10/27/21
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Income Tax: Basic Concepts
Leomar R. Cabarles
Module 6
Contents
1. Definition of income tax
2. Definition of income
3. When is income taxable
4. Income earned tests
5. Income tax systems
6. Features of the Philippine Income Tax Law
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Income Tax: Basic Concepts
Leomar R. Cabarles
Module 6
Contents
1. Definition of income tax
2. Definition of income
3. When is income taxable
4. Income earned tests
5. Income tax systems
6. Features of the Philippine Income Tax Law
Contents
7. Criteria in imposing income tax
8. Types of Philippine Income tax
9. Kinds of taxpayers
10. Gross income vs. taxable income
11. Classification of income as to source
12. Unallocated expenses
Definition of Income Tax
Tax on all yearly profits arising from
property, professions, trades, or offices,
or as a tax on a person’s income,
emoluments, profits and the like
Direct tax – cannot be shifted to another
taxpayer
Excise tax – levied upon the right of a
person to receive income or profits
Taxable? Recovery of damages (compensation for injury) Recovery of damages pertaining to lost income Recovery of items previously deducted from gross income (tax benefit rule) Forgiveness of indebtedness (if effect of entire transaction is a reduction of purchase price of property acquired in prior year) Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Forgiveness of indebtedness in exchange of a service performed Income derived from illegal business (gain) Taxable? Recovery of damages (compensation for injury) Not taxable Recovery of damages pertaining to lost income Recovery of items previously deducted from gross income (tax benefit rule) Forgiveness of indebtedness (if effect of entire transaction is a reduction of purchase price of property acquired in prior year) Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Forgiveness of indebtedness in exchange of a service performed Income derived from illegal business (gain)
Taxable? Recovery of damages (compensation for injury) Not taxable Recovery of damages pertaining to lost income Taxable Recovery of items previously deducted from gross income (tax benefit rule) Forgiveness of indebtedness (if effect of entire transaction is a reduction of purchase price of property acquired in prior year) Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Forgiveness of indebtedness in exchange of a service performed Income derived from illegal business (gain) Taxable? Recovery of damages (compensation for injury) Not taxable Recovery of damages pertaining to lost income Taxable Recovery of items previously deducted from gross income (tax benefit rule) Taxable Forgiveness of indebtedness (if effect of entire transaction is a reduction of purchase price of property acquired in prior year) Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Forgiveness of indebtedness in exchange of a service performed Income derived from illegal business (gain)
Taxable? Recovery of damages (compensation for injury) Not taxable Recovery of damages pertaining to lost income Taxable Recovery of items previously deducted from gross income (tax benefit rule) Taxable Forgiveness of indebtedness (if effect of entire transaction is a reduction of purchase price of property acquired in prior year) Not taxable Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Taxable Forgiveness of indebtedness in exchange of a service performed Taxable Income derived from illegal business (gain) Taxable? Recovery of damages (compensation for injury) Not taxable Recovery of damages pertaining to lost income Taxable Recovery of items previously deducted from gross income (tax benefit rule) Taxable Forgiveness of indebtedness (if effect of entire transaction is a reduction of purchase price of property acquired in prior year) Not taxable Forgiveness of indebtedness (of a stockholder is equivalent to dividend distribution) Taxable Forgiveness of indebtedness in exchange of a service performed Taxable Income derived from illegal business (gain) Taxable
When is income taxable?
There is
income, gain
or profit (and
not return of
capital)
Received,
accrued or
realized
during the
year
Not exempt
from income
tax
Illustration 2 Increase in the value of property
Realization Principle
1. The earning is
complete or
virtually complete
2. An exchange has
taken place
- Advances received are not treated as revenue
- Stock dividends are not income
Actual vs. Constructive Receipt
- Physical transfer
of consideration
- Possession
- Actual receipt of
cash
- Credited to
account of or
segregated in
favor of a person
- No substantial
limitations or
conditions
Actual receipt Constructive receipt
vs.
Constructive Receipt: Examples
1. Deposit in banks without restrictions
2. Notice of debtor to offset a debt and accepted by
the seller as payment
3. Transfer of amounts retained by the payor to the
account of the contractor
4. Interest credited on savings bank deposit
5. Matured interest coupons not yet collected
6. Dividends applied against the debt of a
stockholder
7. Undistributed share in profit of a partner in a GPP
8. Intended payment deposited in court
(consignation)
Right-of-Claim Doctrine
- Doctrine of
ownership,
command, or control
- Income if without
restriction as to
disposition
Should it later appear that the taxpayer was not
entitled to keep the money, the taxpayer would be
entitled to a deduction in the year of repayment
Income from Whatever Source
- All income is taxable,
unless exempt
- Whether voluntarily
or involuntarily
produced
All Events Test
1. A right to income or
liability to pay is
fixed
2. Amount is
reasonably accurate
to determine
Illustration 3 “All-events Test” YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to defend the corporation's title over a property used in the business. For the legal services rendered in 2007 , the law firm billed the corporation only in 2008. The corporation duly paid. YYY Corporation claimed this expense as a deduction from gross income in its 2008 return, because the exact amount of the expense was determined only in 2008. Is YYY's claim of deduction proper? Reasons. SUGGESTED ANSWER: No. The expense is deductible in the year it complies with the all- events test. The test is considered met if the liability is fixed, and the amount of such liability to pay is already fixed in 2007 when the services were rendered, and the amount of such liability is determinable with reasonable accuracy in the same year. Hence the deduction should have been claimed in 2007 and not in 2008
Criteria in Imposing Income Tax
1. Citizenship principle
2. Residence principle
3. Source principle
Types of Philippine Income Tax
1. Graduated income tax on individuals
2. Regular corporate income tax
3. Minimum corporate income tax
4. Preferential rates (for special
corporations)
5. Gross income tax
6. Capital gains tax
7. Final income tax
8. Fringe benefits tax
9. Branch profit remittance tax
Kinds of Taxpayers
any person subject to tax imposed by
Title II of the Tax Code
Taxpayer
means an individual, a trust, estate or
corporation
Person
Individuals
Corporations
Partnerships
Estates and
trusts
Kinds of Taxpayers
Classification of Income as to Source
1. Gross income from sources
within the Philippines
2. Taxable income from sources
within the Philippines
3. Gross income from sources
without the Philippines
4. Taxable income from sources
without the Philippines
5. Income partly within or partly
without the Philippines
Learn which
income are
considered as
income within,
and all else are
considered
income without
Income Within – Interest
- Obligations of Philippine
residents, corporate or
otherwise.
- Ultimately, the situs of interest
income is the residence of the
debtor
Income Within – Dividends
- Domestic corporation
- Foreign corporation – if at least
50% of gross income for the
three-year period ending with
the close of the taxable year prior
to the declaration of dividends
was derived from sources within
the Philippines
Income Within – Services
- Performed in the Philippines.
- As a rule, the situs of