1. Income Taxation Principles
Lecture No. 3
Estelita C. Aguirre, CPA, MM

2. NIRC on Income Tax (Title II)
I Definitions VI Gross Income
II General Principles VII Allowable Deductions
III Tax on Individuals VIII Acctg Periods/Methods
IV Tax on Corporations IX Return & Tax Payments
V Taxable Income X Estates & Trusts
XI Other Income Tax Requirements
XII Quarterly Income Tax Returns & Payments
XIII Withholding Tax on Wages

3. Income Tax Refers to the tax imposed by the government on
taxable income, whether gross or net, earned by
taxable persons.
It is tax on all yearly profits arising from property, professions, trades or offices.
It is a tax on a person’s income, emoluments, profits and the like.

4. Income Tax It is a tax on actual or presumed income of a
taxpayer during the year.
Actual: It applies when the income, profit or gain is realized or received (Sec 39B)
Presumed: It applies to gross sales of real property classified as capital asset where the law presumes that there is gain (Sec.24D1, Sec 25A3 and Sec 27D5).

5. Income Tax, Classification
1) national tax: imposed by the national government
2) excise tax: imposed on a person’s right to earn income
3) direct tax: imposed upon persons who are personally bound by law to pay the tax and cant be shifted to another
4) general tax: imposed for general purposes, the proceeds of which goes to the national/general funds.
5) progressive tax: rates of tax increases as income increases

6. Income Tax System, in General
Global Tax System - all items of gross income, deductions, and personal and additional exemptions, if any, are reported in one income tax return, and one set of tax rates are applied on the tax base.
Schedular Tax System - different types of income are subject to different sets of graduated or flat income tax rates.

7. Income Tax System, In General
Semi-Global, Semi-Schedular
Under this system, the compensation income, business or professional income, capital gain and other income (not subject to final tax) are added together to arrive at gross income, and after deducting the allowable deductions/exemptions is
subjected to one set of graduated rates. The computation therefore is “global”.
On capital gains on sale of shares of stocks stocks and real properties and passive income, different schedular rates and flat rates apply.

8. Income Tax System in the Phil
Global Tax System – to 1981
Schedular Tax System – 1982 to 1985
Semi-Global, Semi-Schedular – 1985 to present

9. Most Recent R.A. on Income Tax
30% Corporate Income Tax effective Jan 1, 2009
R. A. 9504
Minimum wage earners, exempt from Income Tax;
Increased Personal and additional exemptions;
Increased OSD from 10% to 40%.
All effective July 6, 2008

10. Types of Income Tax in the NIRC (Sections 24-26)
Individuals
1. Graduated income tax on individuals;
2. Capital gains tax of an individual on sale or exchange of shares of stocks of classified as capital assets
3. Capital gains tax on sale or exchange of real
properties classified as capital assets; Final tax 4. Final Tax on certain passive income paid to
residents
5. Final Tax income of non-resident aliens
6. Final Tax on special individuals
7. Fringe benefit tax on fringe benefits of
supervisors and managers payable by employer

11. Types of Income Tax in the NIRC (Sections 27-29)
Corporations
1. Normal corporate income tax on corporations;
2. Minimum corporate income tax on corporations;
3. Special income tax rates on special corporations
4. Capital gains tax on sale or exchange of shares
of stocks of classified as capital assets;
5. Capital gains tax on sale or exchange of real
properties classified as capital assets;
6. Branch profit remittance tax; and
7. Tax on improperly accumulated earnings
of corporations

12. Income Tax, General Principles (Section 23)
1. A citizen of the Phil residing therein is taxable
on all income derived from within and without
the Phil;
2. A nonresident citizen is taxable only on income
derived from sources within the Phil;
3. An overseas contract worker is taxable only on
income from sources within the Phil (including
seaman-member of a vessel engaged in
international trade).

13. Income Tax, General Principles (Section 23)
4. An alien individual, whether resident or not
of the Phil is taxable only on income derived
from sources within the Phil.
5. A domestic corporation is taxable on all income
derived from sources within and without
the Philippines; and
6. A foreign corporation, whether engaged or not
in trade or business in the Phil, is taxable only
on income derived from sources within the
Philippines.

14. Situs of Income Taxation (Section 23)
Taxpayer Income
Resident citizen within and without
Nonresident citizen within
Resident alien within
Nonresident alien within
Domestic corporation within and without
Foreign corporation within

15. Criteria in Determining Situs (Section 23)
1. Citizenship – A citizen residing in the Phil
is subject on his worldwide income; a
nonresident citizen, on income from within
the Phil only.
2. Residence – An alien residing in the Phil
is taxable on his income from within
3. Source – A nonresident alien is subject on
his income from sources within the Phil.

16. Individual Taxpayers, Classification (Sections 24-26)
1. Citizens
1.1 residents
1.2 nonresidents
2. Aliens
2.1 resident aliens
2.2 nonresident aliens
NRA engaged in trade or business
NRA not engaged in trade or business

17. Individual Taxpayers, Classification (Sections 24-26)
3. Special class of individual taxpayers
3.1 Regional or area headquarters and
regional operating headquarters of
multinational companies in the Phil;
3.2 Offshore banking units established in the Phil;
3.3 Foreign service contractor or sub-contractor
engaged in petroleum operations in the Phil.
4. Members of GPPs
5. Estates and Trusts
6. Co-ownerships

18. Corporations, Classification (Sections 27-28)
1. Domestic Corporations
2. Foreign Corporations
2.1 Resident foreign corporations
2.2 Non-resident foreign corporations
3. Partnership taxable as a corporation
4. Joint Venture and Consortium

19. Corporations, Classification
Those that do not derive any income from the
Phil and thus exempt from income tax
Ex. Regional or area headquarters of MNC
Those that are subject to the NCIT or MCIT, whichever is higher
Those that are subject to preferential tax rates
Those that are on income tax holidays

20. Compensation Taxpayers, Formula
1. Gross Compensation
Less: P/A Exemptions
Health/Hosp Insurance Premium
SSS/GSIS/PHIC/PAG-IBIG Contrib.
2. Equals: Taxable Net Income
Multiply: Income tax Rates
3. Equals: Income Tax Due
Less: Tax Withheld
4. Equals: Tax Payable/Refundable

21. Self-Employed Taxpayers, Formula
1. Gross Business/Professional Income
Less: Allowable Deductions
2. Equals: Net Income
Less: Reconciliation of PFRS and NIRC)
3. Equals: Net Income after reconciliation
Less: P/A Exemptions and HIP
4. Equals: Taxable Net Income
Multiply: Income tax Rates
5. Equals: Income Tax Due
Less: Tax Credits/Tax paid, if any
6. Equals: Tax Payable

22. Mixed Income Taxpayers, Formula
BIR Version-ITR form
1. Gross Compensation Income
Less: P/A Exemptions/HIP/SSS, GSIS, etc
Equals: Net compensation Income
2. Gross Business Income
Less: Allowed Business Expenses
Equals: Net Business Income
3. Add 1 and 2 = Net Income
Less : Reconciliation PFRS with NIRC
4. Equals: Net Taxable Income
5. Multiply: Income tax Rates = Income tax Due

23. Corporations, Formula DOMESTIC CORPORATION 1. Gross Income Worldwide
Less: Allowed Deductions Worldwide
3. Equals: Net Income Worldwide
Less: Reconciliation of PFRS with NIRC
4. Equals: Taxable Net Income Worldwide
Multiply TNI by 30% = NCIT
Multiply GI by 2% = MCIT
5. Equals: BCIT or MCIT, whichever is higher
Less: Tax Credits (foreign and Phil) if any
6. Equals: Income Tax Payable

24. Corporations, Formula RESIDENT FOREIGN CORPORATION
1. Gross Income Phil
Less: Allowed Deductions Phil
2. Equals: Net Income Phil
Less: Reconciliation between PFRS and NIRC
3. Equals: Taxable Net Income
Multiply TNI by 30% = NCIT
Multiply GI by 2% = MCIT
4. Equals: BCIT or MCIT, whichever is higher
Less: Tax Credits (Phil tax w/held or paid, if any)
5. Income Tax Payable

25. Corporations, Formula NON RESIDENT FOREIGN CORPORATION
Gross Income Phil
Multiply by 30%
Equals: Income Tax due

26. Definitions 1. Person - individual, estate, trust or corporation
2. Corporation - includes partnerships, no matter how
created or organized, joint-stock companies,
joint accounts, associations, or insurance cos, but does not include GPPs and a Joint Venture or consortium formed for the purpose of
2.1 undertaking construction projects and
2.2 engaging in petroleum, coal, geothermal and
other energy operations under a service contract with govt.
3. Domestic Corporation – created or organized
in the Phil or under its laws

27. Definitions
3. General Professional Partnership is a partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived in any trade or business
4. Estate is a taxable entity that comes into existence
upon death of a taxpayer, that includes all his properties and rights, and remains in existence until the assets are distributed to the heirs.
5. Trust is a legal arrangement whereby a person delivers properties to another person who manages or administers the same for the benefit of a designated beneficiary.

28. 4.1 Resident foreign corporation – foreign corp
Definitions
3. Domestic Corporation – created or organized
in the Phil or under its laws
4. Foreign Corporation – created and organized
under foreign laws; a Corp which is not domestic.
4.1 Resident foreign corporation – foreign corp
engaged in trade or business in the Phil.
4.2 Non-Resident Foreign-foreign corp
not engaged in trade or business in the Phil

29. Definitions 5. Regional or Area Headquarters – a branch in
the Phil of multinational companies which do
do not derive income from within
6. Regional Operating Headquarters – branch
established in the Phil by multinational co (engaged in services enumerated under Section 21EE)

30. Definitions 7. Nonresident citizen is a citizen of the Phil who
7.1 establishes to the satisfaction of the CIR the fact of his physical presence abroad
7.2 leaves the Phil during the taxable year for abroad as an immigrant or for a permanent permanent employment
7.3 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

31. Definitions
Notes:
A nonresident Filipino citizen who comes back to reside permanently to reside in the Phil is
exempt on income from abroad until his return.
A taxpayer should show proof of his intention to leave/reside within or without the Phil.

32. Definitions 8. An Alien is one who is not a citizen of the Phil.
8.1 Resident alien – an individual whose residence
is within the Phil and is not a citizen thereof.
8.2 Nonresident alien – one whose residence is not
within the Phil and is not a citizen thereof.

33. Definitions 9. Fiduciary – a guardian, trustee, executor,
receiver, conservator or any person acting
in any fiduciary capacity for any person.
10. Withholding Agent – any person required to
withhold any tax under Section 57.

34. Definitions
11. Rank and File employee – is one holding neither management nor supervisory position as defined under existing provisions of the Labor Code of the Phil.
12. Managers and Supervisors – is one holding
management or supervisory position (not a rank and file)

35. Definitions
13. Fringe Benefit – any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee
14. De Minimis Benefits - Benefits which are relatively of small value which helps promote health,welfare and satisfaction of employees.

36. Definitions 15. Minimum Wage Earner refers
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-agri
sector where he/she is assigned

37. Definitions 16. Statutory Minimum Wage refers
to the rate fixed by the Regional Tripartite
Wage and Productivity Board, as defined
by the Bureau of Labor and Employment
Statistics (BLES) of the Department of
Labor (DOLE)

38. 17. Taxable year means a calendar year or fiscal
Definitions
17. Taxable year means a calendar year or fiscal
year, upon the basis of which is computed.
17.1 Calendar Year means any taxable or accounting period of 12 months ending Dec 31
17.2 Fiscal year means an accounting period of months ending on any month other than
Dec 31
18. Trade, business or profession shall not include
performance of services of an employee.

39. Definitions
19. Shares of stock includes
19.1 shares of stocks of a corporation
19.2 warrants and/or options to purchase shares of stocks of a corp
19.3 units of participation in a partnership (except GPPs), joint stock companies, joint accounts, joint ventures taxable as corporations, associations, recreation and amusement clubs ( such as golf, polo or similar clubs)
19.4 mutual fund certificate

40. Definitions
20. Shareholder includes a
20.1 holders of share/s of stocks and warrants and/ or option/s to purchase corp shares of stocks
20.2 holder of a unit of participation in a partnership (except GPPs), joint stock cos, joint accounts, joint ventures taxable as corps, associations, recreations and amusement clubs (such as golf, polo or similar clubs)
20.3 holder of a mutual fund certificate
20.4 member in any association, joint stock company
or insurance company
- -mutual fund certificates

41. Income Taxation
End of
presentation . . .