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Module 03 - Income Tax Concepts

This document discusses fundamental principles of income taxation, including definitions of income, gross income, and elements that constitute gross income for taxation purposes. It provides examples to illustrate the differences between return of capital versus return on capital, and recovery of lost capital versus recovery of lost profits.
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0% found this document useful (0 votes)
146 views34 pages

Module 03 - Income Tax Concepts

This document discusses fundamental principles of income taxation, including definitions of income, gross income, and elements that constitute gross income for taxation purposes. It provides examples to illustrate the differences between return of capital versus return on capital, and recovery of lost capital versus recovery of lost profits.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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BAINCTAX

Income Taxation

Fundamental Principles

Income
2

Tax
A

T
Concepts
1

CONCEPT OF INCOME
One popular definition of income is the amount of wealth accumulated plus savings and the value of the personal consumption.

The term 'income' refers to all earnings derived from service rendered (labor), from capital (business or investment), or both
including gain derived from sale or exchange of personal or real property classified as either ordinary or capital asset.

There is no single criterion for determining income for tax purposes, but it may be helpful to remember that the "rule-of-thumb
test” to determine income is the increase in net worth.

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 costs.

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 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.

Income Tax Concepts


Fundamental Principles page 1
It includes income from employment, trade, business or exercise of profession, income from properties, and other sources such
as dealings in properties and other regular or casual transactions,

ELEMENTS OF GROSS INCOME


1. It is a return on capital that increases net worth.
2. It is a realized benefit.
3. It is not exempted by law, contract, or treaty.

Increase in Net Worth


The following must be considered if a transaction would result to an increase in net worth.
Return on Capital Capital means any wealth or property. Gross income is a return on wealth or property that increases
vs. Return of the taxpayer's net worth. The return on capital that increases net worth is income subject to income
Capital tax. Return of capital merely maintains net worth; hence, it is not taxable. An improvement in net
worth indicates an ability to pay tax.

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

Income Tax Concepts


Fundamental Principles page 2
Life
The value of life is immeasurable by money. Under Sec. 32 of the NIRC, the proceeds of life insurance
policies paid to the heirs or beneficiaries upon death of the insured are exempt from income tax. The
proceeds of a life insurance contract collected by an employer as a beneficiary from the life insurance
of an officer or any person directly interested with his trade are likewise exempt. However, the
following are taxable return on capital from insurance policies:
a. Any excess amount received over premiums paid by the insured upon surrender or maturity
of the policy (i.e. the insured outlives the policy.)
b. Gain realized by the insured from the assignment or sale of his insurance
policy c. Interest income from the unpaid balance of the proceeds of the policy
d.Any excess of the proceeds received over the acquisition costs and premium payments by
an assignee of a life insurance policy
Health
Any compensation received in consideration for the loss of health such as compensation for personal
injuries or tortuous acts is deemed a return of capital.
Human Reputation
The value of one's reputation cannot be measured financially. Any indemnity received as
compensation for its impairment is deemed a return of capital exempt from income tax.
Income Tax Concepts
Fundamental Principles page 3

Recovery of lost The loss of capital results in decrease in net worth while the loss of profits does not decrease net
capital vs. worth. The recovery of lost capital merely maintains net worth while the recovery of lost profits
Recovery of lost increases net worth. Therefore. the recovery of lost profits is a return on capital. The recovery of lost
profits profits through insurance, indemnity contracts, or legal suits constitutes a taxable return on capital.

Illustration 3.1 RETURN ON CAPITAL VS. RETURN OF CAPITAL


Miss Dina B. Nalican invested P10,000 in the stocks of a mining company. On December 29, 2020, she received P2,500
dividends from the company. Twenty percent of the dividend received was considered liquidating dividends. Only P2,000 of
the receipt is taxable as this is the return on capital. Since the P500 received was liquidating dividend, this clearly suggest a
return of capital.

Illustration 3.2 RECOVERY OF LOST CAPITAL VS. RECOVERY OF LOST PROFITS


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.
Income Tax Concepts
Fundamental Principles page 4
Realized Benefit
The following must be met for the income to have a realized benefit.
Realized The term realized means earned. It requires that there be a degree of undertaking or sacrifice from the
taxpayer to be entitled of the benefit. For a benefit to be realized, there must be an exchange transaction
and the transaction involves another entity.
Exchange Transaction
Bilateral transfers such as sale and barter are onerous transactions and gains from these transactions are
more likely taxable as income. For unilateral transfers such as donations and succession, these gratuitous
transfers do not involve an earning process. Complex transactions like transfers for less than full and
adequate consideration are taxable under income tax and transfer tax.
Involvement of 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 and corporations. An entity may be a taxable entity or an
exempt entity. A taxable item of gross income arises from transactions which involve another natural or
juridical entity.
Gains or income derived between relatives, corporations, and between a partner and the partnership are
taxable since it is made between separate entities. Likewise, the income between affiliated companies such

Income Tax Concepts


Fundamental Principles page 5
as between a holding or parent company and its subsidiaries and between sister companies are taxable
because each corporation is a separate entity. This applies regardless of the underlying economic
relationship. However, the sales of a home office to its branch office are not taxable because they pertain to
one and the same taxable entity. Furthermore. the income between businesses of a proprietor should not
be taxed since proprietorship businesses are taxable upon the same owner. Note that a proprietorship
business is not a juridical entity.

Benefit 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 of a loan - properties increase but obligations also increase resulting in an offsetting effect
in net worth
b. Discovery of lost properties - under the law, the finder has an obligation to return the same to
the owner
Receipt of money or property to be held in trust for, or to be remitted to, another person If the taxpayer is
entitled to keep for his account portion of a receipt, only that portion is a benefit.
Income Tax Concepts
Fundamental Principles page 6

Tax The increase in wealth of the taxpayer in the form of appreciation or increase in the value of his properties
Treatment of or decrease in the value of his obligations in the absence of a sale or barter transaction is not taxable. A
Increase in mere increase in the value of property is not income, but merely and unrealized increase in capital. These
the Value of are referred to as unrealized gains or holding gains because they have not yet materialized in an exchange
Property transaction. Examples of unrealized gains or holding gains:
a. Increase in value of investments in equity or debt securities
b. Increase in value of real properties held (revaluation increment)
c. Increase in value of foreign currencies held or receivable
d.Decrease in value of foreign currency denominated debt by virtue of favorable fluctuation in
exchange rates
e. Birth of animal offspring, accruals of fruits in an orchard or growth of farm
vegetables f. Increase in value of land due to the discovery of mineral reserves

Rendering The rendering of services for a consideration is an exchange but does not cause a loss of capital. Hence, the
of Services entire consideration received from rendering of services such as compensation income or service fees is an
item of gross income.
Income Tax Concepts
Fundamental Principles page 7
Illustration 3.3 MEANING OF REALIZED
A seller sold a piece of jewelry for P140,000 when its fair market value was P200,000. The cost of the jewelry was P90,000. The
difference of the sale price and cost of P50,000 is subject to income tax while the excess of the fair market value and the sale
price of P60,000 is deemed a donation subject to donor’s tax.

Illustration 3.4 MEANING OF BENEFIT


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 income since this was the extent he was benefited.

Illustration 3.5 VALUE INCREASE


Mr. Nash E. Mulan wants you to evaluate whether he is liable to tax on the following:
Income from employment 250,000 Prizes from jueteng 5,000 Fair Value increase of trading
investments 25,000 Cancelled debt for services he rendered 50,000 Cancelled debt out of affection
10,000 Receipt of cash, in trust for his nephew 40,000
Income Tax Concepts
Fundamental Principles page 8
There is no realization of benefits for the fair value increase of the trading investments. The cancelled debt out of affection
constitutes gratuity and is not subject to income tax. The cash receipt which was in trust does not increase his net worth.

Not Exempted by Law, Contract, or Treaty


An item of gross income is not exempted by the Constitution, law, contracts or treaties from taxation. The following
items of income are exempted by law from taxation; hence, they are not considered items of gross income:

1. Income of qualified employee trust fund


2. Revenues of non-profit non-stock educational institutions
3. SSS, GSIS, Pag-Ibig, or PhilHealth benefits
4. Salaries and wages of minimum wage earners and qualified senior citizen
5. Regular income of Barangay Micro-business Enterprises (BMBEs)
6. Income of foreign governments and foreign government-owned and controlled corporations
7. Income of international missions and organizations with income tax immunity

CLASSIFICATIONS OF TAXPAYERS
One of the determinants in the imposition and assessment of taxes is the classification of the taxpayer, thus, one should
consider the nationality and residence of individual taxpayers in computing for their taxes.

Income Tax Concepts


Fundamental Principles page 9
General Classification Rule
In classifying individual taxpayers based on residency, one ought to consider the intention of an individual’s stay within the
Philippines or abroad. The taxpayer shall submit documentary proofs such as visas, work contracts and other documents
indicating such intention.

Individual Taxpayers
Resident A Filipino citizen residing in the Philippines
Citizen (RC) Definition of a Citizen under the Constitution
Under the Constitution, citizens are:
a. Those who are citizens of the Philippines at the time of adoption of the Constitution on February
2, 1987
b. Those whose father or mother are citizens of the Philippines
c. Those born before January 17, 1973 of Filipino mothers who elected Filipino citizenship upon
reaching the age of majority
d.Those who are naturalized in accordance with the law
Non-Resident The following are considered as non-resident citizens:
Citizen (NRC) a. A citizen of the Philippines who establishes to the satisfaction of the BIR Commissioner the fact of
his physical presence abroad with a definite intention to reside therein

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Fundamental Principles page 10
b. A citizen of the Philippines who leaves the country during the taxable year to reside abroad,
either as an immigrant or for an employment on a permanent basis
c. A citizen of the Philippines who works and derives income from abroad and whose employment
thereat requires him to be physically present abroad most of the time during the taxable year; d.A
citizen who has been previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall
likewise be treated as non-resident citizen for the taxable year in which he arrives in the Philippines
with respect to his income derived from sources abroad until the date of his arrival in the
Philippines e. In the absence of information on taxpayer’s intent, citizens staying abroad for a
period of at least 183 days are considered non-resident citizens.
Embassy/Consulate Employees
Filipinos working in Philippine embassies or Philippine Consulate Offices are not considered non
resident citizens.

Resident Alien (RA) A resident alien is someone who is residing in the Philippines but is not a citizen. a. An alien who
lives in the Philippines without definite intention as to his stay b. One who comes to the Philippines
for a definite purpose which in its nature would require an extended stay and to that end makes his
home temporarily in the Philippines, although it may be
Income Tax Concepts
Fundamental Principles page 11

his intention at all times to return to his domicile abroad In the absence of information on
intention, aliens who stayed in the Philippines for more than 1 year as of the end of the taxable
year are considered resident aliens.
An alien who has acquired residence in the Philippines retains his status as such until he abandons the
same or actually departs from the Philippines.

Non-Resident An individual who is not residing on the Philippines and is not a resident thereof, intends to conduct
Alien Engaged in trade, business or exercise of his profession.
Trade or Business In the absence of information as to taxpayer’s intent, aliens who stayed in the Philippines for an
(NRA-ETB) aggregate period of more than 180 days during the year are presumed to be engaged in trade or
business.

Non-Resident An individual who is not residing on the Philippines and is not a resident thereof, not intending to
Alien not conduct trade, business or exercise of his profession. Aliens who come to the Philippines for a definite
Engaged in purpose which in its nature may be promptly accomplished shall not be considered to be engaged in
Trade or trade or business.
Business
(NRA-NETB)
Other Estate
Individual This refers to the properties, rights and obligations of a deceased person not extinguished by death.
Taxpayers Estates under judicial settlement are treated as individual taxpayers. Estates under extrajudicial

Income Tax Concepts


Fundamental Principles page 12

settlement are exempt entities. The income of properties of the estate under extrajudicial settlement is
taxable to the heirs.
Trust
A trust is an arrangement whereby one person called the grantor or trustor transfers property to
another person called the beneficiary, which will be held under the management of a third party
called the trustee or fiduciary.

Corporate Taxpayers
Domestic Corporation (DC) A corporation formed and authorized to conduct trade and business under the Philippine law.

Resident Foreign A corporation organized, authorized, or existing under the laws of any foreign country but is
Corporation (RFC) authorized to engage in trade or business in the Philippines through a permanent
establishment.

Non-Resident A corporation organized, authorized, or existing under the laws of any foreign country and is
Foreign Corporation not authorized to engage in trade or business in the Philippines.
(NRFC)

Other Corporate Taxpayers 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.

Income Tax Concepts


Fundamental Principles page 13

Joint Venture
A joint venture is a business undertaking for a particular purpose. It may be organized as a
partnership or corporation.
Co-Ownership
It is a joint ownership of a property formed for the purpose of preserving the same and/or
dividing its income.
Taxability
The income earned by a taxpayer may be taxed depending on the situs or place where it was earned. Following is a table
summarizing taxability of a taxpayer’s income based on its situs.
Classification Income earned Within Income earned Without Rate of Tax
RC ✓ ✓ Generally, progressive tax on the
net income
NRC ✓ X
RA ✓ X
NRA-ETB ✓ X
NRA-NETB ✓ X Generally, 25% final tax on the
gross income
DC ✓ ✓
Generally, 30% ad valorem tax on
net income
RFC ✓ X

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Fundamental Principles page 14

NRFC ✓ X Generally, 30% final tax on the


gross income
Estates and Trusts Depends on the decedent or trustor Generally, progressive tax on the
net income
Illustration 3.6 TAXPAYER CLASSIFICATION
Mrs. Dina A. Moon, a tax practitioner, derives the following income during the taxable year (all in Philippine
pesos). Within Without
Income from Employment 180,000 - Consultancy Fees 270,000 140,000 Rental Income 40,000 70,000
Interest Income 50,000 10,000 The amount subject to income tax if she is a:
1. Resident Citizen: She will be taxable on her worldwide income totaling P760,000.
2. Resident Alien: She will only be taxable on her income within totaling P540,000.

Income Tax Concepts


Fundamental Principles page 15

SITUS OF INCOME
The situs of income is the place of taxation. It is the jurisdiction that has the authority to impose tax upon the income. It is to be
noted that it is different from source of income as the latter pertains to the activity or property that produces the same. The
following are the specific income situs rules:
Basic Rules Interest Income Debtor’s Residence
Royalties Where the intangible is employed
Rent Income Location of the property
Service Income Place where the service is performed
Merchandising Income Earned where the property is sold
Manufacturing Income Earned where the goods are manufactured and sold
~ separated if the places of such are not the same
Gains on sale Domestic Securities Presumed earned within the Philippines
of property ersonal Properties Earned in the place where the property is sold
Real Properties Earned where the property is located

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Fundamental Principles page 16

Dividend From Domestic Presumed earned within the Philippines


Income Corporation
From Resident Foreign Predominance Test:
Corporation Compare the Philippine Gross Income with the World Gross Income in the
preceding three-year period
~ If at least 50%, the portion of the dividend corresponding to the Philippine
gross income is earned within
~ Less than 50%, the entire dividends received is earned abroad
From Non-Resident Presumed earned abroad
Foreign Corporation

Illustration 3.7 BASIC RULES OF SITUS


Jack E. Shang obtained the following income during the taxable year.
• Collected interest income of P15,000 from a resident Indonesian when they were in vacation in Macau
• Earned P60,000 from rentals of commercial spaces in Tokyo, Japan
• Earned P280,000 compensation expense from a domestic employer
• Received P25,000 royalties from musical compositions copyrighted in the Philippines

Income Tax Concepts


Fundamental Principles page 17
• Earned P145,000 from professional services rendered in the Philippines to non-resident clients
• Earned a gain of P80,000 on merchandise purchased abroad but sold locally
• Transferred goods manufactured at a cost of P80,000 to a foreign branch for P100,000 and was subsequently sold by the
branch at P150,000
The interest income is earned within as the debtor resides in the Philippines. The rentals are earned abroad as the property is
located outside the country. The compensation expense is earned within as the service is performed and the employer is
located domestically. The royalties are earned within as this was registered in the country. Though the recipient of the
professional services are non-residents, the services are rendered within making the income earned within. The gain on
merchandising is earned within as the place of sale is the Philippines. The excess of P20,000 on the transfer of goods to the
foreign branch is a manufacturing income earned within, whereas, the gain of P50,000 is a gain earned abroad.

Illustration 3.8 SITUS OF GAINS


Paul E. Goss obtained the following income:
• Gain on sale of foreign stocks sold in Makati– P200,000
• Gain on sale of domestic bonds sold in Phuket– P50,000
• Gain on sale of agricultural lot in Ilocos – P180,000
• Gain on sale of jewelries in Calamba – P75,000

Income Tax Concepts


Fundamental Principles page 18
All are earned within except for the gain on sale of stocks.

Illustration 3.9 SITUS OF DIVIDEND INCOME


Rosa Noble received P120,000 dividends from Tulips Corporation which had the following gross income in the following
years. Situs 2016 2017 2018 2019 Philippines 100,000 100,000 200,000 300,000 Abroad 150,000 200,000 100,000 100,000 Total
250,000 300,000 300,000 400,000 Determine where the dividend is earned under the following independent scenarios:
a. Tulips is a domestic corporation: The total amount of P120,000 dividend received is earned within. b. Tulips is a non-resident
foreign corporation: The total amount of P120,000 dividend received is earned abroad. c. Tulips is a resident foreign
corporation and the dividend is received in 2020: The gross income ratio for 2017-2019 is 60%. Prorated to the dividend
received, only P72,000 is earned within and the P48,000 is earned abroad.
d.Tulips is a resident foreign corporation and the dividend is received in 2019: The gross income ratio is 47%, therefore, the
whole P120,000 is earned without.
References:
Banggawan, R. (2019). Income Taxation. Pasay City: Real Excellence Publishing.
Valencia, G. & Roxas, E. (2016). Income Taxation. Baguio City: Valencia Educational Supply.
Reyes, V. (2019). Income Tax Law and Accounting under the TRAIN Law. Manila: GIC Enterprises & Co., Inc.
Ampongan O. (2018). Income Taxation. Mandaluyong City: Millennium Books, Inc.

Income Tax Concepts


Fundamental Principles page 19
Self-Check!
Basing on your readings, answer the following questions.
1. When is an item of receipt considered an item of gross income?
2. Who are the different income taxpayers? How do they differentiate in being taxable on their income?
3. When is a benefit considered realized?
4. What are the situs rules discussed in this module?

Exercise 3.1 TRUE OR FALSE


Determine whether the following statements are true or false.
1. Dividends received from a foreign corporation may be earned within the Philippines.
2. A citizen may be both a resident and non-resident in a taxable year.
3. There must be another party involved in an exchange transaction for a benefit to be realized. 4. The situs of
the gains on sale of domestic stocks is the place where the sale occurred. 5. In classifying individual taxpayers,
the intention is evaluated first before applying rules on length of stays. 6. Discovery of lost profits constitute a
taxable income.
7. Cancellation of indebtedness is always exempt from income tax.

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Fundamental Principles page 20
Exercise 3.2 MULTIPLE CHOICE
Choose the best answer from the choices provided.
1. Which of the following is there a benefit realized? a.
Receipt of proceeds of an approved bank loan
b. Receipt of a car from a deed of donation
c. Discovery of lost properties
d.Discovery of hidden treasures in a lot owned
e. None of the above
2. Which of the following is taxable on their income earned abroad? a.
Resident Alien
b. Resident Citizen
c. Non-Resident Alien
d.Non-Resident Citizen
3. When are holding gains subject to income tax?
a. Never subject to income tax
b. Once the value is determined
c. Once the asset is sold
d.Every yearend

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Fundamental Principles page 21
4. Which of the following is subject to income tax?
I. Return on Capital II. Return of Capital III. Recovery of Lost Capital IV. Recovery of Lost Profits a. I and III
b. I and IV
c. II and III
d.II and IV
5. Dividends from this corporation is subject to the pre-dominance test.
a. Domestic Corporation
b. Resident Foreign Corporation
c. Non-Resident Foreign Corporation
d. Special Corporation

Exercise 3.3 TAXPAYER CLASSIFICATION


Determine the classification of each of the following taxpayers.
1. Liza Sober, a Filipino actress, visited Canada for 3 days to promote her movie "Darna" 2.
Melania, a Russian beauty queen, stayed for in the Philippines for 181 days
3. Valak Caudian, an Ilongga dancer, left the Philippines on March 15 for Tokyo, Japan to be an entertainer

Income Tax Concepts


Fundamental Principles page 22
4. Lala Pitan, a Cebuana, is employed in the Philippines in the regional headquarters of McBonalds, a multinational
company
5. Kim Chi, a Chinese, stayed in the Philippines for more than one year
6. Paul Lickett, an British citizen, has a business in the Philippines. He has been staying in the Philippines since April 17
of the previous year
7. Coolie Tan, a Filipino citizen, works as a chef in a Chinese restaurant in Binondo
8. Sam Vanda, a Scottish, lives in the Philippines after being naturalized
9. Michael Angan, a Filipino, maintained his residence in Australia to live a life with his wife 10. Moira dela Sobre, a
Filipino citizen, has been residing abroad for 90 days as an Overseas Filipino Worker 11. Jason Nonoa, an American
citizen, left for South Korea on March 17 for a 50-day vacation. After his vacation, he
immediately boarded to the Philippines. He stayed herein for 2 weeks for the finalization of some business deals 12.
Stephen Agila, a Filipino Pharmacist, went to a 183-day backpacker adventure with his friends in Iraq. 13. Lina Vaughn, a
German, works as a Secretary for the German Ambassador to the Philippines in the German Embassy 14. Dina Natuto, a
Filipino CPA, went abroad for a vacation on September 5. She fell in love with the country she visited so she decided to
stay there for good.
15. Lone Lee, a Singaporean tourist, finding the beauty of the Philippines, stayed therein for 180 days. 16.
Lee Gon Na, a Korean Superstar, visited the Philippines for one week to promote a major clothing line.
Income Tax Concepts
Fundamental Principles page 23
Problem 3.1 DAMAGES
Henson sued an unscrupulous person for derogatory remarks which he considered to have besmirched his reputation. The
court awarded Henson an indemnity of P1,000,000 inclusive of P200,000 reimbursement for Attorney's fees and P100,000
exemplary damages.
Compute Henson's total return on capital.

Problem 3.2 DAMAGES


Jake was one of the passengers of a van that fell off a ravine. Jake sued the bus company and was awarded an indemnity of
P800,000 for the following:
a. P500,000 for the impairment of his health resulting to the amputation of his legs
b. P200,000 for his loss of salaries during his hospitalization
c. P100,000 for his Attorney's fees
Compute Jake's return on capital.

Problem 3.3 TAXABILITY


Kendrick received the following items during the year:
• P200,000 donation from a girlfriend

Income Tax Concepts


Fundamental Principles page 24
• P150,000 service fee from professional services
• P300,000 inheritance from his deceased father
• P100,000 income from illegal gambling
• P50,000 gain on sale of his personal car
• P250,000 profits from his bar restaurant
Compute the total income subject to income tax.

Problem 3.4 TAXABILITY


Jen is engaged in business. The following pertains to her transactions during the year:
• Sold her personal car which was purchased at P200,000 to a friend who paid only half of the car's P500,000 current fair
value.
• Sales of merchandise was P750,000 and the cost of goods sold was P600,000.
• Jen acquired several stocks from the Philippine Stock Exchange for speculation. These stocks have an aggregate
purchase price of P300,000 but with P700,000 fair value by December 31
• Jen's house and lot which she acquired for P1,600,000 in 2010 now have a current fair value of P2,500,000
Compute Jen's total income subject to income tax.

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Fundamental Principles page 25
Problem 3.5 TAXABILITY
Denver is a supervisory employee of Atlantis Corporation. He had the following items of gross income during the year:
• Denver was paid P800,000 salaries.
• Denver's P100,000 personal loan was paid by Atlantis Corporation as reward for his excellent performance. •
Denver's P50,000 advances to the company was paid by Atlantis' chief executive officer as a gift. • Denver is entitled
to excess representation and travel allowances. He received P150,000 of which only P120,000 was actually disbursed.
Compute Denver’s total income subject to income tax.

Problem 3.6 SITUS


Kate has the following income during the year:
• P10,000 interest income from a non-resident Japanese friend
• P40,000 interest income from Philippine residents
• P500,000 rent income from a commercial complex located in the USA which is leased to resident Filipinos
• P200,000 rent income from a boarding house in Baguio City, Philippines
• P200,000 professional fees rendered to Chinese clients in Hong Kong
• P300,000 salary from a resident employer

Income Tax Concepts


Fundamental Principles page 26
• P100,000 gain from sale of merchandise imported and sold to Filipino residents
• P50,000 gain on sale of merchandise purchased locally and sold during her business travel in Hong Kong
• P400,000 gain on sale of the boarding house located in Baguio City to a non-resident
Compute that total income earned from sources within and outside the Philippines.

Problem 3.7 SITUS


TC Company manufactures wooden furniture for the local and export market. It has a distribution outlet abroad which
handles foreign sales. It bills all customers, including the foreign outlet, 70% above manufacturing costs. The foreign outlet
bills its customers 100% above TC Company's billing price. TC Company reports P3,400,000 in total sales inclusive of sales to
the foreign outlet. The foreign outlet reports P2,720,000 total sales to customers.
Compute the manufacturing income respectively earned within and earned without the Philippines.

Case Study 3.1 FROM CATWALK TO TAX-WOKE


Pia Peters is a famous Filipino model. Most of the clothing lines she endorses immediately sells out. She was hired to be one of
the models in the Victor’s Secret Fashion Show abroad. She earned a total of P600,000 but was only able to take home P500,000
due to taxes withheld from her income.

Income Tax Concepts


Fundamental Principles page 27
Pia got frustrated when she learns that the amount is still taxable in the Philippines saying that it violates the territoriality
limitation of taxation. She then adds that the service was rendered abroad and the company which hired her is a non-resident
foreign corporation.
Is her contention tenable?
Income Tax Concepts
Fundamental Principles page 28

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