Fabm 12 Q2 1002 Ak

Unit 10: Income and Business Taxation
10.2. Introduction to Taxation

Questions to Ponder
1. How does income taxation affect the progress of the nation?
Answers may vary. Income taxation supports the nation’s progress by pooling funds from
the income-generating activities of citizens. These funds are used for services and
projects enjoyed by the whole society. Just, fair, and effective taxation can also help
distribute the wealth created by society.
2. Is it beneficial to an individual or business to pay taxes? Why?

Yes. Paying taxes is an enforced obligation. However, it is also beneficial for taxpayers
since they can benefit from government services and projects.
3. Why do some individuals hesitate to pay taxes?

Answers may vary. Some individuals hesitate to pay taxes either because they do not
know the tax laws and regulations or they do not believe that they are benefitting from
the taxes that they pay.
Check Your Progress

1. Why is reciprocity a consideration in Philippine taxation?
Answers may vary. Reciprocity is considered in making tax regulations because the
country is still developing. Taxation, which plays a major role in distributing wealth,
could bring improvements in society.
2. What is the importance of using various forms in filing for income tax?
Using different tax forms when filing is important because it will enable the BIR and the
one filing to understand their classification better. Moreover, it will be easier to track if
such forms are imposed and used.
10.2. Introduction to Taxation 1

Try This
True or False. Write true if the statement is correct. Otherwise, write false.
True 1. Different principles underlie the system of taxation.
False 2. Taxation is not an inherent power of the government.
True 3. Taxes are not only imposed on the income of individuals and
businesses.
True 4. In general, the subject of taxation is unlimited.
True 5. In the absence of expressed law stating otherwise, the

principles of taxation shall prevail.
False 6. The secondary purpose of taxation is to provide funds to the

government.
True 7. A secondary purpose of taxation is to regulate certain activities

and businesses.
True 8. Gross salary includes basic pay.
False 9. SSS is not a mandatory government contribution.
True 10. Pag-IBIG contributions are utilized mainly for housing

assistance.
Practice Your Skills

Read the following situations and calculate the taxable income and tax due.
1. Carol is an employee of ABC Corporation. Her annual gross income is ₱420,000. Her
compensation package includes all government-mandated benefits. Assume that
the total contributions are the following:
SSS: ₱18,900

PhilHealth: ₱11,550
Pag-IBIG: ₱1,200
How much is Carol’s taxable income, and how much is her tax due?
Taxable income = 420,000 – (18,900 + 11,500 + 1,200)

= 420,000 – 31,650
Taxable Income = ₱388,400
Tax Due = 20% of the excess over P250,000

= (388,400 – 250,000) x 0.20
= 138,400 x 0.20
Tax Due= ₱27,680
2. Ely is a freelance marketing professional. His quarterly gross income is ₱350,000.

Suppose that he opted for optional deduction and graduated rates. How much is his
taxable income and tax due?
Taxable income under the Graduated Tax Rate (Optional Deduction) = Gross Sales
– (40% of gross sales)
= 350,000 – (350,000 x 0.40)

= 350,000 – 140,000
Taxable income under the Graduated Tax Rate (Optional Deduction) =
₱210,000
Ely’s taxable income did not exceed ₱250,000, therefore, he has ₱0 tax due for
the quarter.
3. Suppose Ely decided to use the 8% Income Tax Rate option. How much is his tax
due?
Taxable income under the 8% Rate = Gross Sales – 250,000

= 350,000 – 250,000

Taxable income under the 8% Rate = ₱100,000
Tax Due for 8% Income Tax Rate = Taxable Income x 0.08

= 100,000 x 0.08
Tax Due for 8% Income Tax Rate = ₱8,000
4. Kristine’s business, which is a domestic corporation, has the following financial data
for three years.
2020 2021 2022
Gross Income, Ph 740,580 85,390 232,466
Gross Income, Au 50,000 20,000 50,000
Expense, Ph 100,000 140,000 120,000
Expense, Au 15,000 25,000 30,000
Calculate the MCIT for 2020.
𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 (𝑀𝐶𝐼𝑇) = 𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 𝑥 1%

MCIT= (740,580+50,000)x1%
MCIT = 7,905.80
5. Calculate the NCIT for 2021.
𝑁𝑜𝑟𝑚𝑎𝑙 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 (𝑁𝐶𝐼𝑇) = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑥 𝑁𝐶𝐼𝑇 𝑅𝑎𝑡𝑒

NCIT =[(85,390+20,000) – (140,000+25,000)] x 2%
NCIT = -11,922

Challenge Yourself
Answer the following questions:
1. What is the significance of having different tax computation options for Individuals
Earning Business Income and/or Professional Income?
Different tax computation options for Individuals Earning Business Income and/or
Professional Income allow them to determine which option is best depending on their
business income and expenses. In some instances, the 8% Income Tax Rate has lower tax
due, while the Graduated Tax Rate is a better option at other times.
2. What are the similarities and differences in the computation of taxable income and
tax due for individuals and businesses?
The computation of taxable income for both individuals and businesses follows the same
principle: expenses or deductions shall be deducted from the gross income to obtain the
taxable income. However, each method differs in terms of allowable deductions. For
instance, individuals earning purely from compensation can only deduct their
contributions for government-mandated benefits. On the other hand, businesses can
choose between itemized or optional deduction schemes, whichever is more
advantageous to them.
3. An individual earning business income opted for an income tax rate with the least
amount of tax due. Is this good or bad? Justify your answer.
Answers may vary. Choosing the income tax rate with the least amount of tax due is not
necessarily bad. All these options are legal and mandated by law. These options exist so
taxpayers can determine which is the most advantageous to their situations or
circumstances.

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Unit 10: Income and Business Taxation

10.2. Introduction to Taxation

2. Is it beneﬁcial to an individual or business to pay taxes? Why?

3. Why do some individuals hesitate to pay taxes?

Check Your Progress

10.2. Introduction to Taxation 1

True 1. Diﬀerent principles underlie the system of taxation.

False 2. Taxation is not an inherent power of the government.

True 4. In general, the subject of taxation is unlimited.

True 5. In the absence of expressed law stating otherwise, the

False 6. The secondary purpose of taxation is to provide funds to the

True 7. A secondary purpose of taxation is to regulate certain activities

True 8. Gross salary includes basic pay.

False 9. SSS is not a mandatory government contribution.

True 10. Pag-IBIG contributions are utilized mainly for housing

Practice Your Skills

10.2. Introduction to Taxation 2

Taxable income = 420,000 – (18,900 + 11,500 + 1,200)

Tax Due = 20% of the excess over P250,000

2. Ely is a freelance marketing professional. His quarterly gross income is ₱350,000.

= 350,000 – (350,000 x 0.40)

Taxable income under the 8% Rate = Gross Sales – 250,000

10.2. Introduction to Taxation 3

Taxable income under the 8% Rate = ₱100,000

Tax Due for 8% Income Tax Rate = Taxable Income x 0.08

2020 2021 2022

Gross Income, Ph 740,580 85,390 232,466

Gross Income, Au 50,000 20,000 50,000

Expense, Ph 100,000 140,000 120,000

Expense, Au 15,000 25,000 30,000

Calculate the MCIT for 2020.

𝑀𝑖𝑛𝑖𝑚𝑢𝑚 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 (𝑀𝐶𝐼𝑇) = 𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 𝑥 1%

5. Calculate the NCIT for 2021.

𝑁𝑜𝑟𝑚𝑎𝑙 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 (𝑁𝐶𝐼𝑇) = 𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝐼𝑛𝑐𝑜𝑚𝑒 𝑥 𝑁𝐶𝐼𝑇 𝑅𝑎𝑡𝑒

10.2. Introduction to Taxation 4

10.2. Introduction to Taxation 5

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