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Tax - Week 4 - B. Income Taxation - Coggle Diagram

- - - - A2. Flow of Wealth
        
        A3. Severance or Realization/Substantial Alteration Tests
        
        A4. Command or Control of Income;Imputed Income (Section 41, RR No. 02-40)
        
        A5. Recovery of Capital Investment (NIRC 40, RR No. 2 Sec. 36)
        
        A6. Windfall Receipts
        
        A7. Recovery of Deducted Items: Tax Benefit Principles (NIRC Sec. 34, 1E)
        
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        Realization - Lawful and Unlawful Gains are taxable in the same way. These constitute taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it.
        
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        Recovery of Capital - The amount of income derived or loss sustained from an exchange of property: the difference between the market value at the time of the exchange of the property received in exchange of and the original cost, or other basis, of the property exchanged.
        
        Return of Capital - Bayad ng utang. Not considered as income.
        
        Test - Anything that benefits a person materially or economically in whatever way is taxable.
        
        Stock Options - In stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee at the time of exercise (not upon the grant or vesting of the right).
        
        Even if obligation to return, must still be declared as income.
        
        Realization Test - Income is recognized when both of the following conditions are met:
        
        the earning is complete or virtually complete; and
        
        an exchange has taken place.
        
        Severance Test - in order that income may exist, it is necessary that there be a separation from capital of something of exchangeable value. The income requires a realization of gain. Mere increase in value is insufficient, there must be an exchange of asset + severance of the gain from its original value.
        
        Substantial Alteration Tests - Income is earned when there is substantial alteration of the interest of a taxpayer. Income must first be completely materialized. In other words, taxpayer must be in a better position than they were before.
        
        Stocks - Declaration of cash/property dividends by a corporation is when the shareholders realize income, not before. However, if mere stock dividends, not income as no change of position in the interest of the stockholder.
        
        A separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income. This makes taxable income.
        
        Something must have triggered realization of income, not mere appreciation of value of property.
        
        Definition (Conwi v. CTA) - Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the fruits of one's labor.
        
        Earmarking (CIR v. Solidbank) - Earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts, because, although delivered or received, these are by law or regulation reserved for some person other than the taxpayer. On the contrary, amounts withheld form part of gross receipts, because these are in constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process.
      - Income Definition - the gain derived from capital, from labor, or from both combined, including profits gained from dealings in property as well as any asset clearly realized whether earned or not.
        
        Broad Definition - all wealth which flows into the taxpayer other than as a mere return on capital.
        
        Gross Income (NIRC 32) - all income derived from whatever source.
        
        Net Income - Gross less statutory deductions.
        
        Distinguished from Capital (Madrigal v. Rafferty) - A fund of property existing at an instant of time is called capital. A 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 is called income. Capital is wealth, while income is the service of wealth.
        
        Distinguished from Gross Receipts - gross receipts include capital, saka walang deductions
        
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        Income Tax - Tax on the net income or the entire income received or realized in one taxable year.
        
        Nature - A privilege (Excise tax) on the right to earn income. It is self-assessing or self-computed.
        
        Functions -
        
        Revenue - Provide large amounts of revenue
        
        Offset - Offset regressive sales and consumption taxes; and together with estate tax
        
        Mitigate - evils arising from inequalities in distribution of income and wealth which are considered deterrents to social progress, by a progressive scheme of taxation
        
        Flow for Taxation -
        
        What kind of Money - Whether income or not
        
        Citizenship
        
        Source of Money
        
        Allowable Deductions
    - - C. Capital Gain; Ordinary Gain; Presumed Gain
        
        D. Income Tax Systems
        
        E. Criteria in Imposing Philippine Income Tax (NIRC Sec. 23)
        
        F. Tax Treaties – Effect of Tax Treaties
        
        Effect - The NIRC is bypassed, and the provisions of the tax treaty govern specifically. Tax treaties do not impose taxes/taxation rules, but instead sets boundaries as to the applicability of the domestic tax laws.
        
        Objective - Elimination tax evasion or double taxation.
        
        E1. Nationality/Citizenship - Taxation depends on nationality.
        
        E2. Residence
        
        E3. Source
        
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        Effect of Residence - Regardless of nationality, if income is derived in the Philippines, then, they are liable to pay Philippine income tax only on his income from sources within the Philippines but is exempt from tax on his income from sources outside the Philippines.
        
        Tax Levied - A citizen of the Philippines is subject to Philippine income tax:
        
        WORLDWIDE INCOME - On his worldwide income, if he resides in the Philippines; or
        
        NON-RESIDENT - Only on his income from sources within the Philippines, if he qualifies as a non-resident citizen.
        
        Memorize Sec. 23
        
        A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;
        
        A nonresident citizen is taxable only on income derived from sources within the Philippines;
        
        An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived 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;
        
        An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;
        
        A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
        
        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
        
        D1. Global Tax System/Schedular - tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. In a global or unitary system, single tax is imposed on all income received or earned by a person irrespective of the activities which produced the income.
        
        D2. Schedular Tax System - Different tax treatment per type of tax levied.
        
        D3. Semi-Schedular/Semi-Global -
        
        Philippine income tax system is semi-schedular re: individuals. For corporations, semi-global.
        
        All compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates or normal corporate income tax. With respect to such income the computation is global.
        
        Here, everything is collated, regardless of type. 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.
        
        As to Burden
        
        Progressive - Anchored mostly on direct taxation. Distinct from having a progressive tax rate. Progressive tax rate
        
        Regressive - Not anchored on direct taxation (ability to pay) but, more on indirect taxation (Consumption based)
        
        C1. Capital Gain - An income derived from sale of assets not used in trade or business.
        
        C2. Ordinary Gain - Ordinary gain is derived from the sale or exchange of ordinary assets including gains from performance of services and business.
        
        Business Income - In the case of a manufacturing, merchandising, or mining business, "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold.
        
        Income From Trade/Practice of Profession - There must be no employer-employee relationship between the professional and their clients. Tax treatment is based on Sec. 26 (general professional partnerships)
        
        Passive Income - The definition of gross income is broad enough to include all passive income subject to specific rates or final taxes
        
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        C3. Capital Gains | Presumed Gain (NIRC 24D)
        
        Definition - The presumption of the law of the existence of a gain from a sale, exchange, or disposition of real property, including pacto de retro sales and other forms of conditional sales, regardless of whether the taxpayer suffers a loss.
        
        Sale of Real Property - the sale of real property located in the Philippines, classified as capital asset, the tax base is the gross selling price or fair market value, whichever is higher. The law presumes that the seller makes a gain from such sale. Thus, whether or not the seller makes a profit from the sale of real property, he has to pay 6% capital gains tax.
        
        Taxable Amount - The entire amount is included in the gross income.
        
        Definition - Capital gain is the excess of the gains received over the determined cost from the sale or exchange of capital assets. Only the net capital gain is included in the computation of taxable net income.
        
        If the asset involved is a capital asset, the rules on capital gains and losses apply in the determination of the amount to be included in gross income.
        
        Net Capital Gain - Capital Gain minus Capital Loss.
        
        Ordinary Assets -
        
        STOCK - In trade of the taxpayer/ other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.
        
        PROPERTY/SALE - held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
        
        PROPERTY/BUSINESS - used in the trade or business of a character which is subject to the allowance for depreciation
        
        REAL PROPERTY - used in the trade or business of the taxpayer, including property held for rent.
        
        Capital Assets - Non ordinary asset.
      - General Rule: Taxable income shall be computed based on the taxpayer’s annual accounting period, which may be fiscal year or calendar year
        
        XPCN: Taxable income shall be computed based on the basis of calendar year only if:
        
        If the taxpayer's annual accounting period is other than a fiscal year;
        
        If the taxpayer has no annual accounting period;
        
        If the taxpayer does not keep books of accounts;
        
        If the taxpayer is an individual [Sec. 43, NIRC].
        
        Determination of Taxable Income - look at:
        
        Accounting Method - Accrual or Cash
        1a. Accrual - Income as earned, although not received, and expenses incurred, although not yet paid.
        1b. Cash method - Only when actually paid
        
        Accounting Period - Fiscal or Calendar Year.
        2a. Calendar Year - Start at January 1st to December 31st. Individuals are calendar year.
        2b. Fiscal Year - Any (12) month period, beginning at any date other than January 1.
        
        Imputed Theoretical Interests - Presumed income and assessment by the BIR, without providing express proof that interest exists. This is not allowed in the Philippines. BIR cannot impose imputed interests.
        
        In other jurisdictions pwede, to rule out collusion between related parties.
        
        GR: Taxable income shall be computed based on the taxpayer’s annual accounting period, which may be fiscal year or calendar year
        
        XP: Taxable income shall be computed based on the basis of calendar year only if:
        2a. If the taxpayer's annual accounting period is other than a fiscal year;
        2b. If the taxpayer has no annual accounting period;
        2c. If the taxpayer does not keep books of accounts;
        2d. If the taxpayer is an individual [Sec. 43, NIRC].
      - Income Tax - A 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 life. Income tax is a direct tax
- - - - ii. Situs of Income (NIRC 42)
        
        iii. From Sources Within the Philippines (NIRC 42)`
        
        iv. From Sources Without the Philippines
        
        v. Partly Within/Without the Philippines - Relevant only when foreigner.
        
        How Computed - Taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance
        
        Manufacturing - Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines.
        
        Trading - Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold:
        
        General Rule - Items of gross income which are not allocated exclusively to sources from within or without the Philippines shall be treated as derived from sources partly within and partly without.
        
        Exception - The source of income is unmistakably from a source within or without.
        
        Dividends from Foreign Company - Generally received
        
        Interests
        
        Dividends
        
        Compensation for labor and personal services performed outside Philippines
        
        Rental and royalties from property located outside Philippines or for any interest in such property;
        
        or for the use of patents, copyrights, etc. outside Philippines
        
        Gains, profits, income from sale of real property located outside Philippines
        
        Relevant for aliens. If resident, collate into tax base regardless, but if alien, then situs rule applies.
        
        Real Property - if within the Philippines, then situs is Philippines.
        
        Personal Property - Gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section. (Partly within/Partly without)
    - - Gross Income (NIRC 32)
        
        Exclusions from Gross Income - Income that is exempt from taxation under this Title:
        
        Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.
        
        Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.
        
        Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.
        
        Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.
        
        Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.
        
        Retirement Benefits, Pensions, Gratuities, etc. - Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer:
        
        Miscellaneous Items -
        7a. Income Derived by Foreign Government
        7b. Income Derived by the Government or its Political Subdivisions
        7c. Prizes and Awards religious, charitable, scientific, educational, artistic, literary, or civic achievement
        7d. Prizes and Awards in sports Competition
        7e. 13th Month Pay and Other Benefits
        7f. GSIS, SSS, Medicare and Other Contributions
        7g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness
        
        Inclusions - all income derived from whatever source, including but not limited to:
        
        Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
        
        Gross income derived from the conduct of trade or business or the exercise of a profession;
        
        Gains derived from dealings in property;
        
        Interests;
        
        Rents;
        
        Royalties;
        
        Dividends;
        
        Annuities;
        
        Prizes and winnings;
        
        Pensions; and
        
        Partner's distributive share from the net income of the general professional partnership.
        
        Dividends - (b) From a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources;