INTRODUCTION TO INCOME TAXATION

Atty. Angelo Andro M. Suan, CPA, MBA

Gross Income – any inflows of wealth to the taxpayer from whatever source, legal or
illegal, that increases net worth.

ELEMENTS OF GROSS INCOME:

1. Return on Capital that increases net worth
2. Realized Benefit
3. Not exempted by law, constitution or treaty

Anything received as compensation for loss of Capital Items that have INFINITE
VALUES AND ARE INCAPABLE OF PECUNIARY VALUATION, are RETURN OF
CAPITAL.

CAPITAL ITEMS THAT HAVE INFINITE VALUES:

1. Life (except for any excess over premiums paid, gains realized from assignment
or sale of insurance policy, interest income on unpaid balance of proceeds)
2. Health
3. Human Reputation

RECOVERY OF LOST CAPITAL VS. RECOVERY OF LOST PROFITS:

The loss of capital results in decrease in net worth while the loss of profits does
not decrease net worth. The recovery of lost capital merely maintains net worth while
the recovery of lost profits increases wealth, thus, the recovery of lost profits is a
return on capital.

Example: Proceeds of crop/livestock insurance.

CONCEPT OF REALIZED:

Term realized means earned. It requires a degree of undertaking or sacrifice

from the taxpayer to be entitled of the benefit.

REQUISITES OF REALIZED BENEFIT:

1. Exchange transaction (bilateral or onerous, not unilateral or gratuitous)

2. Transaction involves another entity
3. Increases net worth of the recipient

EXAMPLES OF INFLOW OF WEALTH WITHOUT INCREASE IN NET WORTH

1. Receipt of property in trust
2. Borrowing of money under loan agreement

TYPES OF TAXPAYERS
1. Individual
2. Corporations

INDIVIDUAL TAXPAYERS
1. RC – Within and Without
2. NRC – at least 183 days abroad

General Principles. Introduction to Income Tax. Introduction to Regular Income Tax

 3. RA – more than 1 year in Philippines
4. NRA
a) ETB – more than 180 days in Philippines
b) NETB
5. Estates settled judicially
6. Irrevocable Trusts
Note: if silent, trusts are presumed to be revocable.

CORPORATION
1. DC – Within and Without (organized under Philippine Laws, even if controlled
by Foreigners)
2. RFC
3. NRFC

OTHER CORPORATE TAXPAYERS

1. One person corporation

2. Partnership (GPP as exempt)
3. Joint Venture (JV engaged in (PCGO) Petroleum, Coal, Geothermal, Other
energy operations)
4. Co-ownership

SITUS OF TAXATION

1. Interest Income – Debtors’ Residence

2. Royalties – Where intangible is employed
3. Rent Income – Location of Property
4. Service income – Place where service is rendered
5. Domestic securities – presumed earned within Philippines
6. Other personal properties – place where property is sold

Distinction on the 3 inherent powers of the state

Taxation Police Power Eminent Domain

Purpose
To raise revenue To promote public purpose To facilitate the State’s need
through regulations of property for public use

Amount of Exaction

No limit Limited based on the No exaction but private

regulation property is taken

Benefit Received
No special or direct benefit is No special or direct benefit is A direct benefit resulting from
received by the payor, merely received by the payor; an the payment of just
results to a general benefit of economic standard of society compensation to the property
protection is attained owner

Non-impairment of Contracts
Contracts may not be Contracts may be impaired Contracts may be impaired
impaired

Transfer of Property Rights

General Principles. Introduction to Income Tax. Introduction to Regular Income Tax

 Taxes paid become part of No transfer but only restraint Transfer is effected in favor
public funds in its exercise of the State

Scope
All persons, property and All persons, property, Only upon a particular
excises rights and privileges property

Systems of Taxation

Global System Schedular System

A system employed where the tax system A system employed where the income tax
views Indifferently the tax base and treatment varies and is made to depend on
generally treats in common all categories the kind or category of taxable income of the
of taxable income of the individual. taxpayer.
A system which taxes all categories of A system which itemizes the
income except certain passive different incomes and provides for varied
incomes and capital gains. It prescribes percentages of taxes, to be applied thereto.
a unitary but progressive rate for the
taxable aggregate incomes and flat rates
for certain passive incomes derived by
individuals.

INTRODUCTION TO REGULAR INCOME TAX

Income may be subjected either to:

1. Regular Income Tax

2. Final Tax (mostly for Passive Income) – withholding tax
3. Capital Gains Tax (For Capital Assets and Shares of Stocks)

Income Tax
Type Form Deadline
ANNUAL INCOME TAX
Individual:
1. Purely Employed
(note: substituted 1700 April 15 following the
filing) close of taxable year

2. Business/Profession 1701A
(for corporation using
3. Mixed Income fiscal year – 15 days
Earner/Estates and 1701 after the close of the
Trusts quarter following the
Corporation: 1702 close of taxable year)
QUARTERLY INCOME TAX
Individual: 1701Q 45 days after the close
of taxable quarter

Corporation: 1702Q 60 days after the close

of taxable quarter
General Principles. Introduction to Income Tax. Introduction to Regular Income Tax
INDIVIDUAL INCOME:
1. Compensation Income (under Employer-Employee relationship)
2. Business Income/Professional Income
3. Mixed Income Earner

Compensation Income (under Employer-Employee relationship)

Elements of Employer-Employee relationship: 4 fold test.

1. Selection (Hiring)
2. Removal (Firing)
3. Payment of wages/salary
4. Control

Optional 8% Income Tax

- For (SEP) Self Employed and/or Professional can opt to be taxed at 8%
based on Gross Sales/Receipt and other non operating income.
- 8% shall be in lieu of Progressive Income Tax and Percentage Tax (1% under
create law)

Corporate Income Tax (originally 30%)

 20% for domestic corporations with net taxable income not exceeding PHP5
million and with total assets (excluding land where the business entity’s
office, plant and equipment are situated) not exceeding PHP100 million.

 25% for all other domestic corporations and resident foreign corporations.

General Principles. Introduction to Income Tax. Introduction to Regular Income Tax