Chapter 3 Introduction To Income Taxation

 

CHAPTER 3 INTRODUCTION TO INCOME TAXATION

 

Chapter Overview and Objectives Objectives  

This chapter discuss the concept of tax income, the situs of income, and the types of taxpayers.

 

After this chapter chapter,, readers are expected to comprehend and demonstrate knowledge of the following:

1.

Thee con Th conce cept pt of gr gros osss inc incom omee

2.

Thee ty Th type pess of in inco come me ta taxp xpay ayer erss

3. 4.

The ge The gene nera rall ru rule less in in inco come me ta taxa xati tion on Thee inc Th incom omee tax tax si situ tuss rul rules es

 

THE CONCEPT OF INCOME Why is income subject to tax?

Income is regarded as the best measure of taxpayers’ ability to pay tax. It is an excellent object of taxation in the allocation of government cost.

What is income for taxation purposes?

The tax concept of income is simply referred to as “gross income” under the NIRC. A taxable item of income is referred to as an “item of gross income” or “inclusion in gross income”.

Gross income simply means taxable income in layman’ s term. Under the NIRC however, the term ‘taxable income” refers to certain items of gross income less deductions and personal exemptions allowable allowabl e by law. Technically, gross

income is broader to pertain to any income that can be subjected to income tax. Gross income is broadly defined as any inflow of wealth to the taxpayer from whatever source, legal or illegal, that

increases net worth. It includes income from employment, trade, business or exercise of profession, income from  properties, and and other sources sources such as dealings in properties properties and other regular or casual transactions. transactions.

 

ELEMENTS OF GROSS INCOME 1.

It is is retur return n on cap capita itall that that incr increas eases es net net wort worth. h.

2.

It is a rea reali lize zed d ben benef efit it..

3.

It is is not not exemp exempted ted by law law,, conta contact ct or or, treat treaty y

RETURN ON CAPITAL Capital means any wealth or property, Gross income is a return on wealth property that increases the taxpayer’s net worth. Illustration

ABC purchased good for P300 and sold them for P500. The P500 consideration can be analyzed as follows: Selling price (total considerati consideration on received)

P

Cost (value of inventory forgone) Mark- up(gross income)

500 Total return 300 Return of capital

P

200 Return on capital

 

Capital items deemed with infinite value There are capital items that have infinite value and are incapable of pecuniary valuation. Anything received as compensation for their loss is deemed a return capital. Examples: 1.

Life

2.

Health

3. Human re reputation Life The value of life is immeasurable by money. money. Under Sec. 32 of o f the NIRC, the proceeds of life insurance policies paid to the heirs of  beneficiariess upon death of the insured, whether in  beneficiarie in a single sum sum or otherwise, are exempt form income tax. However, the following are taxable return on capital from insurance policies: a.

Any excess excess amount amount received received over over premiums premiums paid by the the insured insured upon surrende surrenderr or maturity maturity of the policy policy (i.e. (i.e. the insure insured d outlives the policy.)

 b.

Gain realized realized by the insured insured from the assignment assignment or sale of his insurance policy

c.

Interest Inte rest incom incomee from the unpai unpaid d balance balance of the proce proceeds eds of of the polic policy y

d.

Any excess excess of the proceeds proceeds received received over over the acquisiti acquisition on cost and premium premium payment payment by an assignee assignee of a life insuranc insurancee policy policy

 

Health Any compensation received and consideration for the loss of health such as compensation for personal injuries or tortuous acts is deemed a return a capital.

Human Reputation The value of one’s reputation cannot be measures financially. Any indemnity received as compensation for its impairment I deemed a return of capital exempt from income tax. Examples include moral damages received from: a.

Oral Or al de defa fama mati tion on or sla sland nder er

 b.

Alienation of affection

c.

Brea Br each ch of pr prom omis isee to to mar marry ry

Recovery of lost capital vs Recovery of lost profits The loss of capital result in decrease in net worth while the loss of profits does not decrease net worth. The recovery of lost capital merely maintains maintains net worth while the recovery recovery of lost profits increases net worth. Therefor Therefor , the recovery of lost

 

Taxable recovery of lost profits The recovery of lost profits through insurance, indemnity contracts, legal suits constitutes a taxable return on capital. The following are taxable recoveries of lost profits: a.

Proc Pr ocee eeds ds of of crop crop or or live livest stoc ock k insu insura ranc ncee

 b.

Guarantee payments payments

c.

Indemn Ind emnity ity rec receiv eived ed from from pat patent ent inf infrin ringem gement ent sui suitt

Illustration 1 Mang Tomas insured his strawberry crop in a P200,000 crop insurance coverage against calamities. The crop was eventually destroyed by an unusual frost. Mang Tomas was paid the P200,000 insurance proceeds The P200,000 proceeds which is a reimbursement for the lost value of the future harvest. Is an item of gross income. The value of the lost crops is , in effect, realized not through actual harvest but through the insurance contract.

 

REALIZED BENEFIT What is meant by realized benefit? The “benefit” concept

The term “benefit” means any form of advantage derived by the taxpayer, There is benefit when there is an increase in the net worth of the taxpayer. An increase in net worth occurs when one receives income, donation or inheritance. The following are not benefits, hence, not taxable a.

Receipt Rece ipt of a loan prope properties rties increas increasee but obligati obligations ons also also increase increase resulti resulting ng in an offsett offsetting ing effect effect in net net worth

 b.

Discovery of lost properties under the law law, the finder has as obligation obligation to return the same to the owner 

c.

Receipt Rece ipt of mone money y or propert property y to be held held in trus trustt for, for, or to be remitte remitted d to anothe anotherr person person

Illustration  1. An employee was granted P20,000 transportation advance. He liquidated P18,000 transportation expenses and was allowed by his employer to keep the P2,000. Only the P2.000 retained by the employee is considered in come since this was the extent he was benefited. (RR-98)

 

The “realized” concept The term realized mean earned. It requires that there is a degree of undertaking undertaking or sacrifice from the taxpayer to be entitled of the  benefit.

Requires of a realized benefit: 1.

Ther Th eree must must be an exc excha hang ngee trans transac acti tion on..

2.

There The re tran transac sactio tion n invo involve lvess anoth another er enti entity ty

3.

It incr increas eases es that that net wor worth th of the rec recipi ipient ent

Type of Transfers 1. Bilateral transfer or exchange, such as

  a.

Sale

  b.

Barter 

  These are referred to as “onerous transaction” 2. Unilateral transfer transfer,, such as :

 

a.

Succ Su cces essi sion on – tr tran ansf sfer er of pr prop oper erty ty up upon on de deat ath h

 

b. b.

Donation

   

These are also referred to as gratuitous transactions

3. Complex transactions Complex transactions a are partly gratuitous and partly onerous. These are commonly referred to as “transfers for less than full and adequate consideration”. The gratuitous portion of the transaction is subject to transfer tax while the benefit from the onerous  portion is subject to income tax. Illustration A taxpayer sold his car which was previously purchased for P100,000 and with a current fair value of P180,000 for only 130,000. The transaction will be analyzed as follows: Fair value

P

180.000

 

P50,000 – Subject to transfer tax

Sell Se llin ing g pric pricee 13 130, 0,00 000 0   Cost100,000

 

P30,000 – subject to income tax

 

What is meant by another entity? Every person, natural or juridical, is an entity. Natural persons are living persons while juridical persons are those created  by law such as partnerships partnerships and corporations. corporations.

Benefits in the absence or transfers The increase in wealth of the taxpayer in the form of appreciation or increase in the value of his properties or decrease in the value of his obligations in the absence of a sale or barter transaction is not taxable. Examples of unrealized gains or holding gains: a. Inc Increa rease se in value value of of inves investme tments nts in in equity equity or or debt debt securi securitie tiess  b.

Increase the value of real properties held (revaluation increment) increment)

c.

Increa Inc rease se in valu valuee of forei foreign gn curre currenci ncies es held held or rece receiva ivable ble

d.

Decrease Decre ase in value value of foreign foreign currenc currency y denominate denominated d debt by virtue virtue of favorabl favorablee fluctuati fluctuation on in exchange exchange rates rates

e.

Birth off anima animall offspri offspring, ng, accrua accruals ls of fruits fruits in an orchar orchard d or growth growth of farm farm vegetabl vegetables es

f.

Increa Inc rease se in valu valuee of land land due due to the the discov discovery ery of of minera minerall reserv reserves es

 

Rendering of services The rendering of services for a consideration is an exchange but does not cause a loss of capital.

Illustrations Mr. Saladin list the following possible items of gross income: Compensation income P 200,000 Winning from gabbling

100,000

Increase in value of investments

50,000

Appreciation in the value of land owned Debt od Saladin cancelled by creditors in

300,000

consideration consideratio n for services he rendered to them

150,000

Debt od Saladin cancelled by his creditors out of affection Loan received from bank  

400,000

The items of gross income are: Compensation income Winning from gambling Debt of Saladin forgiven in consideration

P

200,000 100,000

250,000

for service rendered to his creditors  

150,000

Basis of Exemption of Unrealiz Unrealized ed Income  Normally, taxpayers will have the ability to pay tax when their income materializes in an exchange transaction since tax is generally payable in i n money.

Mode of Receipt/Re Receipt/Realization alization Benefits Taxable items of income may be realized by the taxpayer in two ways: 1.  

Actual re receipt

Actual receipt involves actual physical taking of the income in the form of cash or property.

2.

Con onst stru ruccti tive ve rec recei eipt pt

 

Constructive receipt involves no actual physical taking of the income but the taxpayer is effectively benefited.

Examples: a.

Offset Off set of of debt of of the taxpa taxpayer yer in cons conside iderati ration on for the the sale sale of goods goods or or service service

 b.

Deposit of the income to the taxpayer’s checking account

c.

Matured Mature d detachab detachable le interest interest coupo coupons ns on coupon bonds not yet yet encase encased d by the taxpay taxpayer  er 

d.  

Increa Inc rease se in the the capit capital al of a part partner ner from from the the profit profit of the the partne partnersh rship ip

Inflow of wealth without increase in net worth The inflow of wealth to a person that does not increase his net worth is not income due to the total absence of benefit.

NOT EXEMPTED BY LAW, CONTRACT, OR TREATY   The following items of income are exempted by law from taxation; hence, they are not considered items of gross income: 1.

Income Inc ome of qua qualif lified ied em emplo ployee yee tru trust st fun fund d

2.

Revenues Reve nues of non non – profit profit non – stock stock educ educatio ational nal insti institutio tutions ns

3.

SSS,, GSIS SSS GSIS,, Pag Pag – ibi ibig g or Phi PhilHe lHealt alth h benef benefits its

4.

Salaries Sala ries and wages wages of minimu minimum m wage wage earners earners and qualif qualified ied senio seniorr citizen citizen

5.

Regular Regu lar incom incomee of Bara Barangay ngay Micr Micro o – busi business ness Ente Enterpris rprises es (BMB (BMBEs) Es)

6.

Incomee of foreign Incom foreign governm governments ents and and foreign foreign governm government ent – owned owned and and controlle controlled d corporat corporations ions

7.

Incomee of intern Incom internation ational al mission missionss and orga organiza nization tionss with inco income me tax exten extensive sively ly

 

TYPES OF INCOME INCOM E TAXPA TAXPAYERS A.

Individual

1.

Citizen

 

a.

Resident citizen

 

b.

Non – resident citizen

 

2.

 

Alien a.

Resident alien

 b.

Non – residents residents alien alien

 

a.

engaged in trade or business  b.

3. B.

not engaged engaged in trade trade or business business

Taxable estates and trusts

Corporations

 

1.

Domestic corporation

 

2.

Foreign corporation

 

a.

Resident foreign corporations

 b.  

Non – resident resident foreign foreign corporatio corporations ns

INDIVIDUAL INCOME TAXPAYERS Citizens

Under the Constitution, citizens are: a.

Thosee who are Thos are citizens citizens of the the Philippi Philippines nes at the the time of adoptions adoptions of of the Constit Constitution ution of of February February 2, 2, 1887

 b.

Those whose fathers or mothers mothers are citizens citizens of the Philippines Philippines

c.

Thosee born Thos born before before Januar January y 17, 1973 of the the Filipin Filipino o mothers mothers who elec elected ted Filipi Filipino no

 

citizenship upon reaching the age of majority

d.

Those Tho se who who are are natu natural ralize ized d in acco accorda rdance nce wit with h the the law

Classification of citizens: A. Re Resi side dent nt ci citi tize zen n – A Filipino citizen residing in the Philippines B.

Non No n – res resid iden entt cit citiz izen en includes:

 

1. A citizen citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his  physical presence presence abroad with a definite definite intention to reside therein;

 

 

2.

A citizen of the Philippines who leaves the Philippines during the taxable year top reside abroad, either as an immigrant or for an employment on a permanent basis;

 

3.

   

A citizen of the Philippines who works or derives income from abroad and whose employment thereat requires him to be physical present abroad most of the time during taxable year;

4.

A citizen who has been previously considered as non –citizen and who arrives in the Philippine Philippiness at anytime during the taxable year to reside permanently in the Philippines shall likewise be treated as a non – resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sourced abroad until the date of his arrival in the Philippines

Filipino working in the Philippines embassies or Philippine consulate offices are not considered non – resident citizen. Alien A. Re Ressid ideent ali lieen – an individual who is residing in the Philippines but is not a citizen thereof, such as:  

1. An alien who lives in the Philippines without definite intention as to his stay; or 

 

 

2. One who comes comes to the Philippines Philippines for a definite definite purpose which which in its nature nature would require require an extended extended stay and to

that end make his home temporarily in the Philippines, although it may be his intention at all times to return to his domicile abroad; B. Non – resident alien – an individual who is not residing in the Philippines and who is not citizen thereof  1.   2. a.

 

Non – resi residen dentt alie aliens ns eng engage aged d in in bus busine iness ss (NRA – ETB) – aliens who stayed in the Philippines for an

aggregate period of more than 180 days during the year  Non – resi residen dentt alien alienss not not engag engaged ed in in busi busines nesss (NRA – ETB) – include: Aliens Alie ns who who come come to the the Philip Philippine piness for a definit definitee purpo purpose se which which in in its natur naturee may may be promp promptly tly

accomplished;

 b. Aliens who shall shall come to the Philippines Philippines and stay therein for an aggregate period period of not more more than 180 days during year 

 

THE GENERAL CLASSIFICATION RULE FOR INDIVIDUALS 1.  

Intention

The intention of the taxpayer regarding the nature of his stay within or outside the Philippines shall determine his appropriate residency classification. classification.

Examples:

a.

An alien alien is normally normally non – resident. resident. An alien alien who come to the the Philippine Philippiness with a tourist tourist visa would would still still be classified classified as non – resident alien.

 b.

A citizen is normally normally resident. resident. A citizen who who would go abroad abroad under a tourist visa would would still be considered resident.

c.

An alien alien who come come to the Philippin Philippines es with an immigr immigration ation visa visa would would be reclassi reclassified fied as a residen residentt alien upon upon his arrival.

d.

A citize citizen n would go abroad abroad with with a two – year year working working visa would would be reclas reclassifi sified ed as a non – residen residentt citizen citizen upon his his departure.

 

2. Length of stay   In default of such documentary proof, the length of stay of the taxpayer is considered: considered: a.

Citizens Citiz ens stayin staying g abroad abroad for for a period period of at lest lest 183 days days are are conside considered red non non – residen resident. t.

 b.

Aliens who stayed stayed in Philippines Philippines for more more than 1 year year as of the end end of the taxable taxable year are considered resident resident

c.

Aliens Alie ns who are are staying staying in the Philip Philippine piness for not more more than 1 year year but more more than 180 180 days are are deemed deemed non – residen residentt aliens engaged in business.

d.

Aliens who stayed Aliens stayed in the Philip Philippine piness for not more more than 180 180 days are consi considere dered d non – resident resident aliens aliens not not engaged engaged in trade or business.

Illustration 1

Luiz Mario Aresmendi, a Mexican actor, was contracted by a Philippine television company to do a project in the Philippines. He arrived in the country country on February 29, 2109 and returned to Mexico three weeks weeks later upon completion of the project. Luiz Mario Aresmendi Aresmendi shall be classified as an NRA – NETB in 2019. His stay is for a definite purpose which in its nature will be accomplished immediately.

 

Taxable Estates and Trusts 1.

Estate

 

Estate refers to the properties, right, and obligations of a deceased person not extinguished by his death

2.  

Trust

A trust is an arrangement whereby one person (grantor or trustor) transfers (i.e. donates) property another person (beneficiary) (beneficiary) , which will be held under the management management of a third party (trustee or fiduciary).

 CORPORATE INCOME TAXPAYERS The term “corporation” shall include partnerships, no matter how created or organized, joint – stock companies, joint accounts, association, or insurance companies, except general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium agreement under a service contract with the government.

 

Domestic Corporation

A domestic corporation is a corporation that is organized in accordance with Philippines laws. Foreign Corporation

A foreign corporation is one organized under a foreign law. Types of foreign corporations:

1.

Resident Resi dent foreign foreign corpora corporation tion (RFC) (RFC) – a foreign corpora corporation tion which which operates operates and conducts conducts busine business ss in the Philippin Philippines es through a permanent establishment (i.e. a branch).

2.

Non – resident resident foreign foreign corporati corporation on (NRFC) (NRFC) – a foreign foreign corporatio corporation n which does does not operate operate or conduct conduct busine business ss in the Philippines

Special Corporation Corporationss

Special corporations are domestic or foreign corporations which are subject to special tax rules or preferential tax rates. OTHER CORPORATE TAXPAYERS 3.

Partnership

 

A partnership is a business organization owned by two or more persons who contribute their industry or resources to a

common fund for the purpose of dividing the profits from the venture.  

Types of partnership a)

Genera Gen erall prof profess ession ional al par partne tnersh rship ip (GP (GPP) P)

 

A GPP is a partnership formed for the exercise for the common profession. All partner must  belong to the same profession. profession.

 b)

Business partnership

 

A business partnership is one formed for profit. Its is taxable as a corporation.

2.

Join intt Venture

 

A joint venture is a business undertaking for a particular purpose. It may be organized as a  partnership or a corporation. corporation.

Types of joint ventures:  a.

Exem Ex empt pt jo join intt ven ventu turres

 

Exempt joint ventures are those forms for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating

   

consortium agreement under a service contract with the Government.

b.

Alll tax Al taxab able le jo join intt vent ventur ures es

 

All other joint ventures are taxable as corporations

3.

Co – ownership

 

A co – ownership is joint ownership of a property formed a purpose of preserving the same and / or dividing its income.

THE GENERAL RULES IN INCOME TAXA AXATION TION  

Taxable on income earned

  Individual taxpayers Resident citizen  Non – resident citizen citizen Resident alien  Non – resident alien alien

Within

Without

     

 

 



 

Corporate taxpayers

Domestic corporation Resident – foreign corporation  Non – resident foreign foreign corporation

 

  



  



The residency and Citizenship Rule   Taxpayers who are residents and citizens of the Philippines such as resident citizen and domestic corporations are taxable on all income from sources within and without the Philippines. Basis of the extraterritor extraterritorial ial taxation   Resident citizens and domestic corporations derive most of the benefits from the Philippine government compared to all classes of taxpayers by virtue of their proximity to the Philippine government The issue of international double taxation   The rule on extraterritorial taxation on resident citizens and domestic corporations exposes this taxpayer to double taxation. However, However, the NIRC allows a tax credit for taxes paid in foreign countries. countries. SITUS OF INCOME   The situs of income is the place of taxation of income. It is the jurisdiction that has the authority to impose tax upon the

income.  

 

Situs of income vs. source of income Situs of income should be differentiated from the source of income. The latter pertains to the activity or property that  produces the income.

INCOME SITUS RULES

Types of income

Place of taxation (situs)

1.

Inte In tere rest st in inco come me

Debt De btor’ or’ss re resi side denc ncee

2.

Royalt Roy alties ies

3.

Rent Re nt in inco come me

Loca Lo cati tion on of th thee pr prop oper erty ty

4.

Servic Ser vicee inc income ome

Place Pla ce whe where re the ser servic vicee is ren rende dered red

 

Where Whe re the int intang angibl iblee is emp employ loyed ed

 

Illustration A taxpayer had the following income:

Interest income from deposits in a foreign bank

P

Interest from domestic bonds Royalties from book publishes in the Philippines

300,000

50,000 100,000

Rent income from properties abroad (the lease   co contracts were executed in the Philippines)

150.000

Professional fees for services rendered in the Phil Ph ilip ipp pin inees to non – re ressid iden entt cl clie ien nt (p (paaid in US Dol olllar arss)

400 40 0,00 000 0

 

Applying the situs rules, the following are the situs of the aforementioned income:  

Wit ithi hin n

Intter In ereest of fo fore reig ign n depo posi sits ts

P

Wit ith hou outt -

P

Worl rld d to tota tall   .

300 00,0 ,00 00

P

300 00,0 ,000 00

Interest from domestic bonds

50,000

50,000

Royalties from book of the Philippines

100,000

100,000

Rent income of foreign properties Professional fees Total

150,000

150,000

400,000 P 550,000

400,000 P

450,000

P

1,000,000

Resident citizen or domestic corporation taxpayers would be tax on the world income while other taxpayer would be taxable only the income from within the Philippines.

 

OTHER INCOME SITUS RULES A. Ga Gain in on on sale sale of of prop proper erti ties es        

1. Personal property  

Domestic securities – presumed earned within the Philippines Other personal properties – earned In the place where the property is sold

2. Real property – earned where the property is located

Illustration

A taxpayer had the following income:

Gain on sale of domestic stocks

P

Gain on sale of foreign bonds

200,000 100,000

Gain Ga in on sa sale le of a co comm mmer erci cial al lo lott in Ba Bagu guio io ci city ty

500, 50 0,00 000 0

Gain on sale of car in Ontario, Canada

200,000

Gain on sal salee of mac machin hinerie eriess in Mex Mexico, ico, Pamp Pampanga anga

250,000 250 ,000

Interest income on foreign bonds

50,000

Dividends on domestic stocks  

150,000

The following table summarizes the suits of the fore going income:   Gain on sale domestic stocks.

Within P

P

100,000

50,000

Gain on sale of car in Canada Gain on the sale of machineries

200,000 250,000

Interest on foreign bonds Dividends on domestic stocks Total

 

.

200,000

Gain on sale of foreign bonds Gain on sale of commercial lot

Without

50,000 150,000 P 1,100,000

.

P

350,000

 

B. Dividend income from:   1. Domestic corporation – presumed earned within   2. Foreign corporation  

a) Resident foreign corporation – depends on the pre - dominance test The pre – dominance test

 

If the ratio of the Philippines gross income over the world gross income of the resident foreign corporation in the three – year period preceding the year of dividend declaration

 

is:  At

     

least 50% to portion of dividend corresponding to the Philippines gross income ratio is

earned within  Less

than 50%, the entire dividends received is earned abroad

 b) Non – resident foreign corporation – earned abroad

 

Illustration In 2019, Sarah received a P400,000 dividend income from ABC Corporation, ABC Corporation had the following gross income in 2016 through 2018:  

2016

Philippines Philippin es Abroad Total

2017

2018

P 100,000

P 200,000

P 300,000

200,000

100,000

100,000

P 300,000

P 300,000

P 400,000

Total P

600,000 400,000

P 1,000,000

If ABC Corporation is a: 1.

Domest Dom estic ic corpo corporat ration ion – the the entire entire P400 P400,00 ,000 0 is earne earned d with with in

2.

Non – resid resident ent forei foreign gn corpora corporation tion – the entir entiree P400,00 P400,000 0 is earned earned abro abroad ad

3.

Resident Resi dent forei foreign gn corpor corporation ation – the the 400,00 400,00 divi dividend dend shal shalll be split

 

.

 

Gross Income Ratio = P600,000 / P1,000,000 = 60% Earned within the Philippin Philippines es (60% x P400,000)

P

Earned without the Philippines (40% x P400,000) Total dividends

240,000 160,000

P

400,000

Supposing that the ratio is 49% the entire P400,00 will be deemed earned outside the Philippines. Philippines.

C. Me Merc rcha hand ndis isin ing g in inco come me – earned the property is sold Illustration Source of grass income Goods purchased and sold within

Amount P

200,000

Goods purchased within and sold abroad

100,000

Goods purchased abroad and sold within

150,000

Goods purchased and sold abroad

350,000

.

 

The income earned within and without shall be:  

Within

Purchased and sold within

P

Without

200,000

Purchased within and sold abroad

P

Purchased abroad and sold within

P

100,000

150,000

Purchased abroad and sold abroad

P

Total

..

P

350,000

350,000 P

450,000

D. Ma Manu nufa fact ctur urin ing g incom incomee – earned where where the goods are manufactured manufactured and solid solid Operations

Remark

 

Production

Distribution

Within

Within

Total income from Production and distribution is earned within the Philippines

Without

Without

Total To tal income from production and distributi distribution on is earned without the

Philippines

 

Within

Without

Production income is earned within, Distributi Distribution on income is earned without

Wit itho hout ut

Wit ithi hin n

Distri Dist ribu buti tion on in inco come me is ea earn rned ed wi with thin in,, Pro rodu duct ctio ion n in inco com me is ea earn rned ed without

Illustration 1 Butuan Inc. manufactures goods goods and sells them through its branch. Butuan Butuan bills its branch at established market market prices. Butuan reported the following gross income.  

Home office

Sales

P

Cost of goods sold Gross income

4,000,000

Branch P

2,400,000 P

1,600,000

2,000,000

Total P

1,200,000 P

800,000

.

6,000,000 3,600,000

P

2,400,000

 

The following shows the situs of the gross income of Butuan under of each the following scenario:

Scenario

Home office

Branch

Within

 No.1

Philippines

Philippines

 No.2

Abroad

Abroad

 No.3  No.4

Philippines Abroad

Without

P 2,400,000 0

Abroad

P

0

2,400,00

1,600,000

800,000

800,000

1,600,000

Philippines

Illustration 2

Assuming production is conducted by a parent corporation and the distribution is conducted by its subsidiary corporation:   Sales Cost of goods sold Gross income

Parent

Subsidiary

Total

P 4,000,000

P 2,000,000

P 6,000,000

2,400,000

1,200,000

3,600,000

800,000

P 1,600,000

P 1,600,000

P

.

 

The gross income recognize by each corporation is taxable to each corporation is a separate taxpayer. The situs of taxation shall be the place of sale without regard to the seller or the supplier.

The following are the situs of income for the parent corporation:  Scenario

Parent

 No.1

Philippines

 No.2

Abroad

 No.3

Philippines

 No.4

Abroad

Subsidiary Philippines Abroad Abroad Philippines

Within

Without

P 1,600,000 1,600,000 -

P

-

1,600,00 1,600,000

 

The following are the situs of income for the subsidiary corporation:

Scenario

Parent

 No.1

Philippines

 No.2

Abroad

 No.3

Philippines

 No.4

Abroad

Subsidiary Philippines Abroad Abroad Philippines

Within P

Without

800,000 800,000

800,000 800,000 -