Lex in Motion, Lectures on Taxation 4.

) Prizes or winnings from game of chance

Taxation Covers 2 different areas in taxation, the Tracing Transactions

general principles on taxation and second income
1.) Did the person receive anything from whatever
taxation.
source?
Understanding taxation 2.) Is it income? If no, are you sure it is a mere
return of capital, if you are not sure then it is
Think of taxation 1, particularly the General Principles
income.
of taxations as Constitutional Law 3, think of the cases
3.) Is the income taxable?
as an extension of the cases we have learned in
4.) If the income is taxable, what kind of tax is
Constitutional Law 1 and 2. The cases on Local
applicable?
Government will also be repeated to a certain extent in
General Principles of Tax 1. Income Taxation Cheat Sheet

When it comes to materials, recommended books: Different Kinds of Taxpayers

1.) Justice Dimaampao Resident Citizen (RC) is a Filipino who is Residing in the
2.) Dascil Philippines
3.) Mamalateo
A Non- Resident Citizen (NRC) is a Filipino who:
References for Tax 1
1.) Intends to permanently immigrate to another
1.) NIRC as amended by the Train Law country
2.) The Local Government Code of 1991 ( LGC) 2.) Is a permanent resident of another country
3.) Customs Modernization and Tariff’s Act ( CMTA) 3.) Is an OFW, OCW or Seaman

Income taxation OFW who returns for good are immediately reclassified
as resident citizens.
Income is all wealth that flows into the taxpayer other
than a mere return on capital. Income is any increase in Resident Aliens (RA) are all non- Filipinos who live in
the net worth other than the mere return of the capital. the Philippines.
The law does not distinguish between the source, it can
Non Resident Aliens ( NRA) are classified as:
be illegal or legal, it can be cash or in kind.
1. Engaged in trade or business ( NRAETB)
Sources of Income
2. Not engaged in trade or business ( NRANETB)
 Compensation Income Earner
 Self Employed individual engaged on trade or
business If the alien intends to do business in the Philippines,
 Self employed individual engaged in a then he becomes an NRAETB on his first day in the
profession country.
 Mixed Income Earner
Rules:
Corporations are juridical or artificial persons with a
1.) If the alien stays for a total of less than 180
distinct and separate personality apart from the
days, he is not engaged in trade or business.
owners. Corporations will only earn income from trade
2.) If the alien stays for a total of 181 days or more,
or business
he is engaged in trade or business. Actual trade
The NIRC also identifies other sources of income: or business is not material.

1.) Sale of Capital Assets or Capital Gains A non- resident alien is also engaged in trade or
2.) Sale of Ordinary Assets or ordinary gains business if he enters into a regular transactions, hires
3.) Royalties from inventions, musical compositions employees or puts up a branch of whatever business he
or literary and scientific works has in his home.
Domestic Corporations (DC) is one that is registered
under the laws of the Philippines. A foreign corporation
is one that is registered under the laws of another
country.
If a corporation has a branch in the Philippines, it is
classified as a Resident Foreign Corporation or RFC. If it
does not have a branch in our country. It is called as
non- resident foreign corporation or NRFC.
Section 24 to 27 of NIRC, income can be earned from
sources Within the Philippines and without or outside
the country.
Note: As a general rule the NIRC only imposes only 3
kinds of income taxes.
1.) Net Income Tax
2.) Witholding Tax
3.) Gross Income Tax
How Gross income tax is computed?
Gross income – allowable deductions = Tax Base
Tax base x Tax rate minus tax credit ( if any) = income
tax.
Witholding Tax is a tax that is collected by the
withholding agent. All taxes are TRANSACTIONAL in
nature. The withholding agent COLLECTS the tax at the
point where it is earned.
Note: Withholding tax is collected immediately because
the government need funds for the national budget.
Income tax are paid on regular intervals.
Creditable Witholding tax is the tax that appears as tax
credit in the net income tax formula. The source is
usually compensation if the source is income other than
compensation, it is called expanded withholding tax.
Final Witholding Tax means the tax that allows no
deductions or requires no more payments.
Section 24 (B) covers all sources of Passive Income. This
income earned without the application of physical or
mental labor. They include bank deposits in the
Philippines, dividends, prizes or winnings and royalties.
Section 24 (c ) and Section 24 (d) cover the sale of
assets. Assets are typically classified as capital asset or
as ordinary assets. Section 39 defines capital asset in
the negative. If it is not included in the following it is
considered as capital asset.
Ordinary Assets:
1.) Stocks in Trade
2.) Property included in the taxpayers inventory
3.) Property held primarily for sale to customers in
the ordinary course of trade or business
4.) Property used in trade or business, subject to
depreciation under Section 34(f)
5.) Real Property used in trade or business.
If it is not in the enumeration under Section 39, then
the property is classified as capital asset. The exception
is the taxpayer who is engaged in real estate business.
All of his assets will remain ordinary assets
TIPS AND TRICKS:
1.) Always focus on the exceptions, the exclusions
and wherever the general rules do not apply.
2.) When in doubt, the transaction is always
taxable. It is only the donation in favor of the
government that is not subject to any form of
tax.
3.) Always answer the questions using the three
steps framerok. Identify If the taxpayer receives
anything, if what he received is income and if it
is taxable, then identify the kind of income tax
applicable using our income taxation Cheat
Sheet.