Chapter 3 - Introduction to Income Tax CHAPTER 3 INTRODUCTION TO INCOME TAXATIO! Chapter Overview and Objectives This chapter discusses the concept of tax income, the situs of income, and the types of taxpayers, After this chapter, readers are expected to comprehend and demonstrate knowledge on the following: 1. The concept of gross income 2. The types of income taxpayers 3. The general rules in income taxation 4._ The income tax situs rules THE CONCEPT OF INCOME Why is income subject to tax? Income is regarded as the best measure of taxpayers’ ability to pay tax. It is an excellent object of taxation in the allocation of government costs. Whatis income for taxation purposes? The tax concept of income is simply referred to as “gross income” under the NIRC. A taxable item of income is referred to as an “item of gross income” or “inclusion in gross income”. Gross income simply means taxable income in layman's term. Under the NIRC however, the term “taxable income” refers to certain items of gross income less deductions and personal exemptions allowable by law. Technically, gross income is broader to pertain to any income that can be subjected to income tax. Gross income is broadly defined as 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. ELEMENTS OF GROSS INCOME 1. Itisareturn on capital that increases net worth. 2. Itisa realized benefit. 3, It is not exempted by law, contract, or treaty. 63Chapter 3 - Introduction to Income Tax RETURN ON CAPITAL . , Capital means any wealth or property. oT eth od Wea Property that increases the taxpayer's net worth. } Mlustration | ABC purchased goods for P300 and sold them for P500. The P500 COMSideraton " analyzed as follows: a J ret Selling price (total consideration received) P 5 a henna ital Cost (value of inventory forgone) Return on ea ital Mark-up (gross income) b2m ° The return on capital that increases net worth 4 sneome subject to income , Return of capital merely maintains net worth; nen, it is not taxzp), improvement in net worth indicates an ability to pay tax. 4 Capital items deemed with infinite value . There are fapital items that have infinite value and are incapable of pay, valuation. Anything received as compensation for their loss is deemed 8 return | capital. Examples: 1. Life 2. Health 3. Human reputation Life The value of life is immeasurable by money. Under Sec. 32 of the NIRC, ti Proceeds of life insurance policies paid to the heirs or beneficiaries upon death ¢| the insured, whether ina single sum or otherwise, are exempt from income tax, The proceeds ofa life insurance con from the life insurance of an offic trade are likewise exem, future loss. tract collected by an employer as a benefcn er or any person directly interested with k: ipt. These proceeds are viewed as advanced recovery «| | | However, the following are taxable return on capital from insurance Policies: a. Any excess amount received over Premiums paid by the insured upw. surrender or maturity of the policy (i.e, the insured outlives the Policy.) b. Gain realized by the insured from the assignment or sale of his insurant policy ; Interest income from the unpaid balance ofthe proceeds of the policy d. Any excess of the proceeds received over the x cquisition costs and premiut, payments by an assignee ofalife insurance poligy ° 64Chapter 3 - Introduction to Income Tax Health Any compensation received in consideration for the loss of health such 7 compensation for personal injuries or tortuous acts is deemed a return of capital. Human Reputation ; , The value of one’s reputation cannot be measured financially. Any indemnity received as compensation for its impairment is deemed a return of capital exempt from income tax. Examples include moral damages received from: a. Oral defamation or slander b. Alienation of affection c. Breach of promise to marry Recovery of lost capital vs. Recovery of lost profits The loss of capital results in decrease in net worth while the loss of profits does not decrease net worth. The recovery of lost capital merely maintains net worth while the recovery of lost profits increases net worth. Therefore, the recovery of lost profits is a return on capital. Taxable recovery of lost profits ; The recovery of lost profits through insurance, indemnity contracts, or legal suits constitutes a taxable return on capital. The following are taxable recoveries of lost profits: a. Proceeds of crop or livestock insurance b. Guarantee payments c. Indemnity received from patent infringement suit Mlustration 1 Mang Reyes insured his strawberry crop in a P200,000 crop insurance coverage against calamities. The crop was eventually destroyed by an unusual frost. Mang Reyes was paid the P200,000 insurance proceeds. The P200,000 proceeds which is a reimbursement for the lost value of the future harvest, is an item of gross income. The value of the lost crops is, in effect, realized not through actual harvest but through the insurance contract. Illustration 2 Mr. Ramos purchased a franchise. The franchisor guaranteed an annual franchise income of P100,000 to Mr. Ramos. In the first year of operation, Mr. Ramos’outlet only earned P60,000. The franchisor paid the P40,000 difference to Mr. Ramos, 65Chapter 3 - Introduction to Income Tax | gratuity but a recovery of lost shall report P100,000 ae Me} The P40,000 guarantee payment is not a 4, hi Ramos; hence, subject to income tax. Mr. Ramos income. Illustration 3 _ Davao Crocodile Inc. experienced an unusual decline in its income after a com, copied its patented invention. Davao Crocodile sued the competitor for yt infringement and was awarded an indemnity of P3,000,000. ten | The P3,000,000 indemnity is a compensation for the income not realized by py, | Crocodile due to the patent infringement. The same 'S an item of gross income, | The recovery of lost income or profits is not intended to compensate for the los y capital, It is as good as realization of income; hence, it is an item of gross income, REALIZED BENEFIT | What is meant by realized benefit? The “benefit” concept | e i form of advantage derived by the taxpayer. There j, The term “benefit” means any benefit when there is an increase 1n | net worth occurs when one receives income, hence, not taxable: increase but obligations also increase resulting ‘in the net worth of the taxpayer. An increase iy donation or inheritance. The following are not benefits, a. Receipt of a loan - properties i in an offsetting effect in net worth. , b. Discovery of lost properties - under the law, the finder has an obligation to return the same to the owner. c. Receipt of money or property to be held in trust for, or to be remitted to, another person. If the taxpayer is enti portion is a benefit. | itled to keep for his account portion of a receipt, only that Illustration 1. Anemploye transportation expenses and was all Only the P2,000 retained by the employee is considered income since thi extent he was benefited. (RR2-98) e was granted P20,000 transportation advance. He liquidated P18,000 lowed by his employer to keep the P2,000. s was the | 2. A security agency receives P120,000 from clients, P100,000 of which is for the salaries of security guards. Under RMC 39-2007, only the P20,000 attributable to the agency is considered income of the agency since it is the extent it is benefited. The P100,000 pertaining to salaries of security guards is recognized by the agency asa liability upon receipt. 66Chapter 3 - Introduction to Income Tax The “realized” concept The term realized means earned. 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: 1, There must be an exchange transaction. 2. The transaction involves another entity. 3. Itincreases the net worth of the recipient. Types of Transfers 1. Bilateral transfers or exchanges, such as: a. Sale b. Barter These are referred to as “onerous transactions’. 2. Unilateral transfers, such as: a. Succession - transfer of property upon death b. Donation These are also referred to as “gratuitous transactions”. Under current usage, unilateral transfers are simply referred to as “transfers” while bilateral transfers are called “exchanges.” Benefits derived from onerous transactions are “earned or realized”; hence, they are subject to income tax. Benefits derived from gratuitous transactions are not realized because of the absence of an earning process. Benefits derived from gratuitous transactions are subject to transfer tax, not income tax. 3. Complex transactions Complex transactions are partly gratuitous and partly onerous. These are commonly referred to as “transfers for less than full and adequate consideration”. The gratuitous portion of the transaction is subject to transfer tax while the benefit from the onerous portion is subject to income tax. Illustration A taxpayer sold his car which was previously purchased for P100,000 and with a current fair value of P180,000 for only P130,000. The transaction will be analyzed as follows: Fair value P 180,000 50,000 - Subject to transfer tax Selling price 130,000 } 30,000 - Subject to income tax Cost 100,000 67Chapter 3 - Introduction to Income Tax TI a 2 - he excess of fair value over selling price is @ gratuity or gift whereas the excg, Sof thy) selling price over the cost is an item of gross incom® | What is meant by another entity? ; : Every person, natural or juridical, is a" entity. Natural persons are living | weal furial 4 ‘ yy law such as partners, | ile juridical persons are those created by partners | corporations. An entity may be a taxable entity oF an exempt ati "3 item of gross income arises from ‘ansactions which involve another natyps)* juridical entity. ‘ i ions, and betwes en relatives, corporat the tweet is made between separate oat i | | since it h as betw n h 7. s between a holdi . .n affiliated companies suc! en a holdin Likewise, the income betwee between sister companies are tayay, F i d arent company and its subsidiaries an‘ H 0 tease cach Corporation is a separate entity. This applies regardless of te underlying economic relationship. However, the sales of a home office to its branch office are not taxable becays | they ertain to one and the same taxable entity. Furthermore, the income betwee, y Pi taxed since proprietorship businesses ar, | i roprietor should not be 1 : businesses of a prop! me owner. Note that a proprietorship business is nop taxable upon the sai juridical entity: fits in the absence of transfers pt t | ieee rnereese in wealth of the taxpayer in the form of appreciation or increase jp the value of his properties or decrease in the value of his obligations in the absence ofa sale or barter transaction is not taxable. ‘ed to as unrealized gains or holding gains because they have no These are referré ‘ in an exchange transaction. yet materialized i lized gains or holding gains: .stments in equity or debt securities properties held (revaluation increment) ncies held or receivable lenominated debt by virtue of favorable Gains or income derived be! and the partnership are taxable Examples of unreal a. Increase in value of inve: b. Increase in value of real cc. Increase in value of foreign curre! d. Decrease in value of foreign currency de fluctuation in exchange rates e. Birth of animal offspring, accruals of fruits in an orchard or growth of farm vegetables f. Increase in value of land due to the discovery of mineral reserves Rendering of services The rendering of services for a consi loss of capital. Hence, the entire consideration recel ideration is an exchange but does not causea ived from rendering of services such as compensation income or service fees is an item of gross income. 68Chapter 3 - Introduction to Income Tax Mlustration Mr. Mendoza lists the following possible items of gross income: Compensation income P 200,000 Winnings from gambling 100,000 Increase in value of investments 50,000 Appreciation in the value of land owned 300,000 Debt of Saladin cancelled by creditors in consideration for services he rendered to them 150,000 Debt of Saladin cancelled by his creditor out of affection 250,000 Loan received from a bank anne The items of gross income are: Compensation income P 200,000 Winnings from gambling 100,000 Debt of Mendoza forgiven in consideration for service rendered to his creditors 150,000 Note: 1. Gains from gambling and the forgiveness of debt in consideration of services or properties received are realized gains from exchanges. The forgiveness of debt out of affection or mere generosity of the creditor is a gratuitous transfer subject to transfer tax. 3. The loan received from a bank constitutes a transfer but is not a benefit. Basis of Exemption of Unrealized Income Normally, taxpayers will have the ability to pay tax when their income materializes in an exchange transaction since tax is generally payable in money. 2. This does not mean, however, that only income realized in cash is subject to tax. 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, Moreover, exempting income realized in non-cash considerations would open a wide avenue for tax evasion since taxpayers can easily divert their income in the form of non- cash consideration. Mode of Receipt/Realization Benefits Taxable items of income may be realized by the taxpayer in two ways: 1. Actual receipt Actual receipt involves actual physical taking of the income in the form of cash or property. 2. Constructive receipt Constructive receipt involves no actual physical taking of the income but the taxpayer is effectively benefited. 69Chapter 3 N F ~ Introduction to income Tax Examples; a. Offset of di lebt o' i ideration 1 service f the taxpayer in consideration for the sale of gy, | P-Peposit ofthe income to the taxpayers ch ) - Matured detachable interest coupons 0” by the taxpayer d. Increase in the capital ofa partner from the profit of the partnership ecking account coupon bonds not yet ¢, eas, Inflow of wealth without increase in net worth — ? does not increase his net worth j, is ny The inflow of wealth to a person that income due to the total absence of benefit. Examples: | a. Receipt of property in trust | b. Borrowing of money under an o! bezzlement or nsideret ligation to return | | In law, the proceeds of em swindling where money is taken with, | an original intention to return are CO} .d as income because of the increase, net worth of the swindler. | NOT EXEMPTED BY LAW, CONTRACT, OR TREATY ; | ‘An item of gross income is not exempted by the Constitution, law, contracts o | treaties from taxation. | The following items of income are exempted by law from taxation; hence, they are not considered items of gross income: 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 7. Income of international missions and organizations with income tax immunity _ vely AV awne Items of gross income that are exempted from taxation are discussed extensi under Exclusions in Gross Income in Chapter 8. TYPES OF INCOME TAXPAYERS A. Individuals | 1 Citizen a. Resident citizen b. Non-resident citizen ie 70Chapter 3 - Introduction to Income Tax 2. Alien a. Resident alien b. Non-resident alien a. engaged in trade or business b. not engaged in trade or business 3. Taxable estates and trusts B. Corporations 1. Domestic corporation 2. Foreign corporation a. Resident foreign corporation b. Non-resident foreign corporation INDIVIDUAL INCOME TAXPAYERS Citizens Under the Constitution, citizens are: 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 ¢. 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 - A Filipino citizen residing in the Philippines B. Non-resident citizen includes: 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. Accitizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for an 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 non-resident citizen and who arrives in the Philippines at anytime during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident 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 71“Ay Chapter 3 - Introduction to Income Tax Filipinos working in Philippine embassies or Philippine consulate office, considered non-resident citizens. are My } Alien A. Resident alien - an individual whi citizen thereof, such as: 1. An alien who lives in the Philippines without definite intention ag ,, . stay; or 2. One who comes to the Philippines for a definite purpose which j nature would require an extended stay and to that end makes his iy temporarily in the Philippines, although it may be his intention at ali Pra) to return to his domicile abroad; Mey idence in the Philippines retains his staty ly departs from the Philippines, . is residing in the Philippines but j, Not v An alien who has acquired res! x such until he abandons the same or actuall B. Non-resident alien - an individual who is not residing in the Philippines aul who is not a citizen thereof 1. Non-resident aliens engaged in in the Philippines for an aggregate period of the year raged in business (NRA-NETB) ~ include: 2. Non-resident aliens not eng 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 a aggregate period of not more than 180 days during the year business (NRA-ETB)- aliens who stay| f more than 180 days duriy | THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS 1, Intention t The intention of the taxpayer regarding the nature of his stay within o outside the Philippines shall determine his appropriate resideng classification. The taxpayer shall submit to the CIR of the BIR documentay proofs such as visas, work contracts and other documents indicating sud intention. not result it ts purporting an extended ers Documents purporting short term stay such as tourist visa shall the reclassification of the taxpayer’s normal residency. Document a long-term stay such as immigration visa or working visa for period would result in the automatic reclassification of the taxpay' residency. 72Chapter 3 - Introduction to Income Tax Examples: a. An alien is normally non-resident. An alien who come to the Philippines with a tourist visa would still be classified as non-resident alien. b. A citizen is normally resident. A citizen who would go abroad under a tourist visa would still be considered a resident citizen. c. An alien who come to the Philippines with an immigration visa would be reclassified as a resident alien upon his arrival. d. A citizen who would go abroad with a two-year working visa would be reclassified as a non-resident citizen upon his departure. 2, Length of stay In default of such documentary proof, the length of stay of the taxpayer is considered: a. Citizens staying abroad for a period of at least 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 are considered resident. c. Aliens who are staying in the Philippines for not more than 1 year but more than 180 days are deemed non-resident aliens engaged in business. d. Aliens who stayed in the Philippines for not more than 180 days are considered non-resident aliens not engaged in trade or business. Illustration 1 Daniel Mario Aresmendi, a Mexican actor, was contracted by a Philippine television company to do a project in the Philippines. He arrived in the country on February 29, 2021 and returned to Mexico three weeks later upon completion of the project. Daniel Mario Aresmendi shall be classified as an NRA-NETB in 2021. His stay is for a definite purpose which in its nature will be accomplished immediately. Mlustration 2 Mamoud Jibril, a Libyan national, arrived in the country on November 4, 2021 Mr. Jibril stayed in the Philippines since then without any working visa or work permit. For the year 2021, Mr. Jibril would be considered an NRA-NETB because he stayed in the Philippines for less than 180 days as of December 31, 2021. If he is still within the Philippines until December 31, 2022, he will qualify as a resident alien for 2022. Illustration 3 Without any definite intention as to the nature of his stay, Juan Miguel, a Filipino citizen, left the Philippines and stayed abroad from March 15, 2020 to April 1, 2021before returning to the Philippines. For the year 2020, Juan is a non-resident citizen because he is absent for more than 183 days but he will be classified as resident citizen for the year 2021 because he is absent for less than 183 days in 2021. 2Boy Chapter 3 - Introduction to Income Tax Taxable Estates and Trusts 1, Estate #7 bit Estate refers to the properties, rights, and obligations of a decease not extinguished by his death. Pay, treated as individual taxp, E judici: lement are “ states under judicial sett! f the properties left by the deceder re, ‘ estate is taxable on the income ol iti ‘i entities. R under extrajudicial settlement a" exe cron * pe income ty properties of the estate under extrajudicial S le tothe hei ne person (grantor or trustor) t whereby ©! a , wae another person (beneficiary), which wil a tee or fiduciary). be, 2. Trust A trust is an arrang (ie. donates) property 0 under the management ofa third party (trust i i py the grantor is treated in A trust that is irrevocably designated by vibe a bald ia in tava 7 it is an individual taxpayer The income of the P! sss aee st stag, to the trust. Trusts that are designated as revocable y the grantor are, taxable entities and are not considered as individual taxpayers. The incon, properties held under revocable trusts is taxable to the grantor not tg ] trust. When the trust agreement is silent as to revocability of the trust, the trus presumed to be revocable. CORPORATE INCOME TAXPAYERS The term ‘corporation’ shall include one person corporations (074s) partnerships, nO ‘matter how created or organized, joint-stock companies, joiz accounts, association, or insurance companies, except general professioxg partnerships and a joint venture or consortium formed for the purpose ¢ undertaking construction projects or engaging in petroleum, coal, geothermal, ay other energy operations pursuant to an operating consortium agreement under service contract with the government. the term corporation includes profit-oriented and non-profit institutios cooperatives, government agencies ai or religious and other organizations | Hence, such as charitable institutions, instrumentalities, associations, leagues, civic Domestic Corporation ‘A domestic corporation is a corporation that is organized in accordance wit Philippine laws, It includes one-person corporations (OPC) owned and register by resident citizens in the Philippines.Chapter 3 - Introduction to Income Tax Foreign Corporation A foreign corporation is one organized under a foreign law. Types of foreign corporation Resident foreign corporation (RFC) - a foreign corporation which operates and conducts business in the Philippines through a permanent establishment (i.e. a branch). 2. Non-resident foreign corporation (NRFC) - a foreign corporation which does not operate or conduct business in the Philippines Note: 1. A corporation that incorporates in the Philippines is a domestic corporation under the Incorporation Test even if the same is controlled by foreigners. 2. A foreign corporation that transacts business with residents through a resident branch is taxable on such transactions as a resident foreign corporation through its branch. However, if it transacts directly to residents outside its branch, it is taxable as a non-resident foreign corporation on the direct transactions. é 3. An individual that establishes a one-person corporation (OPC) shall be taxable as a corporate taxpayer for the business transactions of the OPC but he shall be subject to tax as an individual for his personal transactions. Special Corporations Special corporations are domestic or foreign corporations which are subject to special tax rules or preferential tax rates. OTHER CORPORATE TAXPAYERS 1. One-person corporation A one-person corporation is a corporation with a single stockholder who may bea natural person, trust or an estate. Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies, and non-chartered GOCCs may not incorporate as One-person corporations. A natural person who is licensed to exercise a profession may not organize as a One Person Corporation for the purpose of exercising such profession except as otherwise provided under special laws. 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. 75Chapter 3 - Introduction to Income Tax Types of partnership a) General professional partnership (GPP) A GPP is a partnership formed by Pe exercising a common profession, no part 0! from engaging in any trade or business. A GPP is not treated as a corporation an a rtners are taxable in their ing,’ It) divig, | rsons for the sole fthe income of which igite len "he d is not a taxable e, } a. A partnership betw e accountant, to practi dvisory services would be a busi partnership since the two partners are not in the same profession, b. A partnership between accountants Khim and Vhinson to venture jn., | beauty parlor would be a business partnership since the venture is ng ; practice of a common profession. it c. A partners! : ‘services would be a general professional partnership. v . Dentists Wency and Andy partnered to operate a dental clinic. During slag season, they are converting their clinic into a beauty saloon. Their partnership is a business partnership since itis earning income from business. exempt from income tax, but the pal . capacity with respect to their share in the income of the Partnership, ly b) Business partnership | A business partnership is one formed for profit. It is taxable | corporation. % Examples: | een Atty. Mendoza, a lawyer and Mark Santo, | | af neg ice in taxation at Juan and Miguel to venture into aug it 3. Joint venture ; A joint venture is a business undertaking for a particular purpose. It may be organized asa partnership or a corporation. ‘Types of joint ventures: a. Exempt joint ventures Exempt joint ventures are those 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. Similar to a GPP, this type of joint venture is not treated as a corporatiot and is tax-exempt on its regular income, but their venturers are taxable to their share in the net income of the joint venture. b, Taxable joint ventures All other joint ventures are taxable as corporations. 76 oeChapter 3 - Introduction to Income Tax 4, Co-ownership A co-ownership is joint ownership of a property formed for the purpose of preserving the same and/or dividing its income. A co-ownership that is limited to property preservation or income collection is not a taxable entity and is exempt but the co-owners are taxable on their share on the income of the co-owned property. However, a co-ownership that reinvests the income of the co-owned property to other income-producing properties or ventures will be considered an unregistered partnership taxable as a corporation. ‘THE GENERAL RULES IN INCOME TAXATION Individual taxpayers Within Without Resident citizen v v Non-resident citizen Resident alien NESE Non-resident alien Corporate taxpayers Domestic corporation Resident foreign corporation AAS Non-resident foreign corporation ~>he eee vr nnnrnnm Note: 1. Consistent with the territoriality rule, all taxpayers, except resident citizens and domestic corporations, are taxable only on income earned within the Philippines. 2. The NIRC uses the term “without the Philippines” to mean outside the Phil The Residency and Citizenship Rule Taxpayers who are residents and citizens of the Philippines such as resident citizen and domestic corporations are taxable on all income from sources within and without the Philippines. A corporation is a citizen of the country of incorporation. Thus, a domestic corporation isa citizen of the Philippines. Basis of the extraterritorial taxation 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. 77Chapter 3 - Introduction to Income Tax Under our laws, resident citizens and domest hel Atal privileges over aliens. Also, between resident an reident citizens, req, citizens have full access of the publi services tad agovernment DeCaUse they in the country. The taxation of foreign income of resident citizens and domeat® corporations properly reflects this difference i” enefits consistent with», Benefit Received Theory. ; ic corpora in resident citizens and domestic Corporatio, of tax revenues brought i if loss the potential lo , he Pp tructuring transactions such th. t ecuting © rn rd Philippine income taxes. The extra-territorial tax treatment is also intended as a safety net to situs relocation or the practic® of ex income will be realized abroad to avol ‘The issue of international double taxation i The rule on extraterritorial pation on resident Lila Gomes corporations exposes these taxpayers t0 double ae edent a 1 NiR¢ corpora pea for taxes paid In fore countries. Wr pines on th ir force domestic corporations pay ‘minimal taxes 17 the Philippines in their foreig, income because of the tax credit. me. It is the jurisdiction that has SITUS OF INCOME ‘The situs of income is the place of taxation of inco! the authority to impose tax upon the income. ‘Situs of income VS: source of income Situs of income should be differentiated from the source of income. The latter pertains to the activity or property that produces the income. income is taxable in the in determining whether or not an il particularly important to taxpayers taxable only on income is also important to taxpayers taxable on global income for tation of the foreign tax credit. Situs is important Philippines. Situs is within, However, it purposes of the compu' INCOME SITUS. ‘RULES Debtor's residence Where the intangible is employed Location of the property Place where the service is rendered 1. Interest income 2. Royalties 3, Rent income 4, Service income 78Chapter 3 - Introduction to Income Tax Mustration A taxpayer had the following income: Interest income from deposits in a foreign bank P 300,000 Interest from domestic bonds 50,000 Royalties from books published in the Philippines 100,000 Rent income from properties abroad (the lease contracts were executed in the Philippines) 150,000 Professional fees for services rendered in the Philippines to non-resident clients (paid in US Dollars) 400,000 Applying the situs rules, the following are the situs of the aforementioned income: —Within_ _Without _ _World total Interest on foreign deposits P = P 300,000 P 300,000 Interest from domestic bonds 50,000 50,000 Royalties from books in the Philippines 100,000 100,000 Rent income on foreign properties 150,000 150,000 Professional fees 400,000 400,000 Total 2_550,000 P__450,000 P_1,000,000 Resident citizen or domestic corporation taxpayers would be taxable on the world income while other taxpayers would be taxable only on the income from within the Philippines. OTHER INCOME SITUS RULES A. Gain on sale of properties 1. Personal property ¥ Domestic securities ~ presumed earned within the Philippines “Other personal properties - earned in the place where the property is sold 2. Real property - earned where the property is located Illustration A taxpayer had the following income: Gain on sale of domestic stocks P 200,000 Gain on sale of foreign bonds 100,000 Gain on sale of a commercial lot in Baguio City 500,000 Gain un sale of car in Ontario, Canada 200,000 Gain on sale of machineries in Mexico, Pampanga 250,000 Interest income on foreign bonds 50,000 Dividends on domestic stocks 150,000 79Chapter 3 - Introduction to Income Tax the foregoing income: _Without — P 200,000 p 100,000 ‘The following table summarizes the situs of Gain on sale of domestic stocks Gain on sale of foreign bonds 000 Gain on sale of commercial lot bee 200,000 Gain on sale of car in Canada 250,000 " 50,000 Gain on the sale of machineries Interest on foreign bonds __ 150.000 Dividends on domestic stocks as00.900 p_350,000 Total B. Dividend income from: a d within | 1. Domestic corporation — presumed earne ’ 2. Foreign ceeporation situs depends on pre-dominance test The pre-dominance test 7 irene ratio ‘ofthe Philippine gross income over th ‘aration in the three-year Pe? part of the perio resident foreign COrP or for such corresponding to the Philipping | e world gross income of, riod preceding the year das the corporation hy | dividend declaration, been existence, is: ; poet east 50%, the portion of the dividend ¢ ewrncome ratio thats earned within. v cece than 50%, the entire dividends received is deemed earned abroad sident foreign corporations will least likely pass ths tions. Hence, dividends from non. non-re esumed earned abroad. ipsence of Philippine opera Dividends from vations are generally Pr test due to their at resident foreign corpo! Iustration In 2024, Sarah received a 500,000 dividend income from ABC Corporation. ABC Corporation, a foreign corporation, had the following gross income: __2021 __2022 _ 2023 _ —Total__ Philippines P 100,000 P 200,000 P 300,000 P 600,000 Abroad _— 200,000 Total P-300,000 P__300,000 B_400,000 P1,000,000 If ABC Corporation is a: 1. Domestic corporation ~ the entire P500,000 is earned within 2 Resident foreign corporation - the P500,000 dividend shall be split as follows: Gross Income Ratio = P600,000/P1,000,000 = 60% 60% xP500,000) P 300,000 Earned within the Philippines ( Earned without the Philippines (40% x P00,000) 200.000 P_500,000 Total dividends 80——>>——EEZE_ Chapter 3 - Introduction to Income Tax Supposing that the ratio is 49%, the entire PS00,000 will be deemed earned outside the Philippines, c. Merchandising income - earned where the property is sold illustration source ofgrossincome —Amount_ Goods purchased and sold within P 200,000 Goods purchased within and sold abroad 100,000 Goods purchased abroad and sold within 150,000 Goods purchased and sold abroad 350,000 The income earned within and without shall be: Purchased and sold within P 200,000 | Purchased within and sold abroad P 100,000 | Purchased abroad and sold within 150,000 | Purchased abroad and sold abroad 350,000 | Total P_350,000 p__450.000 D. Manufacturing income - earned where the goods are manufactured and sold Operations Remark Production | Distribution Within Within | Total income from production and distribution is earned within the Philippines Without | Without — | Total income from production and distribution is earned without the Philippines Within Without | Production income is earned within, Distribution income is earned without Without Within Distribution income is eared within, | Production income is earned without Mlustration 1 Island, Inc. manufactures goods and sells them through its branch. Island bills its branch at established market prices. Island reported the following gross income: Home office _Branch__ __Total__ Sales P 4,000,000 P 2,000,000 P 6,000,000 Cost of goods sold —2400,000 _ 1,200,000 __3,600,000 Gross income 24,600,000 P__800,000 P_2,400,000 81Cha 3 Pter 3 - Introduction to Income Tax The i following shows the situs of the gross income of Island un, der. following scenario: 7 o Scenario Home office, _Branch__ —Within— ‘ 0.1 Philippines “Philippines P 2,400,000 P 3 No.2 Abroad Abroad 0 2,400,000 No.3 Philippines Abroad 1,600,000 800,000 No.4 Abroad —_—Philippines ‘800,000 1,600,000 Note: 1. Both production and distribution are 2. The branch is not a separate taxable entity, income is taxable to Island Inc. conducted by the same taxable entity, 1 but an integral part of Islang, Ins Mlustration 2 is | Assuming production is conducted by a parent corporation and the dist, conducted by its subsidiary corporation: Sales P 4,000,000 P 2,000,000 P 6,000,000 —3.600,000 Cost of goods sold 2.400.000 B.1600000 P_.g00,000 P_2,400.000 Gross income ‘The gross income recognized by each corporation is taxable to each 2 ee because each corporation is a separate taxpayer. The situs of taxation shay place of sale without regard to the seller or the supplier. k ‘The following are the situs of income for the parent corporation: | No.1 Philippines Philippines P 1,600,000 P 7 No. 2 Abroad Abroad - 1,600,000 No.3 Philippines Abroad 1,600,000 - No.4 ‘Abroad Philippines - 1,600,000 ‘The following are the situs of income for the subsidiary corporation: No.1 Philippines Philippines P 800,000 P - No.2 Abroad Abroad - 800,000 No.3 Philippines Abroad ft 800,000 No.4 ‘Abroad Philippines 800,000 Note to readers: Readers are advised to master the situs rules as this have a significant effect | ‘on your comprehension of advanced tax Tules to be introduced in succeeding | chapters. 82Chapter 3 - Introduction to Income Tax CHAPTER 3: SELF-TEST EXERCISES Discussion Questions 1. Enumerate the characteristics of gross income, 2, What are capital items considered with infinite value? Enumerate. 3, When is income considered realized? 4, Distinguish exchange from transfer. 5. Whatis a complex transaction? How is it taxed? 6. What is a holding gain? Why is it exempt from taxation? 7. Compare actual receipt with constructive receipt. 8. Enumerate and explain the classifications of individual taxpayers. 9. What constitute a taxable estate and trust? 10. Enumerate and explain the classifications of corporate taxpayers. 11, Discuss the taxability of each class of taxpayers. 12, Explain situs, Differentiate situs from source of income. 13. Whats the situs of the following income? a. Interest income b. Service income c. Royalty income d. Rental income e. Gain on sale of movable property £. Gain on sale of immovable property g. Dividend income from domestic corporation h. Dividend income from resident foreign corporation i, Merchandising income Exercise Drill No. 1: Return of capital and Return on capital Indicate the amount representing return of capital or return on capital: Return OF | ReturnON Consideration | For the loss of Capital Capital P 1,000,000 Health P__ 500,000 P 400,000 car P_ 600,000 Income, 1 2. 3. P 300,000 | P 350,000 building | 4. 5. P 1,200,000 Life 83Chapter 3 - Introduction to Income Tax Exercise Drill No. 2: Income tax and transfer tax Check the box where each of the following items is taxable: Transaction Income tax aT ‘ansfer tay Barter of properties Sale of goods Rendering of services Donation of properties Transfer of properties from a decedent to the heirs upon death Transfer for less than full and adequate consideration UP lel a Exercise Drill No. 3: The tax concept of income Check the appropriate box whether the following are exempt or taxable. Item Taxable Exen, Winnings from gambling _ Income from swindling Indemnity for moral damages Harvested fruits from an orchard ‘Compensation income Interest income ‘Amount received by the insured in excess of insurance premiums paid Proceeds of life insurance received by the heirs of the insured Gain on sale of goods by the home office to its ] | | | 4 noone ||| branch Gain on sale of goods and services between 10. relatives Gain on sale of goods by a parent corporation to a subsidiary corporation 12. | Appreciation in the value of land 13. | Birth of animal offspring 14. | Income of a registered Barangay Micro-Business | - Enterprise Cancellation of debt out of gratuity of the creditor Cancellation of debt by the creditor in exchange 16. of services rendered by the debtor 17_| Matured interest from coupon bonds 18, | Receipt of bank loan 11. 15. 84Chapter 3 - Introduction to Income Tax 73, | Salaries of a minimum wage earner 20. | PCSO or lotto winnings 21, | Benefits from GSIS, SSS, Pap-Ibig or PhilHealth 22. | Discovery of hidden treasure Exercise Drill No. 4: Income taxpayer classification Indicate the appropriate classification for each of the following taxpayers: pc- RFC- Domestic corporation RC - Resident citizen Resident foreign corporation NRC - Non-resident citizen NRFC - Non-resident foreign corporation RA - Resident alien NRA-ETB - Non-resident alien engaged in trade or business NRA-NETB - Non-resident alien not engaged in trade or business NT- Not a taxpayer - Person or Entity Classification A fat Mexican tourist ‘Ahardworking overseas Filipino worker ale|p|r ‘An expatriate employee ‘Filipino who is privately employed in the Philippines ‘An unemployed Filipino residing in the Philippines A Chinese businessman who has his domicile in the Philippines for 6 months ‘AJapanese who married a beautiful Filipina and has been residing in the Philippines for 2 years . | A 2H year Korean college student studying in the Philippines 9. | A corporation incorporated under Philippine law ‘foreign corporation doing business in the Philippines {iL} Trust designated by the donor as irrevocable 12. ‘Trust designated by the donor as revocable 123. ‘A business partnership 14, joint venture organized under a foreign law and is not operating in the Philippines 15. ‘An estate of a Filipino citizen judicially administered in Japan 16. An estate of a Filipino citizen extra-judicially administered in the Philippines 17. A taxable joint venture organized in the Philippines 18. ‘Anon-profit corporation organized in the Philippines 85Chapter 3 - Introduction to Income Tax Exercise Drill No. 5: General Income Tax Rule Check the box that properly corresponds to the taxability of the follow, ing tay Taxpayer World income Philippiy income® | 1. | Non-resident citizen 2. | Resident alien 3. | Non-resident alien engaged in trade or business | 4. | Resident foreign corporation 5. | Resident citizen 6. | Non-resident alien not engaged in business 7__[ Non-resident foreign corporation 8. | Domestic corporation 9, | Taxable trusts established by a Filipino citizen in the Philippines 70. | Taxable estate of a non-resident citizen judicially administered abroad Compute how much is earnes the following independent cases: Exercise Drill No. 6: Location and situs of income d within and earned outside the P! [_ Income description Within Without Rim Gonzales earned P100,000 interest income; 40% of these were from non- resident debtors. 2. | A finance company earned P1,000,000 royalties from a franchise; 40% of these were derived abroad. 3. | Ray Gatchiearned P100,000 rent from OFWs from his apartment in the US. He also earned P40,000 rent from his Philippine condominium unit. & | Chester, a resident citizen, works home online and submits his output to clients. He collected P100,000 service fee from foreign clients and P20,000 from resident clients. Afghanistan for P500,000. The services were paid in Afghanistan. 5. | Mark rendered audit services to client in 86 hilippines frog)Chapter 3 - Introduction to Income Tax Income description Within Without a July has store in a tourist parkin Baguio City, Philippines. He earned a total of P40,000 gain from selling souvenir items. 40% were from foreign tourists. x Don Flores sold at a gain of P2,000,000 to | a client abroad a commercial building | located in Quezon City, Philippines. | John sold his stocks in a domestic | corporation to a foreign investor at a gain of P50,000. =| Villanueva received P20,000 dividends from a domestic corporation and 30,000 dividend income from a non- resident foreign corporation. | 10. | Andrew Johnson received P40,00 dividends from a resident foreign corporation; 60% of its historical income is from the Phi ines. Ti. | Abreeza, Inc. manufactures in the ; Philippines and sells to unaffiliated export clients. A total of P100,000 gross income was earned during the period. ; 12. | Marawi manufactures abroad and sells to its Philippines branch at market prices. | Production cost abroad were P200,000. Billings to branch totaled P300,000 while branch sales totaled P450,000. 13. | James Fernandez received P100,000 dividends from a resident foreign corporation which realized 40% of its income in the Philippines. 14. | Kevin received P20,000 dividend from a non-resident foreign corporation. and sells to resident clients. A total of P400,000 gross income was realized ; | [/45-] Macahambus plant manufactures tables | | during the period.Chapter 3 - Introduction to Income Tax Multiple Choice - Theory: Part 1 1. When paid for, which of the following items may i a. House and lot c. Dignity nvolve a return on Capital b. Life d. Health 2. Which isnot a requisite ofgrossincO™Me? ray a, Return on capital c. Exempte' F Not exempted PY kh b. Realized benefit 3, Which is taxable item of income? mals a. Increase in numbers of 8 herd of anima B. Compensation for personal injuries c. Moral damages 4. Interest on moral damages . ich i: pject to income tax? 4. Which isnoe suis =e gales of ee @. Barter of goods a b. Sale ofservice 5, The total consideration received from the sale of service constitute a. Returnon capita ¢ Either a orb b._ Return of capi d.Both a and b 6, The total consideration received from the sale of goods at a gain represents a. Return on capi c Bithera orb b. Return of capital Both a and b 7. The total consideration received from the sale of goods ata loss represents a. Returnon capital c. Either a or b b. Return of capital d. Botha and b 8, Whyis income subject to taxation? a. Income is the most prevalent source ofa taxpayer's wealth. b._ Income is the best measure of taxpayers’ ability to pay tax. nd to have more income than the poor. c. Rich people tel d. Any of these. be imposed for the following purposes, except 9. Income tax may its of revenues a. Toprovide large amount b. Tolimit corruption c. To offset regressive sales and consumption taxes d. To mitigate the evils arising from the inequalities in and wealth the distribution of ineBY Chapter 3 - Introduction to Income Tax 10. Which is not an item of Bross income because of the absence of an undertaking from the taxpayer? a. Proceeds ofa life insurance policy b. Forgiveness of indebtedness as an act of gratuity ¢ Revaluation surplus on properties d. Service fees 11. Which is subject to income tax? a. Proceeds of life insurance policy received by the family of the insured b. Excess of proceeds over the premiums paid received by the taxpayer © Life insurance proceeds received by the corporation from the insurance of a deceased officer d. None of these 12. Which of the following is exempted from income taxation because of the absence of ability to pay? a, Damages received from patent infringement suit b. Unrealized income from investments ©. Gain on sale of goods d. Inheritance 13. Which of the following constitutes taxable income? a. Return of premium on life insurance received by the insured b. Moral damages received from slander ©. Proceeds of crop insurance d. Compensation for personal injury 14. Which is specifically exempted from income taxation by virtue of legal exemption? a. Minimum wage b. Gain on sale of prohibited drugs c. Unrealized gain d. Allofthese 1 a Which of the following is not a constructive receipt of income? a. Forgiveness of indebtedness in consideration of service b. Matured detachable interest coupons c. Deposit of income to taxpayer's bank accounts a. Cash salary of an employee 16. Transfers for insufficient consideration are subject to a. Income tax c. Either a or b b, Transfer tax d. Botha orb 89Cha Pter 3 - Introduction to Income Tax ee Y | | me taxpayer classification? nt foreign corporation ‘sional partnership Multiple Choice - Theory: Part 2 1 Wu Which of the following is not an inco! a Resident citizen c. Reside . Non-resident alien d. General profes: 2. Aresident alien naturalized in accordance with Philippine laws isa a. Resident citizen b. Resident alien c. Non-resident alien engaged in trade oF business 4. Non-resident alien not engaged in trade or business | 3. Whois nota resident alien? a. Analien who stayed in the Philipp b.Analien who married and stayed i ¢. Analien who stayed in the Philippines for more than one year. . An alien who established his intention before the CIR to stay iy | Philippines for an extended period of time. ines for more than two years. in the Philippines for one year. Which taxpayer is nota natural person? a. Resident citizen b. Taxable estate c. Non-resident alien en| d. Non-resident alien not en; ‘A Filipino who has been abroad for more than 183 a. Residentalien b. Non-resident alien c. Non-resident citizen | Nonresident citizen not engaged in trade or business * gaged in trade or business gaged in trade or business days is classified asa wn the Philippines is classified as a nor ‘An alien who stayed Jess than one year in .ss if he stayed herein for less than resident alien not engaged in trade or busine: a. 180days ¢. 183 days b. year d. 2years ‘An American who showed proof to the satisfaction of the Commissions ¢ tema Revenue of his intention to stay in the Philippines as an immigrant classified as a a. Resident citizen c. NRA- ETB b. Resident alien d. NRA -NETB ‘Japanese who is staying in the Philippines for 183 days is a a. Resident alien | b. Non-resident alien c. Non-resident alien engaged in trade or business 90Chapter 3 - Introduction to Income Tax d. Non-resident alien not engaged in trade or business 9, ACanadian who is staying in the Philippines for more than one year is a a. Residentalien b. Non-resident alien © Non-resident alien engaged in trade or business 4. Non-resident alien not engaged in trade or business 10. Acorporation incorporated according to Philippines laws isa a, Domesticcorporation _¢, Non-resident corporation b. Resident corporation —_d. De jure corporation 11. A foreign corporation which is not authorized to conduct business in the Philippines is a a. Domesticcorporation _ ¢, Non-resident corporation b. Resident corporation —_d, De jure corporation 12. Which is taxable on world income? a. Resident corporation _c. Resident citizen b. Non-resident citizen d. Resident alien 13, A foreign corporation which operates a branch in the Philippines is a a. Domestic corporation _ ¢. Non-resident corporation b. Resident corporation — d. De jure corporation 14. A partnership organized in the Philippines but dominantly operates business abroad isa a. Domesticcorporation _ ¢, Non-resident corporation b. Resident corporation _. De jure corporation 15. Which is required to pay income tax? a. Revocable trusts b, Estates under extrajudicial settlement . Co-ownership d. Business partnership 16. Which is not an income taxpayer? a. Non-resident foreign corporation b. Non-resident alien not engaged in trade or business ¢. Joint venture engaged in energy operation pursuant to a service contract with the government d. Irrevocable trusts 17. Which of the following taxpayers is taxable only on income earned from the Philippines? a. Resident corporation _c, Resident citizen b. Domestic corporation . All of these 91Chapter 3 - Introduction to Income Tx income earned from sources wip, in 4 18. All of the following are taxable only com Philippines, except i a. Resident alien c. Non-resident corr o b. Non-residentcitizen Domestic corporation Multiple Choice - Theory: Part 3 1. The place of taxation is in a Situs rule ¢ Territoriality d. Gross income tizen, lent money to Shine, 2 resident Chinese ized by @ property ‘ocated in Japan. The in, b. Situs a non-resident ci 2. Genesis, indebtedness was collateral income is earned in a. the Philippines. Japan. ni b. china. dl @ Japan, China and the Philippines. of income? correct statement regarding situs ‘domicile of the taxpayer. 3. Which is an inc me is earned in the idence of the debtor. a. Service inco! b__ Interest income is earned in the res! c. Royalty is earned where the intangible is employed. din the location of the property: d. Rent is earne nt is correct regarding situs of income? is earned in the location of the propery, 4. Which stateme! the sale of real property i din the place of sale. a. Thegainon f The gain on sale of any property is drm < Merchandising income is earned in tthe residence of the proprietor. ‘come is earned in the place of sale d. Manufacturing in 5 Gains on the sale of goods manufactured Philippines is subject to tax a. wherever sold. ¢ without the Philippines only. d.within the Philippines only. b._ifsold abroad only. anufactured in the Philippines and expo ident citizen. Which is correct? the commodity involved and sold by the taxpayer within 6. Jan, a resident alien, bought a car m: the same at again to Carla, a non-resi a. The gain is subject to tax in the Philippines since manufactured in the Philippines. b. ‘The gain is subject to tax in the Philippines since the buyer is a citizen of| Philippines. bject to tax in the Philippines and abroad since c. The gain is both sul commodity involved is manufactured in the Philippi odit Philippines. d. The gain is taxable in the Philippines since it is sold in the Philippines. 92Chapter 3 - Introduction to Income Tax 7, Juan, a resident alien, and Pedro, a non-resident alien, executed a contract of sale in Japan whereby Pedro shall purchase the lot owned by Juan in the Philippines. Juan gains P1,000,000 in the exchange. Which is true? a. The gain is exempt since the gain is derived outside the Philippines. b. The gain is not subject to Philippine tax since Juan is a resident alien. c. The gain is subject to Philippine tax because Juan is a resident alien. d. The gain is subject to Philippine tax because the property is in the Philippines. Multiple Choice - Problems Problem 3-1 Rica paid P20,000 annual Premium on a life insurance contract which would pay her P1,000,000 in case of her death. After paying for 4 years, Rica assigned the policy to Carlos for P120,000. Compute the return on capital. a. P120,000 cc. P40,000 b. P80,000 d.PO Problem 3-2 Sophia purchased a P1,500,000 life insurance policy for P100,000. During the year, Sophia died and her heirs collected the entire proceeds. How much of the proceeds is exempt from income tax? a. P1,500,000 ¢. P100,000 b. P1,400,000 a.PO Problem 3-3 Sean negotiated a P1,000,000 non-interest bearing promissory note to Candy. Candy paid Sean P950,000. On due date, Sean paid Candy P1,000,000. Which is true? a. Sean earned P50,000 return on capital b. Candy earned P50,000 return on capital © Candy received P50,000 donation 4, Candy received P1,000,000 return of capital Problem 3-4 Andrew received a total sum of P42,000 from his employer consisting of the following: + P5,000 reimbursements for employer's expenses paid by Andrew * 15,000 payment of Andrew's computer set purchased by the employer * P22,000 monthly salary : Andrew's computer set cost him P12,000. Compute the total return on capital which can be subjected to income tax. a P42,000 c. P25,000 b. P37,000 d. P22,000 93, a Chapter 3 - introduction to Income Tax Problem 3-5 Lake Sebu Company insured 500,000 in premiums was paid before the P the life of its president, for P2,000,000. A ¢, Mesident died. The COMPANY coljece "a ; total proceeds. Compute the return on capital. ceive b. 1,500,000 4. P 2,000,000 “ i P120, Pere et ased the P1,000,000 life insurance policy of Ben for ria 200 Danny the 20,000 annual premiums on the policy for 4 yea ; Compute the total return on capital fie a. 1,000,000 : ra , b. 880,000 . Problem 3-7 Carlos paid P20,000 annual premium for a P1,000,000 life insurance Policy, After re carlos surrendered the policy and was paid by the insurance compa 200,000 which represents the cash surrender value of the policy. Compute the return on capital. a P1,000,000 cc P60,000 b. P860,000 PO Problem 3-8 Onyoc insured his newly constructed building costing P1,000,000. Within a few days} the building was totally destroyed by a fire. The insurance company reimburs Onyoc P1,500,000, which represents the fair value of the building. Which statement is false? a. P1,000,000 of the proceeds is a return of capital. b. 500,000 of the proceeds is a return on capital. ¢. P1,500,000 is a return of capital. 4. OnlyAandB Problem 3-9 400,000 income will be totally de 300,000 crop insurance cover fo destroyed Teod: anata by bad weather conditions. He obtained u Gone The, 301000. Just before harvest, a rare frost total °rd's plantation, The insurance company Paid the policy proceeds. Compute 7 mu te total recovery of loss Profits to be Tecognized by Teodoro as income. b. P 100,000 ‘ 300,000 : P 370,000 94Chapter 3 - Introduction to Income Tax Problem 3-10 Carl sued an unscrupulous person for derogatory remarks which he considered to have besmirched his reputation. The court awarded him an indemnity of P1,000,000 inclusive of P200,000 reimbursement for Attorney's fees and P100,000 exemplary damages. Compute Carl's total return on capital, a. P1,000,000 .P700,000 b. 800,000 4.P0 Problem 3-11 Nathan sells hot chili-flavored Pancakes using a secret formula he patented. He sued a competing pancake house for alleged patent infringement and claimed a total indemnity of P1,200,000: P1,000,000 for loss of profits from loss of sales ¢ P200,000 as Attorney’s fee reimbursement If Nathan wins the case and is awarded the total indemnity, compute his total return of capital, a. P1,000,000 PO b. P800,000 d. P 200,000 Problem 3-12 Johnson was one of the passengers of a van that fell off a ravine. Henson sued the bus company and was awarded an indemnity of P800,000 for the following: + P500,000 for the impairment of his health resulting to the amputation of his legs * P200,000 for his loss of salaries during his hospitalization * P100,000 for his Attorney's fees Compute Johnson's return on capital. a. P800,000 c. P200,000 b. P300,000 d. PO Problem 3-13 Clyde received the following items during the year: + P200,000 donation from a girlfriend P 100,000 service fee from professional services 300,000 inheritance from his deceased father P100,000 income from illegal gambling P50,000 gain on sale of his personal car P250,000 profits from his bar restaurant Compute the total income subject to income tax. a. P1,050,000 c. P550,000 b. P750,000 d, P500,000 95Chapter 3 - Introduction to Income TX Problem 3-14 | Manila and @ 70%-owned subsid Pines Corporation has 4 branch in Mores corporation's sales during hog 1,500,000 for merchangt ¥%, int Inc. in Davao. The following data S oe a branch «Pines Corporation bill Many above sequisition cost. The brancy Sh 0 Stay merchandise and did not operate duri ee a Sold merchandise tO unrelated parties at 2 gain Pio’ Bae «Sold merchandise t parrel Asuncion, Pines olin sn ata gain of P100,000 «sold various merchandis to Choco Hills, Inc. a8 gain of P200,000 subject to income tax, ‘Compute the total income of Pines C poration a. P1,700, 000 G 1,100,000 . "200, . 900,000 b. 1,200,000 Problem 3-15 Corporation. He had the fn ‘le Jonathan is a superv items of gross income during the year: Jonathan was paid pg00,000 salaries © Jonathan's 100,000 personal loan was paid by Koronadal Corporation as, for his excellent performance. «Jonathan's 50,000 advances tO the company was paid by Koronaday executive officer as a gift. tation and transportation al ‘entitled to excess represen ‘e out of which P120,000 was di «Jonathan is ;ved P200,000 total allowance Jonathan recei by him. Compute Jonathan's total income subject to income tax. a. P980,000 c. P880,000 b. 900,000 4. P800,000 Problem 3-16 ertains to her transactions during 2021 Jen is engaged in business. The following yer gold his personal car which was purchased at 200,000 to a friend who paid half of the car’s P500,000 current fair value. «Sales of merchandise was P800,000 and the cost of goods sold was P600,000- Jen acquired several stocks from the Philippine Stock Exchange for s ‘These stocks have an aggregate purchase price of 400,000 but with P7 fair value by December 31, 2021. ‘© Jen's house and lot which he acquired for P1,500,000 in 2010 now havea fair value of P2,500,000. Compute Jen's total income subject to it a. P1,800,000 eee b. P1,550,000 4.P250,000 96Chapter 3 - Introduction to Income Tax Problem 3-17 A condominium home owner's association collects dues from unit holders ai the same to service providers on their behalf. Such dues include electricity, security, and maintenance. The association charges unit holders an additional 2% of their utility bills as service charge. ind remits water, During the year, the association processed utility bills for unit holders totaling 5,000,000. How much taxable income is realized by the association? a. P5,000,000 cc. P100,000 b. P4,900,000 d.PO Problem 3-18 Kenjy used to bet in PCSO lotto. On June 3, 2014, he won the P20,000,000 Jackpot prize from the 6/45 lotto. One P20-ticket out of 10 bets took the prize. How much is Kenjy’s total income subject to tax? a. P20,000,000 c. P19,999,900 b. P19,999,990 d.PO Problem 3-19 ‘An American citizen has been staying in the Philippines since August 15, 2021. What would be his taxpayer classification for the year 2021 and 2022, respectively? a, Non-resident alien engaged in trade or business; resident alien b. Non-resident alien not engaged in trade or business; resident citizen c. Non-resident alien engaged in trade or business; resident citizen d. Non-resident alien not engaged in trade or business; resident alien Problem 3-20 Acitizen who left the Philippines on March 1, 2021 would be classified as a. Non-resident for the year 2021. b. Resident citizen for the year 2021... c. Non-resident for the year 2022.. d. Resident citizen for the year 2022. Problem 3-21 An alien received P200,000 compensation income in the Philippines and P300,000 rental income from abroad. How much will be subject to Philippine income tax? a. None c. P300,000 b. P200,000 d. P500,000 Problem 3-22 A non-resident citizen is an international financier who earned P400,000 interest income from resident debtors and P300,000 from foreign debtors. 97Chapter 3 - Introduction to Income Tax a much is subject to Philippine income tax? b. P300,000 d. P700,000 Problem 3-23 Sarah has the following items of income: Case Problems Case Problem 1 Jays a c. P400,000 Abroad 200,000 —-P 100,000 Business income Professional fees 100,000 50,000 Compensation income 400,000 - Rent income 300,000 200,000 30,000 40,000 Interest income Assuming Sarah is a resident citizen, compute the total income subjeq Philippine income tax. a. P1,390,000 c. P1,030,000 b. 1,180,000 . P1,420,000 Sarah is a resident alien, compute the total income subject to Phili Assuming income tax. a. 1,420,000 c.P1,030,000 b. 1,180,000 . P390,000 \g Sarah is a resident corporation, compute the total income subjeq Assumin, Philippine income tax. a. 1,420,000 c. P1,180,000 b. P1,030,000 d.P390,000 rah is a domestic corporation, compute the total income subjet Assuming Sa Philippine income tax. a. P390,000 c. P1,180,000 b. 1,030,000 d. 1,420,000 ‘on has the following income in 2021: P10,000 interest income from a non-resident Japanese friend P40,000 interest income from Philippine residents 7 500,000 rent income from a commercial complex located in the USA whid leased to resident Filipinos house in Baguio City, Philippines P200,009 rent income from a boarding 200,000 professional fees rendered to Chinese clients in Hong Kong 300,000 salary from a resident employer 100,000 gain from sale of merchandise import. 98 ‘ed and sold to Filipino reside™Chapter 3 - Introduction to Income Tax * P50,000 gain on sale of merchandise purchased locally and sold during her | __ business travel in Hong Kong P400,000 gain on sale of resident buyer Required: Compute the total income earned from sources 1, Within the Philippines 2. Outside the Philippines Case Problem 2 Darlene earns franchise fees from her Hot Burger franchise. He also deals in various properties. Johnny realized the following gains in 2021: P500,000 royalty fees from local Hot Burger outlets P200,000 royalty fees from foreign Hot Burger outlets P100,000 gain from sales of equipment to foreign franchisees P200,000 gain from sales of equipment to local franchisees P50,000 gains from sale of investment in domestic stocks to foreign investors P40,000 gains from sale of investments in foreign stocks to Filipino investors Required: Compute the total income earned from sources a. Within the Philippines b. Without the Philippines the boarding house located in Baguio City to a non- Case Problem 3 TNC Company manufactures wooden furniture for the local and export market. It has a distribution outlet abroad which handles foreign sales. It bills all customers, including the foreign outlet, 70% above manufacturing costs. The foreign outlet bills its customers 100% above TNC Company's billing price. TNC Company reports P3,400,000 in total sales, exclusive of sales to the foreign outlet. The foreign outlet reports P2,720,000 total sales to customers, Compute the manufacturing income respectively earned within and earned without the Philippines. a. P1,960,000; P1,360,000 ¢, P840,000; P1,920,000 b. 1,400,000; P1,360,000 d, P840,000; P1,360,000 99 |