Income Taxation Introduction to income Taxation, Lecture notes of Business Taxation and Tax Management

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Chapter 4 - Introduction to income Tm CHAPTER 3 INTRODUCTION TO INCOME TAXATION ~. Chapter Overview and Objectives This chapter discusses the concept of tax income, the situs of income, ang th Wwpes al taxpayers. After this chapter, readers are expected to comprehend and demonstra knowledge on the following: 4. The concept af gross income 2. The qypes of income taxpayers 3. The general mules in income taxation 4 The income tax situs rues ‘THE CONCEPT OF INCOME Why i inceme subject to tax? Income as regarded as the best measure of taxpayers’ ability to pay tax It isa excellent abject of taxation in the allocation of government costs. What Is income for taxation purposes? The tax concept af income is simply referred to as “gross incame” under the MIRC] A taxable item of income is referred to “5 = asan “f pee 5 grass income" tem of gross income” or “inclusion a Gross Income simply means taxable j i however, the term “taxable in big income in layman's term. Under the NI come” refers to certai i aeaian n in items of gross income ks a oo exemptions allowable by law. Technically, gross income Pp to any income that can be Subjected to income tax. Gross ieee jae as any inflow of wealth to the taxpayer [roe meeome €gal, that increases net worth. It includes income fret SINESS OF exerci ” and other sources stich a ee fi of profession, income from properties Transactions. broperties and other regular or cased Tee OF GROSS INCOME iE @ return on capi! " 5 his a realized teae Uist Increases net worth, fis not exempted by law, contract, or treaty. 62 chapter 4 - (ntroduction to [acome Tax RETURN ON CAPITAL Capital means any wealth or property. Gross income is 2 return on wealth or property that increases the taxpayer's net worth. pinstration 8G purchased goods for P300 and sold them for P500. The PS00 consideration can be analyzed as follows: Selling price (total consideration received) P 500 Total return cost (value of inventory fargone) 300 Return of capital Mark-up (gross income) Pu 200 Return on capital The return on capttal that increases net worth is income sub|cet to income tae Return of capita’ merely maintains net worth; hence, It is not taxable. An improvement in net worth indicates an ability to pay tax. Capital irems 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 returt of coprtal Examples: 1. Life 2. Bealth 3. Human reputation Life The value of fife is immeasurable by money, Under Sec. 32 of the NIRC, the proceeds of life insurance pelicies paid to the heirs or beneficiaries upon death of the insured, whether ina single sum er otherwise, are exempt from income tax. ‘The proceeds of a life insurance contract collected by an employer as a beneficiary from the life insurance of au olficer or any person directly Interested with ee trade are likewise exempt. These proceeds are viewed as advanced recovery ©! future loss. i: i insurance policies: However, the following are taxable remum on capital from a Any excess amount received over premiums paid by the Insured upon surrender or maturity of the policy (Le. the insured outlives the policy.) b. Gain realized by the insured from the assigament or sale of his insurance policy ; i i Fthe proceeds of the policy ¢, Interast incame from the unpaid balance o eed: ; d. Any — of the proceeds received over the acquisition costs aid premiom Payments by an assignee of a llfe insurance policy 63