CONCEPTS OF INCOME AND INCOME TAXATION
Nature, Scope, Classification and Essential Characteristics of Income
Define income for tax purposes. (1969)
Income means all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale or other disposition of capital assets. (Sec. 36 Rev. Reg. No. 2)
It is an amount of money coming to a person or corporation, whether as payment for services, interest or profit from investment. (Conwi et al v. CTA 213 SCRA 83)
Income is a flow of service rendered by capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. (Madrigal v. Rafferty 38 Phil 414)
Income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. (Fisher v. Trinidad 43 Phil 981).Thus, to tax a stock dividend would be to tax a capital increase rather than the income. (Commissioner v. CA, January 20, 1999)
Income means earnings lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition. (James v. US, 366 US 213)
Distinguish income from capital (1965)
How does “income” differ from “capital”? (1995)
Capital is wealth or fund while income is profit or gain from the flow of wealth. (Commissioner v. CTA et at January 20, 1999)
Capital is a fund of property existing at an instant of time while income is that flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time.
Capital is wealth while income is the service of wealth.
Capital is a tree, while income is the fruit. (Madrigal v. Rafferty, 38 Phil 414)
Define or explain the meaning of net taxable income of an individual or a corporation. (1971)
In brief, what do you mean by net income for purposes of income tax? (1977)
What is meant by taxable income? (2000)
Taxable income means the pertinent items of gross income specified in the NIRC less the deductions and /or personal exemption and additional exemptions, if any, authorized for such types of income by the NIRC and other special laws. (Sec 31, NIRC)
Mr. Cruz bought a residential house and lot in 1989 for P120,000. In 2002, curious as to how much his property then cost, he asked a real estate broker to reappraise the same. The real estate broker reported that the value of his property has increased to P1,800,000. Should Mr Cruz report the P1,680,000 increase in his income tax return for the year 2002? Reasons (1982)
No. The P1,680,000 increase in the value of the residential house and lot is not considered as income reportable as income of Mr. Cruz because such increase has not yet been received by Mr. Cruz, either physically or constructively.
Besides, capital gains of individuals on dispositions of real property are subject to a final tax, the presumed capital gain tax. Consequently, increases in valuation are not reported in the income tax return. Increases in valuation of real property are not subject to income tax, hence not reportable in the income tax return.
Romulus, 48 years of age and a retired employee had the following properties and transactions at the end of the 2002 taxable year:
a) Shares of stock in Sabinian Corporation which he bought in 1998 for P50,000.00 and which were worth P70,000.00 as of the end of 2002.
b) Shares of Visigoth Corporation which he bought for P40,000.00 in 1990 and which he sold for P100,000.00 in 2002.
Are the above items subject to the regular tax rates found in the schedule under Section 24 (A) of the NIRC which states the tax rates on citizen and residents? Explain your answer. (1986)
a. The shares of stock in Sabinian Corporation are not subject to the regular tax rates found in the schedule under Sec.24 (A) of the NIRC of 1997 because the shares have not been disposed of. Thus, there is no gain to be taxed.
b. Assuming that the shares of Visigoth Corporation are capital assets of Romulus, not listed and traded through a local stock exchange, then the sale is not subject to the regular tax rates found in the schedule under Sec. 24(A) of the NIRC of 1997, because the actual gains derived from the sale are subject to the final tax provided under Sec. 21 (B) (C) of the NIRC of 1997.
Manananggol, a lawyer, has among his clients a recruitment agency which pays him a monthly retainer of P10,000. In order to reduce his income tax liability, Manananggol arranged for the retainer to be paid directly to his daughter, Christina. This year, Manananggol’s gross income from his law practice, exclusive of the P10,000 monthly retainer fee is P2,000,000. How mush gross income must Manananggol report this year? Explain your answer. (1986)
The total amount of P2,120,000 which consists of the amount of P2,000,000 gross income from his law practice plus the total amount of P120,000 paid as a retainer fee to his daughter.
This should be so because there was no visible service rendered by Christina to the recruitment agency. Hence, it is clear that said payment is a mere subterfuge on the part of Manananggol to avoid the taxes.
In 1996, Corporation “X” had a capital stock of 1,000 shares without par value. At the time of its incorporation, the value of each no-par vvalue share was P10. In 2002, due to its profitable operations, the corporation earned a surplus of P200,000. The corporation’s board of directors increased the stated value of each share by P190 making each share worth P200. The BIR, for income tax purposes, assessed each stockholder for the P190 increase. Is the BIR correct. Explain. (1989)
No. The stockholders have not physically or constructively received any income subject to tax. There was no change in the proportion of their ownership in the corporation considering that the shares of stock are without par value. Furthermore, there was no realization of the income through the change in the stated value. When the stockholders disposes of the shares, then the same would be subject to capital gains tax.
“A” was engaged by Premiere Movies to perform A PANTOMIME ACT IN A MOVIE IT WAS MAKING. “A” was to be paid P20,000 for his performance and the parties signed the necessary contract. “A” then gratuitously assigned his rights under the contract to his son, “B”. “B” later on collected the P20,000 from the Premiere Movies. Is the P20,000 taxable to “A”? Reasons. (1989)
Yes. The P20,000 A received for the performance is income from the practice of his profession as an artist. (Sec. 32 (A), NIRC of 1997).The fact that he gratuitously gave the same to his son does not detract from his (A’s) having received the income in exchange for his professional services.
Since, there is no showing of other donations made by A, then the P20,000 is not subject to the donor’s tax because the first P100,000 net donation is exempt from donor’s taxes. (Sec. 99(A), NIRC of 1997)
The employees of Travellers, Inc. satged a strike. X, a non-union member joined the strike and volunteered to picket the company premises from 8am to 5pm, Monday through Friday. Six months into the strike, X ran out of money and asked financial aid from the union since he has no other source of income and needed financial assistance in order to live. The union gave him P3,000 a month to take care of his food requirements plus P1,000 to take care of his monthly rent. When X filed his return, he excluded these benefits from his gross income. The exclusion was denied by the BIR. Decide. (1993)
The denial of the inclusion is not valid. I would consider the amount given as a gift, which should be excluded from his gross income because there is no legally demandable obligation on the part of the union to give X money. The money was in the nature of a donated financial assistance and not compensation for having joined the picket.
In 1999, X started constructing a commercial building with spaces for lease to the public. X required Y, a prospective lessee, to sign a pre-lease agreement, which principally provided; (a) that the lessee shall extend to the lessor a non-interest bearing loan of P100,000 payable within 12 months; and (b) that in consideration of the loan, the rentals shall not be increased while the loan remains unpaid. Upon completion of the building in 2002, Y extended the loan of P100,000 to X and he (X) was given a space in its ground floor. May the BIR consider the P100,000 as taxable income of X? Reasons. (1993)
No. There was no gain realized by X whether as payment for services, interest or profit from investment because he is required to repay the P100,000 loan.
A, an architect, owes Z, a businessman, the sum of P10,000. Z engaged the services of A to remodel his residence at Magallanes Village, Makati. The value of the services rendered by A is P100,000. Accordingly Z cancelled the debt of A.
a. Is the P100,000 value of the services considered income subject to tax? Explain briefly.
b. Under the same facts, suppose Z paid A P100,000 for the services rendered and at the same time condoned A’s indebtedness. Is the amount condoned considered income subject to tax? Explain briefly. (1978)
a. Yes. Whether A uses the accrual method or cash method of accounting. If A uses the accrual method of accounting, then he has recognized income up to the total extent of P100,000 as there is now constructive receipt of income. On the otherhand, if he uses the cash method, he should be subject to tax only up to the extent of P10,000 the amount condoned. This is so because the condonation was in exchange of the services rendered. The P90,000 value of the services is not yet deemed collected.
b. Yes. When Z pays A P100,000, then, the same is considered income from the exercise of A’s profession because of the physical receipt of the money. The amount of P10,000 condoned is considered as a gift because the cancellation was without consideration.
Onesiphorous, a junior executive, owed his employer P4,000. The money was advanced to him to pay for his personal bills. Just recently, he submitted an excellent report to his employer who became very pleased because it attracted a big client to their company. The employer, therefore, decided to cancel the debt of Onesiphorous and, in addition, gave him a round trip ticket to Hongkong plus pocket money of P5,000.
How are the above items to be treated on the income return of Onesiphorous?
The P4,000 is considered as part of the compensation income of Onesiphorous to be reported in his income tax return because the condonation was in exchange of services performed by him for his employer as a result of employer-employee relationship.
The value of the round trip ticket to Hongkong including the pocket money may be treated as income to be reported in the income tax return if Onesiphorous is a rank and file employee, because income includes everything of value not necessarily in money.
If Onesiphorous is not a rank and file employee, then the value of the round trip ticket to Hongkong including the P5,000 pocket money are fringe benefits taxable to the employer and not reportable by the employee in his income tax return. (Sec. 33, NIRC OF 1997)
Mr. X asked you to prepare his income tax return. Is he required to include as part of the gross income his promissory note amounting to P10,000 which was condoned by his creditor? Give your reason.
No. there is no showing in the facts that the condonation was in exchange of services rendered by Mr. X. the condonation amounts to a gift.
Mr. Francisco borrowed P10,000 from his friend Mr. Gutierrez payable in one year without interest. When the loan became due, Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the P10,000 aand at the time the loan was condoned.
Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness? Explain.
No. Mr. Francisco did not derive income. It is clear that the creditor, Mr. Gutierrez, merely desired to benefit the creditor, Mr. Francisco, and without any consideration thereof cancelled the debt. The amount of the debt cancelled is a gift and not income.
An insolvent company had an outstanding obligation of P100,000 from a creditor. Since it could not pay the debt, the creditor agreed to accept payment through dacion en pago a property which had a market value of P30,000. In the dacion en pago document, the balance of the debt was condoned.
a. What is the effect of the discharge of the unpaid balance of the obligation on the debtor corporation?
b. Insofar as the creditor is concerned, how is he affected taxwise as aa consequence of the transaction? (1997)
a. The creditor corporation is deemed to have received a gift from its creditor to the extent of the difference, between the debt P100,000) and the value of the property paid (P10,000), which is P70,000. It is clear that the creditor merely desires to benefit the debtor corporation and without any consideration thereof cancels the debt. (Sec. 50, Rev. Reg. 50). Thus, the amount foregone which is P70,000 is considered a gift and not to be reported as income in the corporation’s return.
b. Since the P70,000 is considered a gift, the creditor shall be subject to appropriate rate for donor’s tax.
Gross Income
What is “gross income” for purposes of the income tax?
Except when otherwise excluded, “gross income means all income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and other similar items;
(2) Gross income derived from the conduct of trade or business of the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Royalties;
(6) Dividends;
(7) Annuities;
(8) Prizes and winnings;
(9) Pensions; and
(10) Partner’s distributive share from the net income of the general professional partnership.” [Sec. 32 (A) of NIRC of 1997]
W was notified by her depository bank on June 3, 2000 that P50 million had been credited to her savings account because of the remittance of US$1 million through a US bank by her sister in the U.S. W lost no time in spending most of the money for various purposes, such as the purchase of luxurious condominium unit and a luxury car, money market placement gifts to relative, etc.
Soon thereafter, the US bank discovered that W’s sister remitted only US$1,000 and not US$1 million. On or about June 29, 2000, the US bank filed a complaint for the recovery of the excess amount with the appropriate Manila court against W, as the remittance of so huge an amount arose from a clerical error. W was also charged with estafa on account of the same money.
On March 15, 2001, W filed her income tax return for the calendar year 2000, without a declaration of the P50 million but with a footnote to the return which reads: “’Taxpayer was the recipient of some money from abroad which she presumed to be a gift but turned out to be an erroneous remittance and is now subject of litigation.”
In March 7, 2003, the Commissioner of Internal Revenue assessed W a deficiency income tax on the P40 million, imposed a 50% surcharge for filing a false and fraudulent return, and charged interest covering three years for late payment.
W contented that the erroneous remittance is not “gross income” within the meaning of the Tax Code. She also disputed the imposition of the 50% surcharge.
If you were the Judge, how would you rule on the legal points raised by W? (1984)
W’s contention that the erroneous remittance is not “gross income” is devoid of merit. It is considered under the NIRC of 1997 as falling within the ambit of “income from whatever source derived” because it is income tax not expressly excluded or exempted from the class of taxable income. This is irrespective of the voluntary or involuntary action of W in producing the income. (Gutierrez v. Collector of Internal Revenue, CTA Case No. 65, August 31, 1965) As a matter of fact the source of the income may be legal or illegal.
W was correct in her intention that she should not be subjected to the 50% surcharge. There was no actual and intentional fraud through willful and deliberate misleading of the Bureau of Internal Revenue. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because W did not conceal anything. W’s notation on her income tax return was an “error or mistake of fact or law” not constituting fraud. So also such notation was practically on invitation for investigation and that W literally “laid cards on the table.” (Commissioner of Internal Revenue v. Javier, Jr., 199 SCRA 824)
“X” issued a check drawn on a bank in which he has no funds. He negotiated the check and received P10,000. He tried his luck in a casino but lost. Thereafter, he was charged and convicted for passing a worthless check. The BIR wants to tax him for the P10,000 he got from negotiating the check. Decide. (1989)
X should be taxed. The P10,000 is considered as his “income from whatever source derived,” [Sec. 32 (A), NIRC of 1997]. The phrase is so broad that it includes all income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income. (Gutierrez v. Collector of Internal Revenue, CTA Case No. 65, August 31, 1965)
Mr. Lajojo is a big-time swindler. In one year he was able to earn P1 million from his swindling activities. When the Commissioner of Internal Revenue discovered his income tax from swindling, the Commissioner assessed him a deficiency income tax for such income.
The lawyer of Mr. Lajojo protested the assessment on the following grounds:
a) The income tax applies only to legal income, not to illegal income;
b) Mr. Lajojo’s receipts from his swindling, hence, his receipt from swindling was similar to a loan, which is not income, because for every peso borrowed he has a corresponding liability to pay one peso; and,
c) If he has to pay the deficiency income tax assessment, there will be hardly anything left to return to the victims of swindling.
How will you rule on each of the three grounds for the protest? Explain. (1995)
a. The first ground should be denied for the reason that all incomes not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income are subject to tax (Gutierrez v. Collector of Internal Revenue, CTA Case No. 65, August 31, 1965). There is no distinction whether the income may be legal or illegal.
b. and c. The second and third grounds should be sustained. There is no income subject to tax for the reason that to collect a tax would give the government an unjustified preference as to the part of the money which rightfully and completely belongs to the victim. Furthermore, there is no income yet because under the claim of right doctrine in the determination of income, there is an obligation to return, hence Mr. Lajojo does not have a claim of right over the amounts swindled.
NOTE NOT PART OF THE ANSWER: A contrary answer may be justified on the basis of the Gutierrez case and under the doctrine of control of income. Since, Mr. Lajojo has the unfettered ability to dispose of the amounts swindled, then it is income to him subject to tax.
In order to facilitate the processing of its application for a license from a government office, Corporation A found it necessary to pay the amount of Php100,000 as a bribe to the approving official. Is the Php100,000 deductible from the gross income of Corporation A? On the other hand, is the Php100,000 taxable income of the approving official? (2001)
The Php100,000 bribe is not allowed to be deductible from gross income because it is an illegal expenditure. [Sec. 34 (A) (1) (c), NIRC of 1997] The bribe is considered as income of the recipient subject to tax. All incomes not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income are subject to tax (Gutierrez v. Collector of Internal Revenue, CTA Case. No. 65, August 31, 1965). There is no distinction whether the income may be legal or illegal.
Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez for ten years at a rental of P12,000.00 per year. The condition is that MR. Enriquez will erect a building on the land which will become the property of Mr. Domingo at the end of the lease without compensation or reimbursement whatsoever for the value of the building.
Mr. Enriquez erects the building. Upon completion, the building had a fair value of P1 million. At the end of the lease, the building is worth only P900,000.00 due to depreciation.
Will Mr. Domingo have income when the lease expires and becomes the owner of the building with a fair market value of P900,000.00? How much income must he report on the building? Explain. (1995)
Whether MR. Domingo, the lessor, will have income when the lease expires and he becomes the owner of the building depends upon the method of recognition he shall use. Mr. Domingo, the lessor may report as income the fair market value of the improvements at the time of completion of construction. In such a case, he need not report any income at the expiration of the lease.
If Mr. Domingo, the lessor spreads over the life of the lease the estimated depreciated value of the improvement at the termination of the lease and report as income for each year of the lease an aliquot part thereof (Sec. 49, Rev. Regs. Nc. 2), he also need not report any income at the expiration of the lease.
On the other hand, Mr. Domingo, may recognize as income the P900,000.00 fair market value of the building at the expiration of the lease, if he did not recognize income in the above described manner.
Concepts of Income Taxation
Discuss the meaning of the Global and Schedular systems of taxation. (1997)
Global system of income taxation A system employed where the tax system views indifferently the tax base and generally treats in common all categories of taxable income of the individual. (Tan v. Del Rosario Jr. 237 SCRA, 324, 331)
A system which taxes all categories if income except certain passive incomes and capital gains. It prescribes a unitary but progressive rate for the taxable aggregate incomes and flat rates for certain passive incomes derived by individuals.
The apparent intent of current amendatory laws to the income tax law is to maintain, by and large, the global treatment on taxable corporations. (Tan, supra)
NOTE: The global system of income taxation for all corporations is evident in the provisions of Chapter IV – Tax on Corporations, , Title II – Tax on Income, the NIRC of 1997 which imposes a tax of whichever is higher of a reduced rate of 32% on taxable income or a 2% minimum corporate income tax. This is irrespective of the tax base. Thus, whether the taxable income is P1,000.00, P10 million, or even higher, the tax rate is the same. In short, the tax on corporate income is not progressive in character.
Schedular system of income taxation. A system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. (Tan v. Del Rosario, Jr., 237 SCRA 324, 331)
A system which itemizes the different incomes and provides for varied percentages of taxes, to be applied thereto.
It is apparent intention of current amendatory laws to the income tax to increasingly shift the income tax system toward the schedular approach in the income taxation of individual taxpayers. (Tan, supra)
NOTE: Sec 24 (A) (1) (c). NIRC of 1997 provides for the application of the schedular system of income taxation to individuals. There is adoption of a progressive rate which taxes at 5% taxable incomes which do not go beyond P10,000.00, progressively increasing up to a high of 32% for taxable incomes exceeding P500,000.00.
To which system would you say the method of taxation under the National Internal Revenue Code belongs? (1997)
a) Global System; and
b) Schedular system.
NOTE: The Philippines has adopted both of these systems.
Distinguish between “schedular treatment from global treatment”: as used in income taxation. (1994)
a) Under the schedular treatment there are different tax rates, WHILE under the global treatment there is unitary or single tax rate;
b) Under the schedular treatment there are different categories of taxable income, WHILE under the global treatment there is no need for classification as all taxpayers are subjected to a single rate.
c) The schedular treatment is usually used in the income taxation of individuals, WHILE the global treatment is usually applied to corporations.
What are the basic features of the present income tax system?
a) Progressive;
b) Global system for taxable corporations and schedular for individuals;
c) Uses gross compensation system.
Currently we hear of the system of income taxation by basing the tax on the gross rather than on the net income. What do you understand by “gross income taxation”? (1980)
What is the system gross income taxation? Explain. (1983)
In a broad sense, the tax base is the total gross income of an individual during the taxable year without any deductions allowed.
What are the advantages and disadvantages, if any, of an income tax based on gross over one based on net income? Explain your answer briefly. (1980)
The advantages of gross income taxation are:
a) The procedure for the computation of the tax is simpler than in the case of taxation based on net income;
b) Less discretion will be allowed on the tax examiners thereby minimizing graft;
c) Examination and/or investigation of tax returns can be made faster;
d) If coupled with an effective withholding tax system would provide more returns to the government.
The disadvantages of gross income taxation are:
a) A taxpayer may derive gross income but suffers a net loss;
b) The rule of taxation may not be equitable and uniform if the gross income were the basis of the tax;
c) If gross income were the basis, it may serve as a disincentive to further employment.
NOTE: the 1987 Philippine Constitution requires that; “The rule of taxation shall be uniform and equitable.” (Sec. 28 (1), Article VI)
General Principles of Income Taxation
In general, on what does the taxability of income depends as regards individuals and corporations? Explain your answer, citing the income taxable under our Income Tax Law. (1970)
The law, in levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that renders resident citizens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from the Philippine sources). (Tan v. Del Rosario, Jr. 237 SCRA 324, 334)
What incomes are subject to tax under the National Internal Revenue Code? (1969)
From what sources of income are the following persons/corporations taxable by the Philippine government?
1. Citizens of the Philippines residing therein;
2. Non-resident citizen;
3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker;
4. An alien individual, whether a resident or not of the Philippines;
5. A domestic corporation. (1998)
The general principles of income taxation in the Philippines are:
a) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;
b) A nonresident citizen is taxable only on income derived from sources within the Philippines;
c) An individual citizen of the Philippines who is working and deriving income abroad as an overseas contract worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;
d) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from the sources within the Philippines;
e) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
f) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. (Sec. 23, NIRC of 1997)
Juan de la Cruz, a resident of the Philippines, left for Australia on August 24, 2002 to reside permanently thereat. During his stay in the Philippines, he received an income of P15,000.00 from January 1, 2002 up to the date of his departure. In Australia, he received during the remainder of the year 2002 an additional income of $10,000.00 from sources within that country. Are these two (2) incomes, P15,000.00 and $10,000.00 taxable in full and is Juan de la Cruz entitled to full personal exemptions and deductions allowed by our law? If Juan de la Cruz was not a citizen but a resident, on what amount is he taxable in full, and what deduction can he claim while in the Philippines? Explain fully your answer. (1979)
Yes. The two incomes, P15,000.00 and $10,000.00 are taxable in full. Juan is considered as a resident citizen. The reason being that he stayed only in Australia for about four (4) months, from August to December, during the taxable year. To be considered as a non-resident citizen, Juan must have stayed in Australia most of the time during the taxable year. Since he is a resident citizen, his taxable income includes all income derived from sources within or without the Philippines.
Juan is likewise entitled to full personal exemptions and deductions because he is considered as a resident citizen.
If Juan is a resident alien, he shall be taxed only on all his income derived from sources within the Philippines. He shall also be entitled to the same deductions as a resident citizen.
Mr. AD, a US citizen hired for five(5) years as plant manager of a local mining company, derives income from investments and real property he owes in the United States. Besides his salary and bonuses from the local mining company, he is provided with a house and allowances for the salaries of his driver and three maids. The mining company reimburses all his gasoline and oil expenses for the use of the company car, plus expenses for his grocery.
a. What income items, if any, should he declare in the Philippine income tax return? Explain.
b. Under the same facts, except that Mr. AD is a Filipino citizen working in Saudi Arabia and his investments and real property are located in the Philippines. What income items, if any, should he declare in his Philippine income tax return and at what rates is he taxed?
a. Only his income derived from sources within the Philippines such as his salary and bonuses from the local mining company and the expenses for his grocery. This is so because being a resident alien he shall be subject to tax only on the income derived from sources within the Philippines.
The value of the use of the house, allowances for the salaries of his driver and the three maids, the value of the use of the company car, as well as the gasoline and oil, are considered as fringe benefits which are taxable to his employer.
b. Since Mr. AD is an overseas contract worker taxable only on his income derived from sources within the Philippines. He is to be taxed only on his income derived from his investments and properties located in the Philippines. If the passive income, then he shall be subject to final taxes. If not, then to the schedular tax.
Great Wall machineries Corporation (GWMC) is a corporation incorporated and operating under the laws of the People’s Republic of China. AGWMC and the Davao Ceramics Corporation (DCC) plan to enter into a US $1000,000 contract on C&F basis, whereby GWMC shall sell to DCC a GWMC-manufactured ball mill. Under the proposed contract which will be signed in Hongkong, GWMC will ship the ball mill from Shanghai to Davao City. GWMC will also send its Chinese technicians to Davao City to install the ball mill and to train DCC personnel on how to run the ball mill. The installation and the trainingwill take 30 days to complete. The airfare, hotel accommodation and salaries of GWMC who will be sent Davao City will be paid for by GWMC. The contract will be fully performed by GWMC within 65 days from the signing. Under the contract, DCC will remit payment in US dollars to GWMC’s bank account in Hongkong. This is the first contract that GWMC will sign with a customer in the Philippines. GMWC HAS NO OFFICE OR AGENT IN THE Philippines. /and GMWC has no intention of securing a license to do business in the Philippines.
Will said GWMC personnel sent to Davao City be subject to Philippine income tax on their salaries while they work in Davao City? Explain. (1990)
Yes, the foreign personnel are subject to Philippine income taxation. This is so because the personnel are considered as non-resident aliens not engaged in trade or business within the Philippines. They are not citizens of the Philippines aand they are not also residents of the Philippiens not having stayed therein for an aggregate period of more than 180 days during the calendar year. (Sec. 22 (G) and 25(A) (1), both of the NIRC of 1997). Consequently, they should be subject to income taxes on all income received within the Philippines which includes compensation. The tax imposed is 25% OF THE GROSS COMPENSATION INCOME RECEIVED. (Sec 25 (B), NIRC OF 1997)
Newtex International (Phils. ) Inc. is an American firm duly authorized to engage in business in the Philippines as a branch office. In its activity of acting as a buying agent for foreign buyers of shirts and dresses abroad and performing liaison work between its home office and the Filipino garment manufacturers and exporters, Newtex does not generate any income. Tofinance its office expenses here, its head office abroad regularly remits to it the needed amount. To oversee its operations for two (2) years, the head office assigned three (3) foreign personnel.
Are the three foreign personnel subject to Philippine income tax? (1991)
Yes, they are considered as resident aliens having stayed in the Philippines for more than two years. They shall be taxed on the incomes derived from sources within the Philippines. They Performed the service within the Philippines, hence taxable.
Juan, a Filipino citizen, has emigrated to the United States where he is now a permanent resident. He owns certain income-earning property in the Philippines from which he continues to derive substantial income. He also receives income from his employment in the United States on which the US income tax is paid.
On which of the above incomes is he taxable, if at all, in the Philippines, and how, in general terms, would such income or incomes be taxed? (1997)
Juan is taxable only on his income derived from sources within the Philippines because he is a nonresident citizen. If the income is passive income, then he shall be subject to final taxes, if not, then to the schedular tax.
HK Co. is a Hong Kong corporation not doing business in the Philippines. It holds 40% of the shares of A co., a Philippine company while the 60% is owned by P Co., a Filipino-owned Philippine corporation. HK also owns 100% of the shares of B Co., an Indonesian company which is a duly licensed Philippine branch. Due to the worldwide restructuring of the HK Co. group, HK Co. decided to sell all its shares in A and B Cos. The negotiations for the buy-out and the signing of the Agreement of Sale were all done in the Philippines. The agreement provides that the purchase price will be paid to HK Co.’s bank account in the US and the title to A and B Cos. Shares will pass from HK Co. to P Co. in HK where the stock certificates will be delivered. P Co. seeks your advice as to whether or not it will subject the payments of the purchase price to WT. Explain your advice. (1999)
The payments for the purchase price are subject to WT because they are considered as income derived from sources within the Philippines.
Since the shares of stock were sold in the Philippines, the income shall be treated as derived entirely from sources within the Philippines and correspondingly taxed therein. {2nd par., Sec 42 (E), NIRC OF 1997]
A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary in Hong Kong (HK Co.) and will assign P for an indefinite period to work full time for HK Co. P will bring his family to reside in HK and will lease out his residence in the Philippines. The salary of p will be shouldered 50% by A Co. while the other 50% plus housing, cost of leaving and educational allowance of P’s dependents will be shouldered by the HK company. A Co. will credit the 50% of P’s salary to P’s Philippine bank account. P will sign the contract of employment in the Philippines. P will also be receiving rental income for the lease of his Philippine residence.
Are these salaries, allowances and rentals subject to Philippine income tax? (1999)
The salaries and allowance of P are not subject to Philippine income tax because these are incomes from without the Philippines earned by P, who is an overseas contract worker.
The rental income derived from his Philippine residence is considered as income derived from sources within the Philippines, hence subject to Philippine tax.
Mr. Cortex is a non-resident alien based in Hong Kong. During the calendar year 2000, he came to the Philippines several times and stayed in the country for an aggregate period of more than 180 days. How will Mr, Cortez be taxed on his income derived from sources within the Philippines and from abroad? (2000)
Mr. Cortez being a non-resident alien engaged in trade in business in the Philippines is going to be taxes only on his income derived from sources within the Philippines [Sec. 25 (A) (1) in relation to Sec. 24, both of the NIRC of 1997] in the same manner as individual citizen and resident alien individuals and shall be subject to same exclusions, deductions and tax rates, except that taxes are allowed as a deduction only if and to the extent that they are connected from the sources within the Philippines. [Sec, 34 (C) (2), Ibid]. Furthermore, he is allowed to use only the itemized deductions but not the standard optional deduction. [Sec 34 (L), Ibid]. Finally Mr. Cortez is allowed to deduct personal exemptions only subject to reciprocity [ Sec 35 (D), Ibid]
Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1998 on March 15, 1999. After an audit of the return, the BIR issued on April 20, 2002 a deficiency income tax assessment for the sum of p250,000, inclusive of interest and penalty. For failure of Mr. And Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on august 19, 20002 warrants of distraint and levy to enforce collection of taxes.
What is the rule of income taxation with respect to Mr. Sebastian’s income in 1998 as a seaman on board the Norwegian vessel engaged in international shipping. Explain your answer. (2002)
Mr. Sebastian is a seaman who is employed by a vessel exclusively engaged in international trade. Thus, his income as a seaman is considered as income derived from sources without the Philippines not subject to Philippine income taxation.
