MODULE 6

Introduction to
Income Tax
Concept of tax Income, the situs of income,
and the types of taxpayers.

INCOME TAX - NC
GROUP 2
THEGENERAL
CLASSIFICATION RULE
FOR INDIVIDUALS
• Intention
• Length of stay
Intention
• The intention of the taxpayer regarding the
nature of his stay within or outside the
Philippines shall determine his appropriate
residency classification.

• Documents purporting short term stay such as

tourist visa shall not result in the reclassification
of the taxpayer‟s normal residency.
example:
An alien is normally non-resident.
A. An alien who come to the Philippines with a tourist visa would still be classified as
non-resident alien.

A citizen is normally resident.

A citizen who would go abroad under a tourist visa would still be considered a
B. resident citizen.

An alien who come to the Philippines with an immigration visa would be

C. reclassified as a resident alien upon his arrival.

A citizen who would go abroad with a two-year working visa would be reclassified
D. as a non- resident citizen upon his departure.
Length of Stay
• Citizens staying abroad for a period of at least 183 days are
considered non-resident.

• Aliens who stayed in the Philippines for more than 1 year as

of the end of the taxable year are considered resident.

• 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.

• Aliens who stayed in the Philippines for not more than 180
days are considered non-resident aliens not engaged in trade
or business.
illustration:
Luiz Mario Aresmendi
• a Mexican actor
• contracted by a Philippine television company
1. • arrived in the country on February 29, 2019
• returned to Mexico three weeks later upon completion of the project.

classified as an NRA-NETB (Non-resident alien not engaged in trade or business) in 2019.

His stay is for a definite purpose which in its nature will be accomplished immediately.
Mamoud jibril
• a Libyan national
2. • arrived in the country on November 4 2019
• Mr. Jibril stayed in the Philippines since then without any
working visa or work permit.

For theyear 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 3l, 2020, he will qualify as a resident alien for 2020.
illustration:
Without any definite intention as to the nature of his stay
Juan Masipag
• a Filipino citizen
3. • 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.
Taxable Estates
and Trusts
• Estates
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. The estate is taxable on income
of the properties left by the decedent.
 • 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
• shall include partnerships, no matter how created or
CORPORATION
• includes profit-oriented and non-profit
institutions such as charitable
institutions, cooperatives, government
agencies and instrumentalities,
associations, leagues, civic or religious
and other organizations
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.
Domestic Corporation
• is a corporation that is organized in
accordance with Philippine laws.

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

Special corporations are domestic or foreign corporations

which are subject to special tax rules or preferential tax rates.
OTHER CORPORATE TAXPAYERS
PARTNERSHIP
• is a business organization owned
Type of Partnership
by two or more persons who • General professional partnership (GPP)
contribute their industry or • Business partnership
resources to a common fund for
the purpose of dividing the profits
from the venture.
a) General professional partnership
(GPP)
• BOTH professional formed a partnership
• 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
• is one formed for profit.
• It is taxable as a corporation
example:

1. 2.

Allan Aira Crytal Jan Ver

+ +
Lawyer Accountant Accountant Accountant
• to practice In taxation advisory services • to venture into a beauty parlor
• different profession • same profession

Business Partnership
taxable as corporation
example:

3.

Isabela Joana
+
Accountant Accountant

• to venture into audit services

• same profession

General Professional Partnership

taxable in their individual capacity
OTHER CORPORATE TAXPAYERS
JOINT VENTURE
• is a business undertaking for a Type of Joint Venture
particular purpose. It may • Exempt joint ventures
organized as a partnership or a • Taxable joint ventures
corporation.
a. Exempt joint ventures
• 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 a service contract
with the Government.

• is not treated as a corporation and is tax-exempt on its

regular income, but their venturers are taxable their share
in the net income of the joint venture.

b. Taxable joint ventures

• All other joint ventures are taxable as corporations.
OTHER CORPORATE TAXPAYERS
CO-OWNERSHIP • that is limited to property preservation or income collection is
not a taxable entity and is exempt but the co-owners are
• is joint ownership of a property
taxable on their share on the income of the co-owned property.
formed for the purpose of
preserving the same and/or
• However, a co-ownership that reinvests the income of the co-
dividing its income.
owned property to other income- producing properties or
ventures will be considered a unregistered partnership taxable
as a corporation.
 THE GENERAL RULES IN INCOME TAXATION

Note:
1. Consistent with the territoriality rule, all taxpayers, except
resident citizens and domestic corporation are taxable only on
income earned within the Philippines.
2. The NIRC uses the term “without the Philippines” to mean
outside the Philippines.
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 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
• 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.
• Situs is particularly important to taxpayers
taxable only on income within.
• However, it is also important to taxpayers
taxable on global income purposes of the
computation of the foreign tax credit.
INCOME SITUS RULES
Types of Income Place of taxation (situs)
1. Interest income 2. Debtor’s residence
Royalties Where the intangible is employed Location
3. Rent income 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 150,000

(the lease contracts were executed in the Philippines)
400,000
Professional fees for services rendered in the Philippines
to non-resident clients (paid in US Dollars)
Applying the situs rules, the following are the situs of the aforementioned income:

Resident Citizen or domestic corporation taxpayers would be tax on the world income while other
taxpayers would be taxable only on the income from within the Philippines
OTHER INCOME SITUS RULE
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

2. Real Property- earned where the property is located

Illustration:
A taxpayer had the following income:

Gain on sale of domestic stock P 200,000

Gain on sale of foreign bonds 100,000
Gain on sale of a commercial lot in Baguio City Gain on sale of 500,000
car in Ontario, Canada 200,000
Gain on sale of machineries in Mexico, Pampanga Interest income 250,000
on foreign bonds 50,000
150,000
Dividends on domestic stocks
The following table summarizes the situs of the foregoing income:
OTHER INCOME SITUS RULE
B. Dividend income from:
1. Domestic corporation- presumed earned within

2. Foreign corporation
a) Resident foreign corporation - depends on the pre-dominance test
b) Non-resident foreign corporation- earned abroad
The predominance test
If the ratio of the Philippine gross income over the world gross income of the
resident foreign 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 dividends received is earned abroad
Illustration:
in 2019, Sarah received a P 400,000 dividends income from ABC Corporation. ABC Corporation had the
following gross income in 2016 through 2018:

If ABC Corporation is a:
1. Domestic corporation- the entire P 400,000 is earned within
2. Non-resident foreign corporation- the entire P 400,000 is earned abroad
3. Resident foreign corporation- the P 400,000 dividend shall split
• Supposing that the ratio
is 49% the entire P
Gross Income = P 600,000/P 1,000,000 = 60%
400,000 will be
deemed earned outside
Earned within the Philippines (60% x P400,000) 240,000
the Philippines.
Earned without the Philippines (40% x P400,000) 160,000
Total dividends 400,000
OTHER INCOME SITUS RULE
C. Merchandising Income
-earned where the property is sold
Illustration:
Source of gross income Amount in Php
Goods purchased and sold within 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 200,000
Purchased within and sold abroad 100,000
Purchased abroad and sold within 150,000
Purchased abroad and sold abroad 350,000

Total =350,000 =450,000

OTHER INCOME SITUS RULE
D. Manufacturing Income -earned where the goods are manufactured and sold
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:

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

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.
Illustration 2:
Assuming production is conducted by a parent corporation and the distribution is conducted by its subsidiary
corporation:

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 parent corporation:

The following are the situs of income for the subsidiary corporation:
 MODULE 6

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INCOME TAX - NC
GROUP 2