Income and Business Taxation -

Income Taxation
Chapter 9B
Income Tax

Income Tax
- is defined as a tax on all yearly profits arising from
property, professions, trades, or offices, or as a tax on the
person’s income, emoluments, profits and the like (Fisher v.
Trinidad, 43 Phil. 981).
Income Tax

• Income is ALL wealth that flows into the taxpayer other

than mere return of capital (Fisher vs. Trinidad, Rev Reg
02).

• Income refers to the gain derived from capital, from labor

or both combined provided it is understood to include
gains from sale or conversion of capital assets - Doyle vs.
Michell (247 US 179).
Income Tax

REQUISITES FOR INCOME TO BE TAXABLE:

1) There must be a gain or addition to net worth.
2) The gain must be realized or received, actually or
constructively; recipient must have complete dominion.
3) The gain must not be excluded by law or treaty from
taxation.
Income Tax

CRITERIA IN IMPOSING INCOME TAX

1. Citizenship Principle – A citizen of the Philippines is

subject to Philippine income tax (a.) on his worldwide
income, if he resides in the Philippines, or (b.) only on his
income from sources within the Philippines, if he qualifies
as nonresident citizen.
Income Tax

CRITERIA IN IMPOSING INCOME TAX

2. Residence Principle – resident alien is liable to pay

income tax on his income from sources within the
Philippines but exempt from tax on his income from sources
outside the Philippines.
Income Tax

CRITERIA IN IMPOSING INCOME TAX

3. Source Principle – An alien is subject to Philippine

income tax because he derives income from sources within
the Philippines. Thus, a nonresident alien is liable to pay
Philippine income tax on his income from sources within the
Philippines such as dividend, interest, rent, or royalty,
despite the fact that he has not set foot in the Philippines.
 CLASSIFICATION OF TAXPAYERS
I. Individuals
a. citizens (1) resident citizens (RC)
(2) non-resident citizens (NRC)
b. aliens (1) resident aliens (RA)
(2) non-resident aliens (NRA)
(a) engaged in trade or business within the Phils. (NRA-ETB)
(b) not engaged in trade or business within the Philippines
(NRA-NETB)
 CLASSIFICATION OF TAXPAYERS
II. Corporations
a. Domestic (DC)
b. Foreign
(1) resident foreign corporation (RFC)
(2) non-resident foreign corporation (NRFC)
III. Estates
IV. Trusts
V. Partnerships and Co-ownership
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 nonresident 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 Philippines: Provided, 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 citizens of the Philippines?

1987 Constitution, Article IV: Citizenship Section 1. The following

are citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the
adoption of this Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who
elect Philippine citizenship upon reaching the age of majority; and
4. Those who are naturalized in accordance with law.
Sec. 22. Definitions.
(A) The term 'person' means an individual, a trust, estate or corporation.

(B) The term 'corporation' shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not include 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 a service contract with the Government.

'General professional partnerships' are partnerships formed by persons for

the sole purpose of exercising their common profession, no part of the income
of which is derived from engaging in any trade or business.
(C) The term 'domestic,' when applied to a corporation,
means created or organized in the Philippines or under its
laws.

(D) The term 'foreign,' when applied to a corporation,

means a corporation which is not domestic.
(E) The term 'nonresident citizen means:
(1) 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.
(2) IMMIGRANT OR PERMANENT EMPLOYEE ABROAD - A citizen of the
Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
(3) PHYSICALLY PRESENT ABROAD MOST OF THE TIME - 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.
(4) BALIKBAYAN - 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
Philippines shall likewise be treated as a nonresident 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.
(5) The taxpayer shall submit proof to the Commissioner to show
his intention of leaving the Philippines to reside permanently
abroad or to return to and reside in the Philippines as the case
may be for purpose of this Section.
(F) The term 'resident alien' means an individual whose residence
is within the Philippines and who is not a citizen thereof.
(G) The term 'nonresident alien' means an individual whose
residence is not within the Philippines and who is not a citizen
thereof.
(H) The term 'resident foreign corporation' applies to a foreign
corporation engaged in trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign
corporation not engaged in trade or business within the Philippines.
Other terms:
Estate - refers to the properties, rights and obligations of a
deceased person not extinguished by is death.
Trust - 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).
Special corporations - domestic or foreign corporations
which are subject to special tax rules or preferential
tax rates.
General Classification Rule for Individual:
1. Intention
2. Length of Stay
a. Citizen staying abroad for a period of atleast 183 days are
considered non-resident.
b. Aliens who stayed in the Philippines for more than 1 year as
of the end of the taxable year is considered resident.
c. Aliens who are staying in the Philippines for not more than 1
year but more than 180 days are deemed NRA-ETB.
d. Aliens who stayed in the Philippines for not more than 180
days are considered NRA-NETB
Gross income - refers to all income from whatever source,
including but not limited to:
1. Compensation income - income that is typically derived
from employement.
2. Business income - income derived from trade, business,
or practice of profession.
3. Passive income - can be broadly define as income
earned without actively working for it.