TAXATION LAW

REVIEW
INCOME TAXATION MSU College
of Law (Iligan
Extension)
 WHAT IS INCOME TAX?

 A tax on all yearly profits arising from property, professions,

trades or of fices, or as a tax on a person’s income,
emoluments, profits and the like.
 WHAT IS INCOME?

An amount of money coming to a person or

corporation within a specified time,
whether as payment for services, interest
or profit from investment
Income is NOT capital
Income = cash received?
Is income only in the form of cash?
 CAPITAL VS. INCOME

 CAPITAL is wealth, while INCOME is the service of

wealth.
 CAPITAL is the TREE, while income is the FRUIT.
 Return or recovery of capital is not subject to
income tax, while income is subject to income tax.

 Mr. A borrowed P 1 Million from Mr. B, with a

condition to pay back 10% interest. At the end of
the period, Mr. B paid Mr. A P 1.1Million. Is the
P1.1Million subject to income tax?
 TESTS IN DETERMINING INCOME

 ALL EVENTS TEST

All events fixing an accrual-method taxpayer’s right to receive income or
incur expense must occur before the taxpayer can report an item of
income or expense
 REALIZATION TEST
 No taxable income until there is a separation from capital of something
of exchangeable value, thereby supplying the realization or
transmutation which would result in the receipt of income
 CLAIM OF RIGHT DOCTRINE
 Presence of a claim of right to the alleged gain and the absence of a
definite unconditional obligation to return or repay the gain

 INCOME FROM WHATEVER SOURCE

 ECONOMIC BENEFIT TEST

 TESTS IN DETERMINING INCOME

 INCOME FROM WHATEVER SOURCE

 All income not expressly excluded or exempted
from the class of taxable income, regardless of the
source of the income, is taxable

 ECONOMIC BENEFIT TEST

 Any economic benefit to the employee that
increases his networth (total assets less total
liabilities), whatever may have been the mode
effected, Is taxable
 NETWORTH METHOD of investigation
 WHEN IS INCOME TAXABLE?

 The money or property received is income, gain or

profit (and not return of capital)
 The income, gain or profit is received (actually or
constructively), accrued, or realized during the
taxable year, and
 The income, gain or profit is not exempt from
income tax under the Constitution, treaty or
statute.
 T YPES OF INCOME

 COMPENSATION INCOME
 BUSINESS AND PROFESSIONAL INCOME
 CAPITAL GAINS
 PASSIVE INCOME
 MISCELLANEOUS INCOME

 Each type of income may be exempt, subject to a

schedular rate, or to a global rate.
 A taxable transaction shall be subject to only one
kind of income tax.
 INCOME TAX SYSTEMS

 GLOBAL TAX SYSTEM

 Taxpayer is required to report all income earned during
a taxable period in one income tax return, which
income shall be taxed under the same rule of income
taxation
 SCHEDULAR TAX SYSTEM
 A separate return for each type of income and the tax is
computed on per return or per schedule basis
 SEMI-SCHEDULAR OR SEMI-GLOBAL
 FEATURES OF THE INCOME TAX LAW

 DIRECT TAX
 PROGRESSIVE TAX (FOR INDIVIDUALS)
 COMPREHENSIVE SYSTEM
 Citizenship Principle
 Residence Principle
 Source Principle
 GENERAL FORMULA TO COMPUTE
INCOME TAX
GROSS INCOME P XX,XXX
LESS:
ALLOWABLE DEDUCTIONS (XX,XXX)
PERSONAL EXEMPTIONS (INDIVIDUALS) (XX,XXX)
ADDITIONAL EXEMPTIONS (XX,XXX)
NET TAXABLE INCOME P XX,XXX
X INCOME TAX RATE %
INCOME TAX PAYABLE P XX,XXX
TAX SCHEDULE BEFORE TRAIN
TAX SCHEDULE AFTER TRAIN
 KINDS OF TAXPAYERS - INDIVIDUALS

 CITIZENS
 RESIDENT CITIZENS (RC)
 NONRESIDENT CITIZENS (NRC)
 ALIENS
 RESIDENT ALIENS (RA)
 NONRESIDENT ALIENS
 ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES (NRA -ETB)
 NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES (NRA -NETB)
 ESTATES AND TRUSTS
 REVOCABLE TRUST
 IRREVOCABLE TRUST
 KINDS OF TAXPAYERS - CORPORATIONS

 DOMESTIC CORPORATIONS (DC)

 FOREIGN CORPORATIONS
 RESIDENT FOREIGN CORPORATION (RFC)
 NONRESIDENT FOREIGN CORPORATIONS (NRFC)

 PARTNERSHIPS
 TAXABLE PARTNERSHIP
 GENERAL PROFESSIONAL PARTNERSHIP (?)
 CITIZENS

 RESIDENT CITIZEN
 Taxed on worldwide income
 If purely compensation income, only allowed personal and additional
personal exemptions

 NONRESIDENT CITIZEN
 Taxed on income within the Philippines
 Immigrants
 Employees of a foreign entity on a permanent basis
 Permanent residents abroad
 OFWs
 At least 183 days outside, non-continuous

DUAL CITIZENS??
 QUESTIONS:

1. Juan, a Filipino citizen, emigrated to the US in January 1 ,

2015, where he is now a permanent resident. He owns
certain income-earning property both in the Philippines and
in the US from which he derives substantial income. He also
receives income from his employment in the US on which
the US income tax is paid. Is his income taxable by the
Philippine government?
2. If Juan emigrated to the US only on June 30, 2015, will this
change your answer?
3. Cherie is a flight attendant of Cathay Pacific plying the
international route. Her salaries are paid locally. Is Cherie a
resident citizen or a non -resident citizen?
 ALIENS

 RESIDENT ALIEN (RA)

 Not a mere transient or sojourner
 TRANSIENT – one who comes to the Philippines for a definite
purpose, which in its nature may be promptly accomplished
 Mere floating intention indefinite to return to another country?
 PE, APE, other deductions, 5-32%
 NON-RESIDENT ALIEN
 ENGAGED IN TRADE OR BUSINESS (NRA -ETB)
 Stay is more than 180 days during any calendar year
 Allowed PE, Other Deductions
 Subject to Reciprocity, 5-32%
 NOT ENGAGED IN TRADE OR BUSINESS (NRA -NETB)
 stay is 180 days or less during any calendar year
 Taxed at gross (no deductions) at 25%
 CLASSIFY THE FOLLOWING ALIENS,THE
ALLOWED EXEMPTIONS OR DEDUCTIONS,
AND THE APPLICABLE TAX RATE
 Mr. A , B, and C are all in Boracay.
 Mr. A is here for work. He rendered architectural consultancy
services to DEF Corporation for a hotel. He was finished
within a week.
 Mr. B is here on vacation. He likes Boracay so much, he has
no intention of going back. He does not yet know where he
will reside permanently. Mr. B is supported by his parents who
lives abroad. Sometimes Mr. B plays the guitar on bars in
Boracay. He earns a token amount from this.
 Mr. C is also here on an extended vacation for ten (10)
months. On the 8 th month, he bought the new IphoneX and
sold his old Iphone 7.
 BAR QUESTION

1. Mr. Cortez is a nonresident alien based in Hong Kong. During

the calendar year 1999, he came to the Philippines several
times and stayed in the country for an aggregated period of
more than 180 days. How will Mr. Cortez be taxed on his
income derived from sources within the Philippines and from
abroad?

1. For income tax purposes, the source of the service income is

important for the taxpayer, who is a:
a) Filipino citizen residing in Makati City;
b) Non-resident Filipino citizen working residing in London, United
Kingdom;
c) Japanese citizen who is married to a Filipino citizen and residing
in their family home located Fort Bonifacio, Taguig City;
d) Domestic corporation .
 EMPLOYEES WITH PREFERENTIAL TAX
RATES (15% ON GROSS COMPENSATION
INCOME) – OBSOLETE
 ALIENS EMPLOYED BY
 RAHQ and ROHQ OF MNCs in the Phils
 OBUs in the Philippines
 Foreign service contractors or sub-contractors engaged in petroleu
operations
 FILIPINOS, in the same position as aliens, in a managerial or
technical position
 ALTERNATIVE TAX RATES, EITHER 15% OR 32%
 (RR 11-2010)
 ESTATES AND TRUSTS

 One layer taxation regime in taxable trust and estates.

(meaning to say, the income is taxed either to the trust/estate
or to the beneficiary)

 ESTATE
 Not to be confused with Estate Tax
 Income earned by the estate during settlement proceedings
 Income distributed to the beneficiaries are considered deductions.
But, this will be considered the income of the beneficiaries.
 REVOCABLE TRUST – taxable to the trustor
 IRREVOCABLE TRUST – taxable to the trustee
 QUESTIONS

 Mr. C leaves behind a building which earns rent at

P100,000/month. Before the settlement of C’s estate, the
total income earned by the building amounted to P600,000.
Mr. C has heirs, D and E. Will the income be taxed? If so, who
is liable for the tax?
 Johnny transferred a 10 -door commercial apartment to a
trustee, Miriam, naming in the trust instrument Santino,
Johnny’s 10-year old son, as the sole beneficiary. The trustee
is instructed to distribute the yearly rentals amounting to
P720,000.
 Is the trustee liable to pay the annual income tax on the property?
 If the trustee is directed to accumulate the rental income and
distribute the same only when the beneficiary reaches the age of
majority. Will your answer be the same?
 CO-OWNERSHIP

 The individual co-owners report their share of the

income in their individual tax returns

 Pascual doctrine – Where the transactions are

isolated, in the absence of other circumstances
showing a contrary intention, the case can only
give rise to CO-OWNERSHIP.
 BAR QUESTION

Noel Langit and his brother, Jovy, bought a parcel of land which
they registered in their names as pro indiviso owners (Parcel A .)
Subsequently, they formed a partnership, duly registered with
the SEC, which bought another parcel of land. Both parcels of
land were sold, realizing net profits for both.

1. Should the sale of parcel A be taxed as a sale by a

corporation?
2. Should the sale of parcel B be taxed as a sale by a
corporation?
 PARTNERSHIPS

 TAXABLE PARTNERSHIPS
 Engaged in trade or business
 NON-TAXABLE PARTNERSHIPS, BUT THE PARTNERS
ARE TAXABLE ON THEIR DISTRIBUTIVE SHARE
 General professional partnerships
 Joint venture for undertaking construction projects,
or petroleum, coal, geothermal and other energy
operations, pursuant to an operating or consortium
agreement under a service contract with the
government
 CORPORATIONS

 DOMESTIC CORPORATION (DC)

 Incorporated or organized in the Philippines or under its
laws
 worldwide income, 30%, net
 (NOTE: Educational institutions, 10%)
FOREIGN CORPORATIONS – not domesitc
 RESIDENT FOREIGN CORPORATION (RFC)
 Foreign corporation engaged in trade or business in the
Phils.
 Philippine income, 30%, net
 NONRESIDENT FOREIGN CORPORATIONS (NRFC)
 Philippine income, 30%, gross, withheld at source
 SPECIAL RULES ON CORPORATE TAXES

 MINIMUM CORPORATE INCOME TAX (2% OF GROSS

INCOME)
 INTERCORPORATE DIVIDENDS ARE EXEMPT FOR DC
AND RFC
 IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
– for closely held corporations; 10% of improperly
accumulated earnings
 RFC – BRANCH PROFIT REMITTANCE TAX (15% of
remittance)
 RESIDENT FOREIGN CORPORATIONS

 RESIDENT FOREIGN CORPORATION

 Doing business in the Phils – continuity of conduct
and intention to establish a continuous business
 Foreign corporation has a branch in the Phils.

 QUERY: WHAT IF THE FOREIGN HEAD OFFICE ALSO

TRANSACTS BUSINESS IN THE PHILIPPINES?
Treat the foreign head office as a nonresident foreign
corporation (NRFC), except if the income is properly
attributable to the branch
 BAR QUESTION

 HK Co is a Hong Kong company, which has a duly

licensed Philippine branch engaged in trading
activities in the Philippines. HK Co. is also
invested directly in 40% of the shares of stock of A
Co., a Philippine corporation. These shares are
not reflected in the assets of the Philippine branch.

A Co. declared and paid dividends to its

stockholders. Are the dividends received by HK Co.
taxable?
 SPECIAL RESIDENT FOREIGN
CORPORATIONS
REGIONAL OPERATING HEADQUARTERS
– 10% ON PHIL NET INCOME
OFFSHORE BANKING UNITS
– 10% GROSS INTEREST INCOME
INTERNATIONAL AIR CARRIERS, INTERNATIONAL SHIPPING LINES
– 2.5% OF GROSS PHILIPPINE BILLINGS
-- IF NO LANDING RIGHTS? Normal corporate tax rate (30%)
GROSS PHILIPPINE BILLINGS – amount of gross revenue derived
from carriage of persons, excess of luggage, cargo and mail
originating from the Phils. In a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document
ONLINE AIR CARRIER -- doing business in the Phils having been
granted landing rights in any Philippine port
 BAR QUESTION

Caledonia Aircargo is an off-line international carrier

without any flight operations in the Philippines. It
has, however, a liaison office in the Phils which is
duly licensed with the SEC, established for the
purpose of providing passenger and flight
information, reservation and ticketing services.
Are the revenues of Caledonia Aircargo from tickets
reserved by its Philippine office subject to tax?
 SPECIAL NONRESIDENT FOREIGN
CORPORATIONS
 CINEMATOGRAPHIC FILM OWNER, LESSOR OR
DISTRIBUTOR (25% OF GROSS INCOME)
 OWNER OR LESSOR OF VESSELS CHARTERED BY
PHIL NATIONALS (4.5% OF GROSS RENTALS)
 OWNER OR LESSOR OF AIRCRAFT, MACHINERIES
AND OTHER EQUIPMENT (7.5% OF GROSS RENTALS)
 BAR QUESTIONS

Triple Star, a domestic corporation, entered into a Management

Service Contract with Single Star, a non -resident foreign
corporation with no property in the Philippines. Under the
contract, Single Star shall provide managerial services for Triple
Star’s Hongkong branch. All said services shall be performed in
Hongkong.

Is the compensation for the services of Single Star taxable as

income from sources within the Philippines? Explain.
 BAR QUESTIONS

Anchor Banking Corporation, which was organized in 2000 and existing

under the laws of the Philippines and owned by the Sy Family of Makati
City, set up in 2010 a branch of fice in Shanghai City, China, to take
advantage of the presence of many Filipino workers in that area and its
booming economy. During the year, the bank ,management decided not to
include the P20 Million net income of the Shanghai Branch in the annual
Philippine income tax return filed with the BIR, which showed a net
taxable income of P30 Million , because the Shanghai Branch is treated
as a foreign corporation and is taxed only on income from sources within
the Philippines, and since the loan and other business transactions were
done in Shanghai, these incomes are not taxable in the Philippines.
a) Is the bank correct in excluding the net income of its Shanghai Branch
in the computation of its annual corporate income tax for 2010? Explain
your answer. (5%)
b) Should the Shanghai Branch of Anchor Bank remit profit to its Head
Of fice in the Philippines in 2011 , is the branch liable to the 15% branch
profit remittance tax imposed under Section 28 (A)(5) of the 1997 Tax
Code? Explain your answer (5% )