Why don’t we

talk about
Taxation?
 INCOME
TAXATION
Here starts the
lesson!
 PRELIM
COVERAGE
Professor:
ANGELES L. ABECIA,cpa,mba,ctca,reb,rea,jd
 CHAPTERS COVERAGE
PRELIM COVERAGE

1. CHAPTER 1

2. CHAPTER 2

3. CHAPTER 3 – INTRODUCTION TO INCOME TAX

4. CHAPTER 7 – INTRODUCTION TO REGULAR INCOME TAX

5. REGULAR INCOME TAX : EXCLUSION FROM GROSS INCOME

6. REGULAR INCOME TAX : INCLUSION IN GROSS INCOME

7. COMPENSATION INCOME
CHAPTER 3
INTRO TO
INCOME TAX
OBJECTIVES
- students are expected to comprehend
and demonstrate knowledge on the
following
3) General Rules in Income
Taxation
1) The concept of gross income

4) Income Tax Situs Rules

2) Types of Income Taxpayers
“Situs defined”
“Income Taxpayers defined”
CHAPTER 3.1
CONCEPT OF
GROSS
INCOME
CONCEPT OF GROSS INCOME includes the following:

GROSS INCOME a. Employment

b. Trade or business
• INFLOW OF WEALTH TO c. Exercise of profession
THE TAXPAYER FROM
”WHATEVER” SOURCE, d. Income from properties
LEGAL OR ILLEGAL,
THAT INCREASES NET e. Dealings in properties
WORTH.
f. Other regular or casual transactions
ELEMENTS OF WHO ARE CONSIDERED TAXPAYERS???

GROSS INCOME
Persons whether natural or juridical who
are obliged to pay taxes in the Philippines.
1) Return “on’ Capital
They can be citizens or non-citizens of
2) Realized Profit the Philippines.

3) Not exempted by law,

contract, or treaty
 Juan put up a business of selling books. He
ILLUSTRATION started a capital of 3M to purchase these books
from the supplier. He added 50% mark-up on
top of 3M in order to cover his operating
expenses and his estimated profit.

Selling Price (3M*1.5%) = 4.5M

1. Return “on” Capital
Cost of books = (3M)

Mark-up (50% of the cost)=1.5M

VERSUS
Here, the mark-up of 1.5M increases the net
worth of Juan by 1.5M. This 1.5M is the
RETURN ON CAPITAL, while the 3M is the
2. Return “of” Capital RETURN OF CAPITAL.
2. Realized Profit ”NOT” REALIZED PROFIT although
received by the taxpayer.
- any form of advantage derived by the
taxpayer and increases its net worth. a. Receipt from loan – asset increases but
liabilities also increases. There is an
- there is increase in ”net worth” when one obligation to return the money to the
lender.
receives:
b. Discovery of lost properties – ownership
a. Income not yours; finder is obligated.

b. Donation c. Money or Property held in “trust” – not

owned, not yours, obligated to
c. Inheritance return/remit to another person.
REQUISITES OF A REALIZED PROFIT
Types of Transfers (exchange transactions)

1) Bi-lateral (onerous)
a. sale
1. Exchange Transactions b. barter
2. The transaction involves another entity or
person.
2) Unilateral (gratuitous)
a. Succession – Estate Tax
3. It increases the net worth of the recipient.
b. Donation – Donor’s
3) Complex Transactions
• Partly gratuitous – subject to transfer tax
• Partly onerous – subject to income tax
ILLUSTRATION
A, owns a house and lot in Pueblo Estate, CDO.
He bought that property in 2015 at 2,000,000.
He sold the property to his only brother at
2,100,000. However, the fair market value of
that property now is 2,500,000.
FMV 2.5M
SP 2.1M ___ 400k subject to Transfer tax
(donation)
Cost 2.0M ___100k subject to income tax
(capital gains tax)
 Exempted from Income Taxation:
3. Not exempted by law, contract or treaty
1. Income of qualified employee trust fund

2. Revenues of non-profit, non-stock educational

Therefore, those expressly exempted by
the Constitution, law, contract or treaties 3.
are not subject to income tax.
4.
institutions
SSS, GSIS, Pag-ibig or Philhealth benefits
Salaries of Minimum wage earners

5. BMBEs

6. Income of foreign governments and foreign

government-owned and controlled corporations

7. Income of international missions and

organizations with income tax immunity (such as
UNICEF)
 CHAPTER 3.2
TYPES OF INCOME
TAXPAYERS
A. Individuals (natural person)
• Citizen
• Resident
3
• Non-resident – 183days ge
7
Pa
fe r to
Re
• Alien
• Resident
One (1) year
• Non-resident alien (NRA) --- [180day rule]

• Engaged in trade or business

not more than one (year) but 180 days

• Not engaged in trade or business

not more than 180days
 • Taxable estates and trusts

B. Corporations (juridical person) 1-7

3
7
ges
Pa
fe r to
Re
• Domestic Corporation
• Foreign Corporation
• Special Corporations

• One-Person Corporation
• Partnership
• Joint venture
• Co-ownership
 CHAPTER 3.3
GENERAL RULES
IN TAXATION
 TERRITORIALITY
RULE
Only Philippine sourced income are subject
to income tax in the Philippines except,
income earned abroad by the resident
citizens and domestic corporations.
 RESIDENCY AND
CITIZENSHIP RULE
 Residents and Citizens of the Philippines are taxable
on all income from sources within and without the
Philippines.

 A Corporation is a citizen of the country of

incorporation.
CHAPTER 3.4
INCOME SITUS
RULE
 “It is the place of taxation
WHAT IS THE income. It is the country that
has jurisdiction or authority to
SITUS OF impose tax upon the income.
INCOME?
1) Interest Income- Debtor’s residence

2) Royalties - Where intangible is employed

3) Rent Income – location of the property

4) Service Income – services is rendered

CHAPTER 7
AN
OVERVIEW
CHARACTERISTICS OF THE REGULAR
INCOME TAX
1) General in coverage
It applies to all items of taxable income
(except those subject to FINAL TAX, CGT, 4) Creditable withholding tax
Special Tax Regimes. Advanced taxes that must be
deducted against regular tax due
2) A net income tax
After deductions and exemptions
allowed by law
5) Progressive or proportional
3) An annual tax tax – Ability to Pay Theory
 REGULAR INCOME TAX
MODEL
GROSS INCOME – inclusions (Chapter 9)
Less: Allowable Deductions (Chapter13)
TAXABLE INCOME subject to income
tax rate
COMPENSATION BUSINESS
INCOME INCOME
EARNER EARNER WITH
(CHAPTER 10) OTHER INCOME
Gross Compensation Gross Business Income
Less: Non-taxable compensation Add: Other gross Income
Taxable Compensation Income Total Gross Income
Add: Other gross income Less: Allowable Deductions
Taxable Income Net Income
INCOME TAX REPORTING BUSINESS
FORMAT FOR INDIVIDUAL INCOME
ENGAGED IN BUSINESS EARNER WITH
OR PROFESSION
OTHER INCOME
Sales
Less: Sales Returns/Discounts Gross Business Income
Net Sales/Revenue/Receipts/Fees
Less: Cost of Sales or Services
Add: Other gross Income
Gross Income from business/profession Total Gross Income
Add: Non-operating Income Less: Allowable Deductions
Total Gross Income Net Income
Less: Allowable Deductions
Taxable Income
CHAPTER 8
EXCLUSIONS
FROM GROSS
INCOME
 CHAPTER 9
INCLUSIONS IN
GROSS INCOME
CHAPTER 10
COMPENSATION
INCOME
 ELEMENT OF ER-EE
RELATIONSHIP:

1) selection and engagement of

EMPLOYER – employees / power to hire

EMPLOYEE 2) payment of wages

RELATIONSHI 3) power to dismiss

P 4) power of control – as to the
means and methods by which the
work is accomplished
 NOT 1) Consultant
EMPLOYEES – 2) Directors without
HENCE NOT management function
COMPENSATI 3) Talents and artists on TV
ON INCOME shows or radio broadcasts
BUT….
 1) Managerial – fringe
TYPES OF benefits
EMPLOYEES 2) Supervisory
AS TO
FUNCTION 3) Rank and File
 1) Minimum Wage Earners –
exempt from income tax on
TYPES OF their compensation
EMPLOYEES 2) Regular Employees –
AS TO subject to regular progressive
TAXABILITY income tax
- Php 20,300/month ,
exempt
 • All remunerations
received under an
GROSS employer – employee
COMPENSATI relationship:

ON INCOME - taxable compensation

- non taxable
compensation
 1) Mandatory Deductions
NON-
TAXABLE 2) Exempt Benefits
2.1 Remuneration received as
COMPENSATI incidents of employment;
2.2 De minimis benefits
ON 2.3 13th month pay and other
benefits not exceeding 90k
2.4 Benefits of MWE
 REGULAR 1) Basic Salary

COMPENSATI 2) Fixed allowances

ON - cost of living allowance

- fixed housing allowances
- representation
- transportation
- other allowances
 1) Fees – professional income
NON- 2) Commissions – business income
COMPENSATI of sales agent

ON 3) Tips and gratuities – should not

ITEMS be accounted for by the employee;
paid directly to an employee by
customers – other income in the
income tax return of the employee
 1) Overtime pay
2) Hozard pay

SUPPLEMENTA 3) Night shift differential pay

4) Holiday pay
RY 5) Commissions
6) Fees (if director is an employee)
COMPENSATIO 7) Emoluments and honoraria
N 8) Taxable retirement and
separation pay
9) Value of living quarters or meals
10) Gains on exercise of stock
options
11) Profit sharing and taxable
bonuses