Chapter 3

INTRODUCTION TO THE
INCOME TAXATION
• WHY IS INCOME SUBJECT TO TAX?

-Income is regarded as the best measure of taxpayers

ability to pay tax.It is an excellent object of taxation in the
allocation of government costs.

• WHAT IS INCOME FOR TAXATION PURPOSES?

-The tax concept of income is simply reffered to as

"gross income".
• LETS DEFINE GROSS INCOME
-Any inflow of wealth to the taxpayer that increases
networth from whatever source,legal or illegal.

• ELEMENTS OF GROSS INCOME

a) It is a return on capital that increases net worth.
b) It is a realized benefit.
c) It is not exempted by law,contract or treaty.
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 capital.
1. life
2. health
3. human reputation
• RECOVERY OF LOST CAPITAL VS. RECOVERY OF
LOST PROFIT
-The recovery of lost income or profits is not
intended to compensate for the loss of capital. It is as
good as realization of income; hence, it is an item of
gross income.

• REALIZED BENEFIT WHAT IS MEANT OF REALIZED

BENEFIT?
- The term "benefit" means any form of advantages derived by
the taxpayer.
• THE FF. ARE NOT BENEFITS,HENCE,NOT
TAXABLE:

a) RECEIPT OF A LOAN

b) DISCOVERY OF LOST PROPERTIES

c) .RECEIPT OF MONEY OR PROPERTY TO BE HELD IN

TRUST FOR OR TO BE REMMITTED TO ANOTHER
PERSON.
TYPES OF TRANSFER

1. Bilateral Transfers or Exchange

• - Sale
• - Barter

2. Unilateral Transfers
• - Succession
• - Donation

3. Complex Transactions
MODE OF RECEIPT/REALIZATION BENEFITS
• Actual Receipt
• Constructive Receipt

INFLOW OF WEALTH WITHOURT INCREASE IN NET

WORTH
• The inflow of wealth to a person that doesn't increase his net worth is the
income due to the gtotal absence of benefit.
EXAMPLES:
A.RECEIPT OF PROPERTY IN TRUST
B.BORROWING OF MONEY UNDER AN OBLIGATION TO RETURN.
NOT INCOME EXEMPTED BY LAW
• Income of qualified employee trust fund
• Revenue of non-profit non-stock educational institutions
• SSS, GSIS, Pag-ibig, or PhilHealth benefits
• Salaries and wages of minimum wage earners and qualified
senior citizens
• Regular income of BMBE’s
• Income of foreign government and foreign government-owned
controlledcorporations
• Income of international missions and organization with income tax
immunity.
TYPES OF INCOME TAX PAYERS
A. Individuals
1. Citizen
a. Resident Citizen
b. Non- Resident Citizen
2. Alien
a. Resident Alien
b. Non- Resident Alien
i. Engaged in trade or Business
ii. Not engaged in trade or Business
3. Taxable states and trusts

B. Corporations
1. Domestic Corporation
2. Foreign Corporation
a. Resident Foreign Corporation
b. Non- Resident Foreign Corporation
THE GENERAL CLASSIFICATION RULE FOR
INDIVIDUALS
• Intention
- The intention of the taxpayer regarding the nature of his stay within
outside the philippines shall determine his appropriate residences
classification. The taxpayer shall submit to the CIR of the BIR documents
proofs such as visas, work contracts and other documents indicating
intention.

• Length of stay
- In default of such documentary proof. The length of stay of the
taxpayer is considered.
Taxable estates and trust
• Estates
- Estate refers to the properties rights and obligation of the diseased
person not extinguished by his death

• Trust
- A trust is an arrangement whereby one person grantor or trustor
property to another person beneficiary, which will be under the management
of a third party (trustee or fiduciary).
Corporate income taxpayers
• The term "corporation" shall include partnerships no matter how
creates organized for joint stocks companies, joints accounts
association or insurance companies except general professionals
partnerships and a joint venture consortium formed for the
purpose of undertaking construction projects in petroleum coal
geothermal and other energy operations persuades an operating
consortium agreement under a service contract with government.
• Domestic corporation
- A domestic corporation is a corporation that is organized in a
accordinance to philippines law

• Foreign corporation
- A foreign corporation is an organized under foreign law
Types of foreign corporations
• Resident foreign corporation (RFC) A FOREIGN CORPORATION
WHICH OPERATES AND CONDUCTS BUSINESS IN THE
PHILIPPINES THROUGH A PERMANENT ESTABLISHMENTS

• Non-resident foreign corporation (NRFC) A FOREIGN

CORPORATION WHICH DOES NOT OPERATE OR CONDUCT
BUSINESS IN THE PHILIPPINES
SPECIAL CORPORATIONS
• Special corporations are domestic or foreign corporation
which are subject to special tax rule or preferential tax
rates
• Other corporate taxpayers
- Partnership a partnership is a business organization
owned by two or more persons who contribute their industry or
resources to a common found for the purposes of dividing the
profits from the venture

• Types of partnerships
-General professional partnerships
-Business partnerships
TYPES OF JOINT VENTURES:
• exempt joint ventures
- are those formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations to an operating consortium agreement under a service contract
with the government.

• taxable joint ventures:

- all other joint ventures are taxable as corporations.

• Co ownership
• THE GENERAL RULES IN INCOME TAXATION:
– Individual Taxpayer
– Corporate Taxpayer

• THE RESIDENCY AND CITIZENSHIP RULE

• BASIS OF THE EXTRATERRITORIALITY TAXATION

• THE ISSUE OF INTERNATIONAL DOUBLE TAXATION

• 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 OF INCOME VS. SOURCE OF INCOME:
• situs of income should be differentiated from the source of income.
• situs is important on determining whether or not an income is taxable in
philippines.

INCOME SITUS RULES: TYPES OF INCOME

• interest income
• royalties
• rent income
• service income
OTHER INCOME SITUS RULES
A.GAIN ON SALE OF PROPERTIES
1.PERSONAL PROPERTY
2.REAL PROPERTY

B.DIVIDENT INCOME
1.DOMESTIC CORPORATION
2.FOREIGN CORPORATION
a.Resident foreign corporations
b.non-resident foreign corporations

C.MERCHANDISING INCOME
D.MANUFACTURING INCOME
THANKYOUU!