Chapter 10

Income and business

taxation
TAXATION

-Is by which by which a government ,through its

law making body, imposes charges on its
inhabitants to raise money for public use.
 PURPOSES OF TAXATION

• The primary purposes of taxation is to raise revenue that will be used in

defraying government expenses (also called the revenue purposes)
• Secondarily, taxation may also be used to achieved certain social and
economic objectives (non-revenue purposes ) , such as the following :
a. Regulate inflation ( e.g taxes maybe djusted in order to prevent
economic depression)
b. B. minimize the adverse effects of certain activities (e.g tobacco is
taxed to discourage smoking, imported goods are taxed to protect
local procedures , and at like )
c. Equitable distribution of wealth ( e.g higher taxes are imposed on
those earn more)
 NATURE OF TAXATION
1. Inherent power
Taxation is the one of three inherent powers of so
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 government to enact laws to promote
peace and order and public welfare security he health and safety ;
and
 Taxation

 The government cannot exist without money. This is why tax

often referred to as the “lifeblood” or the “bread and butter” of the
government.
2. Legislative
Taxation is a process that is legislative in nature . This means that
taxes laws must first be enacted before taxes can be imposed.

3. Subject to constitutional and inherent limitation

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 .
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 is jurisdiction.
c. Non-delegation of legislative power to tax- the power to create
taxes laws rests with Congress( Congressmen and Senators )
and this power cannot be delegated ,except as expressly
allowed by laws ( the exceptions are : delegation to the
President ,local government units ,and administrative bodies).
d. Tax exemption of government entities
e. International comity- the government may not tax the property
belonging to a foreign government
Consitutional limitations on the power of taxation

a. Due process and equal protection of the loans

b. Rule of uniformity and equity in taxation
c. Presidents power to veto tax bills
d. A law granting any tax exemption needs the concurrence of
the majority of the members of congress
e. Supreme courts power to make final judgment of tax cases
f. Non imprisonment for non payment of poll tax
g. Exemption of religious, charitable, or educational entities, non
profitcemeterid 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
 
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
  ASPECT OF TAXATION

a. Levy- Tax laws, specifying the object and amount of taxation,

are enacted.
b. Collection- The tax laws are implemented and administered.

 After tax laws are enacted, the Bureau of Internal Revenue is

tasked in collecting national taxes and administering the
provisions of national tax laws while the Local Government is
tasked in collecting local taxes and administering local tax
laws.
 PRINCIPLES OF A SOUND TAX
SYSTEM

a. Fiscal Adequency - 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
are mandatory contribution imposed upon persons and
property for the support of the government.
  CHARACTERISTICS OF TAX

a. It is mandatory
b. It is levied by the law-making body
c. It is imposed primarily to raise revenues for the government
d. It is generally payable in money
e. It is proportionate in character
f. It is levied on persons and property over which the taxing
authority has jurisdiction
g. It is levied for public purposes
  CLASSIFICATION OF TAXES

1. As to 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
b. Property Tax- tax imposed on properties based on their
value or some other method
c. Excise Tax- tax imposed upon the performance of an act,
the enjoyment of a privilege, or the engaging in an
occupation
2. As to who bears the burden:
a. Direct tax- tax which the taxpayer must pay and cannot shift
to another
b. Indirect tax- tax which the taxpayer can shift to another

3.   As to the determination of amount:

c. Ad Valorem- tax based on the value of the property
d. Specific- tax based on weight, volume or other physical unit
of measurement
4. As to scope:
a. National tax- tax levied by the national government
b. Local tax- tax levied by the local government , city, municipals

5. As to rate or graduation:
c. Proportional - tax based on a fixed rate
d. Progressive- tax based on am increasing rate as the taxable
amount increases
e. Regressive - tax based on a decreasing rate as the taxable
amount increases
 TAX DISTINGUISHED FROM
OTHER FEES
Tax vs. license fee
- Imposed through power of - Imposed through police power
taxation
- The primary purpose is to - The primary purpose is to
raise revenue regulate certain business
activities

- Amount is unlimited - Amount is limited to the costs

of regulation
 Tax vs. Toll fee
- Paid for the support of the - Paid for the use of property,
government e.g., road

Tax vs. Special assessment

- Imposed regardless of public - Imposed because of an
improvement increase in the value of land
due to public improvement
There are various types of taxes. The scope of this book is
limted only to the following types of taxes:
1. Income taxes (Compensation, Business Income and some
Passive income only); and
2. Business taxes (VAT and Percentage Tax only)
 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.
Income tax is tax on income.
Business tax is a tax on the production, sale, or consumption
of goods and service, leasing of property, or other business
activities. Business tax is tax on business
 CLASSIFICATION OF INDIVIDUAL
TAXPAYERS

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 timed
3. RESIDENT ALIEN- a foreigner residing in the Philippines
4. NON- RESIDENT ALIEN- a foreigner not residing in the
Philippines
 Individual Souce of Income
Within the Phils. Outside the Phils.

1. Resident Citizens ✓ ✓

1. Non-resident Citizens ✓ ✘

1. Resident Alien ✓ ✘

1. Non-resident Alien ✓ ✘
INCOME TAXATION
Income includes all inflows and outflows 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 income from practice of profession but
limited to:
1. Compensation Income
2. Business income, including income from practice of
profession
3. Passive income
 GROSS COMPENSATION
INCOME

 SALARIES- compensation that is normally quoted on a per

month (per year) basis and is paid periodically for the
performance of regular work

 WAGES- compensation that is quoted on a per hour basis and

is paid on the number of hours work
 DEDUCTION FROM GROSS
INCOME

The law allows the following deduction to the gross income:

1. Basic personal exemptions
2. Premium payments for health or hospitalization insurance
 BASIC PERSONAL EXEMPTION
Before the individual’s income is taxed, the law allows
deductions called “basic personal exemptions.” These are
intended to cover the personal, family, and living expenses of
individual tax payers.
The effect of these deductions is favorable to the tax payer
because they decrease the amount of tax to be paid. The
remaining amount of income after deducting the allowed
deductions is called the taxable income. Taxable income is the
amount on which the tax is computed.
 The basic personal exemptions are as follows:

Type of exemption Amount of exemption

Personal exemption:  Php 50,000

Additional exemptions:  Php 25,000 per qualified

dependent child, maximum of
four (4)
PERSONAL EXEMPTION
The 50,000 personal exemption is available to the
individual taxpayer, whether single or married, so long as
he or she is earning gross income.
Thus, for married individuals, only the spouse earning
gross income is allowed to claim the personal exemption. If
both spouses are earning gross income, each of them is
entitled to the personal tax exemption.
 ADDITIONAL EXEMPTION
The 25,000 tax exemption is available to an individual taxpayer
who has a qualified dependent child (or children)

i. A qualified dependent child means the child is:

ii. The taxpayer’s child
iii. Not more than 21 years of age
iv. Dependent on the taxpayer for chief support
v. Not married
vi. Not gainfully employed
vii. Living with the taxpayer
ILLUSTRATIONS:
Case 1:
Ms. A, single with no qualified dependent, earns
compensation income of Php 400,000 during 20x1. How
much is the taxable income of Ms. A?

Answer :
Gross Compensation Income 400,000
Less: Personal exemption (50,000)
Additional exemption ----------
Taxable Income 350, 000
 PREMIUM PAYMENTS FOR HEALTH/
HOSPITALIZATION INSURANCE

Another allowed deduction is premium payments for health or

hospitalization insurance, but subject to the following conditions:
1. The insurance is taken by the individual taxpayer himself for
his family
2. The maximum amount deductible 2,400 per year or 200mper
month per family
3. The family has a gross income of 250,000 or less for the
taxable year

 For married individuals, only the spouse entitled to claim for

additional tax exemption is allowed this deduction.
ILLUSTRATIONS:
Case 1:
Ms. C, a single mother of a 3-year old child, earns
compensation income of Php 200,000 during 20x1. During the
year, Ms. C took hospitalization insurance for her child at an
annual premium of Php 2,000. How much is the taxable income
of Ms. C?

Answer:
Gross Compensation Income 200,000
Less: Personal exemption
Additional exemption (25,000x1) (50,000)
Premium on hospitalization insurance (2,000)
Taxable Income 123,000
OTHER FORMS OF COMPENSATION

1. Fixed or Variable Allowances- e. g,.representation allowances,

transportation allowance, cost of living allowance (COLA),and
the like:
2. 13th Month pay- is additional compensation mandated by law
to be given to “rank-and file” employees (i.e.., Non
managers). Thirteen months pay is equal to an employee “s
one 1 month besic salary. However , if the employee has not
worked for the entire year , this amount is prorated.
3. Christmas bonus- is additional compensation provided to
employee at the discretion of the employer. Most often than
not, the timing of payment of 13thmonth pay and Christmas
bonus coincide Distinction between these to are provide below.
 13th month pay Christmas bonus
-Required by the law to be paid to - Not required by law but rather
all “rank-and- file “ employees who paid voluntarily by the employer.
has worked for at least 1 month.
The following employees are
excluded from this requirements:
A. Managers;
B. Employees covered by civil
service law;
C. Housekeepers and persons in the
personal service of another; and
D. Employees paid on purely
commission , boundary , or task
basis
- Amount is determined a 1/12 of - Amount is based on the dis
the employees monthly basic creation of the employer
salary for each month of
service rendered .

- Required to be paid on or - Paid at the discretion of the

before December 24 of the year. employer .
 TAXATION OF 13TH MONTH
PAY
- is not taxable up to ₱82,000. Any excess over this amount is
taxable. Taxation of Christmas bonus
- Non performance based bonus
-Performance based bonus

 Non performance based ('Others Benefits') portion is

combined with the 13th month pay and subjected to the total
limit of ₱82,000. Any excess over this amount is taxable.
 Performance based portion, if received under collective
bargaining agreement ( CBA) and productivity incentive
schemes is not taxable up to a limit of ₱10,000
DE MINIMIS BENEFITS
- are the other forms of benefit that are of relatively small
value and given to employees (rank-and-profile and managerial
or supervisory) to promote health, goodwill, contentment, and
work efficiency.
De Minimis Benefits
a. Monetized unused vacationleave credits of private
employees not exceeding ten (10) 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 ₱750,000 per employee per semester or ₱125,000
per month
d. Rice subsidy of ₱1,500 or one sack of 50kg. rice per month
e. Uniform and clothing alllowance not exceeding ₱5,000 per
annum
f. Actual yearly medical benefits not exceeding ₱10,000 per
annum
g. Laundry allowance not exceeding ₱300.00 per month.
h. Employees achievement award not exceeding ₱10,000
(tangible property)
i. Gifts given during Christmas and major anniversary
celebration not exceeding ₱5,000 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
bargaining agreement (CBA) and productivity incentive
schemes provided that the total monetary value received from
both CBA and productivity incentive schems combined do not
exceed ₱10,000.00 per employee per taxable year
TAXATION:

- “ De minimis” benefits are not taxable up to the

prescribed limits started above.
- Any excess de minimis benefits is considered '
Other benefits' and is included in the “13th” month
pay and Other Benefits” and is subjected to the
₱82,000 limit. Any excess is taxable.
STEPS IN DETERMINING THE TAX
ON 13TH MONTH PAY AND OTHER
BENEFITS

Step 1: Determine the excess of each “de minimis” benefit

received by the employee over the prescribed limits started
above.
Step 2: Add the excess “ de minimis” benefits to the 13th
month pay and Other Benefits received by the employee.
Step 3: Compare the amount determined in Step 2 with the
₱82,000 limit.
- If the amount is less than ₱82,000 it is not taxable
- If the amount exceeds ₱82,000, the excess is taxable
ILLUSTRATION:

An employee receives the following:

13th month pay 24,000

Christmas bonus (Non-performanced based) 6,000
Rice subsidy 21,600
Uniform allowance 7,000
Laundry Allowance 2,400
Productivity Bonus (received under CBA and productivity 5,000
incentive schemes)
Excess de minimis benefits 5,600
13th month pay 24,000
Christmas bonus (non-performance based) 6,000
Total 13th month pay and Other Benefits 35,600
Limit 82,000
Excess – Taxable amount ---
OVERTIME PAY

- compensation for work performed beyond regular

working hours.
Notes:
- Meal allowance given to the employee for overtime
work is not taxable if it does not exceed 25% of the basic
minimum wage
- Reinbursement for transportation cost incurred by the
employee in relation to overtime work is not taxable.
HAZARD PAY
- additional compensation for employees performing
dangerous
work, e.g., hazard payments to electrical power-line
installers and
repairers

COMMISSION
- e.g., percentage of sales made by a salesman
FEES
- additional compensation received by an employee for
services rendered e.g., director's fees.

HONORARIA
- payment for a service which normally has no set price,
e.g.,
honorarium given to a guest speaker in a High School
graduation
ceremony
VACATION AND SICK LEAVES
- paid vacation and sick leaves used by employee are
taxable
Note:
- Unused vacation &/ sick leaves that are monetized
(i.e.,converted
in cash) are considered de minimis benefits and subject to
the following limits:
 Monetized unused vacation leave credits of private
employees not exceeding ten (10) days during the year.
 Monetized value of vacation and sick leave credits paid to
government officials and employees.
 RETIREMENT PAY

- compensation paid to a retiring employee. 'Retirement pay is

normally taxable, except inthe following instances:
a. The retirement pay is paid by the Social Security System (SSS),
Government Service Insurance Systerm (GSIS), or the United
States Veterans Administration;
b. The retirement pay is paid by a private emplyer and:
- The employer's retirement plan is approved by the BIR;
- The employee has been employed for at least 10 years by the
same employer;
- The employee is atleast 50 years old at the time of retirement; and
- The employee is availing the retirement pay for the first time
SEPARATION PAY

- compensation paid in exhange for the termination of an

employee's employment other than from retirement Separation
pay is taxable if availed of voluntarily. It is not taxable if
involuntary. Examples of involuntary separation pay include
death, sickness, or disability of the employee, bankruptcy of the
employer, and other causes beyond the control of the employee
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. Generally, non-cash items are taxed on the basis of
their fair market value. If the non-cash item qualifies as de
minimis benefit, it shall be subjected to the limits stated
earlier.
 ANNUAL INCOME TAX RETURN
(ITR) -BIR NO.1700
- In this section, we will prepare BIR Form No. 1700, which
is the annual income tax return applicable to individual
taxpayers who are earning purely compensation income,
including non-business or non-profession income.
A blank BIR Form No. 1700 is shown below followed by
general guidelines in filling up the form.
GUIDELINES:
WHO SHALL FILE BIR FORM
1700?
Resident citizen deriving compensation income from
within and outside the Philippines.
 Resident alien or Non-resident citizen deriving
compensation income from within the Philippines
 WHO ARE EXEMPT FROM
FILING BIR FORM NO. 1700?
- An individual whose gross compensation income does not
exceed his total personal and additional exemptions
- An individual earning purely compensation income, derived
within the Philippines and on which the income tax has been
withheld correctly, However, an individual deriving
compensation concurrently from two or more employees at any
time during the taxable year shall file an income tax return
- An individual whose income has been subjected to final
withholding tax
- A minimum wage earner or an individual who is exempt from
income tax.
WHEN AND WHERE TO FILE
AND PAY?
- The return shall be filed and tax shall be paid on or before
April 15 of the year following the taxable year.
For example, the tax return and the corresponding tax for
income earned in the year 2017 shall be filed and paid on or
before April 15, 2018
- For Electrical Filing and Payment System (eFPS) tax filers,
the filing and payment shall be made electronically through the
BIR website: www.bir.gov.ph.
• For Non-Electronic Filing and Payment System (Non-
eFPS) tax filers, the filing and payment shall be made
through any Authorized Agent Bank (AAB) located
within the territorial jurisdiction of the Revenue District
Office (RDO) where the tax files is registered.
For example, a tax payer registered with the RDO in
Baguio City, may file and pay through any of the
AAB's in Baguio City, e.g., BPI, PNB, Landbank, etc.
In places where there are no AABs, the filing and
payment shall be made with the concerned Revenue
Collection Officer (RCO) under the jurisdiction of the
RDO
HOW TO ACCOMPLISH THE FORM?

1. Provide the required information in CAPITAL LETTERS

using black ink.
Punctuation marks, like comma and period, shall likewise
be provided whenever necessary.
2. Mark applicable boxes with an “X”.
3. Do not write “NONE”, or make any other marks in the
box(es).
4. Three (3) copies shall be filed- two (2) , including the
original copy, for
the BIR and (1) as copy of the tax filer.
Item 1 Indicate the taxable year covered by the return
being filed. .
Item 2 Choose “Yes” if the tax return is one amending a
previous return filed, “No” if not.
An amended return is one that is filed, for
example, to correct errors committed in a
previously filed return, covering the same taxable
year and taxable income.

Item 3 Indicate whether the tax filer and spouse are filing
jointly or not.
Item 4 Indicate whether the source of income is
compensation income or Other income (non-
business/ non-profession)
 Part I – Background Information on Tax Filer and Spouse

Item 5 (TIN) Enter the tax filer’s Taxpayer Identification

Number (TIN).

Item 6 (RDO Code) Examples of RDO Codes:

District Office RDO Code
Laoag, Ilocos Norte 001
Baguio City 008
West Pasig 43B
Cebu City North 25B

A complete list of RDO Codes can be found

at the BIR website.
Item 7 (PSOC Code) Philippine Standard Occupational Classification
(PSOC)- refers to the “statistical classification of
thw different occupational groups of the
working population, including the military work
force in the country”. It is “primarily used as
basis for manpower and educational planning,
program formulation, policy decision-making
and serves as useful guide for statistical
operations and activities, such as censuses and
surveys.
Type of occupation PSOC Code
Examples:
Accountant (General) 2411

Car washer 9120

Item 8 (Tax Print name as it was entered on the registration
File’s Name) forms.

Item 9 Registered address is one indicated in the

(Registered taxpayer’s registration with the BIR. If the
Address) taxpayer has changed address and the
registration is not updated, accomplish Table 1
on the last page of the ITR.

Item 10-12 If no email address, leave it blank.

Item 13 (Civil Indicate civil status.

Status)
Item 14 & 15 Indicate whether the taxpayer is claiming additional
exemptions and, if yes, the number of qualified
dependents. Recall that the maximum number is four
(4)

Items 16-22 Provide background information on spouse, if

(Spouse) applicable, using the same guidelines as above.
 PART II – Total Tax Payable
Items 23 Accomplish first Part IV – Computation of Tax on Page
2 before accomplishing these items. Then transfer the
information from Part IV to each of these items

Signature Place signature over printed name when all pages of the
Line return are complete. Indicate the number of pages filed.

Items 32 – 35 Place the number, date and place of issue of the

( Gov’t. government issued identification card. If Community
issued I.D. Tax Certificate ( CTC or Cedula ) is used, indicate also
the amount paid for the CTC.
 Part III – Detail of Payment

Item 36 Indicate if payment is made through cash or check. If

through check, indicate the drawee bank and the check
number. Indicate the amount of payment.
For no payment returns, file the ITR with the ITR
with the RDO where the tax filer is registered or the
concerned RCO under the same RDO.
Part IV- Computation of Tax
 ATTACHMENTS TO THE ITR:

The following shall be attached to the return whenever

applicable:
1. Authorization letter, if filed by authorized representative
2. Waiver of the husband’s right to claim additional exemption,
if the wife is claiming the additional exemption.
3. Certificate of Compensation Payment / Tax Withheld ( BIR
Form No. 2316) – for withholding taxes.
4. For amended return, proof of tax payment and the return
previously filed.\
5. Other document relating to tax credits
 GROSS BUSINESS INCOME
Business income is income derived from trade, business, or
practice of profession (or simply, income from self – employment).
To simplify initial learning of taxation, limiting discussions to
gross business income derived by a sole proprietor who is a
resident citizen and who is engaged in a trading/ or merchandising
business. For this purpose, 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 tax payer 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)
ITEMIZED DEDUCTIONS
The following are the 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
 ORDINARY AND NECESSARY TRADE,
BUSINESS OR PROFESSIONAL EXPENSE

These pertain to general business expenses or those that are

“directly attributable to the development, management,
operation and/or conduct of the trade, business or exercise of a
profession” (Tax Code, Sec. 34.A)
Examples include, but not limited to, the following:
Salaries and wages, transportation expense, utilities expense
(electricity, water, internet, etc.), rent expense, commission
expense, repairs and maintenance expense, and the like.
To be deductible, expenses must be supported by sufficient
evidence, such as official receipts or other adequate records.
The following are not allowed as deductions from gross
income:
a. Bribes, kickbacks and other illegal payments
b. Personal expenses of the business owners
c. Capital expenditures, e.g., cost of building and its
permanent improvements. These expenditures are
capitalized; only the depreciation expense therefrom
shall be deducted.
 OPTIONAL STANDARD
DEDUCTION (OSD)

In lieu of the itemized deductions, the tax payers may

choose to deduct the OSD, which is computed as forty
percent (40%) of net sales, without deducting cost of
sales.
ANNUAL INCOME TAX RETURNS
(ITR)- BIR FORM NO. 1701

BIR Form No. 1701 is the annual income tax return

applicable to individual taxpayers who are engaged in
trade/business or the practice of profession including those
with mixed income (i.e., those earning both business
income and compensation income).
 Mixed income
An individual taxpayer may be deriving both
compensation and business income(i.e., mixed income)
. Such individual shall file the BIR Form No. 1701 for
his/her total mixed income and shall be allowed to
deduct personal exemption( additional exemptions,
whenever applicable) only once for the total mixed
income.
 Joint filing
Married individuals shall file a single return for the
taxable year, showing the respective incomes and tax
dues of the spouses. If any income cannot be clearly
attributed to either spouse, it is DIVIDED EQUALLY
between the spouses for the purpose of determining
their respective taxable income. If it is impracticable
for the spouses to file a single return, each spouse
may file a separate return.
 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 bi-monthly basis ( i.e.,
every 15thand 30th of the month.) thus, taxes may be withheld
either on a MONTHLY basis ( every 30th for the total
compensation for the month) or on a SEMI-MONTHLY
basis(every 15th and 30th for the two-week compensation received
on each those dates).
 TAX TABLE (PARTIAL)
If taxable income is : Tax due is:
Over ₱140,000 but not over ₱22,500+ 25% of the excess
₱250,000 over ₱140,000

Tax on ₱140,000 22500

Add: tax on excess[25% x 18,000
(212,000- 140,000)]
Total tax for the year 40,500
Total taxes withheld during the 40,500
year ( 3,375 x 12 months)

SSS/PHILHEALTH/PAG-IBIG
CONTRIBUTION
 =These contributions are required by law and are outright
deductions from the employees compensation, meaning, the
“take-home pay” of the employee is already net of these
contributions.
PAG-IBIG(HDMF)
CONTRIBUTION TABLE
MONTHLY COMPENSATION PERCENTAGE OF MONTHLY COMPENSATION

Employee’s share Employer’s share

₱1,500 and below 1% 1%

Over ₱1,500 2% 2%
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(e.g., non-declaration
or under Declaration of taxable income).
Tax Avoidance- occurs when a taxpayer minimizes his/her
exposure to taxes through legal means.(e.g., careful tax
planning).
 Monetary fines or penalties consist 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.

A Surcharge of 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 of 20% per annum on any unpaid amount of tax,
from the due date until it is fully paid.
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 not be
taxed again, neither does the tax need to be adjusted.
Final tax is computed by MULTIPLYING A FIXED RATE
on the income. Moreover, there are no deductions for
basic personal exemptions when computing for final
tax. 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. 7.5%
3. Royalties ,in general
20%
4. Royalties on books, literary works
and musical composition. 10%

5. Prizes and winnings, in general

Note: Prizes amounting to ₱10,000 or

less is included in income subject to 20%
the tax tables provided earlier.

6. Cash or property dividends received

from a domestic corporation. 20%
Business Taxation
ANNUAL REGISTRATION

Businesses are required to pay an annual registration

fee of Php 500 for every separate place of business (e.g.,
head office, branch, sales outlet, warehouse) 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 for 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 to the BIR, businesses are
also required to pay annual taxes and fees to the local
government (e.g., city hall or municipal hall and
barangay hall), 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
Before the commencement of its business operations, a sole
proprietorship is also required to register with the
Deparment of Trade and Industry (DTI). However, unlike
for the items listed above which are renewable/paid
annually, the DTI registration is valid for 5 years.
BUSINESS TAXES

Business tax us a tax on the production, sale, or cosumption

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 sale 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 it is VAR-registered or
has annual total sales or receipts that exceed One Million,
Nine Hundred Nineteen Thousand, Five Hundred
Pesos (Php 1,919,500).

•VAT is normally computed as 12% of the gross selling price of

the good or service. This is called the 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 below:

VAT
Sale price to customer (Php 10,000) Output (10,000 x 12%) 1,200
Purchase price from supplier (Php 6,000) Input (6,000 x 12%) (720)
Net VAT to be remitted to the BIR 480
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 refund is issued.
b. Sales discount – 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 SALES
Zero-rated sales are those that are subject to zero per cent
(0%) output VAT but the business can still claim the related
input VAT.
Examples of zero-rated sales:
a. Export sales of goods or properties, including sale of
gold to the Bangko Sentral ng Pilipinas (BSP)
b. Foreign Currency denominated sale of goods or
properties to a non-resident;
c. Sale of goods to an entity registered with the Philippine
Economic Zone Authority (PEZA) who is enjoying
income tax holiday or 5% special tax regime.
 VAT-EXEMPT SALES
VAT-exempt sales are those that are not subject to an output
VAT but the business cannot claim the related input VAT.
Examples of VAT-exempt sales ( the list is not exhaustive):

a. Sale or importation of agricultural and marine food products

in their original state, fertilizers, seeds, and non-specialty
feeds (specialty feeds are, for example, those that are
intended for fighting cocks and pets).
b. Importation of personal things of a “balikbayan” coming to
resettle in the Philippines (e.g., cellphone) except when
the thing is subject to customs duties (e.g., car).
c. Importation of personal things by any person coming to settle
in the Philippines which are for Personal use and not for sale,
barter or exchange, except vehicles and machines that are
used for commercial production.
d. Milling of palay into rice, corn into grits and sugar cane into
raw sugar.
e. Medical, dental, hospital and veterinary services rendered by
non-professionals.
f. Educational services of educational institutions accredited by
the Department of Education (DepEd), Commission on Higher
Education (CHED), or Technical Educational and Skills
Development Authority (TESDA).
g. Employee services rendered to an employer.
h. Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority (CDA).
i. Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the CDA.
j. Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the CDA wherein the
share capital of each member does not exceed Php 15,000
k. Export sales by Non-VAT registered persons
l. Lease of a residential unit for a monthly rent not exceeding
Php 12,800
m. Sale, importation, printing or publication of books,
newspaper, or magazine which is not devoted principally to
the publicstion of paid advertisements.
n. Services of Banks.
WITHHOLDING TAXES

The following are subject to a five per cent (5%)

withholding tax:

a. Rental of real property used in business

b. Sale to government entities (i.e., government agencies,
government-owned or controlled corporations
‘GOCCs,’ or any government instrumentality).
ILLUSTRATION 1:
WITHHOLDING TAX ON RENT

Bandolin Enterprise, a publishing company, is renting one

of its facilities, used in business, for a monthly rental of
P75,000, inclusive of VAT.
On paying its monthly rentals to the lessor/landlord,
Bandolin Enterprise (lessee/tenant) is rquired to withhold
(deduct) 5% out of 12% VAT on the rental. This is
computed as follows:
Rent, inclusive of VAT 75,000
Divide by: (100% + 12% VAT) 112%
Rent, exclusive of VAT 66,964
Multiply by: 5% creditable withholding tax 5%
Tax withheld 3,348.21

The net rental paid to the lesor is computed as follows:

Rent, inclusive of VAT 75,000
Tax withheld (3,348.21)
Net Rental 71,651.79
Rent, exclusive of VAT 66,964
Multiply by: 12%
Total VAT on rental 8,035.68

Tax withheld by tenant (5%) 3,348.20

Remainder, on accout of lessor (66,964 x 7%) 4,687.48
Total VAT on rental 8,035.68
FILING AND PAYMENT OF VAT

A VAT-registered business is required to make VAT payments as follows:

a. Monthly- using BIR Form No. 2550M, which shall be filed not
later than the 20th day following the end of each month, for the first
two months in a taxable quarter; and
b. Quarterly payments of VAT using BIR Form No. 2550Q which
shall be filed not later than the 25th day following the end of each
taxable quarter, consolidating all three months of the taxable quarter.
 PERCENTAGE TAX
Percentage tax is similar to VAT. Generally, a business that is
exempt from paying VAT is required to pay percentage tax. For
example, a business with total sales or receipts that do not
exceed Php 1,919,500 is exempt from VAT but is required to pay
percentage tax.

A business, however, has the option to register as VAT-payer even

if its total sales or receipts do not exceed Php 1,919,500. On the
other hand, a business which is registered as a percentage receipts
exceed Php 1,919,500.
The percentage tax rate varies depending on the nature of
the business. Typically though (and for persons exempt
from VAT), percentage tax is computed as 3% of gross
sales or receipts. There is no allowed deduction, unlike for
VAT.
FILING AND PAYMENT OF VAT

A Non-VAT registered business is required to make

percentage tax payments as follows:
a. Monthly- using BRI Form No. 2551M, which shall be
filed not later than the 20th day following the end of
each month, for the first two months in a taxable
quarter; and
b. Quarterly payments of percentage tax using BIR
Form No. 2551Q, which shall be filed not later than the
20th day following the end of each taxable quarter,
consolidating all three months of the taxable quarter.
 SUMMARY
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.
 Resident citizens are taxed on all income they
derive from sources within and without (outside)
the Philipppines.
COMPENSATION INCOME

Is income typically derived fron employment

• personal exemption is Php 50,000
• Additional exemption is Php 25,000 per qualified
dependent child, a maximum of (4)
• contributions to SSS/GSIS, PhilHealth, Pag-IBIG, and
Union dues are deducted from gross income for purposes
of determining the tax due.
BIR FORM NO. 1700

Is the annual income tax return applicable to

individual taxpayers who are earning purely
compensation income, including non-business or
non-profession income.
BUSINESS INCOME

is income derived from trade, business, or

practice or profession (i.e., income from self
employment)
A business is allowed to deduct either the Itemized
deduction or the Optional Standard Deduction (40%
of net sales) for purposes of computing the tax due.
BIR FORM NO. 1701

Is the annual income tax return applicable to

individual taxpayers who are engaged in
trade/business or the practice of profession including
those with mixed income.
Every taxpayer is required to register once with
the BIR and obtain one (1) Tax Identification
Number (TIN)

 Employees are required to withhold taxes on

employees’ compensation.

Monetary Penalties on violation of tax laws

include a surchange of either 25% or 50% and an
annual interest of 20%.
Passive Income is typically subject to final tax

Business are required to pay an annual registration

fee of Php 500 for every separate place of business

A VAT-registered business or a business with

annual total sales or receipts that exceed Php
1,919,500 is required to pay 12% VAT.
 VAT payable is the excess of Output VAT (based
on sales) over Input VAT (based on purchases)
 A Non-VAT registered business is typically
required to pay 3% percentge sales.
ACTIVITY
IDENTIFY THE
JUMBLED WORDS
XATVAOINCEAD
Occurs when a taxpayer
minimizes his/her exposure to
taxes through legal means
TNEMERITER YAP
Compensation paid to a retiring
employee
 NOIARHROO
Payment for a service which normally
has no set price
 OXTTNAAI
Is the process by which government through it’s
lawmaking body, imposes charges on its
inhabitants to raise money for public use.
OMNERTAYEINESF
It consists of surcharge and interest
QUIZ
1.It is which a government ,through its law making
body, imposes charges on its inhabitants to raise money
for public use?
2-4. Purposes of taxation.
5. The right of the government to appropriate private
property for particular uses to promote public welfare?
6.The power of government to enact laws to promote
peace and order and public welfare security he health
and safety ?
7. This means that taxes laws must first be enacted
before taxes can be imposed?
8. The government protects the welfare of its people in
return the people support the government.
9. The government may not tax the property belonging to a
foreign government Consitutional limitations on the power of
taxation.
10. Tax laws, specifying the object and amount of taxation, are
enacted.
11. Revenues should be sufficient to defray expenditures.
12. Mandatory contribution imposed upon persons and
property for the support of the government.
13. Tax laws can be implemented efficiently and effectively,
avoiding unnecessary inconvenience and confusion on the part
of the taxpayers.
14. Taxes are proportionate to the taxpayer’s ability to pay.
15. Fixed amount charged to all persons residing within a
specified territory irrespective of their occupation or property.
16. Tax imposed on properties based on their value or some
other method.
 17. Tax imposed upon the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation
18. Tax based on the value of the property.
19. Tax levied by the local government , city, municipals
20. Tax levied by the national government .
21. When married individuals shall file a single return for the
taxable year, showing the respective incomes and tax dues of
the spouses.
22. Employers are required to withhold taxes on employees
compensation.
23. An individual taxpayer may be deriving both compensation
and business
income.
24.These contributions are required by law and are outright
deductions from the
Employees compensation.
25. It is the employers share percent when monthly
compensation is over ₱1,500.
26. Violations of tax laws are punishable by monetary fines/
and or imprisonment.
27.It is consists of surcharge and interest.
28.It can be broadly defined as income earned without actively
working on it.
29.It occurs when a taxpayer minimizes his/her exposure to
taxes through legal means.
30. It means once the income is taxed, it will not be taxed
again, neither does the tax need to be adjusted.
31. – 32. two (2) kinds of taxation of Christmas bonus
33. Are other forms of benefit that are relatively small value
and are given to employees to promote health, goodwill,
contentment and work efficiency.
34. Paid vacation and sick leaves used by the employees are
taxable.
35. Compensation for work performed beyond regular working
hours.
36. Additional compensation for employees performing
dangerous work.
37. Additional compensation received by an employee for
services rendered.
38. Payemnt for a service which normally has not set price
39. Compensation paid to a retiring employee
40. Compensation paid in exchange for the termination of an
employee’s employment other than from retirement.
PROBLEM SOLVING :

41-45. Ms. Christine, single with no qualified dependent,

earns compensation income of Php 330,000 during 20x7.
How much is the taxable income of Ms. Christine?
46-50. La Rosa co. , a networking company, is renting one
of its office, used in business, for a monthly rental of Php
20,000 inclusive of VAT. On paying its monthly rentals to
its landlord, La Rosa co. is required to withhold 5% out of
the 12% VAT on the rental. How much is the Tax withheld?
KEY
1. Taxation
2. Regulate inflation
3. Minimize the adverse effects of certain activities
4. Equilable distribution of wealth
5. Eminent Domain
6. Police Power
7. Legislative
8. Reciprocal duties of protection and support
9. International Comitee
10. Levy
11. Fiscal Adequacy
12. Tax
13. Administrative Feasibility
14. Theoretical Justice
15. Personal, Capitation or Poll tax
16. property Tax
17. Exercise tax
18. Ad Valorem
19. Local Tax
20. National Tax
21. Joint filing
22. Withholding taxes
23. Mixed Income
24. SSS/PhilHealth/Pag-Ibig Contributions
25. 2%
26. Penalties
27. Monetary Fines
28. Passive Income
29.Tax Avoidance
30. Final Tax
31. Non-performance based bonus
32. Performance based bonus
33. De-minimis benefits
34. Vacation and sick leaves
35. Overtime pay
36. Hazard pay
37. Fees
38. Honoraria
39. Retirement Pay
40. Separation Pay
PROBLEM SOLVING KEY

1. Gross Compensation Income 330,000

Less: Personal exemption (50,000)
Additional exemption --------
Taxable Income 280,000

2. Rent, inclusive of VAT 20,000

Divide by (100% + 12% VAT) 112%
Rent, exclusive of VAT 17,857
Multiply by: 5% creditable withholding tax 5%
Tax withheld 892.85
SUBMITTED BY:
Baldiviano, Loredith
Bagsic, Charlene
Cacao, Areen
Cornico, Justine Reine
Gonzales, Kim Alyanna