Income Lesson next meeting

- Money earned by a business or an individual

- Amount of money left after deducting the
expenses Fringe benefits tax
- Given by company from the benefits
Tax - Received by employees subject to regular
- Mandatory contribution or financial income tax
obligation by an individual or entity charged
by the government Not taxable:
Proceeds from light insurance
Income tax
- Used to fund public services, goods for Chapter 1 banggawan 8/9/21
citizens Taxation
- Tax imposed in respect of the income or As power
profits earned - Gov’t has inherent power to charge tax
- Tax rate increases as the income increases - Lifeblood of the gov’t is tax
- poor are less able to pay while the rich have As process
more excess cash to pay - Act of imposing a charge
- - Property, individual, transaction
- To raise money for public purposes
As a mode of cost distribution
8/4/21 -
Final income tax
- Immediately deducted Inherent power
Deposit 1B interest 10% = 100,000 Police power
- For the safety of the people
Regular - Limitation: no person may be deprived of life,
- File a return liberty, or property w/o due process of law
Eminent domain
- Govt can take private property for public
Income taxation 2021 Banggawan purpose and pay for just compensation
Income taxation made easy 2021 ballada Taxation power
- Govt to enforced contribution for public
service

Importance of taxation
- Primary source of govt revenue
- Exercise to raise revenue
- Supports the other inherent powers of the state

Purposes of taxation
Primary purpose is to raise revenue by collecting
funds
Secondary or non revenue purposes
- Reduction of social inequality
- Encourage the growth of local industries
 - Regulate inflation
- Achieve economic and social stability
Characteristics:
Inherent power of sovereignty
Essentially a legislative function
Public purposes
Territorial in operation
Tax exemption of gov’t
Four element sof a state:
People
Territory
Sovereignty
Gov’t
State is born = automatically possesses power to
collect taxes from its inhabitants
Constitution provide limitation
Congress
- Power to enact law and ordinances
- To impose and collect taxes
Taxation power cannot be delegated
- Power to select coverage, object or property
- Determining nature and purposes
- Determining the place or situs of tax
imposition
- Fixing the amount to be imposed and tax rates
- Granting tax exemptions or condonation
- Setting down the rules of taxation in general
Congress may
- The president to impose tariff rate, import
and export quotas, custom duties, subject to
the limitations and guidelines
- Each local gov’t shall have power to create its
own sources subject to limitation
Proceed of tax must be used:
- Support of the state or gov’t
- To promote welfare of the community
- Public improvement
- Unemployment relief
- Buildings
- Local police forces
- Educational subsidy
- Pensions
- Socialized housing
- Enlistment of the underprivileged
Type of taxes
Poll/capitalization/community taxes
- Based on the residence, regardless of the
source of income or location
Property tax
- Real property is subject to tax where it is
located, regardless whether the owner is a
resident or non-resident. Not movable
- Personal property, the situs is wherever it
was actually kept or located. Movable
Excise taxes
- Where the privilege is exercised
- Where the taxpayer is a national
- Where he has his residence
Tax exemption of the gov’t
- Properties of national govt and local gov’t are
not subject to tax
- Agencies performing governmental functions
are exempt unless expressly taxed
- GSIS, SSS, PHIC, PCSO
Theory of taxation
- If the system of government is not necessary
or does not have importance, people or the
community will not enjoy its benefits
- Is the government’s necessity for funding
Basis of taxation
Principle of necessity
- Govt right to compel citizens, residents and
property w/in its territory to contribute money
Reciprocal duties
- Govt collect in order to perform functions and
provide services (benefit received theory)
- Mutuality:
- Government gives public services to the
people using the taxes paid by the people
- Public services:
 - Access to public health/education - President’s power to veto separate items in
- Comfort of living revenue or tariff bills
- Daily free usage of public infrastructures - Exemption from property taxation or
- Availment of service is not a precondition to religious, charitable or educational entities,
taxation, receipt of benefits is presumed nonprofit cemeteries, churches and convents
apartment
Theories of cost allocation - No public money shall be appropriated for
1. Benefit received theory/reciprocity theory religious purposes
- More benefit received, more taxes - Majority of all the members of the congress
should pay required granting tax exemption
2. Ability to pay theory - The congress may not deprive the supreme
- Based on the capacity to sacrifice to court of its jurisdiction in all cases involving
support the government the legality of any tax, impost or assessment
or toll or any penalty imposed in relation to
Aspects of the ability to pay theory tax
1. Vertical equity - No imprisonment for nonpayment of poll tax
- Extent of paying is directly - Tax collection shall generally be treated as
proportional to the level of tax base general funds of the govt
- The more income the more tax to pay
because of the capacity levy/imposition
- Gross concept - Involves the passage of tax law or ordinances
2. Horizontal equity through the legislature
- Consideration of particular - Determine nature of tax
circumstance - Granting tax exemptions, tax amnesties and
- Same income but if there are tax remedies
dependents then less tax - Purposes
- Net concept - Subjects
- Amount or rate of tax
Lifeblood doctrine - Manner, means, ang agencies of collection of
- Government will be paralyzed for lack of tax
motive power to operate without taxes
Principles of a sound tax system
Limitation: Fiscal adequacy
Inherent limitation - Govt sources of revenue should be sufficient
- Taxes may be levied only for public purposes to meet the demand of public expenditure
- Legislative function regardless of business condition
- Territorial jurisdiction of the state - Govt shall adopt effective measures to collect
- Subject to international comity taxes efficiently and reduce expenditures
- Govt entities are generally tax exempt Equality or theoretical justice
- Tax must be proportionate to taxpayer’s
Constitutional ability to pay
- Due process of law - Received more, give more
- Equal protection of law Administrative feasibility
- Rule of uniformity and equity - Tax law must be convenient, just, uniform and
- Non-impairment of contracts effective in their administration
- Free from confusion and uncertainty
8/16
Doctrines in taxation Prospective application of tax laws
Power to tax included power to destroy - Tax will only be effective after becoming a
- Can impose tax law to anyone at any rate law
- For taxes to work, it should be easy to - Current and prospective
implement/pay - Retrospective → bigger burden to taxpayer,
- Tax can close the business by giving high tax will pay more tax, kasi magbabayad ng tax
rate
nung products before
Power to tax is not the power to destroy but power to
Imprescriptibility of taxes
build
- Taxes are not cancelable
- Tax is a toll that create and sustain the uplift
- Unless provided by the tax law itself
of social condition of the people in general
- Tax holiday and tax incentive → encourage
Double taxation
people to operate business that are necessary - Same taxpayer is being taxed twice in the
for the community same year or period
Reconciliation of marshall and holmes
- Imposition of valid tax could not be judicially Escape from taxation
restrained merely because it would prejudice - Taxpayer to limit or even avoid the impact of
taxpayer’s property tax
- Illegal tax could be judicially declare invalid
and not work to prejudice a taxpayer’s Categories that result to loss of government
property revenue
- Marshall’s view refers to a valid law a. Those that result to loff of gov’t revenue
- Holmes’ view refers to an invalid law Tax evasion
- Illegally reduce or avoid tax
Non compensation or set off Tax avoidance
- You charge it off to a pending tax claim - Legally reducing or avoiding tax
- Cannot charge off the tax Tax exemption or tax holiday
Non assignment of taxes - Freedom from tax
- Tax cannot be assigned or transferred to Shifting
another by contract Forward - essential commodities, consumers
Doctrine of estoppel (restaurant)
- Misrepresentation made to another party Backward -
relying in good faith will be binding making
- Gov’t is not subject to estoppel b.
Judicial non interference
- Not allowed to issue injunction to gov’t to Determining taxable income:
pursuit to collect tax, lifeblood doctrine Gross income - deduction
Strict construction of tax laws
- Law is clear, no room for interpretation, Tax amnesty
application only - General pardon to taxpayer to give chance to
Vague tax laws → against gov’t and in favor of the reform
taxpayers - Retrospective in application
- Covers past violation
Vague exemption law → against taxpayer and in
- Waiver by govt on its right to collect
favor of the gov’t
 - Covers civil and criminal liabilities f. Excise tax
- Paid tax in not refunded g. Documentary stamp tax
Tax condonation 2. Local tax
- Forgiveness of tax obligation under certain a. Real property tax
justifiable grounds b. Professional tax
- Covers civil liabilities c. Business taxes, fees, and charges
- Prospectively d. Community tax
- Requires no payment e. Tax on banks and other financial

Elements of valid tax Distinctions of tax from other charges

1. Tax must be levied by the taxing power Tax vs revenue
having jurisdiction over the object of taxation Tax vs license fee
2. Must not violate constitutional and inherent Tax vs toll
limitations Tax vs debt
3. Must be uniform and equitable Tax vs special assessment
4. Must be for public purposes Tax vs tariff
5. Must be proportional in character Tax vs penalty
6. Generally payable in money
Tax collection system
Classification of taxes 48k advance partial payment
As to purpose 50k tax at end
1. Fiscal or revenue tax 2k
2. Regulatory Withholding system
3. Sumptuary
As to subject matter 8/23 sync
1. Personal, poll or capitation Types of income taxpayers
2. Property tax Individual
3. Excise or privilege tax a. Citizen
As to incidence - resident
1. Direct tax - non-resident
2. Indirect tax
As to amount
1. Specific tax
2. Ad valorem
As to rate
1. Proportional tax
2. Progressive tax
3. Regressive tax
4. Mixed tax
As to imposing authority
1. National tax
a. Income tax
b. Estate tax
c. Donor’s tax
d. VAT
e. Other percentage tax
 c. Taxable estates and trusts

- citizens of the PH
- parents are citizens of PH
- born before 1/17/1973
- naturalized in accordance w/ law

Non resident citizen

- Derives profit outside the country
- Establish physical present abroad, definite
intention to stay in that country
- Left the PH during the taxable year
- Residing abroad either immigrant or
employment basis

b. Alien
- resident
- foreigner residing in PH
- live in PH w/o definite intention as to his
stay
- make PH temporary home, but any time will
go back to their country
- non-resident
- foreigner, not residing in PH but stayed in
PH more than 180 days during taxable year,
engaged in trade or business
- non-resident, not engaged in trade or
business
- did not stay more than 180 days
Corporations
- Include partnerships, except general
professional partnerships and a joint venture
for the purpose of construction projects
engaging in petroleum, coal, geothermal,
other energy operations under a service
contract w/ gov’t
- Includes profit-oriented and non-profit
a. Domestic corporations
- Organized in accordance of PH law
b. Foreign corporations: resident or non-resident
- Under foreign law
Types of foreign corporations:
Special corporation
- Subject to special tax rules or preferential tax
rates
- Domestic/foreign

Joint venture

Situs of income vs source of income

 300,000 - 250k = 50k * 20% = 10,000

Computation of taxes

9/6 sync
Compensation income
- Employee employer relationship
- Employment contract
- Earning derived called compensation income
- 1/2018 - 12/2022 20-35%
Graduated tax
Total compensation income xx
Mandatory contri/nontaxable benefits xx
Net taxable income xx

Earning 400k
Contri - 10k
13th month 10k
380k -250k *20% = 26k
Kasama ang 3M sa 8&=%

Total gross sale 1m

Cost 300k
Expense 100k
Graduated rate 80k

If do not exceed 3M ang gross sale, if not exceed use

graduated rate
B. 1M - 250k * 8% = 60k

Mix income
 - Employment and gross sale - Add both income then less 250,000, then
- Do not deduct 250k from 8% multiplied to 8%
- Using graduate rate, add the compensation
and profit from business, do not compute Business income earners
separately (compensation and business income, w/o 8%)
(graduated tax rate)
Employee salary 400k - Use graduated tax rate
30k - Both income less COS and operating
Earn from business 3M expenses. Then use graduated tax rate
Cost 900k
Expense 500k Business income - 8% tax rate
1.6M - Compute for taxable income, use graduated
sales
240k - Use 8% tax rate on the certain quarters

30k + 240k = 270,000 Mixed income earner

a. w/ 8% tax rate
Graduate rate - Compensation → use graduated tax
1.6M + 400k = 2M - Business income → after computing
= 490k
for taxable income, multiply it to 8%
- Add the tax due on compensation and
9/8 async
business
Compute individual income tax
- No less 250,000 because nasa
Gross income xx
compensation na yon, madodoble na
Allowable deductions (xx)
b. w/o 8% tax rate
Taxable income xx
- Add both compensation and business
income and deduct the necessary
Income tax due xx
deductions to compute for taxable
income
Minimum wage earner
- Tax due, use graduated tax rate
- exempt from income tax
c. Resignation on compensation income to focus
on business, w/ 8%
YT VIDEO
- Check if compensation is < 250,000 =
Minimum wage earners shall be exempt from
no tax
payment of income tax based on their statutory
- Combine compensation and business
minimum wage rate.
income
Holiday pay, overtime pay, night shift, hazard pay are
- Tax due = business income multiply
also exempt.
8%
Minimum wage earners
- Exempt from payment of income tax
- Income tax due = none

Business income earners

(compensation and business income, w/ 8%)
 Timing of MCIT:
9/13 sync Beginning of the 4th taxable yaer, immediately
Gross sales 2,5000,000 following the year in which such corp commenced its
Cost (1,000,000) operation
Gross income 1,500,000 Beg. year + 4 years
Operating (600,000) For first 4 years - not subject to MCIT
900,000
non -operating 100,000 MCIT gross income
Taxable income 1,000,000 - Included all other items of taxable income

1M - 800,000 = 200,000 * 30% = 60,000 + 130,000 =

190,000

Percentage tax of 18% on gross sales/receipts

9/22 sync
Regular corporate income tax
- Applies to all corporations in general
- Regular corporate

Corporate tax schemes

Domestic corporation Gross income
- Gross income tax or regular corporate tax Net sales - CGS =
- Now, wala ng gross income tax, regular
income tax at 20% min corporate income tax
1%

Min corporate income tax

- Before 2% of gross income
- Impose when sustained a loss or no income
- Greater than the regular corporate income tax
- Corporation has zero or negative taxable
income
- Now, 1%
Scope:
Corporation taxable to the 30% regular corporate
income tax, non profit, exempt and special Income that are not subject to capital gain stock are
corporation, not their income subject special tax rate the only one included in the corp income tax

MCIT exempt entities: deduct 2,000 per month

Real estate investment trust Total amount due 30k
Domestic corp 1% (deleted) 2k * 12 = 24k
Domestic or resident corp subject to special tax rate 30k - 24k = 6k withheld
an=ll non-resident foreign corporation - 24% of gross
income
9/27 sync
Kung ang base is regular income tax yung excess ng
MCIT pwedeng magamit in the subsequent
example:
2020 MCIT Excess 50k
2021 MCIT 100k
2022 150k tax is based on regular income RCIT
Result: get the MCIT excess of 150k from 2020 and
2021

2022 70k = 2020 50k and 2021 20k (first in first out
basis)

2023 excess MCIT 75k

2024 RCIT 100k

Under create law

MCIT 2% to 1%
Domestic corporation and resident foreign
corporation CIT 30% to 25%
Corporate net income not exceeding 5M and TA not
exceeding 100M 20%

Incurs a loss, the company can claim it against

taxable income in the year na nag earn ng profit ang
company.
Operating loss same effectivity with MCIT, next 3 Due May
years
MCIT will be deducted to RCIT, net operating loss CIT will be reduced further by 1% annually in the
carry over will be deductible taxable income next 6 years. Ans shall eventually reach 20% by 2027
onwards.
Income tax is computed on a quarterly basis.

NET OPERATING LOSS CARRYOVER

Net income - NOLCO = taxable income
 hospitals

Proprietary 10% → 1%
educational
institution

Foreign currency 10% → 1%

deposit units Depends on the
(FDCUs) and source..
expanded
FDCUS

PEZA or BOI- 5% of gross

registered income earned

3. Exempt corporations
- Exempt non-profit
corporations under the NIRC
- Government agencies and
instrumentalities
- Certain government aimed and
controlled corporations
- cooperatives

B. Resident foreign corporations

1. Regular resident foreign corporation =
25%
2. Special resident foreign corporations

Offshore
Multiplied by 25% banking units
and expanded
FCDUs
Midterm regular and special corp 70% , previous
topic 30% Regional area No tax
Mcq headquarters
Regional Before 10%,
operational 25%
10/18 sync
headquarters of
Corporate income taxpayers multinational
A. Domestic corporation companies
1. Regular domestic corporation
- 25% or 20% MSMEs International 2 ½ % of gross
carriers PH billings
2. Special corporation
BOI or PEZA-
Non-profit registered
10% → 1%
enterprises
 C. Non resident foreign corporation
1. Regular non-resident foreign
corporation = 25% FWT
2. Special non-resident foreign
corporation = FWT

Non-resident 25%
cinematographic
film owner,
lessor or
distributor

Non-resident 4½%
lessor of vessels,
chartered by PH
nationals

Non-resident 7½% FCDUs

owner or lessor - Limited under their license to short-term
of aircraft, foreign currency-denominated transactions
machineries and
- Short-term foreigncy currency loans
other equipment

EFCDU
Special corporation
- Subject to special tax treatments or
preferential tax rates lower than the RCIT
rate.

Exempt domestic corporations

1. Exempt non-profit corporations under the
NIRC
2. Gov’t agencies and instrumentalities exempt
gov’t-owned and controlled corporations
3. Cooperatives

Related activities are the only one that are exempt in

tax
 10/25 sync
Chapter 13
Deductions from GI
- Pertains to the business expenses incurred by
a taxpayer engaged in business or engaged in
the practice of a profession
- Employment is not a business, self-
employment is a business
BOI-registered
- Enjoy income tax holiday fro 6 yrs from Entity concept
commencial operations and 4 yrs for non- - Entity and owner have separate financial
pioneer firms records
- May be further extended not exceed 10 yrs

Peza
- w/in PH economic zone authority
- 5% of gross income earned except real
property tax on land of developers

Allocation of common expenses

- Expenses that are intended for both the
business and for personal use of the a
taxpayer are allocated between the two
Regional HQ - Only those that pertain to business are
- Administrative and supervision purposes, do ductible
not earned income - 30% * 10k = 3,000 is deductible

Rules on deducting capital expenditure
1. Non-depreciable asset
→ cost of assets that does not depreciate by
usage
2. Depreciable properties
→ deduction over the useful life of the
property
Depreciation method
● Straight line method
● Sum-of-the-years-digit method
● Declining balance method (150%or200%)
● Other methods
3. Intangible assets
4. Inventory
→ costs are deducted when sold/used in the
business
5. Prepaid expenses
→ deducted in the future period as they
expire or as theta re used
Special conditions with deductions
1. Property repairs and improvements
- Repairs that significantly increase the
valueprolong the useful life =
capitalized
- Property w/o causing increase in FV
of useful life of the property shall be
deducted as outright expense
2. Property acquisition-related costs
→ all cost directly related to the acquisition
of an item of PPE = capialized, except VAT
3. Securities issue cots
→
4. manufacturing g expenses
5. Effects of accounting methods
6. Effects of value-added tax
Treatment of input VAT
a. VAT taxpayer, the input VAT is claims as tax
credit against output VAT, not claimable as
deductions
b. non-VAT taxpayaer, input VAT is part of the
costs of the purchase/expense, claimable as
deductions
General principles of deductions from GI
1. Expenses must be legitimate, ordinary, actual,
and necessary
2. Matching principle
3. Related party rule - gains are taxable but
losses are not deductible. Ex. transaction
between family members
4. Withholding rule - no deduction is allowed
unless the withholding tax required by the law
or regulations to be withheld on the income
payment is withheld and remitted by the
taxpayer to the gov’t
8k per month *12 = 96k
Characteristics of legitimate business expense
- Incurred in and for the curren taxable period
- Not a capital expenditures
- Pertains to the business
- Not contrary to law, public polocy/morals
- Adequately substantiated w receipts or other
documents
560k sales
12% VAT
Supplies 112k include 12%
*112 *12
Output = 560k/112k*12% = 60k
Input = 112k/112k*12% = 12k
VAT payable = 60 - 12 = 48k
11/10 sync
Discuss prefinal exam
11/15 sync
Ch 13
Modes of claiming deductions from gross income
1. Itemized deductions
- List every item of business expense
they claim as deductions
- Point the provision of the law
authorizing the deduction, support of
receipts, vouchers, canceled checks
- Deductions comply with applicable
deduction ceilings set by law
2. Optional standard deductions
- Applicable to all taxpayers
- Presumed as a fixed percentage of
gross income for corporations and
gross sales or receipts for individuals
- Single percentage 40%
Not directly related to COGS DISCOUNT
Interest expense
Jan1, 2021 20%
Interest expense 100k
Earned 10k interest income
Gross interest income 100k
Arbitrage limit(10k *33%) (3,300)
Deductible interest expense 96,700
Arbitrage limit
- Intended to recover tax savings of taxpayers
who take advantage of higher regular tax
Corporate income tax rate - final tax on interest
income / corp income tax rate
Create law
25-20%
Discount or pre-deducted interest is a prepayment.
Not deductible upon release of the loan
If loan is on installment, deductible according to
installment payment
Income taxes are not cause of earning income
VAT non-deductible
Deduction approach
Tax credit approach
- Foreign taxes paid are not deducted against
gross income but are credited against the
income tax due on world taxable income
Next session nov. 29?
After the turn, chat thumbs up on gc
11/22 sync
Exclusions in gross income
a. Proceeds of life insurance policy
- Interest payments included in gross
income (taxable)
b. Amount received by the insured as a return of
premium
- Amount received as a return is
excluded from gross income
c. Gifts, bequests, and devises or descent
- Bequests - transfer of personal
property
- Devise - transmission of real property
- Descent - succession
- Not subject to regular income tax
- Not part of gross income
- If the property, any income derived
will be taxable income like rental
Gifts - no value tot he exchange, free
Exchange - involves a consideration, sales transaction
d. Compensation for injuries and sickness
- Not subject to tax
- Pertains to physical injuries
e. Sw
f. Retirement benefits, pensions, gratuities and
other benefits
11/29 sync
Regular income tax: inclusion in gross income
Gross income subject to regular tax
Items of gross income subject to regular tax
1. Compensation for services in whatever form
paid
- Type of employee benefits
- Income received from the conduct of
trade
2. Gains from dealings in properties
- gains/losses in dealing in ordinary
assets are subject to RIT
3. Interest income
 - Other than passive income subject to
final tax
- Ex. bank deposits abroad
- Exempt interest income (interest
income earned by landowners and
imputed interest income)
4. rents
- Arises from leasing properties
- Passive income but not subject to final
tax

5. Royalties

6. dividends
- Distribution of profits to the company
- Dividends declared by foreign
corporation
7. Annuities
- Excess annuity payments received by
the recipient over premium paid is
taxable in the year of the receipt
8. Pensions
- fir

Cancelation of indebtedness

12/6 sync
fina l exam
40 items
Dec 15 1:30pm
Beg to last focus si last