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TAXATION I | Atty. Percy Valsan Jun P.

Donalvo (2017-2018)

TAX SYLLABUS - 12 months but starts and ends on different days

2ND EXAM (2017-2018) other than January 1 and December 31.
COVERAGE: INCOME TAXATION - Can be used by corporations only.


1) Global Tax System - Taxpayer begins or terminates his business in
2) Schedular Tax System the middle of the year.
3) Semi-schedular or Semi-global Tax System - Instances when taxable income shall be
computed on the basis of a short period:
FEATURES OF PHILIPPINE INCOME TAX (P-I-N-E-D) o GR: taxable period is always 12
1) Direct Tax months.
2) Progressive Tax o 5 Xs (where a taxpayer may have a
3) Excise Tax taxable period of less than 12 months)
4) National Tax are:
5) Internal Revenue Tax a) Taxpayer, other than an individual,
changes his accounting period
CRITERIA IN IMPOSING PHILIPPINE INCOME TAX from fiscal to calendar year or from
1) Citizenship or Nationality Principle calendar year to fiscal year or from
2) Residence or Domicile Principle one fiscal year to another (Section
3) Source Principle 46, Tax Code)
b) Taxpayer dies
NIRC (G-N-P-C-U) d) Corporation is dissolved
1) Gross Income Tax e) Tax period is terminated by the CIR
= All income - Exclusions by authority of law (Section 6(D),
2) Net Income Tax Tax Code)
= Gross income Allowable Deductions
3) Presumptive Income Tax KINDS OF TAXPAYERS
= law presumes that there is income and is subjected
to Philippine income tax A) INDIVIDUALS
4) Composite Tax 1. Citizens (Section 24, NIRC)
= series of separate quasi-personal taxes assessed to a. Resident Citizens
a particular income with a superimposed personal - A citizen of the Philippines residing therein is
tax on the income as a whole taxable on all income derived from sources
5) Unitary Income Tax within and without the Philippines (Sec. 23a)
= income is arranged according to source - The following are considered citizens of the
Philippines (Constitution):
KINDS OF TAXABLE PERIODS a) Those who are citizens of the Philippines at
1) Calendar Period the time of the adoption of the Constitution
- 12 months (January 1 to December 31) b) Those whose fathers or mothers are citizens
- All taxpayers (individuals and corporations [with of the Philippines
BIR approval]) are allowed to use this. c) Those born before January 17, 1973 of
- Six (6) instances when taxable income shall be Filipino mothers, who elect Philippine
computed on the basis of calendar year: Citizenship upon reaching the age of
a) Taxpayers accounting period is other than majority; and
fiscal year d) Those who are naturalized in accordance
b) Taxpayer has no annual accounting period with law
c) Taxpayer does not keep books
d) Taxpayer is an individual b. Nonresident Citizens
e) Taxpayer is a general professional - A nonresident citizen is taxable only on income
partnership derived from sources within the Philippines
f) Taxpayer is an estate or a trust (Sec. 23b)
- Who are nonresident citizens (6):
2) Fiscal Period

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TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)

1) A citizen of the Philippines who establishes to to reside permanently in the Philippines shall
the satisfaction of the Commissioner the fact of likewise be treated as a nonresident citizen for
his physical presence abroad with a definite the taxable year in which he arrives in the
intention to reside therein. Philippines with respect to his income derived
2) A citizen of the Philippines who leaves the from sources abroad until the date of his arrival
Philippines during the taxable year to reside in the Philippines.
abroad, either o Balikbayan.
a) as an immigrant or o Prior to arrival = nonresident citizen
b) for employment on a permanent basis. o Upon date of arrival = resident citizen
3) A citizen of the Philippines who works and 5) The taxpayer shall submit proof to the
derives income from abroad and whose Commissioner to show his intention of leaving
employment thereat requires him to be the Philippines to reside permanently abroad or
physically present abroad most of the time to return to and reside in the Philippines as the
during the taxable year. case may be for purpose of this Section. (Sec.
o Most of the time means presence 22e)
outside the Philippines for not less than 6) An individual citizen of the Philippines who is
183 days during the taxable year. (Sec. working and deriving income from abroad as an
2, RR No. 1-79) overseas contract worker is taxable only on
o The BIR held that the local companys income derived from sources within the
engineers sent to various countries for Philippines: Provided, That a seaman who is a
a maximum period of 214 days per citizen of the Philippines and who receives
calendar year cannot qualify to be compensation for services rendered abroad as a
nonresident citizens because the member of the complement of a vessel engaged
phrase employment thereat [as used exclusively in international trade shall be
in paragraph (3) of Section 22(E)] treated as an overseas contract worker. (Sec.
means that the individual must be 23c)
employed in such foreign country. (BIR o If POEA registered = nonresident citizen
Ruling No. 517-2011) o If not POEA registered = 183-day rule
o A government employee (DSWD) who
was on assignment (appointed as 2. Aliens
Deputy Sec. Gen for the ASEAN - An alien individual, whether a resident or not of the
Secretariat) abroad (Indonesia) for Philippines, is taxable only on income derived from
three years was held to be a resident sources within the Philippines (Sec. 24d)
citizen for tax purposes and as such, a. Resident Aliens (Section 24, NIRC)
subject to tax on her worldwide o An alien may be considered as a resident of the
income. In the ruling, the critical points Philippines for income tax purposes if:
raised by the BIR are the temporary 1) He is not a mere transient or sojourner.
nature of the transfer (secondment), 2) He has no definite intention as to his or her stay.
the continuing employee-employer 3) His purpose is of such nature than an extended
relationship with the Philippine stay may be necessary for its accomplishment.
employer, and the lack of intention of o An alien who has acquired residence in the
the official to reside in Indonesia. (BIR Philippines retains his status as a resident until
Ruling No. 305-2016) he abandons the same and actually departs
Summary of the BIR Rulings: from the Philippines. (RR 2)
What seems to be the b. Nonresident Aliens (Section 25, NIRC)
determining factor is whether i. Engaged in trade or business in the Philippines
the individual remains - He is actually engaged in business in the
employed by the local Philippines and
employer, regardless of where - He stays for an average period of more
the employee gets directions than 180 days.
or compensation. ii. Not engaged in trade or business in the
4) A citizen who has been previously considered as Philippines
nonresident citizen and who arrives in the - Taxed at their gross income.
Philippines at any time during the taxable year
3. Special Individuals

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TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)

o Minimum wage earners (MWEs). Co-ownerships are generally not taxable unless their
o Tax exempt. intention in forming such is to divide the profits among
o MWEs, to be exempt, must be: themselves.
1) Must be employees of their employer only.
2) Not earning other compensation income. INCOME
3) The MWE is not earning any business income. Nature: An income tax is an excise tax and not a tax on
4. Estates and Trusts (Section 60, NIRC) property. It is levied upon the privilege of receiving
a. Revocable trust income or profit.
b. Irrevocable trust When Taxable: Taxable income means the pertinent
items of gross income specified in this Code, less the
B) CORPORATIONS deductions and/or personal and additional exemptions, if
1. Domestic Corporations (Section 27, NIRC) any, authorized for such types of income by this Code or
- Taxable on all sources within and outside the other special laws. (Section 31)
Philippines. Requirements for Taxable Income:
2. Foreign Corporations (Section 28, NIRC) 1) There must be gain or profit.
- A foreign corporation, whether engaged or not in 2) The gain or profit must be received or realized.
trade or business in the Philippines, is taxable Requirements for realization of income:
only on income derived from sources within a) Earning process is complete or virtually
the Philippines (Sec. 23f) complete.
a. Resident foreign corporations b) An exchange has already taken place.
o Engaged in trade and business in the Kinds of Receipt of Income:
Philippines. a) Actual Receipt
b. Nonresident foreign corporations b) Constructive Receipt
o Not engaged in trade and business in the - the money or consideration or its
Philippines. equivalent is placed in the control of
the person who rendered the service or
3. Partnerships
who sold the object without any
a. Taxable partnership (Section 73(D), NIRC)
restriction on the part of the payor.
b. Exempt partnership
- Examples: bank to bank transactions,
i. General Professional Partnership (Section
offsetting of debts, money given thru
26, NIRC)
an agent, consignment in court
o persons engaging in business as 3) The gain must not be excluded by law or treaty.
partners in a GPP shall be liable for
income tax only in their separate and SOURCES OF INCOME
individual capacities computed on their 1) Services
respective distributive shares of the 2) Capital (money, property, or industry)
partnership profit. (Sec. 26)
3) Gains from Exchange of Properties
ii. Joint venture or consortium undertaking INCOME vs. CAPITAL
construction activity or engaged in INCOME CAPITAL
petroleum operations with operating
The service of wealth which Wealth or the source of
contract with the government
flows into the taxpayer other income.
than a mere return on
Term corporation includes:
Denotes a flow of wealth A fund or property existing at
1) Those mentioned under the Corporation Code,
during a definite period of one distinct point in time.
whether domestic or foreign.
2) Partnerships no matter how treated, as a general
However, stock dividends Generally, stock dividends
constitute as income if a represent capital and do not
3) Joint Stock companies
corporation redeems stock constitute as income to its
4) Joint Accounts
issued so as to make a recipient.
5) Associations or Insurance Companies
6) Joint Ventures, as a general rule.
Exemplary/Punitive Damages
and Compensatory Damages.

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TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)

(6) Royalties;
1) Cash Method
Recognize income if there is actual cash
received; consider expense as incurred if there
is actual cash paid. (7) Dividends;
Income is reported in the year payments are
received while expenses are deducted in the
year paid.
2) Accrual Method
The income is recognized when it is earned (8) Annuities;
regardless of whether it has been received or
not. Expenses are accounted for in the period in
which they are incurred even if not yet paid.
Income is reported in the year it is earned while
expenses are deducted in the year it is incurred, (9) Prizes and winnings;
regardless of receipt or disbursement of cash.
3) Installment Method
Collections of the proceeds of sales and incomes
extend over relatively long periods of time and
there is strong possibility that full collection will (10) Pensions; and
not be paid.
4) Deferred Payment Method
Payments are made at a later date.
5) Percentage of Completion Method
applicable in the case of a building, installation (11) Partner's distributive share from the net income of the
or construction contract covering a period in general professional partnership.
excess of one year, whereby gross income
derived from such contract may be reported
upon the basis of percentage of completion. EXCLUSIONS FROM GROSS INCOME:
1) Life Insurance
- GR: proceeds paid to heirs/beneficiaries upon death are
GROSS INCOME excluded.
- X: such amounts are held by insurer under an
SOURCES OF INCOME SUBJECT TO NORMAL TAX: agreement to pay the interest thereon.
2) Amount Received by Insured as Return of Premium
(1) Compensation for services in whatever form paid, 3) Gifts, Bequests, and Devises.
including, but not limited to fees, salaries, wages, - GR: value of property acquired by gift, bequest, devise
commissions, and similar items; or descent.
- X: income from such property, as well as gift, bequest,
devise or descent of income from any property, of
(2) Gross income derived from the conduct of trade or transfers of divided interest
business or the exercise of a profession; 4) Compensation for Injuries of Sickness.
5) Income Exempt under Treaty
(3) Gains derived from dealings in property;
6) Retirement Benefits, Pensions, Gratuities, etc.
7) Miscellaneous Items
a) Income derived by foreign government.
(4) Interests;
b) Income derived by the government or its political
c) Prizes and awards.
(5) Rents; - made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or
civic achievement but only if (1) recipient was
selected without any action on his part to enter the

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TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)

contest or proceeding and (2) recipient is not

required to render substantial future services as a
condition to receiving the award.
d) Prizes and awards in sports competition.
e) 13th month pay and other benefits.
- provided total exclusion under this shall not exceed
f) GSIS, SSS, Medicare and other contributions
g) Gains from the sale of bonds, debentures or other
certificate of indebtedness
- with a maturity of more than 5 years.
h) Gains from redemption of shares in mutual fund

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