Income Taxation Excise tax – a legislated tax on specified

Module 1: Introduction and Basic goods or services at purchases such as

Principles fuel, tobacco, and alcohol.
Income Tax – tax on all yearly profits
arising from property, profession, trade or Basic of Taxing Income
business, or a tax on person’s income,  State partnership Theory
emoluments, profits and the like. The basis of government in taxing income
- Taxes is what we paid for. emanates from the State’s partnership in
the production of income by providing
Taxation – Lifeblood of the nation protection, resources, incentives and
- Without taxes, government proper climate for such production.
cannot run
General Principles of Income Taxation
3 Fundamental Power Taxpayer Taxable Income
Police Power – the power of the state of Resident citizen All income derived
promoting public welfare by restraining from sources
and regulating the use of liberty and within and without
property. the Philippines.
- State power to regulate Non- Resident Taxable only on
Power of Taxation – the process by which citizen income derived
the state through it is law- making body from sources
within the
(Legislative Branch) raises revenue to
Philippines.
defray the necessary expenses of
Alien (whether Taxable only on
government.
resident or non- income derived
- To charge revenue, taxes for resident) from sources
all income of whatever source within the
Power of Eminent Domain – the power of Philippines.
the state to take private property for public Domestic Taxable only on
purpose upon payment of just Corporation income derived
compensation. from sources
- Taking of private property for within and outside
pubic use the Philippines.
Foreign Taxable only on
Nature of Income Tax Corporation income derived
 An income tax is generally an from sources
within and without
excise tax and not a tax on
the Philippines.
property. It is levied upon the
privilege of receiving income or
profit.
In Short…
 Only Resident Citizen and Domestic What is the nature of income?
Corporation are taxable on their  Income is the flow of service
WORLDWIDE Income rendered by that capital by the
 Other types of individual and payment of money from it or any
corporate taxpayers (i.e. non resident other benefit rendered by a fund of
citizen, non-resident alien, foreign capital in relation to such fund
corporation) are taxable only on through a period of time;
income derived from sources WITHIN  Income is the “fruit” of capital or labor
the Philippines. severed from the “tree”
 Kung walang capital hindi tayo
Animus Rivertandi – intend to return magkakaroon ng income.

Income Distinctions between Capital and Income

 Refers to all wealth which flows into Capital Income
the taxpayer other than a mere return Constitutes the Any wealth which
of capital investment which flows into the
 Includes the forms of income is the sour e of taxpayer other
specially described as gains and the income than a mere
profits; including gains derived from return of capital
the sale or disposition of capital It is the wealth Is the service of
which is the wealth, the fruit of
assets
source of income capital
Fund Flow
Income Not subject to tax Subject to tax
 Flow of service rendered by capital by  Yung capital na nilagay mo sa
payment of money from it or any business may tax nay un dati
benefit rendered by a fund of capital  That capital is prior income na natax
in relation to such fund through a na
period of time.
 Kapag ang Negosyo hindi nagsasara Examples
ibig sabihin may income o kumikita at a) Loans Receivable
habang tumatagal lumalaki yung tax Receipt of payment;
nila kaya yung iba nagpapalit ng Principal – mere return of capital
pangalan ng business. Interest paid on such loans –
 Take note: Mere advance in the value return on capital
of the property or of a corporation in
no sense constitutes the income b) Sale of Merchandise
specified by law. Such advance Receipt of payment;
constitutes and can be treated merely Representing Cost of Sales –
as an increase in capital. return of capital
 Representing the profit(mark-up) - When is income realized?
return on capital
Conditions:
When is income taxable? 1. The earning process is complete or
Element of Taxable Income: virtually complete; and
 There is income, gain or profit 2. An exchange has taken place
(existence of income)
 The income, gain or profit is not Note: nagawa mo na, nakuha na at
exempt or excluded from income tax nakahiwalay na yung capital at income mo
 The income, gain or profit is 1989 Bar Question:
received or realized during the In 2000, ABC Corporation had a capital
taxable year (realization of income) stock of 1,000 shares without par value. At
o Mawala lang kahit isa hindi na the time of its incorporation, the value of
sya pwede maging Income each no-par value share was P10. In
Taxable 2011, due to its profitable operations, the
corporation earned a surplus of
When is income considered received for P200,000.00. The Corporation’s Board of
income tax purposes? Directors increased the stated value of
1. If actually or physically received by each share by P190, making each share
the taxpayer (actual receipt); or worth P200. The BIR, for income tax
2. If constructively received by the purposes assessed each stockholder for
taxpayer (constructive receipt) the P190 increase. Is the BIR correct?
Note: Actual – hawak / nabayaran na/
nasayo na yung resibo after mo bayaran Answer:
Constructive – credited to the account/ No. The stockholders have not physically
utang / hindi actual kasi hindi pa or constructively received any income
naibibigay or hindi mo pa nababayaran subject to tax. There was no change in the
kaya next quarter need mo siya bayaran/ proportion of their ownership in the
ikakaltas after ng taon. corporation considering that the shares of
stock are without par value. Furthermore,
Principle of Constructive Receipt for Tax there was no realization of the income
Purposes through the change in stated value. When
the stockholder disposes of the shares,
Income which is credited to the account of then the same would be subject to capital
or set apart for a taxpayer and which may gains taxes.
be drawn upon by him at any time is
subject to tax for the year during which
they are so credited or set apart, although
not then actually reduced to possession.
Year 2000 Capital 1000 w/o
 Stock par value  For income or expense to accrue,
Year 2011 200k surplus this test requires the fixing of a right
Php 200 to income or liability to pay, and the
par value availability of the reasonable
accurate determination of such
Note: No par value = no equivalent share income or liability.
o Lahat ng pwede ibawas ibabawas
- Hindi pwedeng itax kasi hindi moa
na para makita talaga yung income
lam ang par value kung magkano
ang share kaya hindi pwede. Taxable Periods:
- No parvalue kaya bawal itax
1. Calendar Period or Calendar Year
- Pag Nakita mo na yung par value
 an accounting period which starts
tsaka lang pwede mo siya itax
from January 1 and ends on
-
December 31.
Tests for Income Determination: 2. Fiscal Period or Fiscal Year
 an accounting period of 12 months
1) Realization/ Severance Test
ending on the last day of any
 There is no taxable income until month other than December 31.
there is a separation from capital of 3. Short Period
something of exchangeable value.  an accounting period wherein
 Income is not deemed realized until income shall be computed on the
the fruit has been plucked from the basis of a period less than 12
tree. months.
o Kapag pinagseparate na yung
What is the general rule in computing the
capital sa income
taxpayer’s taxable income?
2) Claim of Right Doctrine
 A taxable gain is conditioned upon • The taxable income shall be
the presence of a claim of right to computed upon the basis of the
the alleged gain and the absence of taxpayer’s annual accounting period,
definite unconditional obligation to that is, fiscal year or calendar year,
return or repay. as the case may be.
o Also known as Doctrine of Can an individual taxpayer compute his
ownership income on the basis of fiscal year?
o May claim yung may may
Karapatan  No. Individual taxpayers cannot use
o Kailangan iconsider yung mga the fiscal period. They are required
capitalist’s income kasi may claim to use the calendar year (RR 2-40).
of right sila don This would include Estates and
3) All Events Test Trusts and General Professional
Partnerships.
 Is a corporation required to use only the Method and Expense
calendar year? Cash  All items of income
Method received during the
 No. Corporations may, with the year shall be
approval of the CIR, file their returns accounted for in such
and compute their income on the taxable year (lahat ng
basis of a fiscal year income na nareceived
accounted during
When is taxable income computed on
taxable year)
the basis of calendar year?
 Only expenses
1. Taxpayer’s accounting period is actually paid shall be
other than fiscal year claimed as deductions
2. Taxpayer has no annual during the year (mga
accounting period expense na bayad
3. Taxpayer does not keep books lang ang pwede iclaim
bilang deduction sa
4. Taxpayer is an individual
loob ng taon)
5. Taxpayer is a general professional
 Dependent on inflow
partnership
or outflow of cash
6. Taxpayer is an estate or a trust
Accrual  Gains and profits are
When is taxable income computed on the Method included in gross
basis of a short period? income when earned
1. Taxpayer, other than an individual, whether received or
not, (ang mga gain
changes his accounting period
isasama sa gross
from fiscal to calendar year or
income natapos mo
from calendar year to fiscal year or na yung service kahit
from one fiscal year to another hindi pa bayad)
2. Taxpayer dies  Expenses are allowed
3. Corporation is newly-organized as deductions in the
4. Corporation is dissolved period they are
5. Tax period is terminated by the incurred, although not
CIR by authority of law (kahit yet paid. (mga
kumpletp permit pero pag madumi expense ay allowed
yung place tatanggalin sa CIR) ideduct kapag may
natamo na kahit hindi
pa nababayaran)
 It is the right to receive
and not the actual
receipt that
METHODS OF ACCOUNTING
determines the
Accounting Recognition of Income inclusion of the
 amount in the gross  taxpayer is required to lump up all
income items of income earned during a
taxable period
 pay under a single set of income
Installment Method tax rates on these different types of
income
• Appropriate when collections of the  lahat ng income iintayin muna
proceeds of sales and incomes tsaka babayran ang tax
extend over relatively long periods of  sabay-sabay babayaran ito
time and there is strong possibility
 isusummarize lahat ng income to
that full collection will not be paid
set one taxable/ isang bayaran
(Angkop kapag ang mga koleksyon
2. Schedule tax System
ng mga nalikom sa mga benta at kita
 different tax treatments for different
ay umaabot sa medyo mahabang
types of income
panahon at may malaking posibilidad
na ang buong koleksyon ay hindi  separate tax return is required to
mababayaran) be filed for each type of income
• Seller recognizes the gross profit on  tax is computed on per return or
sale in proportion to the cash per schedule basis.
collected during the year.  Hinahati hati ito
3. Semi-Global or Semi-Schedular tax
System
Percentage of Completion  tax system which is either (a)
• Applicable in the case of a building, global or (b) schedular or (c) both
installation, or construction contract global and schedular may be
covering a period in excess of one year applied depending on the nature of
(Naaangkop sa kaso ng isang building, the income realized by the taxpayer
pag-install, o kontrata sa pagtatayo na during the year.
sumasaklaw sa isang panahon na  Nakadepende sayo kung semi
lampas sa isang taon) global o schedular kung kaya
• Gross income derived from such contract bayaran ng isang bultuhan okay
may be reported upon the basis of lang kung hindi mag schedular ka
percentage of completion Note: The Philippines has adopted the
semi-schedular or semi-global tax system.

What are the features of the Philippine

Income Tax systems?
What are the different kinds of income tax
systems? 1. It is a Direct Tax
1. Global Tax System
  Tax burden is borne by the
income recipient upon whom
Compensation Income
the tax is imposed
 Hindi ipapasa sa iba Four Fold Test (employer-emplyee
2. It is a Progressive Tax relationship )
 Tax rate increases as the tax 1. Selection & Engagement
base increases 2. Payment of Wages
 Tumataas yung tax kapag 3. Power of dismissal
tumatas din yung income 4. Power of control
3. It is Comprehensive
 Adopts citizenship principle, DEFINITION OF COMPENSATION
resident principle and the FOR INCOME TAX PURPOSES
source principle in imposing • All remuneration for services
income tax. performed by an employee for his
 Nakadepende yung tax based employer under an employer-
sa source employee relationship unless
Types of taxable Income specifically excluded by the Tax
Code. This includes the cash value of
1. Compensation Income – derived all remuneration paid in any medium
from rendering of services under other than cash.
an employer-employee
relationship NOTE:
2. Professional Income – fees • The name by which the
derived from engaging in an remuneration for services is
endeavor requiring special training designated is immaterial.
as professional as a means of
livelihood. • The basis upon which the
3. Business Income – gain or profits remuneration is paid is immaterial.
derived from rendering services, TEST TO DETERMINE WHETHER AN
selling merchandise, INCOME IS COMPENSATION OR NOT
manufacturing products, farming
and long-term contracts. • The test is whether such income is
4. Passive Income – Income in which received by virtue of an employer-
the taxpayer merely waits for the employee relationship.
amount to come in such as
Dividend income, interest income,
royalty income, winnings and Q: If the compensation is paid after
prizes, etc. separation, will it still form part of
5. Capital Gain- gain derived from compensation income?
dealings in capital assets
Yes. Remuneration for services • The employee should report as
constitutes compensation even if the income and pay the corresponding
employer-employee relationship no longer income taxes by allocating or
exists at the time when payment is made spreading his back wages,
between the person in whose employ the allowances and benefits thru the
services had been performed and the years from this separation up to the
individual who performed them final decision of the court awarding
the back wages.
Q: Are living allowances treated as
compensation income? Jan 1 2021 A employed
Oct 2021 File complaint
A: Generally, living allowances should be
DOLE
treated as income of the recipient.
However, if any amount thereof is paid
Backwages
directly by the employer and paid for the
Allowances
convenience of the latter, the excess of
Benefits
what the recipient employee would have
April 2022
ordinarily incurred for his own subsistence
Jan 1-Oct 2021 Short Term
is not taxable income but a business
expense of the employer. This exemplifies
Nov 1- April 2022 Short Term
the employer’s convenience rule

BACKWAGES, ALLOWANCES AND Jan 2020- March Either fiscal or

BENEFITS AWARDED IN LABOR 2021 Calendar
DISPUTE April 2021-Jan2022 Short Term

• Back wages, allowances and

benefits awarded in a labor dispute ITEMS NOT INCLUDED IN
constitute remuneration for services COMPENSATION INCOME
that would have been performed by 1. For agricultural labor paid entirely in
the employee in the year when products of the farm where the labor is
actually received or during the period performed; (not being paid by money but
of his dismissal from the service the product itself [seasonal employee])
which was subsequently ruled to be 2. For domestic service in a private home;
illegal. (kapag sa private home is 24hours yung
• Jacobe may trabaho sya sa Nissin trabaho/ the service render is exceed or
ng 8hours pero wala syang OT, SSS, more than the regular service/ private
PAGIBIG, Hazard pay kaya home lang)
nagcomplaint sya to seek all the OT, 3. For casual labor not in the course of the
SSS etc and damages. employer’s trade or business; (casual
labor-part time/temporary 1. No employer-
employee relationship 2. Only work DEFINITION OF PROFESSIONAL
certain period of time) INCOME
4. For services by a citizen or resident of • Professional income refers to fees
the Philippines for a foreign government received by a professional from the
or an international organization (NU AND practice of his profession provided that
WORLDHEALTH). (the exemption of there is NO employer-employee
resident/ because government cannot tax relationship between him and his clients.
other government) • It includes the fees derived from
engaging in an endeavor requiring
STATUTORY MINIMUM WAGE special training as a professional as a
• Compensation income falling within means of livelihood, which includes, but
the meaning of "statutory minimum is not limited to, the fees of CPAs,
wage" (SMW) under R.A. No. 9504 doctors, lawyers, engineers and the like
shall be exempt from income tax and
withholding tax. Q: Distinguish professional income from
• Kapag minimum wage exempted compensation income.
from income tax and withholding tax The existence or absence of an employer-
• Holiday pay, overtime pay, night shift employee relationship determines whether
differential pays, and hazard pay the income shall be treated as
earned by Minimum Wage Earner compensation income or professional
(MWE) shall likewise be covered by income. If there is an employer-employee
the above exemption, provided that relationship, then it is considered
an employee who receives/earns compensation income. Otherwise, it is
additional compensation in EXCESS considered professional income.
of the allowable statutory amount of  Kapag hindi nagboard or bar exam,
P30,000 shall NOT enjoy the hindi siya professional
privilege of being a MWE and,  Kapag may employer-employee
therefore, his/her entire earnings are relationship siya ay compensational
not exempt from income tax and income kapag wala naman edi
withholding tax. professional income pero need na
• Kapag yung wage mo na is 30,000 nagtake sya ng board exam or bar
you are not exempted from tax and
withholding tax

PROFESSIONAL INCOME INCOME FROM BUSINESS

DEFINITION OF BUSINESS INCOME the nature of the asset. For example, if
• Business income refers to gross real property is a capital asset, the gain
income derived from the sale of from the sale thereof shall be subject to
goods, properties or services. It may the final capital gains tax of 6%. If it is
come from the conduct of trade or an ordinary asset, any gain from the
business or the exercise of a sale thereof shall form part of the
profession or gains from dealings in ordinary income which shall be subject
property. either to graduated income tax rates (if
an individual) or corporate income tax
ENGAGED IN TRADE OR BUSINESS (if a corporation).
• There is no specific criterion as to
what constitutes "doing" or Passive Income - Refers to income
"engaging in" or "transacting" derived from any activity on which the
business. Each case must be judged taxpayer has no active participation or
in the light of its peculiar involvement.
environmental circumstances.
- Example: pension share of
• The term implies continuity of
stocks
commercial dealings and
- Walang ginagawa
arrangements and contemplates, to
- Any effort that is not passive
that extent, the performance of acts
income
or works or the exercise of some of
the functions normally incident to, Passive Incomes subject to Final tax
and in progressive prosecution of, under the NIRC (Section 24 (B))
commercial gain or for the purpose
1. Interests; (nilalagay sa bank)
and object of the business
2. Cash and/or property dividends;
organization.
(invest sa cooperative)
3. Royalties; and (out of the name
INCOME FROM DEALINGS IN
example franchising)
PROPERTY
4. Prizes and awards (walang
What gains from dealings in property are
mechanical act na ginagawa example
included in the “gross income”?
boto)
 Only gains derived from the sale or
exchange of property considered as
What is meant by “income subject to
ordinary assets.
final tax?” (2001 Bar)
• Income subject to final tax refers to
income wherein the tax due is fully
collected through the withholding tax
Q: What is the importance of knowing if system.
an asset/income is capital or ordinary
The tax treatment will vary depend on
 • The payor of the income withholds an overseas contract worker or a Filipino
the tax and remits it to the seaman and his/her spouse or dependent
government as a final settlement of who is a resident in the Philippines, 50%
the income tax due on said income. of the interest income from such bank
deposit shall be treated as exempt while
- Kada income na nareceive mo iba’t
the other 50% shall be subject to a FWT
iabng treatment
of 7.5%.
- Kapag hindi nakabayad – meron na
syang interest - 50% exempt at 50% Final
Withholding Tax (7.5%)
• The recipient is no longer required to
3. Interest Income from Long-term
include the item of income subjected
deposit or investment
to final tax as part of his gross
income in his income tax return. Recipient Tax rate
s
Interest Income - It is the amount of
RC/ Deposit held for:
compensation paid for the use of money NRC/ 1. Less than 3
or forbearance from such use. RA/NRA- years – 20%
- Pera lang lagi pinaguusapan ETB 2. 3 years to less
1. Interest on currency bank than 4 years –
12%
deposits, yield or other monetary
3. 4 years to less
benefits from deposit substitutes,
than 5 years –
trust funds & similar 5%
arrangements. 4. 5 years or more
Recipients Tax Rate - EXEMPT
RC/NRC/RA/NRA- 20% final tax
ETB NRA- 25% final tax
NRA-NETB 25% final tax NETB

2. Interest income under the Dividend Income - Any distribution made

Expanded Foreign Currency by corporation to its shareholders out of
Deposit System its earnings or profits and payable to its
shareholders, whether in money or other
Recipients Tax Rate property
RC/RA 7.5% final tax
NRC/NRA- Exempt - Kapag ang income galing sa share
ETB/NRA-NETB automatic dividend income na
Cash and/or property dividends may come
Note: Under Revenue Regulations No. 14- from:
2012, if a bank account that is jointly in • A domestic corporation or from a
the name of a non-resident citizen such as joint stock company, insurance or
 mutual fund companies and regional • If the recipient is a resident citizen, it
operating headquarters of shall be subject to the normal
multinational companies; graduated tax rates.
- Dito pwedeng makuha ang • If the recipient is a non-resident
dividend income ex. Mutual citizen or a resident alien, it shall be
funds subjected to the graduated rates for
dividend earned from sources within
• Share of an individual in the
the Philippines.
distributable net income after tax of
a partnership (except a GPP) of Royalty Income - It is the payment for the
which he is a partner; use and exhaustion of property such as
earnings from copyrights, patents,
• Share of an individual in the net
trademarks, formulas and natural
income after tax of an association, a
resources under lease.
joint account, or a joint venture or
consortium taxable as a corporation - You own that
of which he is a member or co- - Copyright (kapag ginamit need
venturer. bayaran)
- Patent (kapag nay kapareho pwedeng
- Filipino first policy – iaalok
idemanda)
muna sa kapwa Filipino, it
- Trademark or tradename (ex. Shells or
must be Filipino owner by 75%
jollibee)
• Tax on cash and/or property
Tax rates of other royalties (e.g. patents
dividends shall apply only on income
and franchises)
earned on or after January 1, 1998
subject to the following rates:
a. 6% beginning January 1, 1998;
b. 8% beginning January 1, 1999;
and Tax rates of royalties on books, literary
c. 10% beginning January 1, 2000. works and musical composition

Tax Rates of dividend Income

Prizes and winnings - Refers to the

amount of money in cash or in kind
Note: Cash and/or property dividends received by chance or through luck and
from a foreign corporation are generally taxable except those
mentioned under Section 32 (B) of the yun ang icocompute mo sa gross
NIRC. income
- When you won lotto (taxable) What is General Professional
Partnership?
- a partnership formed by professionals for
Tax rates on prizes (exceeding
the sole purpose of exercising their
P10,000.00) and winnings
common profession, no part of the income
of which is derived from engaging in any
trade or business.
- sole purpose is practice of profession
- Wala ng iba, yun lang
Income Taxation for General Professional -Exercise of common profession
Partnership
-Magkakasama
Section 26 - A general professional
partnership as such shall not be subject to -In the same field of profession
the income tax imposed under this General Professional Partnership are
Chapter. Persons engaging in business as NOT subject to income tax
partners in a general professional
partnership shall be liable for income tax - but they are required to file returns of
only in their separate and individual their income for the purpose of furnishing
capacities. information as to the share in the gains or
profits which each partner shall include in
For purposes of computing the distributive his individual return
share of the partners, the net income of
the partnership shall be computed in the • The distributive shares of individual
same manner as a corporation. partners in the net profit of a GPP is
taxable in the hands of the partners
Each partner shall report as gross income
his distributive share, actually or • It is the individual partners who shall
constructively received, in the income of be subject to income tax, and
the partnership. consequently, to withholding tax, in
their separate and individual
- Itatax on their individual capacities capacities
- Iba binabayaran ng firm at iba ang
binabayaran ng individual • Since the taxable income is in the
- Individual -PTR hands of the partner, the individual
- Firm - - business tax partner may still claim deductions
- Pagkatapos ng huli, tinitignan kung apart from the expenses claimed by
magkano hahatiin, tapos yung hinati the GPP.
 How much should be reported by the
ILLUSTRATION: partners in their individual ITR assuming
A and B formed a General Professional no profits were distributed to them?
Partnership under the style of A, B and Answer:
Associates engaged in the practice of Their respective shares in the net income
architectural design. Their profit and loss of P100, 000.
sharing ratios are: A, 70% and B, 30%. To A: 70%of P100, 000= P70, 000
To B, 30% of P100, 000 = P30, 000
During the year, the partnership made a
net income of P100, 000. Question No.4:
How much should the partners report in
Question No.1: their individual ITR assuming A received
Is the partnership subject to income tax? P5,000 and B P5,000 as partial
Why? distribution of their shares in the net
Answer: income of the partnership of P100, 000?
No. Under the Tax Code, a general Answer:
professional partnership is exempt from The answer is the same in 3rd because
income tax. the partners in a general professional
partnership are required to declare in their
Question No.2: ITR their respective shares whether
Is the partnership required to file an distributed or not in the net income of the
income tax return? partnership.
Answer:
Yes. Even if a general professional [ Ang format sa pagsasagot sa tanong ni
partnership is exempt from income tax, it Atty dito is “Yes/No. Legal basis (ex. Yung
is required under the Tax Code to file an tax code), because………”]
ITR because it serves as a check on the
partner’s share in the net income of the
partnership as reported by them in their
individual ITR and as a basis in the
examination by the BIR to determine the
correctness of such share as declared by
the partners.

Question No.3: