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Income Taxation in General (Supplement)

The document discusses various aspects of income taxation in the Philippines. It covers: 1) the different types of income taxes - ordinary income tax, passive income tax, and capital gains tax; 2) tests for determining taxable income such as the gross income realization test, claim of right doctrine, and economic benefit test; 3) accounting periods for individuals and corporations; and 4) situs of income rules for determining income derived within and outside of the Philippines for both residents and non-residents.

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50 views4 pages

Income Taxation in General (Supplement)

The document discusses various aspects of income taxation in the Philippines. It covers: 1) the different types of income taxes - ordinary income tax, passive income tax, and capital gains tax; 2) tests for determining taxable income such as the gross income realization test, claim of right doctrine, and economic benefit test; 3) accounting periods for individuals and corporations; and 4) situs of income rules for determining income derived within and outside of the Philippines for both residents and non-residents.

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Income Taxation in General (Supplement)

I. Kinds of Income Taxes


A. Ordinary Income
- A tax imposed upon it is net income tax.

B. Passive Income

- A tax imposed upon it is a final tax.

C. Capital Gains
- A tax imposed upon it is capital gains tax.

II. Tests in Determining Whether Income Is Earned for Tax Purposes


A. Gross Income Realization Test
Revenue is generally recognized when both of the following conditions are
met:
• The earning process is complete or virtually complete; and
• An exchange has taken place.

B. Claim of Right Doctrine (Doctrine of Ownership, Command or Control)


A taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of definite unconditional obligation to return
or repay.

C. Economic Benefit Test (Doctrine of Proprietary Interest)


Taking into consideration the pertinent provisions of law, income realized
is taxable only to the extent that the taxpayer is economically benefited.

D. Severance Test
Income is recognized when there is separation of something which is of
exchangeable value.

E. All-Events Test
It is a test applied in the realization of income and expense by an accrual-
basis taxpayer. The test requires (1) the fixing to the right to the income or
liability to pay; and (2) the availability of reasonably accurate determination

1
of such income or liability, to warrant the inclusion of the income or
expense the gross income or deductions during the taxable year.

F. Flow of Wealth Test


The test of taxability is the “source” i.e., the property, activity, or service
that produced the income determines whether any gain was derived from
the transaction.

III. Accounting Periods


A. For Individuals
- The accounting period shall be calendar year or that which is a 12-
month period that ends in December 31.

B. For Corporations
- The accounting period shall be either be calendar or fiscal year, the
latter being an accounting period of 12 months ending on the last day
of the month other than December.

IV. Situs of Income


A. For Individuals

Income Within PH Income Outside PH


Resident Citizens Taxable Taxable
Non-Resident Citizens Taxable Non-Taxable
Resident Alien Taxable Non-Taxable
Non-Resident Aliens Taxable Non-Taxable
Engaged in Trade or
Business
Non-Resident Aliens Taxable Non-Taxable
NOT Engaged in Trade
or Business

B. For Corporations

Income Within PH Income Outside PH


Domestic Taxable Taxable
Corporations

2
Resident Foreign Taxable Non-Taxable
Corporations
Non-Resident Foreign Taxable Non-Taxable
Corporations

C. Rules on Situs
1. Interest
- Residence of the debtor
- If the debtor is a resident of PH, then the interest is considered earned
within PH.

2. Dividends
- The following are considered earned within PH:
a. Dividends received from a domestic corporation
b. Dividends received from a foreign corporation
The rule here is if the gross income from PH of the foreign
corporation in relation to its worldwide gross income is:
• Less than 50% - All are treated as income from outside PH.
• 50% or More – That same percentage is treated as earned
within PH in relation to the dividend received.

3. Services
- Where performed
- If the service is performed within PH, then such service is considered
earned within PH.

4. Rentals and Royalties


- Location of the property or place of use of the intangible
- If the property is located within PH, then the related rentals and
royalties therefrom are considered earned within PH.

5. Sale of Real Property


- Location of the property
- Gains, profits and income from the sale of real property located in PH
are considered earned herein.

6. Sale of Personal Property

3
- For purchase (location of sale): : If the personal property is purchased
outside PH but subsequently sold in PH, the related gains, profits and
income shall be treated as earned within PH.
- For production: If the personal property is produced in PH but
subsequently sold abroad, the related gains, profits and income shall
be treated as derived from sources partly within PH and partly outside
PH.

7. Income Partly Within and Partly Without (meaning “outside”) the


Philippines
- Aside from the sale of personal property produced in PH, income from
transportation and other services rendered partly within and partly
outside is covered by this item.

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