Ch.3A Introduction to Income Tax Flashcards
Why is income subject to tax?
Because income is the best measure of taxpayer’s ability to pay tax. It is an excellent object of taxation in the allocation of government costs
Under the NIRC, the tax concept of income is simply referred to as
Gross Income
A taxable item of income is referred to as an
“item of gross income” or “inclusion in gross income”
In layman’s term gross income simply means
Taxable Income
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 of the taxpayer from whatever source, legal or illegal, that increases net worth
What are the elements of gross income
- It is a return on capital that increases net worth
- It is a realized benefit
- It is not exempted by law, contract, or treaty
Define Return on Capital
Return on capital or gross income is a return on wealth or property that increases the taxpayer’s net worth, and is subject to income tax
Difference of Return on Capital and Return of Capital
Return of Capital merely maintains your net worth, hence, is not subject to income tax. Return on capital is the increase of net worth and is subject to income tax
What are the capital items that are deemed with infinite value?
- Life
- Health
- Human Reputation
Define capital items with infinite value
Capital items with infinite value are incapable of pecuniary valuation. Anything received as compensation for their loss is deemed a return OF capital
Are the compensations received from loss of life, health or human reputation taxable?
No, it is not taxable but exemptions apply when a person receive benefits excess of return of capital
Difference between recovery of lost capital vs recovery of lost profits
The loss of capital results in decrease in net worth while the loss of profit does not decrease net worth. Recovery of lost capital merely maintains net worth, while recovery of lost profits increases net worth. Therefore, the recovery of loss profits sis a return of capital.
Are the recovery of lost profits through insurance, indemnity contracts or legal suits as given on the examples on the book (p.65-66) constitutes a taxable return on capital? and why?
Yes, since it’s not a lost capital, but rather a recovery of loss profit. It is an income that is just realized in a different manner, so it is still taxable.
What does the term “benefit” mean?
The term means any form of advantage derived by the taxpayer.
When can we say that there is a benefit?
There is a benefit when there is an increase in the net worth of the taxpayer. An increase in net worth occurs when one receives income, donation or inheritance.
Is a receipt of loan taxable?
No, even though properties or assets increase, your obligation also increase resulting in an offsetting effect in net worth
The term realized means?
Earned
Explain the realized concept
It requires that there is a degree of undertaking or sacrifice from the taxpayer to be entitled of the benefit
Requisites of a realized benefit
- There must be an exchange transaction
- The transaction involves another entity
- It increases the net worth of the recipient
What are the types of transfers?
- Bilateral transfers or exchanges
- Unilateral Transfers
- Complex Transactions
Bilateral transfers or exchanges are also referred to as?
Onerous Transactions
Unilateral Transactions are also referred to as?
Gratuitous Transactions
Under current usage, unilateral transfers are simply referred to as “__________” while bilateral transfers are called “_________”
Unilateral Transfers - Transfers;
Bilateral Transfers - Exchanges;
Benefits derived from bilateral transfers are subject to?
Income tax
Benefits derived from unilateral transfers are subject to?
Transfer Tax
What are complex transactions?
These are partly gratuitous and partly onerous. Commonly referred to as “transfers for less than full and adequate transaction.” The gratuitous portion is subject to transfer tax while the benefit from the onerous portion is subject to income tax
What is meant by another entity
Every person, natural or juridical, is an entity. Gains or income derived between relatives, corporations, and between a partner and the partnership are taxable since it is made between separate entities.
What is a natural person
Natural persons are the living people
What is a juridical person
Juridical persons are those created by law such as partnerships and corporations
A taxable item of gross income arises from?
transactions which involve another natural or juridical entity
Are 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 taxable?
No, it is not. These are referred to as unrealized gains or holding gains because they have not yet materialized in an exchange transaction.
Explain the basis of exemption of unrealized income
Income realized in non-cash properties are, in-effect, received in cash but the taxpayer used the same to acquire the non-cash property. Income received in non-cash considerations is taxable at the fair value of the property received. (Basically, if an exchange happens using non-cash considerations, we use the FV to get the taxable portion. We treat the FV of the non-cash property as the cash paid in the exchange)
What are the mode of receipt/realization benefits
- Actual Receipt
- Constructive Receipt
Explain to me actual receipt
Actual receipt involves actual physical taking of the income in the form of cash or property
Explain to me constructive receipt
Constructive receive involves no actual physical taking of the income but the taxpayer is effectively benefited
Are inflows of wealth without increase in net worth an income?
They are not income due to the total absence of benefit
What are the types of income taxpayers?
- Individuals (Citizen, Alien, Taxable estates and trusts)
- Corporations (Domestic and Foreign Corps)
Under the constitution, citizens are:
- Those who are citizens of the Philippines at the time of adoption of the Constitution on February 2, 1987
- Those whose fathers or mothers are citizens of the Philippines
- Those born before January 17, 1973 of Filipino mothers who elected Filipino citizenship upon reaching the age of majority
- Those who are naturalized in accordance with the law
What are the classification of citizens
- Resident Citizen
- Non-resident Citizen
What is a resident citizen?
A Filipino Citizen residing in the Philippines
Non-resident citizen includes:
- Citizen of Philippines who has a definite intention to reside abroad
- Citizen of Philippines who left during taxable year to reside abroad, either as an immigrant or for an employment on a permanent basis
- A citizen of the Philippines who works and derives income from abroad and whose employment requires him to be present abroad most of the taxable year
- A former non-resident citizen who arrives in the Philippines will be treated as a non-resident citizen for the current taxable year with respect to his income derived from abroad until the date of his arrival to the Philippines
Classifications of an alien
- Resident Alien
- Non-resident alien
What is an resident alien
an individual who is residing in the Philippines but is not citizen thereof. An alien who has acquired residence in the Philippines retains his status as such until he abandons the same or actually departs from the Philippines
What is a non-resident alien
an individual who is not residing in the Philippines and who is not a citizen thereof
What are the types of a non-resident alien
- Non-resident aliens engaged in business
- Non-resident aliens not engaged in business
Explain what is non-resident aliens engaged in business
aliens who stayed in the Philippines for an aggregate period of more than 180 days during the year (NRA-ETB)
Explain what is non-resident aliens not engaged in business
a. Aliens who come to the Philippines for a definite purpose which in its nature may be promptly accomplished
b. Aliens who shall come to the Philippines and stay therein for an aggregate period of not more than 180 days during the year
What are the General Classification Rule for Individuals
- Intention
- Length of Stay
What is an estate?
Estate 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 the income of the properties left by the decedent.
Estates under extrajudicial settlement are?
Exempt Entities. The income of the estate under extrajudicial settlement is taxable to the heirs
Difference between Judicial and Extrajudicial Settlements
Judicial needs to undergo court action. Extrajudicial are resolved outside out of the court
What is a trust
A 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)
When is the time a trust in taxation treated as if it is an individual taxpayer?
When a trust is designated by the grantor irrevocable. The income of the property held in trust is taxable to the trust
When is the time a trust in taxation is treated as if it is not taxable entities and not individual taxpayer?
When a trust is designated as revocable by the grantor. The income 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
Explain what a domestic corporation is
A domestic corporation is a corporation that is organized in accordance with Philippine laws. It includes one-person corporations (OPC) owned and registered by resident citizens in the Philippines
Explain what is a foreign corporation
A foreign corporation is one organized under a foreign law
What are the types of foreign corporations
- Resident Foreign Corporation (RFC)
- Non-Resident Foreign Corporation (NRFC)
Explain what is a special corporation
Special corporations are domestic or foreign corporations which are subject to special tax rules or preferential tax rates
Explain what is a one-person corporation
A one-person corporation is a corporation with a single stockholder who may be a natural person, trust, or an estate.
Explain what is a partnership
A partnership is 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
What are the types of partnership
- General Professional Partnership (GPP)
- Business Partnership
Explain what is a General Professional Partnership
A GPP is partnership formed by people 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.
Are GPP a corporation and tax eligible?
No, GPP are not a corporation and they are not a taxable entity. But the partners are taxable from their share in the income of the partnership.
What is a joint venture?
A joint venture is a business undertaking for a particular purpose. it may be organized as a partnership or a corporation
What are types of joint ventures?
- Exempt Joint Ventures
- Taxable Joint Ventures
Explain what Exempt Joint Ventures are
they are 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
Are exempt joint ventures not treated as a corporation and tax-exempt?
Yes, they are not treated as a corporation and is tax-exempt, but similar to GPP their venturers are taxable to their share in the net income of the joint venture
What are taxable joint ventures
All other joint ventures are taxable as corporations
Explain Co-ownership
A co-ownership is joint ownership of a property of a property formed for the purpose of preserving the same and/or dividing its income
When is a co-ownership considered not a taxable entity?
When the co-ownership is limited to property preservation or income collection. The co-owners are still taxable on their share on the income of the co-owned property
If a co-ownership reinvests the income of the co-owned property to other income-producing properties or ventures then the co-ownership will be considered an?
An unregistered partnership taxable as a corporation
Explain the residency and citizenship rule
Taxpayers who are residents and citizens of the Philippines are taxable on all income from sources within or outside the Philippines. A corporation is a citizen of the country of incorporation. Thus, a domestic corporation is a citizen of the Philippines
Explain basis of the extraterritorial taxation
Even though profits are derived outside the country, resident citizens and domestic corporations enjoys preferential privileges over aliens, and they have full access of the public services of our government because they are in the country. This basis also serves as a safety net to the potential loss of tax revenues brough by situs relocation or the practice of executing or structuring transactions such that income will be realized abroad to avoid Philippine income taxes.
Explain the issue of international double taxation
The rule on extraterritorial taxation on resident citizens and domestic corporations exposes them to double taxation. However, NIRC allows 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.
