TAXATION I | Atty. Percy Valsan Jun P.
Donalvo (2017-2018)
A) INDIVIDUALS
(1) FILIPINO CITIZENS
The following are considered citizens
of the Philippines (Constitution):
1) Those who are citizens of the
Philippines at the time of the
adoption of the 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
KINDS OF INCOME TAX PAYERS
(a) RESIDENT FILIPINO
CITIZENS
A citizen of the Philippines
residing therein is taxable on
all income derived from
sources within and without
the Philippines. (Sec. 23 a)
(b) NONRESIDENT FILIPINO
CITIZENS
- A nonresident citizen is
taxable only on income
derived from sources
within the Philippines (Sec.
23 b)
(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) 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) 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) 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.
(6) 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. (Sec. 23 C)
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(2) ALIENS
An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines. (Sec. 23 d)
TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)
(a) RESIDENT ALIENS
The term 'resident alien' means an individual whose
residence is within the Philippines and who is not a
citizen thereof.
Requisites to be considered a resident alien:
1) He is not a mere transient or sojourner.
2) He has no definite intention as to his or her stay.
3) His purpose is of such nature than an extended
stay may be necessary for its accomplishment.
Loses resident status: ENGAGED IN TRADE/BUSINESS IN THE PHIL.
1) he abandons his residence in the Philippines and
2) he actually departs from the Philippines How to determine:
1) He is actually engaged in trade and business
in the Philippines.
2) If he stays in the Philippines for an average
period of more than 180 days
(b) NONRESIDENT ALIENS
The term 'nonresident alien' means an individual
whose residence is not within the Philippines and
who is not a citizen thereof.
NOT ENGAGED IN TRADE/BUS. IN THE PHIL.
- Generally taxed at gross income.
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(3) ESTATES AND TRUSTS
The tax imposed by this Title upon individuals
shall apply to the income of estates or of any kind
of property held in trust. (Sec. 60)
They should be properly treated as individuals as
their taxable income is computed in the same
manner and on the same basis as in the case of
an individual (see Section 61, Tax Code)
SEC. 62. Exemption Allowed to Estates and
Trusts. - For the purpose of the tax provided for
in this Title, there shall be allowed an exemption
of Twenty thousand pesos (P20,000) [39] from the
income of the estate or trust.
TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)
(a) REVOCABLE TRUST
SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of
the corpus of the trust is vested
(1) in the grantor either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of such part of the corpus or the income therefrom, or
(2) in any person not having a substantial adverse interest in the disposition of such part of the
corpus or the income therefrom, the income of such part of the trust shall be included in computing
the taxable income of the grantor.
b) IRREVOCABLE TRUST
SEC. 65. Fiduciary Returns. - Guardians, trustees, executors, administrators, receivers, conservators and
all persons or corporations, acting in any fiduciary capacity, shall render, in duplicate, a return of the
income of the person, trust or estate for whom or which they act, and be subject to all the provisions of
this Title, which apply to individuals in case such person, estate or trust has a gross income of Twenty
thousand pesos (P20,000) [40] or over during the taxable year. Such fiduciary or person filing the return
for him or it, shall take oath that he has sufficient knowledge of the affairs of such person, trust or estate
to enable him to make such return and that the same is, to the best of his knowledge and belief, true
and correct, and be subject to all the provisions of this Title which apply to individuals: Provided, That a
return made by or for one or two or more joint fiduciaries filed in the province where such fiduciaries
reside; under such rules and regulations as the Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with the requirements of this Section.
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 TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)

(4) SPECIAL CLASS OF INDIVIDUAL EMPLOYEES:

MINIMUM WAGE EARNERS (MWEs)

The term 'minimum wage earner' shall refer to a worker in the private sector paid the
statutory minimum wage or to an employee in the public sector with compensation income
of not more than the statutory minimum wage in the non-agricultural sector where he/she is
assigned.

MWEs, to be exempt, must be:

1) Must be employees of their employer only.
2) Not earning other compensation income.
3) The MWE is not earning any business income.

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

B) CORPORATIONS

(1) DOMESTIC

A domestic corporation is taxable on all income derived from sources within and without the Philippines. (Sec. 23 e)

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

RESIDENT FOREIGN CORPORATION

The term 'resident foreign corporation' applies to a foreign corporation

engaged in trade or business within the Philippines. (Sec. 22H)

(2) FOREIGN

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. (Sec. 23 f) NONRESIDENT FOREIGN CORPORATION

The term 'nonresident foreign corporation' applies to a foreign

corporation not engaged in trade or business within the Philippines.
(Sec. 22 I)

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

(a) TAXABLE PARTNERSHIP

These are business partnerships or partnerships
which are organized for the purpose of engaging in
trade or business. They are subject to income tax
as if they were corporations whether or not
registered with the SEC as a partnership
(3)PARTNERSHIPS GENERAL PROFESSIONAL PARTNERSHIP
sECTION 73 (D) Net Income of a Partnership
Not Taxable: Deemed Constructively Received by Partners. - SEC. 26. Tax Liability of Members of General Professional Partnerships. - A
The taxable income declared by a partnership for general professional partnership as such shall not be subject to the income tax
1) Professional a taxable year which is subject to tax under imposed under this Chapter. Persons engaging in business as partners in a
partnership: one Section 27 (A) of this Code, after deducting the general professional partnership shall be liable for income tax only in their
exercising a corporate income tax imposed therein, shall be separate and individual capacities.
common deemed to have been actually or constructively
profession. For purposes of computing the distributive share of the partners, the net
received by the partners in the same taxable year
income of the partnership shall be computed in the same manner as a
and shall be taxed to them in their individual
corporation.
capacity, whether actually distributed or not.
Taxable: Each partner shall report as gross income his distributive share, actually or
1) Business constructively received, in the net income of the partnership.
Partnership: one Elements of a taxable partnership)
who is not in the 1. An intent to form the same
exercise of a JOINT VENTURE OR CONSORTIUMS UNDERTAKING CONSTRUCTION PROJECTS
professional 2. Generally participating in both profits and losses
OR ENGAGED IN PETROLEUM OPERATIONS WITH AN OPERATING CONTRACT
partnership (in the 3. Such a community of interest, as far as third WITH THE GOVERNMENT
negative). persons are concerned as enables each party to
2) Individual make contract, manage he business and dispose of
professional the whole property. General Rule: Not liable for income tax.
partner. Exceptions (RR No. 010-12 [JUNE 1, 2012]) a joint venture or consortium formed
for the purpose of undertaking construction projects which is not considered as a
taxable corporation should be:
(b) EXEMPT PARTNERSHIP 1. For the undertaking of a construction project;
2. Should involve joining or pooling of resources by licensed local contractors,
licensed by the Philippine Contractors Accreditation Board (PCAB) of the DTI;
These are partnerships not considered as
taxable entities for income tax purposes 3. The local contractors are engaged in construction business;
i.e. General Professional Partnerships). 4. The joint venture itself must likewise be duly licensed as such by the PCAB

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Except when otherwise provided in this
Title, gross income means all income
derived from whatever source,
Income from whatever sources refers
to all income not expressly excluded
or exempted from the class of taxable
income, irrespective of the voluntary
or involuntary action of the taxpayer
in producing the income
including (but not limited to) the following
items:
Enumeration is not exclusive
COMPENSATION INCOME
(1) Compensation for services in whatever
form paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items;
Compensation here means all
remuneration for services performed
by the employee for his employers
unless exempted by law from tax.
Allowances
o GR: compensation income.
o X: If allowance is excluded
from your gross income if it is
subject to liquidation and
such expense is an ordinary
and necessary expense of the
business.
Retirement pay and Separation pay.
Vacation and sick leaves
GROSS INCOME
o GR: compensation income.
o X: monetized value of
unutilized leave credits up to
10 days.
Fringe Benefits
o Fringe benefits are money or
properties given to the
employees in addition to the
regular salaries. It is a benefit
given to employees over and
above their basic salary.
A) if a rank and file employee will
receive a fringe benefit, it will
form part of his gross income, its
part of compensation income.
B) if it is given to a managerial or
supervisorial employee, the fringe
benefit is subject to fringe benefit
tax (FBE).
o GR: Tax rate is 32%.
o X: 25% for nonresident alien
not engaged in trade and
business.
BUSINESS INCOME
(2) Gross income derived from the conduct
of trade or business or the exercise of a
profession;
OTHER INCOME
TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)
(3) Gains derived from dealings in property; in such forms prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed
(4) Interests; under this Subsection.
Interest income means the amount PRE-TERMINATION: Provided, finally,
of compensation paid for the use of That should the holder of the
money or forbearance from such use. certificate pre-terminate the deposit
GR: Interests received or credited or investment before the fifth (5th)
to the account of the depositor or year, a final tax shall be imposed on
investors are included in their the entire income and shall be
gross income deducted and withheld by the
X: unless they are exempt from depository bank from the proceeds of
tax or subject to a final tax. the long-term deposit or investment
20% FINAL TAX: A final tax at the rate certificate based on the remaining
of twenty percent (20%) is hereby maturity thereof:
imposed upon the amount of interest o Four (4) years to less than five
from any currency bank deposit and (5) years 5%;
yield or nay other monetary benefit o Three (3) years to less than
from deposit substitutes and from four (4) years 12%; and
trust funds and similar arrangements. o Less than three (3) years
7.5% FINAL TAX: Provided, however, 20%.
That interest income received by an
individual taxpayer (except a (5) Rents;
nonresident individual) from a It is the amount received for the use
depository bank under the expanded or lease or enjoyment of a property,
foreign currency deposit system shall whether its real or personal.
be subject to a final income tax at the GR: Part of gross income.
rate of seven and one-half percent (7
%) of such interest income. (6) Royalties;
TAX EXEMPT: Provided, further, That Royalties mean payments of any kind
interest income from long-term received as consideration for the use
deposit or investment in the form of or right to use of any copyright or
savings, common or individual trust literary or scientific work including
funds, deposit substitutes, cinematographic films, TV broadcast,
investments evidenced by certificates
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any patent, trademark, etc. in other
words, these are the money or
properties paid to you because of
your intellectual property rights.
GR: Part of gross income.
X:
o If it is exempted;
o Those which are subject to
final tax on two occasions:
When it refers to
books, literary works,
musical compositions
10% final tax;
All other type of
royalties within the
Philippines 20%.
Royalties, except on books, as well as
other literary works and musical
compositions, which shall be imposed
a final tax of ten percent (10%)
(7) Dividends;
The term dividends means any
distribution made by a corporation to
its shareholders out of its earnings or
profits and payable to
shareholders, whether in money or in
other property.
It is taxable at the time of their
declaration by the corporation, and
not at the time of actual payment of
dividends, since dividend income is
taxable whether actually
constructively received.
KINDS OF DIVIDENDS:
If the distribution is in money, it is
called a cash dividend.
If it is in property, it is called a
property dividend.
o Taxable. As provided in
Section 251, RR No. 2,
dividends paid in securities
or other property (other
than its own stock), in which
the earnings of a that amount of money or
corporation have been
invested, are income to the
recipients to the amount of
the full market value of
such property when
receivable by individual
stockholders.
If it is in stock, it is called a stock (8) Annuities;
dividend.
o GR: a stock dividend only
represents the transfer of
surplus to capital account and,
as such, is not subject to
income tax.
o X:
1) Change in the stockholders
its equity, right or interest in the
net assets of the corporation
2) Recipient is other than the
shareholder
3) Cancellation or redemption of
shares of sock
4) Distribution of treasury stocks
or 5) Dividends declared in the
guise of treasury stock (10) Pensions; and
dividend to avoid the effects
of income taxation
TAXATION I | Atty. Percy Valsan Jun P. Donalvo (2017-2018)
6) Different classes of stocks (11) Partner's distributive share from the
were issued. net income of the general professional
partnership.
If it results from the distribution by a
corporation of all its property or
assets in complete liquidation or
dissolution, it is called a liquidating
dividend.
o Liquidating dividends are
property distributed by the
corporation to the
stockholder in the event of
dissolution and liquidation of
a corporation.
An annuity refers to the periodic
installment payments of income or
pension by insurance companies during
the life of a person or for a guaranteed
fixed period of time, whichever is longer,
in consideration of capital paid by him.
(9) Prizes and winnings;
prizes (except prizes amounting to
Ten thousand pesos (P10,000) or less
which shall be subject to tax under
Subsection (A) of Section 24; and
other winnings (except Philippine
Charity Sweepstakes and Lotto
winnings), derived from sources
within the Philippines:
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