Chapter 10

Income
and
Business Taxation
Taxation

• is the process by which a

government, through its
lawmaking body, imposes
charges on its inhabitants
to raise money for public
use.
Purposes of Taxation

The Primary purpose of

taxation is to raise revenue that
will be used in defraying
government expenses (it is also
called "revenue purpose".)
 Secondarily, taxation may also be
used to achieve certain social and
economic objectives (non revenue
purposes) such as the following:

a. regulate inflation
b. minimize the adverse effects of
certain activities
c. equitable distribution of wealth
 Nature of Taxation
1. Inherent power

Taxation is one of the following three inherent powers of a

sovereign state:

• Eminent domain- the right of the government to

appropriate private property for particular uses to promote
public welfare.

• Police power- the power of the government to enact laws

to promote peace and order, public welfare, security, health
and safety

• Taxation
Nature of Taxation
*The government cannot exist
without money. It needs the power
of taxation to raise the money
needed to support its existence.
This is why TAX is often
referred to as the LIFEBLOOD or
the BREAD AND BUTTER of the
government.
 Nature of Taxation

2. Legislative

Taxation is a process that is

legislative in nature. This means that
tax laws must first be enacted before
taxes can be imposed.
 Nature of Taxation
3. Subject to constitutional and inherent limitations

The power of taxation is considered plenary

(absolute or supreme), subject only to constitutional

and inherent limitations. This means that the

government can tax anything or anyone within its

jurisdiction.
 Nature of Taxation

 Inherent limitations on the power of taxation:

a.) Purpose- taxes can only be levied for

public purposes.
b.) Territorial jurisdiction- the government
may levy taxes only on persons and
properties within its jurisdiction.
Nature of Taxation
c.) Non-delegation of legislative power to tax-
the power to create tax laws rests with the
Congress and this power cannot be delegated,
except as expressly allowed by law.

d.) Tax exemption of government entities.

e.) International comity- the government may

not tax the property belonging to a foreign
government.
Constitutional limitations on the power of taxation:

a. Due process and equal protection of the laws.

b. Rule of uniformity and equity in taxation.
c. President's power to veto tax bills.
d. A law granting any tax exemption needs the concurrence of
the majority of the Members of the Congress.
e. Supreme Court's power to make final judgement on tax
cases.
f. Non-imprisonment for non-payment of poll tax.
g. Exemption of religious, charitable, or educational entities,
non profit cemeteries, and churches from property taxation
h. Exemption of revenues and assets of non-stock, non-profit
educational institutions from taxation.
Theory and basis of taxation
The government cannot exist without money. The
government, therefore, has the right to compel those within
its jurisdiction to pay taxes. This is based on the following:

a. Reciprocal duties of protection and support- the government

protects the welfare of its people, in return, the people
support the government.

b. Benefits received principle- taxes are used for the benefit

of the public.
 Aspects of taxation:

1. Levy- tax laws, specifying the object and

amount of taxation, are enacted.

2. Collection- the tax laws are implemented

and administered.
Principles of a sound tax system:

a. Fiscal adequacy- revenues should be sufficient to

defray expenditures.

b. Theoretical justice- taxes are proportionate to the

taxpayer's ability to pay.

c. Administrative feasibility- tax laws can be

implemented efficiently and effectively, avoiding
unnecessary inconvenience and confusion on the part
of the taxpayers.
Taxes

Taxes are mandatory contributions

imposed upon persons and property for
the support of the government.
Characteristics of tax

• it is mandatory
• it is levied by the lawmaking body
• it is imposed primarily to raise revenues for
the government
• it is generally payable in money
• it is proportionate in character
• it is levied on persons and property over
which the taxing authority has jurisdiction
• it is levied for public purposes
Classification
of
taxes
1. As subject matter:

a. Personal, capitation or poll tax- a fixed amount charged

to all persons residing within a specified territory irrespective
of their occupation or property.

*Ex: Community tax or "cedula"

b. Property tax- tax imposed on properties based on their

value or some other method of apportionment.

*Ex: Real estate tax

c. Excise tax- tax imposed upon performance of an act,

the enjoyment of a privilege, or the engaging in an occupation.

*Ex: Value-added tax

2. As to who bears the burden:

a. Direct tax- tax which the taxpayer must pay and cannot
shift to another.

*Examples: personal tax, income tax

b. Indirect tax- tax which the taxpayer can shift to another.

*Ex: Value-added tax

3. As to the determination of the amount:

a. Ad Valorem- tax based on the value of the property.

*Ex: Real estate tax

b. Specific- tax based on weight, volume or other physical

unit of measurement.

*Ex: Excise tax on wines

4. As to scope:

a. National tax- tax levied by the national government

*Examples: Income tax & Value added tax

b. Local tax- tax levied by the local government, e.g, city municipal

*Examples: Community tax, Real estate tax, Municipal licenses tax

5.As rate or graduation:

a. Proportional- tax based on fixed rate

*Ex: Value added tax

b. Progressive- tax based on increasing rate as the taxable amount

increases

*Ex: Income tax

c. Regressive- tax based on a decreasing rate as the taxable amount

increases
 Tax distinguish from Other Fees
TAX LICENSE FEE

Imposed through power of taxation. Imposed through police power.

The primary purpose is to raise The primary purpose is to regulate

revenue. certain business activities.

Amount is unlimited. Amount is limited to the cost of

regulation.
TAX TOLL FEE

Paid for the support of the government Paid for the use of property (e.g.,
road)
TAX SPECIAL ASSESSMENT

Imposed regardless of public Imposed because of an increase in the

improvement value of land due to public improvement.
INCOME TAX

VS.

BUSINESS TAX
 Income Tax is a tax on a person's income
derived from employment, business, trade,
practice of profession, or from property, after
excluding the deductions allowed under the law.

Business Tax is a tax on the production,

sale, or consumption of goods and services,
leasing of property, or other business activities.
Classification of Individual Income Taxpayers
Individual income taxpayers are classified into the
following:
1. Resident citizen- a Filipino citizen residing
permanently in the Philippines.
2. Non- resident citizen- a Filipino citizen residing
permanently abroad or works abroad most of the time
3. Resident alien- a foreigner residing in the Philippines
4. Non-resident alien- a foreigner not residing in the
Philippines

Resident citizens are taxed on all income they derive

from sources within or without (outside) the Philippines
Nonresident citizens and aliens taxed only on income
they derive within the Philippines
 Income Taxation
Income includes all inflows of wealth to the
taxpayer other than those that represents a mere
return of capital.

Gross Income refers to all income derived from

whatever source, including (but not limited to):

1. Compensation income

2. Business income

3. Passive income
Gross Compensation Income
Compensation income is income that is typically derived from
employment.

Examples:

 Salaries- compensation that is normally quoted on a per

month (per year) basis and is paid periodically(e.g., twice a
month) for the performance of a regular work.

 Wages- compensation that is quoted on a per hous basis and

is paid based on the number of hours worked
Taxable Income
Taxable income is gross income minus the deductions
allowed by law. Taxable Income is the amount on which tax
is computed.
The Following are allowed deductions from gross income:
1. Contributions for the following
a. Social Security System (SSS)- for private employees
b. Government Service Insurance System (GSIS)- for
government employees
c.Philippines Health Insurance Corporation (PhilHealth)
d. Home Development Mutual Fund (HDMF) or popularly
known as Pag-IBIG
e. Union dues
2. Compensation for Injuries or Sickness- recieved through
Accident or Health Insurance or under Workmen's
Compensation Act
 Illustration
Mr. A’s pay slip for the month shows the
following:

Salary 26,000
SSS contribution 581
PhilHealth contribution 325
Pag-IBIG contribution 100
Union dues 50

Requirement: How much is Mr. A’s taxable income?

Solution

Salary 26,000
SSS contribution 581
PhilHealth contribution 325
Pag-IBIG contribution 100
Union dues 50
Taxable income 24,944
Tax Due
The individual taxpayer’s income tax due is
computed using the tax table below:
TAX TABLE
TAX SCHEDULE EFFECTIVE JAN. 1, 2018 UNTIL DEC. 31, 2022
If taxable income is: Tax due is:
Not over Php250,000 0%
Over Php250,000 but not over 20% of the excess over Php250,000
Php400,000
Over Php400,000 but not over Php30,000+25% of the excess over
Php800,000 Php400,000
Over Php800,000 but not over Php130,000+30% of the excess over
Php2,000,000 Php800,000
Over Php2,000,000 but not over Php490,000+32% of the excess over
Php8,000,000 Php2,000,000

Over Php8,000,000 Php2,410,000+35% of the excess

over Php8,000,000
 TAX TABLE
TAX SCHEDULE EFFECTIVE JAN. 1, 2018 UNTIL DEC. 31, 2022
If taxable income is: Tax due is:

Not over Php250,000 0%

Over Php250,000 but not over 15% of the excess over Php250,000
Php400,000

Over Php400,000 but not over Php25,000+20% of the excess over

Php800,000 Php400,000

Over Php800,000 but not over Php102,500+25% of the excess over

Php2,000,000 Php800,000

Over Php2,000,000 but not over Php402,500+30% of the excess over

Php8,000,000 Php2,000,000

Over Php8,000,000 Php2,202,500+35% of the excess

over Php8,000,000
Example 1:

The taxable income is Php49,000. How much is

the tax due?
(*use the tax table for Jan. 1,2018 until Dec. 31,2022)

TAX TABLE
2018-2022 (partial)

If taxable income is: Tax due is:

Not over Php250,000 0%

A taxable income of Php249,000 is “not over

Php250,000”
Php249,000 x 0%=0

Answer: 0
Example 2:
The taxable income is Php560,000. How much
is the tax due?
(*use the tax table for Jan. 1,2018 until Dec. 31,2022)
TAX TABLE
2018-2022 (partial)
If taxable income is: Tax due is:
Over Php400,000 but not over Php30,000+25% of the
Php800,000 excess over Php400,000
The Php560,000 taxable income is over Php400,000 but not over
Php800,000. The tax due is computed as follows:
Tax on Php400,000 30,000
Add: Tax on excess (25%(560,000-400,000) 40,000

Tax due 70,000

Rounding-off of Centavos
When computing for the taxable income
or the tax due, centavos are rounded-off
as follows:
a.) For less than 0.50 centavos, drop or
omit the centavos.

b.) For 0.50 centavos and above, round up

to the next peso.
Rounding-off of Centavos
Example:
The taxable income is Php4,267,912.42. How
much is the tax due?
Answer:
Tax on Ph200,000,000 490,000
Add: Tax on excess
(32%(4,267,912.42(a)-2,000,000) 725,732(b)
Tax due 1,215,732

(a) 4,267,912.42 is rounded-down to 4,267,912.

(b) (32%(4,267,912 – 2,000,000)) equals 725,731.84.
This is rounded-up to 725,732.
Illustration
Information on Mr. A’s salary for the year is
as follows:

Salary 312,000
SSS contribution 6,972
PhilHealth contribution 3,900
Pag-IBIG contribution 1,200
Union dues 600

Requirement: How much is Mr. A’s taxable income?

Solution
Mr. A’s taxable income is computed as
follows:

Salary 312,000
SSS contribution (6,972)
PhilHealth contribution (3,900)
Pag-IBIG contribution (1,200)
Union dues (600)
Taxable income 299,328
Mr. A’s tax due is computed as follows:

Tax on Php250,000 0
Add: Tax on excess
(20%(299,328-250,000) 9,866*
Tax due 9,866

*amount rounded-off
Other Forms of Compensation
1. Fixed or Variable Allowances- e.g.,
representation allowance transportation
allowance, cost of living allowance (COLA),
and the like.
Example:
ABC Co.’s place of business is located in the outskirts
of the town. To avoid tardiness and to promote
convenience on both ABC Co. and the employees,
ABC Co’s provides free living quarters and meals
for its employees. The living quarters are located
in ABC Co.’s business premises. The cost of the
board and lodging received by an employee is tax
exempt.
2. 13th month pay- is additional compensation mandated by law
to be given to "rank and file" employees. Thirteenth month pay
is equal to an employee’s one month basic salary.
3. Christmas Bonus- is additional compensation provided to the
employee at the discretion of the employer. More often than
not, the timing of payment of 13th month pay and Christmas
bonus coincide. Distinctions between these two are provided
below:
13th month pay Christmas bonus

-required by law to be paid to all -not required by law but

“rank-and-file” employees who has rather paid voluntarily
worked for at least 1 month. by the employer.
-amount is determined as 1/12 of -amount is at the
the employee’s monthly basic salary discretion of the
for each month of service rendered. employer.
-required to be paid on or before -paid at the discretion
December 24 of the year. of the employer.
Taxation of 13th month pay
Thirteenth month pay is not taxable up to
Php90,000. Any excess over this amount is taxable.

Taxation of Christmas bonus

The Christmas bonus is split into the following:
a.) The Non-performance based (‘Other Benefits’)
portion is combined with the 13th month pay and
subjected to the total limit of Php90,000. Any
excess over this amount is taxable.
b.)The Performance based portion, if received under
collective bargain agreement (CBA) and
productivity incentive schemes, is not taxable up
to a limit of Php10,000.
Other Forms of Compensation
4. De Minimis Benefits- are other forms of benefit that
are of relatively small value and are given to employees to
promote health, goodwill, contentment and work
efficiency. The following are considered
de minimis” benefits:
a. Monetized unused vacation leave credits of private
employees not exceeding ten days during the year.
b. Monetized value of vacation and sick leave credits paid to
government officials and employees.
c. Medical cash allowance to dependents of employees not
exceeding Php750 per employee per semester or Php125
per month.
d. Rice subsidy of Php1,500 or one sack of 50 kg. rice per
month.
e. Uniform and clothing allowance not exceeding Php5,000
per annum.
 … “de minimis” benefits
f. Actual yearly medical benefits not exceeding Php10,000
per annum.
g. Laundry allowance not exceeding Php300 per month.
h. Employees achievement award not exceeding Php10,000
(tangible property).
i. Gifts given during Christmas and major anniversary
celebration not exceeding Php5,000 per annum.
j. Daily meal allowance for overtime work not exceeding
25% of the basic minimum wage.
k. Benefits received by an employee by virtue of a
collective bargain agreement (CBA) and productivity
incentive schemes provided that the total monetary
value received from both CBA and productivity
incentive schemes combined do not exceed Php10,000
per employee per taxable year.
Taxation:

“De minimis” benefits are not taxable

up to the prescribed limits stated at the
last slide.

Any access de minimis benefit is

considered ‘Other benefits’. It is
included in the “13th month pay and Other
Benefits” and is subjected to the
Php90,000 limit. Any excess is taxable.
Other Forms of Compensation

5. Overtime pay- compensation for work performed

beyond regular working hours

6. Hazard pay- additional compensation for

employees performing dangerous work, e.g,.
hazard payments to electrical power line
installers and repairers.

7. Commission- e.g., percentage od sales made by a

sales man
Other Forms of Compensation

8. Fees- additional compensation recieved by an

employee for services rendered

9. Honoraria- payment for service which normally

has no set price

10. Vacation and sick leaves- paid vacation and

sick leaves used by the employee are taxable

11. Retirement pay- compensation paid to a

retiring employee
Other Forms of Compensation
12. Separation pay- compensation paid in exchange
for the termination of an employee's employment
other than from retirement

13. Compensation paid in kind- compensation is

normally in the form of cash. However, there may
be instances where the employee receives non
cash items as compensation for services
rendered.
 Gross Business Income
Business income is income derived from trade,
business, or practice of profession (or simply,
income from self-employment).

Gross Business Income is computed as follows:

Gross sales xx
Less: Sales returns,
allowances & discounts (xx)
Net sales xx
Less: Cost of Sales (xx)
Gross income from
business xx
Deductions from Gross Business Income

An individual taxpayer deriving business

income is allowed to deduct from
his/her gross business income either
one of the following:

1. Itemized deductions; or
2. Optional standard deduction (OSD)
1. Itemized deductions :
a. Ordinary and necessary trade, business or
professional expenses
b. Interest expense
c. Taxes
d. Losses
e. Bad debts
f. Depreciation
g. Depletion
h. Charitable and other contributions
i. Research and development
j. Pension trust
The following are not allowed as
deductions from gross income:

a. Bribes, kickbacks, and other illegal

payments
b. Personal expenses of the business owner
c. Capital expenditures, e.g., cost of building
and its permanent improvements. These
expenditures are capitalized; only the
depreciation expense therefrom shall be
deducted.
2. Optional standard deduction (OSD)

In lieu of the itemized deductions, the

taxpayer may choose to deduct the
OSD, which is computed as 40% of net
sales, without deducting cost of sales.
 Illustration
The accounting records of a sole proprietorship business
show the following information for the taxable year:
Accounts Debit Credit
Sales Php1,000,000
Sales return and discounts Php100,000
Inventory, beg. 50,000
Purchases 200,000
Commissions expense 30,000
Communication, Light & Water 20,000
Depreciation expense 40,000
Insurance expense 12,000
Office Supplies expense 10,000
Rent expense 30,000
Salaries expense 300,000
Taxes and licenses 70,000
Transportation expense 5,000
Totals Php867,000 Php1,000,000
Additional information :
-The ending inventory per physical count
is Php60,000.
Requirements:
a.Compute for the tax due assuming the
taxpayer uses the itemized deductions.
b.Compute for the tax due assuming the
taxpayer avails the optional standard
deduction (OSD).
Solutions:
Requirement (a): Itemized deductions
Sales 1,000,000
Sales return and discounts (100,000)
Net sales 900,000
Cost of sales
Inventory, beg. 50,000
Purchases 200,000
Total Goods Available for Sale 250,000
Inventory, end. (60,000) (190,000)
Gross income from business 710,000
Itemized deductions:
Commissions expense 30,000
Communication, Light, & Water expense 20,000
Depreciation expense 40,000
Insurance expense 12,000
Office Supplies expense 10,000
Rent expense 30,000
Salaries expense 300,000
Taxes and licenses 70,000
Transportation expense 5,000 (517,000)
Taxable income 193,000
continuation…
Solutions:
Requirement (a): Itemized deductions

TAX TABLE
If taxable income is: Tax due is:
Not over Php250,000 0%

Tax due 0
Requirement (b):
Optional Standard Deduction (OSD)

Sales 1,000,000
Sales returns and discounts (100,000)
Net Sales 900,000
Optional Standard Deduction
(900,000 x 40%) (360,000)
Taxable income 540,000
continuation…
Requirement (b):
Optional Standard Deduction (OSD)
TAX TABLE
If taxable income is: Tax due is:
Over Php250,000 but not over 20% of the excess over
Php400,000 Php250,000

Tax on Php250,000 0

Add: Tax on excess (20% x (540,000-250,000)) 58,000

Tax due 58,000

 Optional Eight Percent Tax
Self-employed individuals whose gross
sales or gross receipts and other non-
operating income do not exceed the
Php3,000,000 VAT threshold have the
option to avail of the 8% tax on gross
sales or gross receipts and other non-
operating income in excess of two
hundred fifty thousand pesos
(Php250,000) in lieu of the graduated
income tax rates and percentage tax.
Income Tax Return (ITR)

Taxpayers are required to file

an income tax return (ITR) with
the BIR when paying taxes,
exempt when the taxpayer is
specifically exempted by law
from such filing.
 The following are exempt from
filing an ITR:

a. Individuals whose taxable income does not

exceed Php250,000. However, a business
income earner is required to file an ITR
regardless of the amount of his or her gross
income.
b. Employees earning purely compensation
income from only one employer, regardless of
the amount; provided that, the income tax is
correctly withheld.
The ITR consists of a maximum of four
(4) pages in paper or electronic form.
It contains the following information:

a.Personal profile and information;

b.Gross income, excluding income subject
to final tax;
c.Allowance deductions;
d.Taxable income; and
e.Tax due and payable
Filing of the annual ITR

The annual ITR is required to be

filed on or before May 15 of the year
following the taxable year. For example,
the ITR and the corresponding tax for
income earned in the year 2018 shall be
filed and paid on or before May 15,2019.
 Declaration of estimated income and
Quarterly returns
A self-employed individual is required to file a
declaration of his or her estimated income for the
current year on or before May 15 of the same year
and pay the corresponding tax due in four (4)
installments by filing quarterly returns as follows:

1. 1st installment – at the time of declaration;

2. 2nd installment – on or before August 15 of same
year;
3. 3rd installment – on or before November 15 of the
same year; and
4. 4th installment – on or before May 15 of the
following year.
Installment payment

When the tax due exceeds Php2,000, the tax

filer my elect to pay in two equal installments:

a.the first installment (50% or ½ of the tax

due) is to be paid at the time the return is
filed; and

b.the second installment (the remaining 50%),

on or before October 15 of the same year.
Mixed income
An individual taxpayer may be deriving
both compensation and business income (i.e.,
‘mixed income’).
Mixed income earners are taxed as follows:
a. On compensation income – at graduated rates (i.e.,
based on the tax tables).
b. On income from business or practice of profession:
i. if exceeding the Php3M VAT threshold – at
graduated rates
ii. if not exceeding the Php3M VAT threshold – an
option of either (1) at graduated rates or (2) at the
optional 8% tax on gross sales/receipts and other
non-operating income
Joint filing
Married individuals shall file a single return
for the taxable year, showing the respective
incomes and tax dues of the spouses.
Taxpayer Identification Number
(TIN)
Every taxpayer is required to register
once with the BIR and obtain one (1) TIN.
A taxpayer obtaining more than one TIN
for himself/herself is punishable by law
through monetary fine and/or imprisonment.
Registration for TIN is made as follows:

Source of BIR Form Date of registration

income No.
Compensation 1902 Within ten (10) days
from date of employment

Business/ 1901 On or before the

Mixed commencement of
business
Withholding taxes
 Employers are required to withhold
taxes on employees’ compensation.
 This means that the salaries or wages
received by the employee as “take-home
pay” is already net of the related income
tax.
 Salaries are typically paid on a bi-
monthly basis. Thus, taxes may be withheld
either on a monthly basis or on a semi-
monthly basis.
Income and Business Taxation
 Illustration
Mr. A earns net compensation
income of Php26,000 for the
month.

Case A – Monthly withholding tax

How much is the withholding tax
assuming Mr. A’s employer withholds
taxes on a monthly basis?
Solutions:
Mr. A’s compensation is in the
“Php20,833 – Php33,332” range
(column 2).
MONTHLY 1 2
Compensation Php20,833 and Php20,833 –
Range below Php33,332

Prescribed Php0 Php0 + 20% over

Withholding Tax Php20,833
…Solutions:

Mr. A’s withholding tax for the month is

computed as follows:

Tax on Php20,833 0
Add: Tax on excess (20% x (26,000-20,833)) 1,033
Withholding tax for the month 1,033
…Solutions:

Reconciliation:
Assuming Mr. A’s net compensation is uniform all
throughout the year so that he earns a total of
Php312,000 for the year (Php26,000 x 12 months),
we can reconcile his total tax due for the year with
the total taxes withheld as follows:

Total compensation income

for the year (26,000 x 12) 312,000
Taxable income 312,000
…Solutions:
TAX TABLE
If taxable income is: Tax due is:
Over Php250,000 but not over 20% of the excess over
Php400,000 Php250,000
Tax on Php250,000 0

Add: Tax on excess (20% x (312,000-250,000)) 12,400

Total tax for the year 12,400

Total taxes withheld

12,396*
during the year (1,033 x 12 mos.)
*the difference of Php4 is due to rounding-off.
Since the tax due is correctly withheld, Mr. A is exempt from filing
an income tax return.
Case A – Monthly withholding tax
How much is the withholding tax assuming
Mr. A’s employer withholds taxes on a
semi-monthly basis?
Solutions:
Mr. A’s net compensation on a semi-
monthly basis is Php13,000
(Php26,000  2).
This is on the “Php10,417 – Php16,666”
compensation range (column 2).
SEMI-MONTHLY 1 2
Compensation Php10,417 and Php10,417 –
Range below Php16,666

Prescribed Php0 Php0 + 20% over

Withholding Tax Php10,417
…Solutions:

Mr. A’s semi-monthly withholding tax is

computed as follows:
Tax on Php10,417 0
Add: Tax on excess (20% x (13,000-10,417)) 516.60
Semi-monthly withholding tax 516.60

Notice that if we multiply the semi-monthly

withholding tax by 2, we will come up with the
amount computed in Case A, i.e., 516.60
semi-monthly x 2 = 1,033 monthly.
SSS/PhilHealth/Pag-IBIG Contribution

In this section, we will compute for

the SSS, PhilHealth, and Pag-IBIG
contributions by an employee. These
contributions are required by law and are
outright deductions from the employee’s
compensation, meaning, the “take-home
pay” of the employee is already net of
these contributions.
Illustration

Mr. B earns monthly salary of

Php24,000. How much is the
required SSS contribution of
Mr. B?
Answer:
Mr. B’s “Range of Compensation” is “15,750 -
over” (last row in SSS Contribution Table).
Therefore, Mr. B’s required SSS Contribution
per month is Php581.30 (EE column of
‘Employee’ column)
Mr. B’s employer is required to contribute
Php1,208.70 on behalf of Mr. B. therefore,
the total amount to be paid to the SSS is
Php1,790
(Php1,208.70 employer’s share + Php581.30)
contribution of Mr. B shall be deducted from
his monthly salary.
Illustration:

Mr. B earns a
monthly salary
of Php24,000.
How much is
the required
PhilHealth
contribution of
Mr. B?
Solution:
Mr. B belongs to Salary Bracket No. 17.
Therefore, his monthly PhilHealth contribution is
Php300.
Mr. B’s employer is also required to
contribute Php300 on behalf of Mr. B. Therefore,
the total amount to be paid to PhilHealth is
Php600 (Php300 employer’s share + Php300
employee’s share).
However, only the Php300 contribution of Mr. B
shall be deducted from his monthly salary.
Pag-IBIG (HDMF) Contribution Table
Monthly Percentage of Monthly
Compensation Compensation
Employee’s share Employer’s share

Php1,500 and 1% 1%
below.
Over 2% 2%
Php1,500
The maximum monthly compensation allowed for computing
an employee’s Pag-IBIG contribution is Php5,000
The maximum amount an employee can contribute is Php100
The employer shall contribute another Php100
The total amount to be paid to the Pag-IBIG is Php200
The table above is useful only if the employee earns monthly
compensation of below Php5,000
Illustration:

Mr. C has the following monthly compensation.

Basic monthly salary 23,000

Cost of living allowance (COLA) 1,000
Total 24,000
Requirement:

Compute for Mr. C’s monthly

“take-home pay,” net of SSS,
PhilHealth, and Pag-IBIG
contributions and monthly
withholding tax.
Solution:
Basic monthly salary 23,000

Cost of living allowance (COLA) 1,000

Total 24,000

SSS Contribution (581.30)

PhilHealth Contribution (300)

Pag-IBIG(maximum amount) (100)

Net compensation subject to withholding taxes 23,019

Withholding tax (see computation on the next page) (437)

Net pay 22,582

…Solution:

Withholding tax – monthly:

Tax on Php20,833 0
Add: Tax on excess
(2% x (23,019 – 20,833)) 437
Withholding tax for the month 437
Passive income
Passive income can be broadly defined as
income earned without actively working for it.
Passive income is typically subject to final
tax.
Final tax means once the income is
taxed, it will nit be taxed again.
Final tax is computed by multiplying
a fixed rate on the income, rather than
subjecting the income to the tax tables
provided earlier.
*The amount of passive income received
by the earner is net of the final tax.
 Examples of passive income Final tax rate
(for a resident
citizen)
1. Interest income from bank deposit 20%

2. Interest income from foreign currency deposit 15%

3. Royalties, except on books, as well as other literary 10%

works and musical compositions

4. Prizes and winnings exceeding Php10,000 20%

Notes:
a. Prizes amounting to Php10,000 or less are included
in income subject to the tax tables provided earlier.
b. Winnings from Philippine Charity Sweepstakes
Office (PCSO) and Lotto amounting to Php10,000 or less
are exempt.

5. Cash or property dividends received by an individual 10%

from a domestic corporation

6. A partner’s share in the after-tax profit of a 10%

partnership (except a general professional partnership)
Illustration:
Mr. A, a resident citizen, earns the
following passive incomes, gross of final
taxes:
Interest income from a
peso bank deposit 1,000
Royalties from invention 1,000,000
Prize won on a singing
contest 200,000
Winnings from LOTTO 500,000
Cash dividends from a
domestic corporation 40,000
Requirement:

Compute for the net amount

received from the passive
incomes earned.
Solution:
Passive income Amount Final tax Final tax
rate
Interest income 1,000 20% 200

Royalties from 1,000,000 10% 100,000

invention

Prize won on singing 200,000 20% 40,000

contest

Winnings from 500,000 20% 100,000

LOTTO

Cash dividends 40,000 10% 4,000

Totals 1,741,000 244,200

…Solution:

Total passive income, gross of final tax 1,741,000

Less: Total final tax (244,200)
Net amount received 1,496,800
Business Taxation
Annual registration
Businesses are required to pay an annual
registration fee of Php500 for every separate place
of business on or before January 31 of the current
year. This is done through BIR Form No. 0605
(Payment Form).
The following are also required from a business:
1. Registration of Books of Accounts
2. Application for Authority to Print Receipts and
Invoices
3. Application to Authority to Use Computerized
Accounting Systems
4. Application for Permit to Use CRM (cash register
machine) and/or point-of-sale (POS) machine.
 Aside from the annual payments t BIR, businesses
are also required to pay annual taxes and fees to the
local government, which include, but not limited to,
the following:

a. Business permit/Mayor’s permit, including business

tax
b. Fire safety inspection certificate fee
c. Sanitary inspection certificate fee
d. Garbage collection fee
e. Barangay clearance/permit

A sole proprietorship is required to register with the

Department of Trade and Industry (DTI).
The DTI registration is valid for 5 years
Business taxes
Business tax is a tax on the production,
sale, or consumption of goods and
services, leasing of property, or other
business activities.
Business taxes are
classified into the following:
1.Value-Added Tax (VAT)
2.Percentage Tax
3.Excise Tax
 Value-Added Tax (VAT)
Value-Added Tax (VAT) is imposed on
“any person who, in the ordinary
course of business, sells, barters,
exchanges, leases goods or
properties, renders services, and any
person who imports goods”. (NIRC Sec. 105)
Characteristics of VAT
a.It is a consumption tax – A tax
imposed on the consumption of goods
or services in the Philippines,
including importation of goods.
b.It is a form of sales tax – the tax is
based on sake price.
c.It is an indirect tax – it can be shifted
or passed on to the buyer.
A business is required to pay VAT if:
a.It is VAT-registered; or
b.It has annual total sales or receipts
that exceed Three Million Pesos
(Ph3,000,000); or
c.There are reasonable grounds to
believe that its annual total sales or
receipts will exceed Three Million
Pesos (Ph3,000,000).
Those who elected to be taxed at the
optional 8% tax are not allowed to
register as VAT-payer.
VAT is normally computed as 12% of
the gross selling price of the good or
services. This is called output VAT.
Before paying the output VAT to the
BIR, the VAT-registered business is
allowed to deduct an input VAT,
computed as 12% of purchases or
payments to other VAT-registered
businesses.
**These are exemplified on the next page**
 VAT
Sale price to Output (10,000 x 12%) 1,200
customer (10,000)
Purchase price from Input (6,000 x 12%) (720)
supplier (6,000)
Net VAT to be 480
remitted to the BIR
Sales returns, allowances and discounts
The following are excluded from the selling price
when computing for VAT:
a.Sales returns and allowances – in which a
refund is made or a credit memorandum or
return is issued.
b.Sales discounts – which is granted at the time
of sale, indicated on the invoice, and does not
depend upon the happening of a future event.
Zero-rated and VAT-exempt sales
Not all sales transaction are subject to the
12% VAT. Some are considered Zero-rated or
VAT-exempt.
Zero-rated sales are those that are subject
to zero percent (0%) output VAT but the
business can still claim the related input VAT.

VAT-exempt sales are those that are not

subject to an output VAT but the business
cannot claim the related input VAT.
Percentage Tax
A business that is exempt from paying
VAT is required to pat percentage tax.
A business has the option to register as
VAT-payer even if its total sales or
receipts do not exceed Php3,000,000. on
the other hand, a business which is
registered as a percentage tax payer will
be required to pay VAT when its total
sales or receipts exceed or expected to
exceed Php3,000,000.
Percentage tax rate varies
depending on the nature of the
business.

Percentage tax is computed as 3%

of gross sales or receipts.

No deduction is allowed for

percentage tax.
Illustration:

A Non-VAT registered
business reports total sales of
Php100,000 during the month.
How much is the percentage
tax?
 Answer:
Php3,000 (100,000 x 3%)
 Keeping of
books of accounts
All taxpayers are required to
maintain appropriate
bookkeeping records from
which all taxes due to the
government can be readily
determined any time.
Taxpayers with gross annual sales or
receipts exceeding Php3,000,000 are
required to have their books of
accounts audited annually by a
Certified Public Accountant and their
income tax returns accompanied by
an Account Information Form which
contains information lifted from the
taxpayer’s audited financial
statements.
Issuance of Receipts or
Commercial/Sales Invoices
All taxpayers are required to
issue a BIR-registered
receipt or commercial/sales
invoice at the point of sale if
the services rendered or
goods sold are valued at
Php100 or more.
Issuance of Receipts or
Commercial/Sales Invoices
The receipt or invoice should show
the date of transaction, quantity,
unit cost and description of the
goods or service.
If the purchaser is VAT-
registered, the receipt or invoice
should also show the purchaser’s
TIN
Issuance of Receipts or
Commercial/Sales Invoices
The original copy of the receipt or invoice
is given to the purchaser at the time of
transaction; the duplicate is retained by
the taxpayer.
Receipts or invoices shall be kept for a
period of 3 years from the end of the
year of the transaction. In the case of
electronic receipts or invoices, the
digital records shall be kept for the
same period.
Penalties
Violations of tax laws are punishable by
monetary fines and/or imprisonment.
The following are relevant terms to this
sub-topic:
Tax evasion (tax dodging) – occurs
when a taxpayer avoids paying his/her
taxes using illegal means.
Tax avoidance – occurs when a
taxpayer minimizes his/her exposure
to taxes through legal means.
Monetary fines or
penalties consists
of surcharge and
interest.
Surcharge
A surcharge of 25% of the tax due
is imposed on the following
violations:
a. Late filing and payment of taxes.
b. Filing with the wrong RDO.
c. Failure to pay the correct amount
of tax.
d. Failure to pay a deficiency tax on
time.
Surcharge
A surcharge 50% of the tax
due is imposed on the following
violations:
a. Willful neglect to file a return
and pay the tax on time.
b. Filing of fraudulent return.
Interest
Interest at the double of the
legal interest rate for loans or
forbearance of any money in the
absence of an express
stipulation as set by the BSP
from the due date until the
amount is fully paid.
Tax evasion and Violation related to printing of
receipts or invoices. A fine of not less than
Php500,000 but not more than Php10,000,000
and imprisonment of not less than 6 years but
not more than 10 years is imposed to a
taxpayer who:
a. willfully attempts to evade any tax;
b. prints receipts or invoices without authority
from the BIR;
c. prints double or multiple sets of receipts or
invoice; or
d. prints receipts or invoices not in accordance
with the specifications required by the BIR