INCOME AND BUSINESS

TAXATION
(Midterm Period)

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INCOME AND BUSINESS
TAXATION
(Midterm Period)

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 ACCOUNTING PERIODS

1. Calendar year - a period of 12 months beginning

January 1 and ending December 31 of every year;
and
2. Fiscal year – a period of 12 months ending on the
last day of any month other that December.

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 ALLOCATION OF GROSS INCOME

 The Commissioner of Internal Revenue is authorized to

distribute, apportion, or allocate gross income between or
among organizations, trades or business if he sees it necessary
to prevent tax evasion or to clearly reflect the income of such
organizations controlled directly or indirectly by same interests.

 The purpose is to place a controlled taxpayer on a tax parity

with an uncontrolled taxpayer, by determining, according to the
standard of an uncontrolled taxpayer, the true taxable income
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 ROLE OF INCOME IN TAXATION
 Income serves as the base and like any tax base, it is
a means for assigning relative shares of the total tax
burden.

 Income is the title given to that collection of

attributes used to determine each individual’s or
organization’s share of the tax burden.

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 LEGAL CONCEPT OF INCOME

All Income xxx (as judicial concept)

Less: Exclusions xxx (income declared to be nontaxable by
Congress)
Gross Income xxx (a term used in the Code)
Less: Deductions xxx (subtraction items provided by
Congress)
Taxable Income xxx (the tax base)
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 STATUTORY CONCEPT OF INCOME
 The basic statutory authority on income is Section 31 of the Code, which
reads as follows:
Gross income means all income derived from whatever source including
but not limited to the following items:
1. Compensation for services, in whatever form paid, including but not
limited to fees, salaries, wages, commissions and similar item;
2. Gross income derived from the conduct of trade or business or from the
exercise of a profession;
3. Gains derived from dealings in property;
4. Interest;
5. Rents;
6. Royalties
7. Dividends
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 STATUTORY CONCEPT OF INCOME
8. Annuities;
9. Prizes and winnings;
10.Pensions
11.Income from whatever source

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 JUDICIAL CONCEPT OF INCOME
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 Income in its broads, means all wealth, which flows into the
taxpayer other than a mere return of capital. It is the return in
money from one’s business, labor, or capital invested, e.g. gains,
profits, salary and wages.

 Income is also defined as the amount of money coming to a person

or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent.

 Income may also be thought of as a flow of the fruits of one’s labor.

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 JUDICIAL CONCEPT OF INCOME
 Capital is a fund property existing at one distinct point of time.
Income, on the other hand, denotes a flows of wealth during a
definite period of time. While capital is wealth, income is the
service of wealth.

 In the Madrigal case, the Supreme Court made an essential

distinction between capital and income. Capital is a fund, while
income is a flow; capital is wealth, while income is the service of
wealth; capital is a tree and income is a fruit.
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 INCOME TAX DEFINED, BASE AND NATURE
 Income tax is a tax on all yearly profits arising from property,
profession, trade or business, or is a tax on a person’s income,
emoluments, profits and the like.

 Income tax is a generally regarded as an excise (privilege) tax. It is

not levied upon persons, property, funds, or profits as such but upon
the right of a person to receive income or profits.

 Income tax is based on income, either gross or net, realized in one

taxable year.
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 GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 1 – is to identify the taxpaying party or “entity” to which the tax
computation formula applies.

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 GENERAL PROCEDURES IN DETERMINING INCOME TAX

 Step 2 – is to determine the taxpayer’s “gross income.”

Appreciation in market value is not generally regarded as income
for tax purposes unless realized through a sale or exchange.

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 GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 3 – is to determine the expenses and certain other items that can
be deducted in computing the taxpayer’s “taxable income.”

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 GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 4 – is to apply the appropriate tax rate to the taxpayer’s taxable
income to find the “tax due”.

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 GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 5 – is to subtract any applicable “tax credit/payments” from the
taxpayer’s tax due in finding the tax payable.

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 GENERAL PROCEDURES IN DETERMINING INCOME TAX
 Step 6 – is to increase the tax by “penalties and interests”

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 ITEMS OF GROSS INCOME
 Gross income as discussed in this chapter may be appropriately be
referred to as gross taxable income, in the case of corporation or gross
taxable/business professional income, income, in the case of individual
taxpayer engaged in trade, business or profession.

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1. COMPENSATION INCOME

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 COMPENSATION INCOME
 Compensation Income – means all remuneration for services
performed by an employee for his employer under an employer-
employee relationship, unless specifically excluded by the Code.
 The term used to designate the remuneration is immaterial. Thus,
salaries, wages, emoluments and honoraria, allowances,
commissions , fees including director’s fees, if the director, is at the
same time, an employee of the employer/corporation, taxable
bonuses and fringe benefits except those which are subject to the
fringe benefits tax, taxable pensions and retirement pay, and other
income of a similar nature constitute compensation income
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 COMPENSATION INCOME
 The timing or the basis upon which the remuneration is paid is
immaterial in determining whether the remuneration constitutes
compensation. Thus, it may be paid on the basis of piece work, or
a percentage of profits; and may be paid hourly, daily weekly,
monthly or annually.
 If services are paid for in a medium other than money (e.g. stocks,
bonds and other forms of property), such is to be treated as
compensation in kind. The fair market value of the thing taken in
payment is the amount to be included as compensation.
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 COMPENSATION INCOME
Definition of Terms –
1. Payroll Period – means the period of services for which a
payment of compensation is ordinarily made to an employee
by his employer. It is immaterial that the compensation is not
always paid at regular intervals.
2. Employee – is an individual performing services under an
employer-employee relationship. The term covers all
employees, including officers and employees, whether
elected or appointed, of the Government of the Philippines’
political subdivision thereof or any agency or instrumentality.
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 COMPENSATION INCOME
Definition of Terms –
 In general, an employer-employee relationship exists when the
person for whom services were performed has the right to control
and direct the individual who performs the services, not only as to
the result to be accomplished by the work but also to the details
and means by which the result is accomplished.

 In general, individuals who follow an independent trade, business,

or profession, in which they offer their services to the public, are
not employees.
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 COMPENSATION INCOME
Definition of Terms –
No distinction is made between classes or grades of
employees. Thus superintendents, managers and others
belonging to similar levels are employees. An officer of a
corporation is an employee of the corporations. An individual
performing services for a corporation, both as an officer and
director, is an employee subject to withholding on
compensation, including director’s fees

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 COMPENSATION INCOME
Definition of Terms –
3. Employer – any person for whom an individual performs or
performed any service, of whatever nature, under an employer-
employee relationship.
 It is not necessary that the services be continuing at the time the
wages are paid in order that the status of employer may exist. A
person for whom an individual has performed past services and
from whom he is still receiving compensation is an employer
 The term “employer” is also defined as any person paying
compensation on behalf of a non-resident alien individual, foreign
partnership, or foreign corporation, who is not engaged in trade or
business within the Philippines.
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 COMPENSATION INCOME
Definition of Terms –
4. Statutory Minimun Wage – refers to the rate fixed by the
Regional Tripartite Wage and Productivity Board, as defined
by the Bureau of Labor and Employment Statistics (BLES) of
the Department of Labor and Employment.
5. Minimum Wage Earner – refers to a worker in the private
sector paid the statutory minimum wage, or to an employee
in the public sector receiving compensation equivalent to
salary grade ten (10) and below.
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 COMPENSATION INCOME
Forms of Compensation –
Amendments in Revenue Regulations have been incorporated in
this discussion. Compensation does not always come in the
forms of money or is always termed as such.

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 FORMS OF COMPENSATION
1. Compensation paid in kind
2. Living quarters and meals
3. Facilities and privileges of a relatively small value (Fringe
Benefits)
4. Tips and gratuities
5. Pensions, retirement and separation pay
6. Fixed or variable transportation, representation and other
allowances
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 FORMS OF COMPENSATION
7. Vacation and sick leave allowances
8. Deductions made by employer from compensation of
employee
9. Remuneration for services as employee of a non-resident
alien individual or foreign entity.
10.Compensation performed outside the Philippines.

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 COMPENSATION INCOME
Forms of Compensation –
1. Compensation paid in kind – may be in some medium other
than money, as for example, stocks, bonds or other forms of
property. In this case, the fair market value of thing taken in
payment is the amount to be included as compensation
subject to withholding. Where compensation is paid in the
property other than the money, the employer shall make
necessary arrangements to ensure that the amount of the tax
required to be withheld is available for payment to the Bureau
of Internal Revenue.
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 COMPENSATION INCOME
Forms of Compensation –
2. Living Quarters and Meals – if a person receives salary as
remuneration for services rendered, and in addition thereto,
living quarters or meals are provided, the value to such
person of the quarters and meals so furnished shall be added
to the remuneration paid for the purpose of determining the
amount of compensation subject to withholding. However, if
living quarters or meals are furnished to an employee for the
convenience of the employer, the value thereof need not be
included as part of compensation income.
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 COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value – ordinarily,
facilities and privileges, otherwise known as “de minimis
benefits,” furnished or offered by an employer to his
employees, are not considered as compensation subject to
income tax and consequently to withholding tax if such
facilities or privileges are of relatively small value are offered
or furnished by the employer merely as a means of promoting
the health, goodwill, contentment, or efficiency of his
employees.
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 COMPENSATION INCOME
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Forms of Compensation –
3. Facilities and privileges of relatively small value –
The following shall be considered “de minimis” benefits not subject
to income tax, hence, not subject to withholding tax on
compensation income of both managerial and rank and file
employees:
a. Monetized unused vacation leave 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;
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 COMPENSATION INCOME
Forms of Compensation –
3. Facilities and privileges of relatively small value –
c. Medical cash allowance to dependents of employees not exceeding
P1,500 per employee per semester or P250 per month;
d. Rice subsidy of P2,000 or one (1) sack of 50-kg, rice per month
amounting to not more than P2,000;
e. Uniforms and clothing allowance not exceeding P6,000 per annum;
f. Actual medical assistance, e.g. medical allowance to cover medical
and healthcare needs, annual medical/executive check up,
maternity assistance and routine consultations, not exceeding
P10,000 per annum;
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 COMPENSATION INCOME
Forms of Compensation – Slide 35
3. Facilities and privileges of relatively small value –
g. Laundry allowance not exceeding P300 per month;
h. Employees achievement awards, e.g. for length of service or safety
achievement, which must be in the form of a tangible personal property
other than cash or gift certificate with an annual monetary value not
exceeding P10,000 received by the employee under an established
written plan which does not discriminate in favor of highly paid
employees;
i. Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum; and
j. Daily meal allowance for overtime work and night/graveyard shift not
exceeding twenty-five (25%) of the basic minimum wage on a per region
basis.
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 COMPENSATION INCOME Slide 36
Forms of Compensation –
3. Facilities and privileges of relatively small value –
 All other benefits given by employers which are not included in the above
enumeration shall not be considered as “de minimis” benefits, hence, shall be
subject to fringe benefits tax.
 The amount of “de minimis” benefits conforming to the ceiling above prescribed
shall not be considered in determining the P90,000 (eff. January 1, 2018) of
“other benefits” excluded from gross income under Section 32(b)(7)(e) of the
Code.
 However, if the employer pays more than the ceiling prescribed, the excess shall
be considered as part of “other benefits” and shall be taxable to the employee
receiving the benefits only if such excess is beyond the P90,000 ceiling.
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 COMPENSATION INCOME
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Forms of Compensation –
3. Facilities and privileges of relatively small value –
NOTE further that MWEs receiving “other benefits” exceeding the
P90,000 limit shall be taxable on the excess benefits as well as on his
salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW
Any amount given by the employer as benefits to its employees,
whether classified as “de minimis” benefits or fringe benefits, shall
constitute as deductible expense upon such employer.
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 COMPENSATION INCOME
Illustration:
For taxable year 2018, DBA Corporation presented the following details for
its employee to be able to compute the tax to be collected for December
2018:

Mr. Tuazon, married with two qualified dependent children who received
the following compensation for the year:
Basic Monthly Salary P45,000.00
Overtime Pay for November 5,000.00
Thirteenth Month Pay 45,000.00
Other Benefits 12,000.00
Slide 38 Withholding tax (Jan-Nov) 58,000
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 COMPENSATION INCOME
Received for
Compensation Non-Taxable Taxable
the year
Basic Salary (P45,000 x 12) P540,000 P540,000

Overtime (November) 5,000 5,000

13th Month Pay 45,000 45,000

Other Benefits 12,000 12,000

Total P602,000 P57,000 P545,000

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 Slide 40
COMPENSATION INCOME
Total Gross Compensation P545,000
Less: Basic Personal Exemption 0
Net Taxable Compensation P545,000
Tax Due
On P400,000 P 30,000
145,000 x 25% 36,250
Total P 66,250
Less: Withholding Tax (Jan-Nov) 58,000
Tax to be collected in December 2018 P 8,250
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 INCOME TAX TABLE Slide 41
Not over P250,000…………………….…………………… 0%
Over P250,000 but not over P400,000…………… 20% of the excess over
P250,000
Over P400,000 but not over P800,000…………… P30,000+25% of the excess
over P400,000
Over P800,000 but not over P2M…….……..………P130,000+30% of the excess
over P800,000
Over P2M but not over P8M……………………………P490,000+32% of the
excess over P2M
Over P8M ………………………………………….……………P2,410,000+35% of the
excess over P8M
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