000
bonds
Royalties from books in 100,000 100,000
the Philippines
Rent income on foreign 150,000 150,000
properties
Professional fees 400,000 400,000
Total P 550,000 P450,000 P1,000,000

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 Resident citizen or domestic corporation taxpayers would be tax on the income while other taxpayers would
be taxable only on the income from the Philippines

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

3. 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 sale of car in Ontario, Canada 200,000
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 P200,000

domestic stocks

Gain on sale of P100,000

foreign bonds

Gain on sale of P500,000

commercial lot

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 Gain on sale of car P200,000
in Canada

Gain on the sale of P250,000

machineries

Interest on foreign P50,000

bonds

Dividends on P150,000
Domestic Stocks

Total P1,100,000 P350,000

B. Dividend Income from:

1. Domestic Corporation- Presumed earned within

2. Foreign Corporation
a) Resident Foreign Corporation- depends on the predominance test
 The predominance test- If the ratio of the Philippines gross income over the
word gross income of the resident foreign corporation in the three year period
preceding the year dividend declaration is:
 At least 50% the portion of the dividend corresponding to the Philippines gross
income ratio is earned within
 Less than 50% the entire dividends receives is earned abroad
b) Non Resident Foreign Corporation- Earned Abroad

Illustration:

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In 2019, Sarah received a dividend income from ABC Corporation

Corporation had the following gross income in 2016 through 2018:

2016 2017 2018 2019

Philippines 100,000.00 200,000.00 300,000.00 600,000.00

Abroad 200,000.00 100,000.00 100,000.00 400,000.00

Total 300,000.00 300,000.00 400,000.00 1,000,000.00

If ABC Corporation is a:

1. Domestic corporation - the entire P40 0,000 is earned within

2. Non-resident foreign corporation - the entire is earned abroad

3. Resident foreign corporation - the P400,000 dividend shall be split

Gross Income Ratio = P60,000/P1,000,000 = 60%

Earned within the Philippines (60% x P 400,000) P 240,000

Earned without the Philippines (40% x P400,000) 160,000

Total dividends P 400.000

Supposing that the ratio is 49%, the entire will be deemed earned outside the Philippines.

C. Merchandising income - earned where the property is sold

Illustration

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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 income and within and distribution is earned without the Philippines

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 Without Within Distribution income and within and Production is earned without the Philippines

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 4,000,000.00 2,000,000.00 6,000,000.00

COST OF GOOD SOLD 2,400,000.00 1,200,000.00 3,600,000.00

GROSS INCOME 1,600,000.00 800,000.00 2,400,000.00

The following shows the situs of the gross income of Butuan under each of the following scenario:

SCENARIO HOME OFFICE BRANCH Within Without

1 Philippines Philippines 2,400,000.00 -

2 Abroad Abroad - 2,400,000.00

3 Philippines Abroad 1,600,000.00 800,000.00

4 Abroad Philippines 800,000.00 1,600,000.00

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.

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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

1 Philippines Philippines 1,600,000.00 -

2 Abroad Abroad - 1,600,000.00

3 Philippines Abroad 1,600,000.00 -

4 Abroad Philippines - 1,600,000.00

The following are the situs of income for the subsidiary:

SCENARIO PARENT SUBSIDIARY Within Without

1 Philippines Philippines 800,000.00 -

2 Abroad Abroad - 800,000.00

3 Philippines Abroad - 800,000.00

4 Abroad Philippines 800,000.00

The BIR authorizes the following expenses to be deducted from your gross sales in order to arrive at a lower taxable
income. Here’s a list of the allowable deductible expenses:

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 Advertising and Promotions
 Amortizations
 Bad Debts
 Charitable Contributions (Note: Donations should be made to BIR accredited donee institutions, otherwise
individual taxpayers can only claim 10% of the donation as deductible)
 Commissions
 Communication, Light and Water
 Depletion
 Depreciation
 Director’s Fees
 Fringe Benefits
 Fuel and Oil Insurance
 Interest (Note: The taxpayer’s allowable deduction for interest expense shall be reduced by an amount equal
to the 33% of the interest income subjected to final tax. Moreover, all interest incurred or paid to related
parties cannot be claimed as deductions to income)
 Janitorial and Messengerial Services
 Losses
 Management and Consultancy Fee (Note: A portion of expenses must be withheld and paid to BIR.)
 Miscellaneous
 Office Supplies
 Other Services
 Professional Fees (Note: A portion of expenses must be withheld and paid to BIR.)
 Rental (Note: A portion of expenses must be withheld and paid to BIR.)
 Repairs and Maintenance-Labor
 Repairs and Maintenance-Materials/Supplies
 Representation and Entertainment (Note: Limited to 0.5% of net sales for sellers of goods or 1% of net
revenue for seller/provider of services.)
 Research and Development
 Royalties
 Salaries and Allowances
 Security Services
 SSS, GSIS, Philhealth, HDMF and Other Contributions
 Taxes and Licenses
 Tolling Fees
 Training and Seminars
 Transportation and Travel
 Others (Case to case)

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Tax table of the Philippines

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