CHAPTER 3: Introduction to Income Taxation Flashcards
______ is regarded as the best measure of taxpayers’ ability to pay tax. It is an excellent objects of taxation in the allocation of government costs.
Income
The tax concept of income is simply referred to as “______” under the NIRC.
gross income
A taxable item of income is referred to as an “______” or “______”
item of gross income, inclusion in gross income
taxable income in layman’s term
GROSS INCOME
Under the NIRC however, the term “______” refers to certain items of gross income less deductions and personal exemptions allowed by law.
taxable income
Technically, ______ is broader to pertain to any income that can be subjected to income tax.
gross income
Any inflow of wealth to the taxpayer from whatever source, legal or illegal, that increases net worth. It includes income from employment, trade, business or exercise of profession, income from properties, and other sources such as dealings in properties and other regular or casual transactions.
GROSS INCOME
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.
Any wealth or property
RETURN ON CAPITAL
______ is a return on wealth property that increases the taxpayer’s net worth.
Gross income
Capital items deemed with infinite value
- Life
- Health
- Human reputation
The value of life is immeasurable by money. Under ______ of the NIRC, the proceeds of life insurance policies paid to the heirs or beneficiaries upon death of the insured, whether in a single sum or otherwise, are ______ from income tax.
Sec. 32, exempted
The proceeds of a life insurance contract collected by an employer as a beneficiary from the life insurance of an officer or any person directly interested with his trade are likewise exempt. Theses proceeds are viewed as ______.
advanced recovery future loss
Taxable return on capital from insurance policies:
a. Any excess amount received over premiums paid by the insured upon surrender or maturity of the policies
b. Gain realized by the insured from the assignment or sale of his insurance policy
c. Interest income from the unpaid balance of the proceeds of the policy
d. Any excess of the proceeds received over the acquisition costs and premium payments by an assignee of a life insurance policy
Any compensation received in consideration for the loss of health such as compensation for personal injuries or tortuous acts is deemed a ______.
return of capital
The value of one’s reputation cannot be measured financially. Any indemnity received as compensation for its impairment is deemed a ______ exempt from income tax.
return of capital
Examples of human reputation cases
a. Oral defamation or slander
b. Alienation
c. Breach of promise to marry
The ______ results in decrease in net worth while the ______ does not decrease net worth.
lost of capital, loss of profit
The recovery of ______ merely maintains net worth while the recovery of ______ increases net worth.
lost capital, lost profits
Therefore, the recovery of profits is a ______.
return on capital
Recovery of lost profits through insurance, indemnity contracts, or legal suits constitutes a ______
taxable return on capital
Taxable recoveries of lost profits:
a. Proceeds of crop or livestock insurance
b. Guarantee payments
c. Indemnity received from patent infringement suit
Any form of advantage derived by the taxpayer.
REALIZED BENEFIT
There is benefit when there is an ______ in the net worth of the taxpayer
increase
The following are not benefits, hence, not taxable:
a. Receipts of a loan
b. Discovery of lost properties
c. Receipts of money or property
properties increase but obligations also increase resulting in an offsetting effect in net worth.
Receipts of a loan
under the law, the finder has an obligation to return the same to the owner.
Discovery of lost properties
The term realized means ______. It requires that there is a degree of undertaking or sacrifice from the taxpayer to be entitled of the benefit.
earned
Requisites of a realized benefit:
- There must be an exchange transaction.
- The transaction involves another entity.
- It increases the net worth of the recipient.
TYPES OF TRANSFER
- Bilateral transfers or exchanges
- Unilateral transfers
- Complex transaction
onerous transactions
Bilateral transfers or exchanges
gratuitous transactions
Unilateral transfers
Examples of Bilateral transfers or exchanges
a. Sale
b. Barter
Examples of Unilateral transfers
c. Succession
d. Donation
bilateral transfers are called “______”
exchanges
Benefits derived from onerous transactions are “______”; hence, they are subject to ______.
earned or realized, income tax
Benefits derived from gratuitous transactions are ______ because of the absence of an earning process.
not realized
Benefits derived from gratuitous transactions are subjects to ______, not income tax.
transfer tax
partly gratuitous and partly onerous
Complex transaction
Complex transactions are commonly referred to as “______”.
transfers for less than full and adequate consideration
The gratuitous portion of the transaction is subject to ______ while the benefit from the onerous is subject to ______.
transfer tax, income tax
Every person, natural or juridical, is an ______.
entity
______ are living persons while ______ are those created by law such as partnerships and corporation.
Natural persons, juridical persons
An entity may be ______ or an ______.
taxable entity, exempt entity
A ______ arises from transactions which involve another natural or juridical entity.
taxable item of gross income
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
______ or ______ because they have not yet materialized in an exchange transaction.
Unrealized gains, holding gains
Is an exchange but does not cause a loss of capital.
Rendering of services
Hence, the entire consideration received from rendering of services such as compensation income or service fees is an ______.
item gross income
taxpayers will have the ability to pay tax when their income ______ in an exchange transaction since tax is generally payable in money
materializes
MODE OF RECEIPT/REALIZATION BENEFITS
- Actual receipt
- Constructive receipt
actual physical taking of the income in the form of cash or property.
Actual receipt
no actual physical taking of the income but the taxpayer is effectively benefited.
Constructive receipt
The inflow of wealth to a person that does not increase his net worth is not income due to the total absence of ______.
benefit
An ______ is not exempted by the Constitution , law, contracts or treaties from taxation.
item of gross income
EXEMPTED BY LAW FROM TAXATION
- Income of qualified employee trust fund
- Revenues of non-profit, non-stock educational institutions
- SSS, GSIS, Pag-IBIG, or PhilHealth benefits
- Salaries and wages of minimum wage earners and qualified senior citizen
- Regular income of Barangay Micro-business Enterprises (BMBEs)
- Income of foreign governments and foreign government-owned and controlled corporations
- Income of international missions and organizations with income tax immunity
TYPES OF INCOME TAXPAYERS
A. Individuals
B. Corporations
INDIVIDUAL TAXPAYERS
- Citizen
- Alien
- Taxable estates and trusts
CORPORATION TAXPAYERS
- Domestic corporation
- Foreign corporation
Types of Individual Citizen Taxpayers
a. Resident citizen
b. Non-resident citizen
Types of Individual Alien Taxpayers
a. Residents alien
b. Non-resident alien
Types of Foreign Corporation Taxpayers
a. Resident foreign corporation
b. Non-resident foreign corporation
CITIZENS
a. Those who are citizens of the Philippines at the time of adoption of the Constitution on February 2, 1987
b. Those whose fathers or mothers are citizens of the Philippines
c. Those born before January 17, 1973 of Filipino mothers who
elected Filipino citizenship upon reaching the age of majority
d. Those who are naturalized in accordance with the law
CLASSIFICATION OF CITIZENS:
A. Resident citizen
B. Non-resident citizen
residing in the Philippines but is not a citizen.
Resident alien
an individual who is not residing in the Philippines and who is not a citizen.
Non-resident alien
NRA-ETB
Non-resident aliens engaged in business
NRA-NETB
Non-resident aliens not engaged in business
THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS
- Intention
- Length of stay
The ______ of the taxpayer regarding the nature of his stay within or outside the Philippines shall determine his appropriate residency classification
intention
Citizens staying abroad for a period of at least ______ days are considered non-resident.
183
Aliens who stayed in the Philippines for more than ______ as of the end of the taxable year re considered resident.
1 year
Aliens who are staying in the Philippines for not more than 1 year but more than ______ days are deemed non-resident aliens engaged in business.
180
Aliens who are staying in the Philippines for not more than 180 days are considered ______.
non-resident aliens not engaged in trade or business
Refers to the properties, rights, and obligations of a
deceased person not extinguished by his death.
Estate
An arrangement whereby one person (grantor or trustor) transfer(i.e donates) property to another person (beneficiary), which will be held under the management of a third party (trustee of fiduciary)
Trust
one person corporation (OPCs), partnerships, no matter how created or organized, joint-stock companies, joint accounts, association, or insurance companies, excepts general professional partnership 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 a service contract with the government.
Corporation
Corporation that is organized in accordance with Philippine laws.
Domestic Corporation
Corporation is one organized under a foreign law.
Foreign Corporation
Types of foreign corporations:
- Resident foreign corporation (RFC)
- Non-resident foreign corporation (NRFC)
a foreign corporation which operates and conducts
business in the Philippines through a permanent establishment
Resident foreign corporation (RFC)
a foreign corporation which does not operate or conduct business in the Philippines
Non-resident foreign corporation (NRFC)
Domestic or foreign corporations which are subject to special tax rules or preferential tax rates.
Special Corporations
OTHER CORPORATE TAXPAYERS
- One-person corporation
- Partnership
- Joint Venture
- Co-ownership
is a corporation with a single stockholder who may be an natural person, trust or an estate
One-person corporation
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.
Partnership
TYPES OF PARTNERSHIP
a) General professional partnership (GPP)
b) Business partnership
formed by persons for the sole purpose of exercising common profession, no part of the income of which is derived from engaging in any trade or business.
General professional partnership (GPP)
- is one formed for profit.
- It is a taxable as a corporation.
Business partnership
is a business undertaking for a particular purpose
Joint venture
TYPES OF JOINT VENTURES
a. Exempt joint ventures
b. Taxable joint ventures
is a joint ownership of a property formed for the purpose of preserving the same and/or dividing its income.
Co-ownership
Taxpayers who are residents and citizens of the Philippines such as resident citizen and domestic corporations is a taxable on all income from sources within and without the Philippines.
The Residency and Citizenship Rule
Resident citizens and domestic corporations derive most of the benefits from the Philippine government compared to all other classes of taxpayers by virtue of their proximity to the Philippine government.
Basis of the extraterritorial taxation
place of taxation of income
SITUS OF INCOME
jurisdiction that has authority to impose tax upon the income.
SITUS OF INCOME
Situs of Interest income
Debtor’s residence
Situs of Royalties
Where the intangible is employed
Situs of Rent income
Location of the property
Situs of Service income
Place where the service is rendered
Personal property
Domestic securities
Other personal properties
Situs of gain on sale of real property
earned where the property is located
Situs of dividend income from Resident foreign corporation
depends on the pre-dominance test
Situs of dividend income from Non-resident foreign corporation
earned abroad
Situs of Merchandising income
earned where the property is sold
Situs of Manufacturing income
earned where the property is sold
