Taxation I under Atty. Bonilla

Cecille Carmela T. de los Reyes

Notes from Atty. Michael Ingles

CAPITAL VS. INCOME

Capital is a fund

Capital is wealth

Property is a tree, labor is a tree, capital is a

tree

A mere advance on the value of property of a

person or corporation in no sense constitutes

income as specified in the law. Such

advances constitutes and can be treated

merely as an increase in capital.

Stock dividends is not taxed as income

because it is merely inchoate as it is mere

anticipation of income. (receipt of a

representation of the increased value of the

assets of a corporation)

Income is flow

Income is service of wealth

Income is the fruits of the property, labor or

capital.

Income may be defined as the amount of

money coming to a person or corporation

within a specified time, whether as payment

for services, interest or profit from

investment.

Cash dividends is taxed income because it

has been realized (actual receipt of profits =

becomes income)

When dealing with money or property, the questions

you should ask are:

(1) Is this capital or is this income?

(2) Has it been realized or is it merely inchoate?

INCOME TAX (income

from capital asset)

Income tax is simply a tax on income, either

based on net or gross, realized during the

taxable year.

Income tax is a tax on yearly profits arising

from property, professions, trades or offices,

or as a tax on persons income, emoluments, profits and the like.

It is tax on income whether net or gross

realized in one taxable year. It is due on or

before the 15th of the 4

th month (April 15)

following the close of the taxpayers taxable year and is generally regarded as an excise tax levied

upon the right of a person or entity to receive

income or profits. (Mobil Philippines Inc. v. City

Treasurer of Manila)

ORDINARY INCOME

(income NOT from capital

asset)

Any gain from sale or exchange of property which

is not a capital asset or property described in

Sec. 39 A-1. Any gain from the sale or exchange

of property which is treated or considered, under

other provisions of this Title, as ordinary income shall be treated as gain from the sale or

exchange of property which is not capital asset.

Note: TAXABLE YEAR IN THE PHILIPPINES IS

EVERY APRIL 15 TO DECEMBER 31. J

Sec. 23: General Principles of Income Taxation in the Philippines

Except when otherwise provided in this Code:

[a] A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines.

[b] A non-resident citizen is taxable only on income derived from sources within the Philippines.

[c] An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only

on income derived from sources within the Philippinesprovided that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be

treated as an overseas contract worker;

[d] An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines

[e] A domestic corporation is taxable on all income derived from sources within and without the Philippines, and

[f] A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources

within the Philippines.

Who are taxed on income derived from all

sources whether within or outside the

Philippines? Taxed worldwide!

Resident CitizensDomestic

CorporationsThe other kinds of

taxpayers are subject to tax

only on income derived

from Philippine sources

Citizenship and Residency

Taxable Income

Inside PH Outside PH

Resident citizen

Non-resident citizen

Overseas Contract Worker

Resident alien

Non-resident alien

Domestic corporation

Foreign corporation

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

No

No

Yes

No

Sec. 32 [a]

GROSS INCOME

All income derived

from whatever source,

including but not

limited to:

Compensation for services

in whatever form paid

including but not limited to

fees, salaries, wages,

commissions and similar

items

Gross income from the

conduct of trade or business

or exercise of a profession

Gains derived from dealings

in property

Interests

Rents

Royalties

Dividends

Annuities

Prizes and winnings

Pensions

Partners distributive share from the net income of the

general professional

partnership

Gross Income presumed to include all income

The NIRC of gross income is presumed to include all

receipt of money or property unless excluded by a

specific provision of law or doctrine.

REASON: lifeblood theory

Withheld taxes are part of gross income unless

specifically allowed to be deductible

NS

EW

Exclusions of Gross Income:

Income received or earned but is not taxable because it is exempted

by law or treaty.

Rationale for the Exclusion:

Some receipts are excluded from gross income because they are

not income. Even if they are by definition income, the exclusions are

not subject to tax because of policy considerations such as to avoid

the effects of double taxation, or to provide incentives for certain

socially desirable activities.

Taxpayers who may avail of the exclusion:

All kinds of taxpayers, individual, estates and trusts and corporate,

whether citizens, aliens, whether residents or non-residents may

avail of the exclusions.

Classification of Exclusion:

Temporary Exclusion = exclusions from gross income which result

from a timing of recognition of income. These are income which are

deferred recognition for tax purposes.

Substantive Exclusion = receipts which are not considered as

income. They shall not be included in the income tax return and

there fore are exempt from income taxation.

Exclusion = refers to the flow of wealth to the taxpayer which are

not treated as part of gross income for purposes of computing the

taxpayers taxable income because it is exempted by the fundamental law by statutes and it does not come within the

definitions of income.

Life

Insurance

Proceeds

EXCLUSIONS TO GROSS INCOME UNDER THE

NATIONAL INTERNAL REVENUE CODE OF 1997

Life insurance is the insurance on human life and

insurance appertaining thereto or connected

therewith. An insurance upon life may be payable on

the death of the person, or on his surviving a

specified period, or otherwise contingently on the

continuance or cessation of life

Conditions for exclusions from gross income of life

insurance proceeds:

(a) the proceeds of life insurance policies

(b) paid to the heirs or beneficiaries

[c] upon the death of the insured

[d] whether in a single sum or otherwise

Reason for exclusion:

Proceeds of life insurance are excluded from gross

income because they partake more of indemnity or

compensation rather than gain to the recipient

Life insurance proceeds serve the same purpose as

nontaxable inheritance

Instances where the life insurance proceeds are not excluded from gross income:

Where the insurance policy is used to secure a money obligation

Where the life insurance policy was transferred for a valuable consideration

The recipient of the insurance proceeds is a business partner of the deceased and the

insurance was taken to compensate the partner-beneficiary to any loss income that may

result as the death of the insured partner

The recipient of the insurance proceeds is a partnership in which the insured is a partner

and the insurance was taken to compensate the partnership for any loss in income that

may result from the dissolution of the partnership caused by the death of the insured

partner

The recipient of the insurance proceeds is a corporation in which the insured was an

employee or officer.

Amount

Received by

Insured as

Return of

Premium

Conditions for exclusions from gross income:

The amount received by the insured

As a return of premiums paid by him

Under life insurance, endowment or annuity

contracts

Either:

1. during the term

2. at the maturity of the term mentioned in the

contract

3. upon surrender of the contract

Reason for the exclusion:

The amounts returned are not income but return of

capital. They represent earnings which were

previously taxed

Interest or earnings of premiums returned

included in gross income:

The interests or earnings are income, not return of

capital

Endowment:

The insurer agrees to pay a sum

certain to the insured if he outlives a

designated period. If he dies before

the date, the proceeds are to be

paid to the designated beneficiary

Tax Treatment of Proceeds Received under

Endowment Policies

(a) If the insured dies and the beneficiary

receives the life insurance proceeds, these are

not taxable income because they are excluded

from the gross income.

(b) if the insured does not die and survives the

designated period, the amount pertaining to the

premiums he paid are excluded from gross

income, but the excess shall be considered part

of his gross income

Gifts,

Bequests

and

Devises

Property received as a gift or received under a will

or testament, or through legal succession is exempt

from income tax although the income therefrom or

income derived from its investment, sale or

otherwise is not.

An amount of principal paid under a marriage

settlement is a gift. Neither alimony nor an

allowance based on separation agreement is

taxable income.

Reason for exclusion:

The property is subject to donors or estates taxes as the case may

be. Furthermore, there is no

income.

Gifts, bequests and devises included

in the gross income:

a. Income from such property acquired

by gift, bequest, devise or descent

b. As well as gift, bequest, device or

descent of income from any property, in

case of transfers of divided interest shall

be included in gross income

Gift = a gift of personal property transmitted through will

Devise = a gift of real property by will

Descent = strictly speaking the intestate transfer of real

property to the heirs of a decedent compared with the

term distribution which is used in relation to the intestate

transfer or personal property to the heirs

Gift = any transfer not in the ordinary course of

business which is not made for full and adequate

consideration in money or moneys worthCompensation vs. Gift

If the payment is intended to represent payment,

whether designated as compensation or otherwise,

for services rendered either in the past, present or

future; the amount received will be taxable income to

the recipient.

If the payment made are made to show goodwill or a

mere kindness towards the recipients and are not

intended as a recompense for services rendered, then

the payments represent gifts and should be exempt.

Compensation

for Injuries or

Sickness

Amounts received, through accident

or health insurance or Workmens Compensation Acts as compensation

for personal injuries or sickness plus

the amounts of any damages

received, whether by suit or by

agreement on account of such

injuries or sickness.

Reason for exclusion of damages

They are mere compensation for

injuries or sickness suffered and not

income. The legal theory of personal

injury damages is that the amount

received is intended to make the

plaintiff whole as before the injury.

There is need to exclude the

compensation so as to restore the

injured party whole as before the injury.

Two kinds of compensation that may

be excluded from gross income

1. Amounts received through accident

or health insurance or workmens compensation actsas compensation

for personal injuries or sickness

2. Amounts of any damages received

whetherby suit, agreement, on account of or resulting from such

injuries or sickness

Income Exempt

Under Treaty

Income exempt under treaty from

gross income

Income of any kind to the extent

required by any treaty obligation

binding upon the Government of the

Philippines. Although this is income, it

is included from gross income by

reason of public policy.

Reason for the exclusion

Public policy recognizes the principle of

reciprocity and comity among nations

as reasons behind the exclusion.

Retirement

Benefits,

Pensions,

Gratuities, etc.

Retirement benefits, gratuities, pensions excluded

from gross income

Retirement benefits received under RA 7641 (Retirement

Pay Law)

Retirement received from reasonable private benefit plan

after compliance with certain conditions

Amounts received for beyond control separation

Foreign securities, retirement gratuities, pensions

USVA benefits

SSS benefits

GSIS benefits

Conditions for excluding retirement benefits from

gross income

Retirement benefits

Received under RA 7641

Received by officials and employees of private firms,

whether individual or corporate in accordance with

reasonable private benefit plan maintained by the

employer, provided that Retiring official or employee has been [a] in the service

of the same employer for at least ten years [b] not less

than 50 years at time of retirement [c] the benefits

granted under this subparagraph shall be availed of by

an official employee only once

Miscellaneous

Items

Income derived by the foreign government

Income derived by foreign governments that

are excluded from gross income

Income derived by the government or its

political subdivision that are excluded from

gross income

Prizes and awards

Prizes and awards in sports competition

13th Month Pay and other benefits

GSIS, SSS, Medicare and other Contributions

Gains from Sale of Bonds, Debentures, or

other Certificates of Indebtedness

Gains from Redemption of Shares in Mutual

Fund

NS

EW

INCOME

ACCORDING TO

SOURCE

Income from

sources within

the Philippines

Gross

Income

Interests

Dividends

Services

Rentals and

Royalties

Sale of Real and

Personal

Property

Interests derived from sources within the

Philippines, and interests on bonds, notes

or other interest-bearing obligation of

residents, corporate or otherwise.

The amount received as dividends:

(1) from a domestic corporation

(2) from a foreign corporation, unless less than 50%

of the gross income for the 3-year period ending

with the close of its taxable year

Compensation for labor or service

performed in the Philippines

Use of any copyright, patent, design, model, plan,

secret formula or process, goodwill, trademark,

trade brand x x x et al

Use of/ right to use any industrial, commercial or

scientific equipment

Supply of scientific, technical, industrial or

commercial knowledge or information

Supply of services by a nonresident person or his

employee in connection with the use of property

or rights belong to, or the installation or operation

of an brand, machinery or other apparatus

purchased from such nonresident person

Technical advice, assistance or services rendered

in connection with technical management or

administration of any scientific, industrial or

commercial undertaking, venture, project or

scheme;

The use of, or the right to use: motion picture

films, films or video tapes for use in connection

with television, tapes for use in connection with

radio broadcasting

Gains, profits and income from sale of real or

personal property

Taxable

Income

General Rule Exception

There shall be deducted the expenses,

losses and other deductions properly

allocated thereto and a ratable part of

expenses, interests, losses and other

deductions effectively connected with the

business or trade conducted exclusively

within the Philippines which cannot be

allocated to some items or class of gross

income:

Provided, that such items of deductions

shall be allowed only if fully substantiated

by all the information necessary for its

calculation.

No deductions for interest paid or incurred

abroad shall be allowed from the item of

gross income specified in subsection A

unless indebtedness was actually incurred

to provide funds for use in connection with

the conduct or operation of trade or

business in the Philippines.

INCOME

ACCORDING TO

SOURCE

Income from

sources without

the Philippines

Gross

Income

Interests other than those

derived from sources

within the Philippines

Dividends other than

those derived from

sources within the

Philippines

Compensation for labor or

personal services

performed without the

Philippines

Rentals or royalties from

properties located without

the Philippines

Gains, profits and income

from the sale of real

property located without

the Philippines

Taxable

Income

There shall be deducted the expenses, losses

and other deductions properly apportioned or

allocated thereto and a ratable part of any

expense, lsoss or other deduction which

cannot definitely be allocated to some items or

classes of gross income.

The remainder if any shall be treated as a full

taxable income from sources without the

Philippines.

NS

EW

Income from

sources PARTLY

within and

without the

Philippines

Where items of gross income are separately

allocated to sources within the Philippines,

there shall be deducted (for the purpose of

computing the taxable income therefrom)

the expenses, losses and other deductions

properly apportioned or allocated thereto

and a ratable part of other expenses, losses

or other deductions which cannot definitely

be allocated to some items or classes of

gross income.

NS

EW

Sec. 22 (F) The term resident alien means an individual whose residence is

within the Philippines and who is not a

citizen thereof.

Resident alien is

an individual:

Whose residence is

within the Philippines

(stays in the PH)

Who is not a citizen

(alien)

Must be actually present

in the Philippines for

more than 12 months

from his arrival.

Garrison v. CA: Mere physical body presence

is enough and not the intention to make the

country ones abode.

An alien actually present in the Philippines

who is not a mere transient or sojourner is a

resident of the Philippines for purposes of

income tax. Whether he is a transient or not is

determined by his intentions with regard to the

length and nature of his stay.

If he lives in the Philippines and has no

definite intention as to his stay, he is a

resident. One who comes to the Philippines

for a definite purpose which in its nature may

be promptly accomplished is a transient

Indefinite stay = resident

Definite stay = transient

Definite stay + extended stay = he

becomes a resident

RESIDENT ALIENS

NON-RESIDENT

CITIZENS

SEC. 22. [E] The term nonresident means:

A citizen of the Philippines who establishes to the satisfaction of the Commissioner

the fact of his physical presence abroad with a definite intention to reside therein.

A citizen of the Philippines who leaves the country during the taxable year to

reside abroad, either as an immigrant or for employment on a permanent basis.

A citizen of the Philippines who 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.

A citizen who has been previously considered as nonresident citizen and who

arrives in the Philippines at any time during the taxable year to reside permanently

in the PH shall likewise be treated as a non-resident citizen for the taxable year in

which he arrives in the Philippines with respect to his income derived from sources

abroad until the date of his arrival in the Philippines.

The taxpayer shall submit proof to the Commissioner to show his intention of

leaving the PH to reside permanently abroad or to return to and reside in the PH

as the case may be for the purpose of this section.

Meaning of Non-

Resident Citizen

Citizen who establishes to the satisfaction of the

Commissioner the fact of his physical presence abroad

with a definite intention to reside therein

Citizens who leaves the PH during the taxable year to

reside abroad, either as an immigrant for employment

on a permanent basis

Citizen who works and derives from abroad whose

employment thereat requires him to be physically

present abroad most of the time during the taxable

year

Citizen who has been previously considered as non-

resident citizen and who arrives in the PH at any time

during the taxable year to reside permanently in the PH

shall likewise be treated as a non-resident citizen for

the taxable year in which he arrives in the PH with

respect to his income derived from sources abroad

until the date of his arrival in the PH.

Who Are Non-Resident

Citizens? RR 1-79

Immigrant = one who leaves the

PH to reside abroad as an

immigrant for which a foreign visa

has been secured

Permanent employee = one who

leaves the PH to reside abroad

for employment on a more or less

permanent basis

Contract worker = one who

leaves the PH on account of a

contract of employment which is

renewed from time to time under

such circumstance as to require

him to be physically present

abroad most of the time.

Non-resident citizens who are exempt from tax with respect

to income derived from sources outside the PH shall no

longer be required to file information returns from sources

outside the PH beginning 2001. (RR-5-2001)

The phrase most of the time re: contract worker shall mean that the said citizen shall have stayed abroad for at

least 183 days in a taxable year. (Within 183 days and more

= not taxable)

The same exception applies to an overseas contract worker

but as such worker, the time spent abroad is not material for

tax exemption purposes. All that is required is for the

workers employment contract to pass through and be registered with the POEA. (BIR Ruling 33-2000).

NON-RESIDENT

ALIENS

SEC. 22 (G). The term non-resident alien means an individual whose residence is not within the

Philippines and who is not a citizen thereof.

Who are non-

resident aliens?

An individual whose

residence is not within

the PH

Not a citizen of the

Philippines

Alien can either be:

1. Deriving income in the PH

2. Stays in the PH for more than

180 days during any calendar year

(deemed to be a non-resident

alien engaged in the PH)

Loss of residence by

alien:

An alien who has acquired residence in

the Philippines retains his status until he

abandons the same and actually departs

from the Philippines.

A mere intention to change his residence

does not change his status. An alien who

has acquired a residence is taxable as a

resident for the remainder of his stay in

the Philippines (Sec. 6, RR-2)

Title II Chapter I Definitions.vsdPage-1Capital v. IncomeGen PrinciplesGross IncomeExclusions from Gross IncomeIncome within the PHIncome without the PHIncome from sources partly within and without PHResident AliensNon-Resident CitizensNon-Resident Aliens