INCOME TAXATION TRANSCRIPTION

LESSON 5 – PART TWO

(D) Individuals Earning Income Both from Compensation and from Self-employment
(business or practice of profession). – For mixed income earners, the income tax rates
applicable are:

1. The compensation income shall be subject to the tax rates prescribed under Section 24
(A)(2)(a) of the Tax Code, as amended; AND

2. The income from business or practice of profession shall be subject to the following:

a. if the gross sales/receipts and other non-operating income do not exceed the VAT
threshold, the individual has the option to be taxed at:

a.1. Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax
Code, as amended; or

a.2. Eight percent (8%) income tax rate based on gross sales/receipts and other non-
operating income in lieu of the graduated income tax rates and percentage tax
under Section 116 of the Tax Code, as amended. 

Ang 8% iaapply natin sa gross receipt plus other non-operating income. So what are the
conditions para magamit natin ‘tong option na to? Kasi kung hindi natin gagamitin ‘tong option
na ‘to, ang gagamitin na tax rate will be graduated income tax rates under Section 24. 

So, for compensation income, ang gagamitin talaga Section 24. For business income, mayroong
option, we use the graduated tax rates or the 8% tax based on gross receipt and other non-
operating income. So, the income from business or practice of profession should be subject to
the following conditions in order that the business may avail the 8% gross receipt tax. 

b. If the gross sales/receipts and other non-operating income exceeds the VAT
threshold, the individual shall be subject to the graduated income tax rates
prescribed under Section 24(A)(2)(a) of the Tax Code, as amended. 

The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of
8% income tax rate on gross sales/receipts and other non-operating income in excess of
P250,000.00 mentioned is not applicable to mixed income earners since it is already
incorporated in the first tier of the graduated income tax rates applicable to compensation
income. Under the said graduated rates, the excess of the P250,000.00 over the actual taxable
compensation income is not deductible against the taxable income from business/practice of
profession under the 8% income tax rate option. 
Now, kahit na hindi nagexceed sa 3 million threshold, hindi parin siya makakaavail ng 8% kung
VAT registered siya, kase may mga VAT Registered na below 3million yung gross receipts nila.
So kung ang registration ay VAT, hindi pwedeng mag-avail ng 8% income tax rates, gross
receipts and other non-operating income.  

Kung merong compensation at saka may self-employment or business, we do not allow on the
business the P250,000.00. kase ang assumption don, yung 250,000 naapply na dun sa
compensation income. So yung cocomputan natin ng 8% at babawasan natin ng 250,000
exemption, kailangan  purely business income lang yan or purely practice of profession income
lang. kapag may comoensation income na kasama, hindi na babawasan ng 250,000 yung
business income, deretso nang iaapply yung 8% income tax rate on gross receipts/sale and
other non-operating income.  

What if the compensation is not more than 250,000? May cross over ba ng balance? Wala, hindi
pwedeng yung kulang na portion duns a 250,000 ay iaapply sa business income. There is no
provision for that. On the contrary, hindi pwedeng icrossover o iapply yung excess. 

The total tax due shall be the sum of: (1) tax due from compensation, computed using the
graduated income tax rates; and (2) tax due from self-employment/practice of profession,
resulting from the multiplication of the 8% income tax rate with the total of the gross
sales/receipts and other non-operating income. 

Mixed income earner who opted to be taxed under the graduated income tax rates for income
from business/practice of profession, shall combine the taxable income from both compensation
and business/practice of profession in computing for the total taxable income and consequently,
the income tax due.

So kapag yung isa nag -avail ng 8%, separate yung computation ng compensation tsaka ng
business income kase hindi pwedeng pagsamahin yung magkaiba ng tax rates. Now, kung yung
business income ay hindi naman gumamit ng 8% income tax rate, pagsasamahin nalang yung
gross compensation at saka yung business income to compute for the income tax.

Illustration 7: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation
in 2018 of P1,500,000.00 inclusive of 13 th month and other benefits in the amount of
P120,000.00 but net of mandatory contributions to SSS and Philhealth. Aside from employment
income, he owns a convenience store, with gross sales of P2,400,000. His cost of sales and
operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating
income of P100,000.00.

a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight
percent (8%) income tax rate on his gross sales for his income from business:
Total compensation income P1,500,000.00
Less: Non-taxable 13th month pay and other benefits (max)       90, 000.00
Taxable Compensation Income P1,410,000.00
Tax due:
1. On Compensation:
On P800,000.00 P130,000.00
On excess (1P1,410,000 – P800,000) x 30%   183,000.00
Tax due on Compensation Income P313,000.00

2. On Business Income:
Gross Sales P2,400,000.00
Add: Non-operating Income       100,000.00
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%     
Tax Due on Business Income P   200,000.00

Total Income Tax Due (Compensation and Business) P    513,,000.00

 The option of 8% income tax rate is applicable only to taxpayer’s income from business,
and the same is in lieu of the income tax under the graduated income tax rates and the
percentage tax under Section 116 of the Tax Code, as amended.
 The amount of P250,000.00 allowed as deduction under the law for taxpayers earning
solely from self-employment/practice of profession, is not applicable for mixed income
earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already incorporated in the first tier of the
graduated income tax rates applicable to compensation income. 

b. His tax due for 2018 shall be computed as follows if he did not opt for the eight percent
(8%) income tax based on gross sales/receipts and other non-operating income:
Total compensation income P1,500,000.00
th
Less: Non-taxable 13 month pay and other benefits-max         90,000.00
Taxable Compensation Income P1,410,000.00
Add: Taxable Income from Business – 
Gross Sales P2,400,000.00
Less: Cost of Sales P1,000,000.00
Gross Income P1,400,000.00
Less: Operating Expenses       600,000.00
Net Income from Operation P    800,000.00
Add: Non-operating Income       100,000.00     900,000.00
Total Taxable Income P2,310,000.00

Tax Due:
On P2,000,000.00 P490,000.00
On Excess (P2,310,000 – 2,000,000) x 32%     99,200.00
Total Income Tax P589,200.00
  The taxable income from both compensation and business shall be combined for
purposes of computing the income tax due if the taxpayer chose to be subject under the
graduated income tax rates.
 In addition to the income tax, Mr. MAG is likewise liable to pay percentage tax of
P72,000.00, which is 3% of P2,400,000.00.

c. On February 2019, taxpayer tendered his resignation to concentrate on his business. His total
compensation income amounted to P150,000.00 inclusive of benefits of P20,000.00 His
business operations for taxable year 2019 remains the same. He opted for the eight percent
(8%) income tax rate. 

Total compensation income P    150,000.00

Less: Non-taxable 13th month pay and other benefits-max          20,000.00
Taxable Compensation Income P    130,000.00

Tax due:
1. On Compensation:
     On P130,000.00 (not over P250,000.00)              P                0.00
2. On Business Income:
     Gross Sales P 2,400,000.00
     Add: Non-operating Income       100,000.00
      Taxable Business Income P 2,500,000.00
    Multiplied by income tax rate           8%
     Tax Due on Business Income P     200,000.00     

Total Income Tax Due (compensation and business) P     200,000.00   

The option of 8% income tax rate is applicable only to taxpayer’s income from business,
and the same is in lieu of the income tax under the graduated income tax rates and the
percentage tax under Section 116 of the Tax Code, as amended.

Illustration 8: Mr. WBV, an officer of AMBS International Corp., earned in 2018 an annual
compensation of P1,200,000.00 inclusive of 13 th month and other benefits in the amount of
P1,200,000.00. Aside from employment income, he owns a farm, with gross sales of
P3,500,000.00. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00,
respectively, and with non-operating income of P100,000.00.
His tax due for 2018 shall be computed as follows:

Total compensation income P 1,200,000.00

Less: Non-taxable 13th month pay and other benefits (max)         90,000.00
Taxable Compensation Income P 1,110,000.00
 Add: Taxable Income from Business –
Gross Sales P 3,500,000.00
Less: Cost of Sales   1,000,000.00
Gross Income P 2,500,000.00
Less: Operating Expense       600,000.00
Net Income from Operation P 1,900,000.00
Add: Non-operating Income       100,000.00 2,000,000.00
Total Taxable Income P 3,110,000.00

Tax Due:
On P2,000,000.00 P    490,000.00
   On excess (P3,110,000 – P2,000,000) x 32%       355,200.00
Total Income Tax due P    845,200.00

The taxpayer has no option to avail of the 8% income tax rate on his income from
business since his gross sales exceeds the VAT threshold. However, he is still not subject to
business tax since the nature of his business transactions is VAT exempt.

(E) Income Tax Rates on Certain Passive Income – the following passive income shall be subject
to the following final income tax rates:

a. Interests from any currency bank deposits and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements – 20% 

b. Interest income received by an individual taxpayer (except) a non-resident individual)

from a depository bank under the expanded foreign currency deposit system – 15 %;

c. Proceeds of pre-terminated long-term deposit or investment in the form of savings,

common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form s prescribed by
the BANGKO Sentral ng Pilipinas (BSP) – the final tax shall be based on the remaining
maturity of the investment:
Four (4) years but less than five (5) years – 5%
Three (3) years but less than four (4) years – 12 %; and
Less than three (3) years – 20%

d. Royalties (except royalties on books and other literary works and musical compositions)
– 20%

e. Royalties on books and other literary works and musical compositions – 10%
 f. Prizes (except prizes amounting to P10,000 or less) – 20%

g. Winnings (except Philippine Charity Sweepstakes and Lotto winnings amounting to

P10,000 or less) – 20%

h. Cash and Property Dividends – 10%

i. Capital Gains from Sale of Shares not Traded in the Stock Exchange – 15%

j. Capital Gains from Sale of Real Property located in the Philippines – 6%

SECTION 4. INCOME TAX RATES ON NON-RESIDENT ALIEN INDIVIDUAL – The following income
tax rates shall be imposed to non-resident alien individual:
A. Non-resident Alien Engaged in Trade or Business Within the Philippines – In general, the
income tax rates applicable to this taxpayer shall be the rates imposed on individual citizen
and a resident alien individual on the taxable income derived within the Philippines;

B. Non-resident Alien Not Engaged in Trade or Business Within the Philippines – Upon the
entire income received from all sources within the Philippines by this taxpayer such as
interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments or other fixed or determinable annual or
periodic or casual gains m, profits, and income, and capital gains. – 25%

C. The preferential income tax rate under subsection (C), (D) and (E) of Section 25 of the Tax
Code, as amended, shall no longer be applicable without prejudice to the application of
preferential tax rate under existing international treaties, if warranted. Thus, all concerned
employees of the regional or area headquarters and regional operating headquarters of
multinational companies, offshore banking units and petroleum service contractor and
subcontractors shall be subject to the regular income tax rate under Sec.  24 (A)(2)(a) of the
Tax Code, as amended. 

Illustration 9: Ms. CCF, an alien in MCUD Corporation that is a petroleum service contractor,
receive compensation income of P5,000,000.00 for 2018, inclusive of P400,000.00 13 th month
pay and other benefits.
All employees of RHQs/ROHQs/OBUs, and Petroleum Service contractors and
subcontractors shall be subject to regular income tax rate under section 24(A)(2)(a) of the Tax
Code, as amended, without prejudice to the application of preferential tax rates under existing
international tax treaties, if wanted.

SECTION 5. GOVERNMENT OWNED AND CONTROLLED CORPORATIONS (GOCCS), AGENCIES

OR INTRUMENTALITIES. – Under Section 27(C) of the Tax Code, as amended, GOCCs,
Government Agencies or Instrumentalities shall pay such rate of tax upon their taxable income
as imposed upon corporations or associations engaged in a similar business, industry, or
activity, except for the following:
a. Government Service Insurance System (GSIS);
b. Social Security System (SSS);
c. Philippine Health Insurance Corporation (PHIC); and
d. Local Water Districts (LWD).

SECTION 6. EXCLUSIONS FROM GROSS INCOME - The following items shall not be included in
gross income and shall be exempt from income taxation:

A. Life Insurance - The proceeds of life insurance policies paid to the heirs or beneficiaries upon
the death of the insured, whether in a single sum or otherwise, but if such amounts are held by
the insurer under an agreement to pay interest thereon, the interest payments shall be
included in gross income;

B. Amount Received by Insured as Return of Premium;

C. Gifts, Bequests, and Devises;

D. Compensation for Injuries or Sickness;

E. Income Exempt under Treaty;

F. Retirement Benefits, PEnsions, Gratuities, etc.;

G. Miscellaneous Items. - 
a.  Income derived by Foreign Government;
b. Income derived by the Government or its Political Subdivisions;
c. Prizes and Awards;
d. Prizes and Awards in SPorts Competition;
e. 13th Month Pay and Other Benefits. - Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total exclusion under this
item shall not exceed ninety thousand (P90,000), which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant
to RA No. 6686;
(ii) BEnefits received by employees pursuant to pursuant to Presidential Decree No. 851, as
amended by Memorandum Order No. 28 dated August 13, 1986;
(iii) BEnefits received by officials and employees not covered by Presidential Decree No. 851, as
amended by Memorandum Order No. 28 dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus;

f. GSIS, SSS, Medicare and Other Contributions;

g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness with a
maturity of more than five (5) years; and
h. Gains from Redemption of Shares in Mutual Fund.

SECTION 7. SPECIAL TREATMENT OF FRINGE BENEFITS -- The tax on fringe benefits at the rate
of THIRTY-FIVEPERCENT (35%) shall be imposed on the grossed-up monetary value of fringe
benefits furnished or granted to an employee (except rank and file employees) by the
employer, whether an individual or a corporation (unless the fringe benefit is required by the
nature of, or necessary to the trade, business or professio of the employer.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by SIXTY-FIVE PERCENT (65%), effective January 1, 2018
and onwards.

SECTION 8. DEDUCTIONS FROM GROSS INCOME - In general, there shall be allowed at the
option of the taxpayer, itemized deductions or an Optional Standard Deduction (OSD) at the
rate of forty percent (40%). In case of Individual taxpayers, OSD shall be computed at the rate
of forty percent (40%) of gross sales/ receipts, as the case may be. Corporations may elect
standard deduction in an amount not exceeding forty percent (40%) of its gross income.

The following are the allowable itemized deductions:

A. Expenses;
B. Interest;
C. Taxes;
D. Losses;
E. Bad Debts;
F. Depreciation;
G. Depletion of Oil and Gas Wells and Mines;
H. Charitable and Other Contributions;
I. Research and Development; and
J. Pension Trusts.

Ms. MRU’s income tax liability if she signifies in her 1 st quarter return her intention to be
taxed at 8% income tax rate, will be computed as follows:
Gross Sales – Convenience Store P1,800,000.00
Gross Receipts – Bookkeeping     400,000.00
Total P2,200,000.00
Less: Amt. allowed as deduction under Sec. 24 (A)(2)(b)     250,000.00

Net Taxable Income P1,950,000.00

Tax Due:
8% of P1,950,000.00 P   159,000.00

Ayan pinakita yung computation ng tax kung 8% lang siya. Madaming pag-iisipan ngayon kung
mag fifile ka ng tax, kung mag 8% ba ko? Mag osd ba ko? Okay so eto, P1,800,000.00, ito yung
taxable amount. Ito yung total plus other income kung may other income pa siya. So,
P2,200,000.00. Ang imiminus lang natin dito ay P250,000.00 yung exemption. And then the
taxable income. Tax due is 8%, P159,000.00 lang ang babayaran niya. Pero dito sa OSD
P286,000.00. Malaki ang mimiminus plus yung percentage tax na 3%. Eh kaya lang ang
kailangan lang dito di ka mag eexceed sa vat threshold or hindi ka VAT taxpayer. Okay, yan ang
mga reason. 

The gross sale of GEAL Corporation for 2018 amounted to P6,000,000.00, with cost of sales
amounting to P4,000,000.00. It incurred operating expenses amounting to P1,000,000.00, and
on the filling of its first Quarter Income Tax Return, it signified its intention to avail of the OSD. 

Computation of OSD and Tax Due:

Gross Sales   P6,000,000.00
Less: Cost of Sales     4,000,000.00
Gross Income   P 2,000,000.00
Less: OSD (P2,000,000.00 x 40%)       800,000.00
Taxable Income   P1,200,000.00

Tax Due 
30% of P1,200,000.00   P360,000.00

Hindi na magiging option yung 8% dito kasi 4 million na ito eh. So kung gagamitan ng OSD, ^
million, gross sales, less cost of sales. So makikita ninyo, sa computation ng corporation, uhmm
magkaiba. Okay, you look at this. Ang gross income magkaiba ang definition ng corporation
tsaka ng individual. Ang gross income sa corporation will be gross sales – cost of sales. That
would be the definition of gross income of cosporation. Pero pag dating sa individual yung gross
income niya yung gross income niya. Ang deduction lang dun eh yung sales returns and
allowances and discount. Pero pagdating sa ano sa, corporation ang gross income ay net sales.
Gross profit from sales, kasi miniminus yung cost of sales eh. So tandan niyo yan. O kapag
nagapply ng OSD ang corporation imiminus niyo yung cost of sales. Hindi itong 6 million ang
basehan pero kung individual yan yang 6 million ang basehan. Pero corporation ito ang basehan
gross profit from sales so, 2 million. So yung gross income from corporation is defined from
different way of the tax of itself, kaya yan ang meaning ng gross income ng corporation. So 2
million minus OSD of 800,000.00 will be 1,200,000. Tax Due will be the same computation. The
tax due will be flat, 30%. We multiply the taxable income by 30%  to get the P360,000.00 tax
due.