Ch3 - Introduction to Income Taxation

Income

is regarded as the best measure of taxpayers' anility to pay tax

Gross income

The tax concept of income is simply referred to as _____________ under the NIRC

Item of gross income or inclusion in gross income

A taxable item of income is referred to as an _________________ or _________________ under the NIRC

Taxable income

refers to certain items of gross income less deductions and personal exemptions allowable by law

Gross income

is broadly defined as any inflow of wealth to the taxpayer from whatever source, legal or illegal, that increases net worth.

1 Is a return on capital that increases net worth

2 Is a realized benefit

3 Not exempted by law, contract, or treaty

Elements of Gross Income (3)

Capital

means any wealth or property

False, Gross income

True/False

Capital is a return on wealth or property that increases the taxpayer's net worth

True

True/False

Return on Capital is taxable

True

True/False

Return of capital is not taxable

False, return of capital

True/False

Anything received as compensation for the loss of capital items deemed with infinite value is deemed a return on capital.

False, exempt from income tax

True/False

The value of life is immeasurable by money. Proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured, however, whether in a single sum or otherwise, are subject to income tax.

1 Excess amount received over premiums paid

2 Gain realized by the insured from the assignment or sale of policy

3 Interest income from the unpaid balance of the proceeds of the policy

4 Excess of proceeds received over the acquisition costs and premium payments

The following are taxable return on capital from insurance policies: (4)

False, return of capital

True/False

Any compensation received in consideration for the loss of health such as compensation for personal injuries or tortuous acts is deemed a return on capital

True

True/False

Any indemnity received as compensation for impairment of human reputation is deemed a return of capital exempt from income tax

False, return on capital

True/False

The loss of capital results in decrease in net worth while the loss of profits does not decrease net worth. Therefore, the recovery of lost profits is a return of capital.

Benefit

means any form of advantage derived by the taxpayer

False, not a benefit, not taxable

True/False

Receipt of a loan is taxable

True, the finder has an obligation to return the same to the owner

True/False

Discovery of lost properties is not taxable

True

True/False

Receipt of money or property to be held in trust for, or to be remitted to another person is not taxable

False, only that portion is a benefit

True/False

If the taxpayer is entitled to keep for his account portion of a receipt, the receipt in its entirety is subject to income tax.

Earned

The term realized means ___________

1 There must be an exchange transaction

2 The transaction involves another entity

3 It increases the net worth of the recipient

Requisites of a realized benefit

Bilateral transfers or exchanges

are referred to as onerous transactions (e.g. sale, barter)

Unilateral transfers

are referred to as gratuitous transactions (e.g. succession, donation)

True

True/False

Benefits derived from onerous transactions are "earned or realized"; hence, they are subject to income tax.

False, transfer tax

True/False

Benefits derived from gratuitous transactions are subject to income tax.

Complex transfers

are partly gratuitous and partly onerous

Transfers for less than full and adequate consideration

Complex transactions are commonly referred to as ___________

Natural persons

are living persons

Juridical persons

are persons created by law

False, taxable since made between separate entities

True/False

Gains or income derived between relatives, corporations, and between a partner and the partnership are not taxable

True, they pertain to one and the same taxable entity

True/False

Sales of a home office to its branch office are not taxable

True

True/False

The increase in wealth of the taxpayer in the form of appreciation or increase in the value of his properties or decrease in the value of his obligations in the absence of a sale or barter transaction is not taxable

Unrealized gains or holding gains

gains that have not yet materialized in an exchange transaction

False, does not cause a loss of capital

True/False

The rendering of services for a consideration is an exchange and causes a loss of capital

FV of the property received

Income received in non-cash considerations is taxable at the _____________________________

Actual receipt

involves actual physical taking of the income in the form of cash or property

Constructive receipt

involves no actual physical taking of the income but the taxpayer is effectively benefited

True

True/False

The inflow of wealth to a person that does not increase his net worth is not income due to the total absence of benefit

True

True/False

The proceeds of embezzlement or swindling where money is taken without an original intention to return are considered as income because of the increase in net worth of the swindler

Constitution, law, contracts or treaties from taxation

An item of gross income is not exempted by the __________________ (4)

1 Citizen

a Resident Citizen

b Non-resident Citizen

2 Alien

a Resident Alien

b Non-resident Alien

- engaged in trade or business

- not engaged in trade or business

Types of Income Taxpayers (Individuals)

1 Domestic Corporation

2 Foreign Corporation

a Resident Foreign Corporation

b Non-resident Foreign Corporation

Types of Income Taxpayers (Corporations)

AMEN

1 Citizens at the time of Adoption of the Constitution (Feb 2, 1987)

2 Fathers or Mothers are citizens of the Philippines

3 Born before Jan 17, 1973 of Filipino mothers who Elected Filipino citizenship upon reaching the age of maturity

4 Those who are Naturalized in accordance with the law

Under the constitution, citizens are: (4)

Resident Citizen

a Filipino Citizen residing in the Philippines

Non-resident Citizen

A citizen of the Philippines who:

-establishes the fact of his physical presence abroad with a definite intention to reside within

-leaves the PH during a taxable year to reside abroad

-works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year

-has been previously considered as non-resident citizen and who arrives in the Philippines at anytime during the taxable year to reside permanently in the PH

False, not

True/False

Filipinos working in Philippine embassies or Philippine consulate offices are considered non-resident citizens

Resident alien

an individual who is residing in the Philippines but is not a citizen thereof

Non-resident alien

an individual who is not residing in the Philippines and who is not a citizen thereof

Non-resident aliens engaged in business (NRA-ETB)

aliens who stayed in the Philippines for an aggregate period of more than 180 days during the year

Non-resident aliens not engaged in business (NRA-NETB)

aliens who come to the PH for a definite purpose which in its nature may be promptly accomplished or those who stay therein for an aggregate period of not more than 180 days during the year

False, bali

True/False

Documents purporting a long-term stay such as immigration visa or working visa for an extended period shall not result in the reclassification of the taxpayer's normal residency. Documents purporting short term stay such as tourist visa would result in the automatic reclassification of the taxpayer's residency

False, non-resident

True/False

Citizens staying abroad for a period of at least 183 days are still considered resident

True

True/False

Aliens who stayed in the Philippines for more than 1 year as of the end of the taxable year are considered resident

True

True/False

Aliens who are staying in the Philippines for not more than 1 year but not more then 180 days are deemed non-resident aliens engaged in business

False, not engaged

True/False

Aliens who stayed in the Philippines for not more than 180 days are considered non-resident aliens engaged in business

Estate

refers to the properties, rights, and obligations of a deceased person not extinguished by his death

False, treated as individual taxpayer

True/False

Estates under judicial settlement are exempt entities.

True, income is taxable to the heirs

True/False

Estates under extrajudicial settlement are exempt entities.

Trust

is an arrangement whereby one person (grantor or trustor) transfers property to another person (beneficiary), which will be held under the management of a third party (trustee or fiduciary)

True

True/False

A trust that is irrevocably designated by the grantor is treated in taxation as if it is an individual taxpayer

True, the income of the properties held under revocable trusts is taxable to the grantor not to the trust

True/False

Trusts that are designated as revocable by the grantor are not taxable entities and are not considered as individual taxpayers.

revocable

When the trust agreement is silent as to revocability of the trust, the trust is presumed to be ____________________

False, way labot GPP and joint ventures for construction

True/False

The term 'corporation' shall include OPCs, partnerships, joint stock companies, joint accounts, association, insurance companies, 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 service contract with the government.

Domestic Corporation

is a corporation that is organized in accordance with Philippine laws

True

True/False

Domestic corporation includes OPCs owned and registered by resident citizens in the Philippines

Foreign Corporation

is a corporation organized under a foreign law

Resident foreign corporation (RFC)

a foreign corporation which operates and conducts business in the Philippines through a permanent establishment

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

One person corporation

is a corporation with a single stockholder who may be a natural person, trust, or an estate

Partnership

a business organization owned by two or more persons who contribute their industry or resources to a common fund for the purpose of dividing the profits from the venture

General professional partnership (GPP)

a partnership formed by persons for the sole purpose of exercising a common profession, no part of the income of which is derived from engaging in any trade or business

False, the GPP is exempt from income tax but the partners are taxable in their individual capacity with their respect to their share in the income of the partnership

True/False

A GPP and its partners are exempt from tax

Business partnership

is a partnership formed for profit

True

True/False

A business partnership is taxable as a corporation

Joint venture

is a business undertaking for a particular purpose

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

True

True/False

Similar to a GPP, exempt joint ventures are tax-exempt on its regular income, but their venturers are taxable to their share in the net income of the joint venture

True

True/False

All other joint ventures are taxable as corporations

Co-ownership

is joint ownership of a property formed for the purpose of preserving the same and/or dividing its income

False, not taxable

True/False

A co-ownership that is limited to property preservation or income collection is a taxable entity

Situs of income

the place of taxation of income

Debtor's residence

Situs of interest income

Where the intangible is employed

Situs of royalties

Location of the property

Situs of rent income

Place where the service is rendered

Situs of service income

Presumed earned within the Philippines

Situs of domestic securities

Earned in the place where the property is sold

Situs of other personal properties

Earned where the property is located

Situs of real property

Presumed earned within

Situs of domestic corporation

if ratio is at least 50%, portion of the dividend corresponding to PH gross income ration is earned within

if ratio is less than 50%, entire dividend received is deemed earned abroad

Situs of foreign corporation

Earned where the property is sold

Situs of merchandising income

Earned where the goods are manufactured and sold

Situs of manufacturing income