Work Text in

Income
Taxation

Joseph Anthony M. Romero

Compiler
Course No. BAC 204
Descriptive Title Income Taxation
Credit Units 3
School Year/Term 2021-2022/ 2nd Semester
Mode of Delivery Modular
Name of Instructor Joseph Anthony M. Romero, CPA, MBA
Course Description This course focuses on providing tax consciousness to students,
specifically, providing them with knowledge on the general
principles of taxation, pertinent items of income and allowable
deductions of individual taxpayers, computation of income taxes
and proper reporting of the same to Bureau of Internal Revenue.
This course also emphasizes the purpose and meaning of taxation
that inspire good governance and nation building to students.
Through this, students are expected to develop a sense of
stewardship and accountability in recording and reporting taxes
truthfully and become catalysts of change in the society
Course Outcomes 1. Explained the general principles of taxation and understood the
intricacies and updates of Philippine Income Taxation;
2. Computed tax due/payable of individuals earning
compensation income, business/professional income or a
combination of both, correctly;
3. Filled-up the necessary forms and documents to be filed by
income tax payers to the Bureau of Internal Revenue; and
4. Developed a sense of stewardship and accountability in
recording and reporting taxes truthfully that inspire good
governance and nation building.
SLSU Vision By 2040, Southern Leyte State University is a leading higher
education institution that advances knowledge, innovation and
compassion for humanity, creating an inclusive society and a
sustainable world.
SLSU Mission We are a smart and green University that advances education,
technological and professional instruction, research and
innovation, community engagement services and progressive
leadership in arts, sciences and technology that are relevant to the
needs of our communities. We produce graduates and life-long
learners equipped with knowledge that enhances lives and
invigorates economic development.
 CONTENTS
Unit No. Title Page
1 General Principles of Taxation 1-12
Learning Tasks 12-15
3 Concepts of Income and Income Taxation 16-27

Learning Tasks 27-29

MODULE GUIDE

 This section introduces the lesson proper and provides

LET’S LEARN THIS! valuable concepts for learning the topic
 This section provides supplementary materials to
LET’S LEARN MORE! enhance understanding of the lesson

 This section provides enabling activities for application

LET’S Do THIS! of students’ learning
 Income Taxation 1

UNIT 1

GENERAL PRINCIPLES OF TAXATION -

CONCEPT, NATURE, AND CHARACTERISTICS OF TAXATION AND TAXES

OBJECTIVES
At the end of the lesson, you should be able to:
1. Explained the general principles of Taxation; and
2. Discussed the intricacies of the Philippine Taxation system.

LET’S LEARN THIS!

Taxation
Soon after people stopped living as nomads and started to settle in large communities, it
became clear that funds would be needed to obtain the things and services that everyone needed
but no one could afford on their own – things such as roads, freshwater, defense, healthcare, etc.
In answer to this dilemma, taxes are levied and collected so everyone can contribute something for
the greater good. Taxes help provide infrastructures such as roads, bridges, water dams and public
services such as police, hospitals and schools.
In its simplest form, taxation involves the collection of money by the leaders of a community
to pay for goods and services the community needs. As Oliver Wendell Holmes remarked, taxes are
the consequence of living in a civilized society.

“Taxes are what we pay for a civilized society”

Oliver Wendell Holmes

Meaning of Taxation
Taxation is one of the powers of every sovereign state. This power is very broad, supreme and is
essential to its existence. Without such power, the state cannot fulfill its fundamental responsibility
to its citizens which is to provide services such as protection, education, social welfare, and health
care. The government needs money to cover its expenses.
Such money is generated through the imposition and collection of taxes which are pooled together
into what is known as public funds.
Taxation is a process or means by which the sovereign, through its law-making body, raises
income to defray the necessary expenses of its government.
From this definition the nature of the power of Taxation can be inferred which are as follows:
 Income Taxation 2

 Inherent in sovereignty. Taxation is essential to the existence of every government. The

government can exercise taxation even if the constitution is silent about it.
 Legislative in character. The power to tax is exclusively a legislative act and cannot be
exercised by the executive or judicial branch of the government, only the Congress.
 Subject to constitutional and inherent limitations. The power of taxation is not absolute
and is subject to certain limitations and restrictions. Most of these limitations are
specifically provided in the Constitution or implied there from or inherent in the nature of
the taxation power.

As a power, taxation refers to the inherent power of the state to

demand enforced contributions for public purposes.

Purpose and Scope of Taxation

The primary purpose of taxation on the part of the government is to provide funds or
property with which to promote the general welfare and protection of citizens. But taxation may
also be exercised to attain the various social and economic objectives:
 shifting wealth from the rich to the poor,
 maintaining price stability,
 stimulating economic growth, and
 encouraging full employment.
But in the most broadest and general sense, taxation includes every imposition of charge
or burden by the sovereign power upon persons, property, or property rights for the use and support
of the government in the discharge of their functions.

Theory and Basis of Taxation

1. Existence of the Government. Taxation is the lifeblood of the nation. Every action of the
government require money derived from taxes. Thus, taxation is a system for ensuring that the
government is able to fulfil its mandated duties to the people.
2. Reciprocal duties of State and Inhabitants. Every citizen receives general advantages and
protection from the government, including those who do not pay taxes. In return, they
contribute to the general fund of the state in form of taxes. This is known as the “benefits
received principle”.
3. Public purpose requirement for lawful taxation. All persons taxed enjoys the privileges of
living in an organized society established and safeguarded by the devotion of taxes for public
purposes. Hence, revenues derived from taxes cannot be used for purely private purposes or
for the exclusive benefit of private persons, but solely for public purposes.
 Income Taxation 3

Aspects of Taxation
The exercise of the power of taxation involves two aspects or stages:
1. Levying or imposition of the tax. This refers to the creation of a tax law which is a legislative
act.
2. Collection of the tax levied which is essentially administrative in character.

Together, these two processes constitute the

“Philippine Taxation System”

Basic Principles of a Sound Tax System

1. Fiscal Adequacy – Means that the sources of revenue are sufficient to meet government
expenditures.
2. Equality or Theoretical Justice – Means that the tax burden must be proportionate to the tax
payer’s ability to pay or ability-to-pay principle. Taxation should be uniform as well as equitable.
3. Administrative Feasibility – Means that tax laws should be capable of convenient, just and
effective administration or enforcement at a reasonable cost. This means that each tax in the
system should be:
 clear and plain to the taxpayer;
 capable of uniform enforcement by the government officials;
 convenient as to time, place, and manner of payment; and
 not duly burdensome upon or discouraging to business activities.

Inherent Powers of the State

The Philippines as a sovereign state has several powers to implement its plans and
programs. These powers are either vested by the constitution or are inherent to the state. The three
inherent powers are:

Power Taxation Eminent Domain Police

 Refers to the inherent
power of the state to
exact an enforced
contribution upon
Meaning persons, properties and
rights for the purpose of
generating revenues for
the use and support of
the government.
 This is the strongest of all
powers of the state.
 Refers to the  Refers to the inherent
inherent power of power of the state to enact
the state to take such laws in relation to
private property for persons and property as
public use upon may promote public health,
payment to the public morals, public safety
owner of just and the general welfare of
compensation with the people.
the observance of  This power springs from
due process. the obligation of the State to
protect its citizens and
provide for the safety and
welfare of society.
 Income Taxation 4

National Taxes: The government takes  Requiring a license for the

 Income tax and pays private land- practice of a profession
 Customs Duties owners for:  Right to drive motor
 Documentary Stamp tax  road-widening; vehicles;
 Value-Added tax  building of public  Punishing vagrancy and
Example Local Taxes: schools, hospitals, prostitution;
 Real Estate tax and facilities for  Regulating the use of traffic
 Community tax, public use. on roads;
 Barangay clearance  Regulating prices of
commodities, etc.

These powers are inherent in every sovereign state because they are necessary for the
government to function and promote the general welfare of its citizens. Without these powers, the
government is helpless and cannot effectively administer its programs and protect its people. Since
these powers are inherent in the sovereign state, they can be exercised without constitutional
authority, for they are ingrained in the state’s establishment of its government.

Limitations of the Power of Taxation

Though Taxation is the strongest among all powers of the state, it is not an absolute power. It has
the following limitations:
1. Constitutional Limitations – Those restrictions found in the 1987 Philippine Constitution or
implied from its provisions.
2. Inherent Limitations – Those which spring from the nature of the taxing power itself although
they may or may not be provided in the Constitution.

Taxation is not an absolute power that can be exercised

by the legislature in any way it pleases

Constitutional Limitations
1. Due Process. According to the constitution, no person shall be deprived of life, liberty, or
property without due process of law, nor shall any person be denied the equal protection of the
law.
Example: A law is passed requiring all Filipino income earners to pay an income tax of 80% of
their gross income. Is the law valid?
Answer: No. Taxes which are excessive and beyond the paying capacity of the taxpayers are
confiscatory, oppressive and may result into deprivation of the taxpayer’s property without due
process.
2. Equal Protection of the Laws. According to the constitution, no person or class of persons shall
be deprived of the same protection of laws enjoyed by other persons or other classes in the same
place and in like circumstances.
 Income Taxation 5

3. Rule of uniformity and equity in taxation. The rule of taxation shall be uniform and equitable.
According to the constitution, the Congress shall evolve a progressive system of taxation.
Uniformity of taxation means that all the taxable persons or property of the same nature shall be
taxed at a uniform or same rate. There is uniformity of taxation when the tax operates with the
same force and effect on this subject wherever found.
4. Non-imprisonment for non-payment of poll tax. In the United States, a Poll tax is levied on
adults and is linked to their voting rights, it is usually fixed in amount. According to the
constitution, no person shall be imprisoned for non-payment of debt or non-
payment of a poll tax.
Example: Evander refused to pay the basic community tax of P5.00 and the
additional tax of P1.00 for every P1,000.00 of his income from business. Can
he be imprisoned for non-payment?
Answer: He cannot be imprisoned for non-payment of the basic tax of P5.00.
However, imprisonment will be sanctioned for his failure to pay the additional
community tax because it is not a poll tax.
5. Non-impairment of the obligations of contracts. According to the constitution, no law
impairing the obligations of contracts shall be passed.
Example: The government entered into a contract with Abala Lines. The condition provided that
Abala Lines shall carry government mails. In return, the former shall be exempt from the
payment of income tax. Can the Congress later on pass a law revoking such exemption?
Answer: No. since the granting of the tax exemption is based on a valid contract. The imposition
of such law would weaken the obligation of contracts. The obligation of contract is impaired or
weakened or lessened when its terms or conditions are changed by law or by treaty without the
consent of the other, thereby weakening the position of the latter.
6. Non-infringement/breach of religious freedom – According to the constitution, no law shall
be made respecting the establishment of religion, or prohibiting the free exercise thereof. The
free exercise of religious profession and worship, without discrimination or preference, shall
forever be allowed.
Example: A religious group engaged in the sale of bibles and other religious articles was
required to pay taxes on the sales of the merchandise. Is the imposition of the tax valid?
Answer: No. To require such religious group to pay taxes would impair its free exercise and
enjoyment of religious freedom and worship, as well as its rights and dissemination of religious
beliefs.
7. No appropriation for religious purposes – No public money or property shall be
appropriated, applied, paid or employed, directly or indirectly, for the use, benefit, or support of
any sect, church, denomination, sectarian institution, or system of religion, or of any priest,
 Income Taxation 6

preacher, minister, or other religious teacher, or dignitary as such, except when such priest,
preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or
government orphanage or leprosarium.
8. Exemption of religious, charitable or educational entities, non-profit cemeteries, and
churches from taxation – Charitable institutions, churches, and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and
improvements, actually, directly, and exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation. The word “exclusive” means primarily (mostly or
mainly) rather than solely.
 Who are exempt: Charitable, educational and religious institutions
 What taxes are exempt: Real Property Tax
9. Exemption of revenues and assets of non-stock, non-profit educational institutions and
donations for education purposes from taxation – All revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties.
Subject to the conditions prescribed by law, all grants, endowments, donations or contributions
used actually, directly, and exclusively for educational purposes shall be exempt from tax.
 Who are exempt: Non-stock, non-profit educational institutions
 What taxes are exempt: Income tax, Property tax, Customs Duties
10. Concurrence by a majority of all members of the Congress for the passage of a law
granting any tax exception – According to the constitution, no law granting any tax exemption
shall be passed without the concurrence of a majority of all the members of the Congress. The
Congress constituting a Quorum is not enough to grant tax exemption.
11. Power of the President to veto any particular item or items in a revenue or tariff bill –
The President shall have the power to veto/reject any particular item or items in an
appropriation, revenue or tariff bill, but the veto shall not affect the item or items to which he
does not object.
12. Non-impairment of the jurisdiction of the Supreme Court in tax cases – According to the
constitution, the Supreme Court shall have the power to review, revise, reverse, modify or
affirm on appeal or certiorari as the law or the Rules of Court may provide.
Example: The Congress enacted a law declaring that the decisions of the Court of Tax Appeals
shall be final and non-appealable for purposes of improving the tax collection of the
government. Is the law valid?
Answer: No, such law shall violate the constitutional limitation on the non-impairment of the
jurisdiction of the Supreme Court in tax cases.
 Income Taxation 7

Inherent Limitations
1. Requirement that levy must be for a public purpose
2. Non-delegation of the legislative power to tax. The people created a legislative department for
the exercise of legislative power. Thus, this power should not be delegated to any other person
or body. However, delegation of this power is permitted in the following cases:
a. Delegation to the President – The Congress may by law authorize the President to fix within
specified limits, and subject to such limitations and restrictions as it may impose tariff rates,
import and export quotas, tonnage and wharfage dues, and other duties or imports, within the
framework of the national development program of the government.
b. Delegation to local governments – Section 5, Article X of the Constitution provides that
“each local government unit shall have the power to create its own sources of revenues and
levy taxes, fees and charges, subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of the local autonomy. Such taxes, fees and charges
shall accrue exclusively to the local governments.
c. Delegation to administrative bodies. This is otherwise known as the “power of
subordinate legislation.”
3. Exemption from taxation of government entities. As a rule, the government may not tax itself
so as its corresponding agencies. However, Congress is allowed by the Philippine Constitution
from requiring the government, or any of its agencies or instrumentalities such as the Armed
Forces of the Philippines to pay taxes if it so desires
The rule is:
 Government Agencies performing governmental functions. These are tax exempt
unless expressly taxed. Examples: GSIS, PhilHealth, DepEd, BIR, Bureau of Customs, NBI
 Government Agencies performing proprietary functions. Subject to tax unless
expressly exempted. Examples: Mass Railway Transit (MRT), Light Railway Transit
(LRT), Philippine Gaming Corporation (PagCor)
4. International Comity – Comity means, mutual respect among nations, the mutual recognition
among nations of one another’s laws, customs, and institutions. As a result, the property of a
foreign state may not be taxed by another state.
Example: The United States Embassy in the Philippines is being taxed to pay customs duties on
all properties being transported to the Philippines, for use in the embassy by the ambassador
and other diplomatic officers. May the US government be required to pay?
Answer: No, under international comity the property of a foreign state or government may not
be the subject of taxation by another. This principle is based on the sovereign equality among
states under international law, by virtue of which one state cannot exercise its sovereign power
over another
 Income Taxation 8

5. Territoriality
Example: A law is passed requiring owners of lands in Indonesia to pay real property tax in the
Philippines. Is the law valid?
Answer: No. A state cannot tax a property lying outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or privilege in another state. The reason is that the
properties located within the jurisdiction of another state generally do not receive protection
from the Philippine Government. Moreover, the tax laws of particular country do not operate
beyond a its jurisdictional limits.

Meaning of Taxes
Taxes are enforced proportional and pecuniary contributions from
persons and property levied imposed by the law-making body (i.e.
legislative branch) of the state having jurisdiction over the subject of the
burden for the support of the government and all public needs.

Classification of Taxes
There are many different kinds of taxes and these can be classified according to various criteria:
1. As to Subject Matter
a. Personal Tax or Capitation or Poll Tax – Refers to that fixed amount imposed upon certain
classes of persons, or upon persons residing within the territorial jurisdiction of the state
regardless of their property, profession or occupation. Example: Community tax
b. Property Tax – Are taxes imposed on property, whether real or personal, in proportion
either to its value or in accordance with some other reasonable method of apportionment.
c. Excise Tax or Privilege Tax – Are taxes imposed on the taxpayer’s exercise or right or
privilege to perform an act such as the practice of a profession or engage in an occupation.
Example: Income tax, Value-Added tax, Percentage tax
2. As to scope or Authority
a. National Tax – Are taxes imposed by the national government. Example: Income tax,
Customs Duties, Documentary Stamp tax, Value-Added tax, Excise tax
b. Municipal or Local – Are taxes imposed by municipal corporations or local governments.
Example: Real Estate tax, Community tax, Barangay clearance Income tax, Customs Duties,
Documentary Stamp tax, Value-Added tax, Excise tax
3. As to Purpose
a. General Tax, Fiscal or Revenue – Are taxes imposed for general purpose, the proceeds of
which go to the National funds. Example: Income tax and Value-Added tax
b. Special Tax – Refers to that imposed for special purposes, the proceeds of which go to certain
special funds. Example: Travel tax and Immigration tax
 Income Taxation 9

4. As to the Subject of the Tax Liability

a. Direct Tax – Are taxes imposed upon persons directly bound to pay the tax, which cannot be
passed on or shifted to other persons for payment. Example: Income tax and Community tax
b. Indirect Tax – Are taxes imposed upon persons liable to pay said taxes but which are
permitted by law to be shifted or passed on to other persons for payment. Example: Value-
Added tax
5. As to Determination of Amount
a. Specific Tax – Are taxes imposed upon properties and rights whose amount is determined
based on weight or volume capacity or any physical unit of measurement.
Example: Excise tax on wines and liquors
b. Ad Valorem Tax – Ad Valorem is a latin term for “according to value”. Are taxes imposed
upon properties and rights whose amount is determined based on sales price or other
specified values of the properties. Example: VAT and Property Tax
6. As to Graduation or Rate
a. Proportional – Are taxes based on fixed percentage of the amount of the property, income
or other basis to be taxed. Example: Real estate tax, Value-Added tax, other Percentage Tax
b. Progressive or Graduated – Tax rate of which increases as the tax base increases or as the
tax bracket increases. Example: Gift Tax, Estate Tax, Income Tax
c. Regressive Tax – Tax rate of which decreases as the tax base increases or as the tax bracket
increases. In the Philippines, we do not have regressive taxes.

Some important Doctrines in Taxation

1. Double Taxation
2. Escape of Taxation
3. Situs of Taxation

Double Taxation
1. Direct Double Taxation. This happens when:
a. the same subject is taxed twice when it should be taxed only once; and
b. both taxes are imposed on the same purpose by the same taxing authority within the same
jurisdiction or taxing district, for the same taxable period, for the same kind or character of a
tax. If this is done, then the imposition of tax becomes legally objectionable for being
oppressive and inequitable.
2. Indirect Double Taxation. This type is allowed and is not unconstitutional. An example of this
occurs when a business tax is imposed by the municipal government prior to the issuance of
business license to a taxpayer for engaging in advertising business. His income from his
advertising business shall later be imposed income tax by the national government.
 Income Taxation 10

Escapes of Taxation
Taxpayers escape the payment of taxes through legal and illegal means which can be

Escape Tax Avoidance Tax Evasion

 Legal means of escaping the payment
Nature
of taxes
 This happens when the taxpayer
minimizes his tax liability by taking
advantage of legally available tax
Situation planning opportunities which is known
tax minimization.
 Illegal means of not complying with
applicable provisions of the law
 This occurs when the taxpayer resort to
unlawful means to lessen or to get away
with his tax liability.

 Tracking and claiming of allowable  Misrepresentation of records

deductions  Understating revenue and income
Example
 Donation to charity  Overstating expenses and loses
 Bookkeeping diligently  Fraudulent tax returns

Situs of Taxation
The Situs of taxation is the place of taxation. The rule is that the state may rightfully levy
and collect the tax where the subject being taxed has a situs under its jurisdiction. The situs of
taxation is determined by a number of factors:
1. Subject Matter or what is being taxed. He may be a person, property, an act or activity.
2. Nature or which tax to impose. It may be an income tax, an import duty or a real property tax.
3. Citizenship of the taxpayer
4. Residence of the taxpayer

The Tax Collection System

The BIR adopts the File and Pay System. The methods of collection utilized by the BIR are classified
into two major categories:
System Collection by voluntary compliance Collection by enforcement

 Refers to the act of tendering the

 This is conducted through the
payment of a self-assessed tax or is
identification of sectors or business
referred to as “voluntary payment”.
Meaning or industries, and/or segments of
This method of collection reflects the
economic activities where the degree
“Self-assessment system” under
of compliance is low
Republic Act 8424.

 The taxpayer calculates the tax by

himself or through an accountant, fills-
up his tax return, files it with the
Situation
proper tax office, and pays the tax due
thereon upon filing.
 Subsequent audit or investigation of
identified enterprises and companies
is made.
 Income Taxation 11

The Bureau of Internal Revenue (BIR)

The Bureau of Internal Revenue (BIR) functions under
the supervision and control of the Department of Finance
(DOF). The mission of the BIR is “to collect taxes efficiently and
effectively, for and at the least cost to the government, through
impartial and consistent enforcement of internal revenue
laws, and convenient and honest service to taxpayers.”
The BIR is tasked to help the government meet its target annual budget by way of tax collection.
The duties of the BIR include:
a. assessment and collection of all National taxes, fees and charges;
b. enforcement of Tax laws for forfeitures, penalties, and fines;
c. execution of judgments by the Court of Tax Appeals and other courts; and
d. implementation of the National Internal Revenue Code (NIRC) of the Philippines
All matters pertaining to Philippine Income taxation are under the administration of the
BIR headed by the Commissioner and 4 Deputy Commissioners (Assistants). For administrative
purposes, the BIR is under the executive supervision and control of the Department of Finance.
In addition the bureau through the commissioner of the BIR, has the functions of:
a. accounting for all revenues collected;
b. exercising all legal requirements that are appropriate;
c. preventing and prosecuting tax evasions and other illegal activities;
d. exercising supervision and control over its constituents; and
e. performing other functions as may be provided by law.

The Tax Payer Identification Number (TIN)

The TIN is the reference index number
issued and assigned by the BIR to each and every
person registered in its database. Once this number
is assigned to a particular taxpayer, it is non-
transferable. Only one TIN shall be assigned to the
taxpayer. The TIN comprises of a 9 to 13 digit
numeric code where the first 9 digits is the TIN
proper and the last 4 digits is branch code (in case of business entities).
The following entities and persons are required to secure the TIN:
 All persons subject to national internal revenue taxes;
 Persons required to withhold taxes on account of their income payments made to taxable
individuals or entities;
 Income Taxation 12

 Person required under the Tax Code to make, render or file a return, statement or other
document with the BIR for his proper identification;
 Persons applying for a Mayor’s permit;
 Persons applying for a business license with the Department of Trade and Industry (DTI);
 Other documents specified in the regulations.

End of Unit 1

LET’S LEARN MORE!

 Watch in Youtube:
 The Evolution of Taxation
https://www.youtube.com/watch?v=Vp0tjXsfewk
 A brief history of taxation
https://www.youtube.com/watch?v=zgffJbDe_TI
 Brief history of taxation in the Philippines
https://www.youtube.com/watch?v=g9SMUffH0_g
 Taxes: Crush course economics
https://www.youtube.com/watch?v=7Qtr_vA3Prw
 Angat pa Pinas!
https://www.youtube.com/watch?v=VDjBkXdf6TA

LET’S Do THIS!
Exercise 1 Alternative Response Type
Instruction: Write TRUE if the statement is correct and FALSE if the statement is incorrect.
1. The power of taxation can be exercised without a previous constitutional authority.
2. Taxes are not enforced contributions by the government, they are voluntary contributions of
citizens.
3. The Philippines as a sovereign state cannot exist without the aid of taxation, because taxation
is inherent in sovereignty.
4. A person cannot object to or resist from the payment of taxes solely because he did not
receive any personal benefit arising out from the tax.
5. Taxation can only be exercised for the purpose of providing funds or property to its citizens,
and not for social and economic objectives.
6. Taxes are paid only by those who are directly benefiting from the government.
7. Mr. Boboy Molley owns an Illegal drug Factory in Banday California, Philippines, He is
required to pay tax on his income.
8. The power to tax is not absolute and has limitations in the exercise thereof.
9. Taxation is a power that can be exercised by the legislature any way it pleases.
10. Taxes are in some ways dependent upon the will or consent of the person taxed.
 Income Taxation 13

Exercise 2 Alternative Response Type

Instruction: Write TRUE if the statement is correct and FALSE if the statement is incorrect.
1. Some government agencies may be taxed when expressly stated in a tax law.
2. Upon the exercise of Eminent Domain, the government can receive just compensation from
the owner of the private property taken by them for Public Purpose.
3. The properties of the Philippine embassy in the US can be taxed with Real Property Tax since
it is within their jurisdiction.
4. Generally, the power to tax can be delegated to another person or government body in the
discharge of their function.
5. All laws granting tax exemptions must be approved by a two-thirds (2/3) vote of all the
members of the congress.
6. Indirect Double Taxation is not unconstitutional.
7. The income of non-stock, non-profit educational institution is exempted from income tax.
8. Progressive Taxation is practiced here in the Philippines.
9. Ms. Thalita is working in Saudi Arabia. She earns 30 Million annually for being an OFW. Her
income is taxable in the Philippines.
10. Tax evasion is an example of a tax minimization practice.
11. Tax avoidance is illegal because the taxpayer avoids from paying the tax.
12. The levying of tax is essentially an administrative function.
13. Indirect Double Taxation is allowed by the Philippine constitution.
14. A Tax law which requires a religious group engaged in the sale of bibles and other religious
articles to pay taxes on their sales of the merchandise is invalid.
15. Tuition Fees of non-stock and profit oriented educational institution are tax exempt.

Exercise 3 Multiple Choice

Instruction: Write the letter that corresponds to the right answer.
1. Which of following statements is incorrect
a. For the exercise of the power of taxation, the state can tax anything at anytime
b. The provision of taxation in the Philippine Constitution are grants of power and not
limitations on taxing powers
c. Taxes may be imposed to raise revenues or to provide disincentives to certain activities
within the state
d. The state can have the power of taxation even if the Constitution does not expressly give it
to the power to tax
2. Which of the following statements best describes the power of taxation? The power to tax:
a. Is subject to the President’s authority
b. Can be exercise by the BIR Officials
c. Is subject to constitutional and inherent limitations
d. All of the above
3. It is a tax of fixed proportion of the value of the property with respect to which the tax is
assessed and requires the intervention of assessors or appraisers to estimate the value of
such property.
a. Specific c. Special or regulatory
b. Ad valorem d. None of the above
4. The law permits that this type of tax can be shifted or passed on to other persons for
payment.
 Income Taxation 14

a. Excise Tax c. Percentage Tax

b. Value-Added Tax d. All of the above
5. Situs of taxation is the place of taxation. Which of the statements is not true about situs?
a. Subject matter is a must to determine situs
b. Situs of persons is the residence of the taxpayer
c. Citizenship, in determining the situs, is not a factor to consider
d. None of the above
6. There is _______________ when the tax operates with the same force and effect on its subject
wherever found.
a. Equal Protection of Laws c. Uniformity of Taxation
b. Due Process d. All of the Above
7. One of the characteristic of tax is that
a. It is generally assignable c. It is generally payable in money
b. It is generally based on contract d. None of the above
8. The following institutions are exempt in the payment of real estate tax, which is not one of
these?
a. Religious Institutions c. Charitable Institution
b. Non-Government Organization d. Non-Profit Institution
e. None of the above
9. Which of the following may not raise money for the government?
a. Power of Taxation c. Police Power
b. Eminent Domain d. None of the above
10. Choose the best answer. A fundamental rule in taxation is that the property of one country
may not be taxed by another country. This is known as:
a. International Law c. International Comity
b. Reciprocity d. All of the Above
11. Which of the following is not an element of direct double taxation?
a. Two Taxes c. Same year
b. Same subject matter d. Same amount
12. No law granting any tax exemption shall passed without the concurrence of:
a. Majority of all the member of the House c. Majority of all the members present
b. Majority of all the members of the Senate d. Majority of all the members of Congress
13. Value added tax is an example of:
a. Graduated Tax c. Regressive Tax
b. Progressive Tax d. Proportional Tax
14. The government entered into a contract with Moon Telecommunications agreeing that Moon
will provide free use of its telecommunication lines to the government. In return, the
company will be exempted from paying income tax. Can the Congress later on pass a law that
all telecommunication companies will be required to pay income tax regardless of any
existing agreement?
a. No, because there is no Due Process
b. No, because of the non-impairment of obligation of contracts clause
c. No, because Moon is a government agency
d. None of the above
15. A canon of taxation which means that tax laws must be clear and concise, capable of proper
enforcement, and not burdensome, convenient as to manner and time of payment.
a. Fiscal Adequacy c. Ability-to-pay principle
 Income Taxation 15

b. Administrative Feasibility d. Theoretical Justice

16. The delegation of the legislative power to tax which is also known as the “power of
subordinate legislation.”
a. Delegation to Administrative Bodies c. Delegation to Local Governments
b. Delegation to the President d. All of the above
17. The following are constitutional limitations on the power of taxation, except one:
a. Public Purpose c. Power of the president to veto items in a revenue bill
b. Equal protection of law d. No imprisonment for non-payment of poll tax
18. A tax which is collected for special purpose?
a. Value-Added Tax c. Travel Tax
b. Income Tax d. Documentary Stamp Tax
19. This means the “ability to pay” principle:
a. Equality or Theoretical Justice c. Administrative Feasibility
b. Fiscal Adequacy d. All of the Above
20. Which of the following may not raise money for the government?
a. Power of Taxation c. Police Power
b. Eminent Domain d. None of the above
 Income Taxation 16

UNIT 3

CONCEPTS OF INCOME AND INCOME TAXATION

OBJECTIVES
At the end of the lesson, you should be able to:
1. Understand the pertinent items of gross income and allowable deductions
2. Compute tax due/payable of individual income earners correctly

LET’S LEARN THIS!

Definition of Income
Income means all wealth which flows into the taxpayer other than 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.

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

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 generally regarded as
an excise or 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.

Categories of Income and Tax Rates

1. Compensation Income – In general, the term compensation means all remuneration for
services performed by an employee for his employer under an employee and employer
relationship, unless specifically excluded by the Tax Code. Other forms of remuneration for
services include emoluments, honoraria, allowances (e.g. transportation, representation,
entertainment and the like), commissions, director’s fees, taxable bonuses.
 Compensation income earners are taxed using the New Graduated Income Tax Schedule.
Compensation income earners whose annual taxable incomes are P250,000.00 and below or
less than P21,000.00 a month are EXEMPTED from the personal income tax.
2. Business Income – Arises from self-employment or practice of profession. Self-employed and
 Income Taxation 17

professional taxpayers (SEP) whose annual taxable incomes are P250,000.00 and below are
EXEMPTED from the personal income tax.
SEPs whose annual gross receipts or sales are below the VAT threshold of 3 Million have the
option to be taxed using:
 New Graduated Income Tax Schedule or
 8% Flat tax rate in excess of P250,000.00. Should the SEP choose the 8% income tax rate,
his gross sales or receipts and other non-operating income in excess of the P250,000.00 will
be taxable by 8% and will be exempted to pay the 3% percentage tax. Starting January 1,
2019, SEPs with annual gross sales and/or receipts not exceeding P500,000.00 shall be
exempted from 3% percentage tax.
3. Passive Income – Are income derived from any activity in which the taxpayer does not
materially participate. Examples of passive income are Interests, royalties, prizes, winnings and
dividends. Passive Income are subject to a separate and final tax, these are tax rates ranging
from 5% to 25%.
Note: Any income subjected to Final tax will no longer be included in the gross income subject to
the Graduated Income Tax rates.
4. Capital Gains
a. Capital Gains from sale of Shares of Stocks, not traded through local stock exchange –
Taxed at 15% Final Tax on net capital gains.
b. Capital Gains from sale of Real Property – Taxed at 6% Final Tax on Gross Selling price or
current Fair Market Value (FMV) whichever is higher.
5. Fringe Benefits – Means any good, service or other benefit furnished or granted by any
employer in cash or in kind in addition to basic salaries, to an individual employee (except rank-
and-file) under an employee-employer relationship. Fringe benefit tax (FBT) under the TRAIN
law is 35% on the grossed-up monetary value of the benefit granted.

General Procedures in Determining Income Tax

Step 1 – Identify the Taxing Entity to which the tax computation formula applies. Taxpaying
entities include: individuals, corporations, private partnerships, and estates.
 Note 1: Income from sole Proprietorships and General Professional Partnerships (GPPs) are
NOT taxed directly to them, rather their income is taxed directly to their owners.
 Note 2: The Citizenship and Residency of the taxing entity is considered. For individuals who are
Resident Citizens, all income earned within and outside the Philippines are SUBJECT to tax. For
Aliens/Foreigners or Non-Residents, only their Income within the Philippines IS SUBJECT to tax.
Their Income outside the Philippines IS NOT SUBJECT to tax.
Step 2 – Determine the taxpayer’s Gross Income. Gross Income is computed as follows:
 Merchandising or Manufacturing = Gross/Net Sales less Cost of Sales/Cost of Goods Sold
 Income Taxation 18

 Service-oriented = Gross Receipts less Cost of Service

Step 3 – Determine the Deductions and Expenses that can be deducted in computing the
taxpayer’s taxable income.
Step 4 – Apply the appropriate Tax Rate to the taxpayer’s taxable income to compute the Tax Due.
Step 5 – Subtract any applicable “Tax Credits or Payments” from the taxpayer’s Tax Due in finding
the Tax Payable.
Step 6 – Increase the tax by “penalties and interests” to obtain the Total Amount Payable.

Taxing Entities or Persons

In Income Taxation, the subject is a person, which includes both natural and juridical, on whom the
levy is made, while the object is the income or the right to earn income.
1. Natural or Individual Person – Pertains to human beings
2. Juridical Person – Pertains to “an artificial being created by the operation of Law”. Examples:
Corporations, Partnerships, and Estates and Trusts.

Taxation of Individuals
Generally, the state has the right to tax the following:
 All Citizens, whether residing in the state or not;
 All its Residents; and
 In certain specified cases, even those who are neither citizens nor residents.

Kinds of Individual Taxpayers

1. Citizens of the Philippines, who may be:
a. Resident Citizens – Filipinos residing (most of the time) in the Philippines.
Note: A Resident Citizen is taxed on all incomes derived from sources within and outside the
Philippines in a given taxable year.
b. Non-resident Citizens – Filipinos not residing in the Philippines.
Note: A Non-resident citizen is taxed only on income derived from sources within the
Philippines in a given taxable year, before and after she departed there from.
Non-resident Citizens are Filipinos who are presently abroad as an:
 Overseas Filipino Worker (OFW),
 Immigrant, or
 One with a permanent job abroad whose employment requires him/her to be physically
present abroad most of the time during the taxable year, with the intention of going back
to the Philippines after his/her contract or work expires, is deemed a non-resident citizen.
2. Aliens or Foreigners, who are:
a. Resident Alien – Is a foreign individual who comes into the Philippines for a purpose, which
requires an extended stay* and makes the Philippines his/her temporary home.
 Income Taxation 19

* To be classified as a resident alien, he/she should have stayed for more than a year.
Note: An alien whether resident or not, is taxable only on income derived from sources within
the Philippines.
b. Non-resident Alien Engaged in Trade or Business (NRAETB) in the Philippines – A
foreign individual – he/she is a tourist, but maintains and operates a business in the
Philippines.
Note: If a foreigner who stays for more than 180 days during any Calendar Year – he/she is
deemed a NRAETB in the Philippines. The length of stay (i.e. 180 days) is a necessary criterion
to classify him/her as NRAETB.
c. Non-resident Aliens Not Engaged in Trade or Business (NRANETB) in the Philippines -
A foreigner who comes to the Philippines as a tourist and stays in the Philippines for not more
than 180 days in a calendar year.
Note: He/she is not authorized to do business in the Philippines, but becomes a taxpayer the
moment he/she makes a business transaction for profit.
3. Special Individual tax payers, these are foreigners employed by:
a. Multinational Corporations;
b. Offshore Banking Units (OBUs); and
c. Foreign Petroleum Contractors and subcontractors
 These individuals are now taxed using the New Graduated Income Tax schedule, the
same with other individual taxpayers. The TRAIN law repealed the provision that
these individuals will be taxed a preferential tax rate.

Summary for Taxation of Individuals

Individual Requirement Taxed
1. Resident Citizen Resides within the Philippines most of the time Within & Outside
2. Non-resident Citizen Resides outside the Philippines most of the time Within Only
3. Resident Alien Resides within the Philippines for more than 1 Year Within Only
4. Non-resident Alien ETB Resides within the Philippines for more than 180 Days Within Only
5. Non-resident Alien NETB Resides within the Philippines for 180 Days or less Within Only
6. Special Individual Taxpayers Aliens Employed by Foreign Corporations Within Only

Formula for Computing Taxable Income

Gross Income XXX
Less: Allowable Deductions XXX
Taxable Income XXX

Under the TRAIN law, there are no personal and additional exemption in arriving at the individual’s
taxable income whether the taxpayer is single, married, head of the family, with or without
dependents.
 Income Taxation 20

Gross Income
Means all income derived during the taxable year by a taxpayer from whatever source, whether
legal or illegal, including (but not limited to) the following items:
1. Compensation for services, in whatever form paid, such as fees, salaries, wages, commissions and
similar items;
2. Gross income derived from the conduct of trade or business, or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes & Winnings;
10. Pensions; and
11. Partners’ distributive share from the Net Income of the General Professional Partnership.

Allowable Deductions
These are items or amounts which the Tax Code allows to be deducted from the gross income of a
taxpayer in order to arrive at his taxable income, but only authorized expenses during the taxable
year.
1. Deductions from compensation income of individual taxpayers. An individual taxpayer
earning only compensation income cannot deduct his personal and living expenses for the
purpose of computing the Taxable Income.
2. Deductions from business and/or professional income of individual taxpayers. An individual
taxpayer may opt for:
a. Itemized Deductions (i.e. actual business expenses). Examples: Salaries, wages, and other
forms of compensation for personal services; losses; bad debts; depreciation; depletion;
charitable contributions; research and development; rentals; insurance; interest paid or
incurred, supplies, maintenance and other general and administrative expenses;
b. Claim the 40% Optional Standard Deductions (OSD) in lieu of his business expenses.

Classification of Expenses
1. Non-business expenses – This includes personal, family and living expenses of the taxpayer.
These are NOT allowed to be deducted for the purpose of computing the taxable income.
2. Business expenses – are the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or connected to the operations of the business or trade or in the
exercise of profession.
 Income Taxation 21

Rules for Claiming Itemized Deductions

Itemized deduction is a deduction of individually identified expenses. Business expenses are
deemed deductible only if they comply with all the conditions for deductibility which are as follows:
1. They are incurred during the taxable year;
2. They are connected to trade, business or profession;
3. They are considered ordinary and necessary business expenses;
4. Not against public order or public policy;
5. Duly substantiated by receipt or supporting documents; and
6. If any, the corresponding withholding taxes must have been paid .

Optional Standard Deduction (OSD)

OSD is a deduction from the gross income in lieu of actual business expenses (e.g. cost of
sales/service and operating expenses). OSD is equivalent to forty percent (40%) of Gross
Sales/Revenues/Receipts/Fees. Some features of the OSD are the following:
1. OSD can be claimed by persons engaged in trade or business or in the practice of a profession,
except individuals earning purely compensation income;
2. Individuals who have chosen OSD are not required to submit with their income tax returns any
financial statement, but they should keep the corresponding records pertaining to their gross
income.

Computing for Optional Standard Deduction:

1. 40% of gross sales, in the case of merchandising and manufacturing concern business
2. 40% of gross receipts or revenues in the case of service concern business

Summary for computing Taxable Income

Individual
1. Resident Citizen
2. Non-resident Citizen
3. Resident Alien
4. Non-resident Alien ETB
5. Non-resident Alien NETB
6. Special Individual Taxpayers
Requirement
All Incomes (Within & Outside) (minus) All Allowable Deductions (Within &
Outside)
Income (Within Only) (minus) Allowable Deductions (Within Only)
Income (Within Only) (minus) Allowable Deductions (Within Only
Income (Within Only) (minus) Allowable Deductions (Within Only)
Income (Within Only) But cannot claim Allowable Deductions
Income (Within Only) But cannot claim Allowable Deductions

Illustrative Problem
Mr. Bayani Agbayani owns several businesses inside and outside the Philippines. The following are
his data for the year 2021.
Gross Sales from Business in the Phil. 1,420,000.00
Cost of Sales from Business in the Phil. 620,000.00
 Income Taxation 22

Other Income in the Philippines (non-business related) 46,000.00

Operating Expenses of Business in the Philippines 455,000.00
Gross Sales from Business in Malaysia 870,000.00
Cost of Sales from Business in Malaysia 420,000.00
Operating Expenses of Business in Malaysia 186,000.00
Premium payments on health & hospitalization 2,400.00

Compute the Taxable Income using Itemized Deduction of Mr. bayani if he is a:

1. Resident Citizen
2. Non-resident Citizen
3. Resident Alien
4. Non-resident Alien ETB
5. Non-resident Alien NETB

Answer # 1 (Resident Citizen)

Gross Income from Business (Phil.) P 800,000.00 (1,420,000.00 – 620,000.00)
Other Income (Phil.) 46,000.00
Gross Income Business (Foreign) 450,000.00 (870,000.00 – 420,000.00)
Total Gross Income 1,296,000.00
Less: Operating Expenses (Phil.) 455,000.00
Operating Expenses (Foreign) 186,000.00 641,000.00
Taxable Income P 655,000.00

Answer # 2 (Non-Resident Citizen)

Gross Income from Business (Phil.) P 800,000.00 (1,420,000.00 – 620,000.00)
Add: Other Income (Phil.) 46,000.00
Less: Operating Expenses (Phil.) 455,000.00 (870,000.00 – 420,000.00)
Taxable Income P 391,000.00

This computation applies also to:

 Resident Alien, and
 Non-resident Alien Engaged in Trade or Business (NRAETB)

Answer # 5 (Non-Resident Citizen NETB)

Gross Income from Business (Phil.) P 1,420,000.00
Add: Other Income (Phil.) 46,000.00
Taxable Income P 1,466,000.00

Note 1: Premium payments on hospitalization insurance are no longer considered a deduction to gross
income under the TRAIN law.
 Income Taxation 23

Note 2: Only the Resident citizens are taxed from sources within and outside the Philippines, all others are
taxed from within only.
Note 3: A non-resident alien not engaged in trade or business is not allowed to claim or deduct allowable
deductions (e.g. cost of sales/receipts and operating expenses) in determining his taxable income.

Illustrative Problem (Continuation)

Using the same information of Mr. Bayani, assume that he opt to use the Optional Standard
Deduction (OSD) instead of the itemized deduction for his business expenses.
Compute the Taxable Income using Optional Standard Deduction (OSD) of Mr. bayani if he is a:
1. Resident Citizen
2. Non-resident Citizen
3. Resident Alien
4. Non-resident Alien ETB
5. Non-resident Alien NETB

Answer # 1 (Resident Citizen)

Gross Sales from Business (Phil.) P 1,420,000.00
Other Income (Phil.) 46,000.00
Gross Sales from Business (Foreign) 870,000.00
Total Gross Sales/Income 2,336,000.00
Less: OSD - Phil. (1,420,000.00 x .40) 568,000.00 (see explanation page 25-OSD)
OSD - For. (870,000.00 x .40) 348,000.00 ____ 916,000.00
Taxable Income P 1,420,000.00
Answer # 2 (Non-Resident Citizen)
Gross Sales from Business (Phil.) P 1,420,000.00
Other Income (Phil.) 46,000.00
Total Gross Sales/Income 1,466,000.00
Less: OSD - Phil. (1,420,000.00 x .40) 568,000.00
Taxable Income P 898,000.00

This computation applies also to:

 Resident Alien, and
 Non-resident Alien Engaged in Trade or Business (NRAETB)

Answer # 5 (Non-Resident Citizen NETB)

Gross Sales from Business (Phil.) P 1,420,000.00
Add: Other Income (Phil.) 46,000.00
Taxable Income P 1,466,000.00
Note: A non-resident alien not engaged in trade or business is not allowed to use Optional Standard
Deduction (OSD) to determine his taxable income.
 Income Taxation 24

Summary of Tax Rates of Individual Taxpayers

Resident Non-Resident Resident Non-Resident Alien
TYPE OF INCOME
Citizen Citizen Alien Engaged in Bus. Not Engaged
New Graduated New Graduated
On TAXABLE INCOME New graduate rates under TRAIN Income Tax Income Tax
schedule schedule
PASSIVE INCOME on Interest,
Final Tax 5% to Final Tax 5% to
Royalties, Prices and Other Final Tax 5% to 25%
25% 25%
winnings
PASSIVE INCOME on Cash or
6%, 8% and 10% Final Tax 20% Final Tax 25%
Property Dividends
CAPITAL GAIN Sale of Shares of
Stocks not traded in a stock Final Tax 15% Final Tax 15%
exchange
CAPITAL GAIN Sale of Real
6% on Gross Selling Price 6% on Gross Selling Price
Property

The Tax Due

We use the Taxable Income amount as the tax base upon which the tax rate is applied to arrive at
the Tax Due.
To compute for the Tax Due, the Taxable Income of the tax payer will be multiplied by the
appropriate tax rates. Under the TRAIN Law, the tax due on compensation income and
business/professional income is computed using the NEW GRADUATED INCOME TAX SCHEDULE
under revised section 24(A)(2)(a) of the tax code. The following rules shall apply:

A. For purely Compensation income earners

New Graduate Income Tax Schedule
Not over P250,000.00
Over P250,000.00 but not over P400,000.00
Over P400,000.00 but not over P800,000.00
Over P800,000.00 but not over P2,000,000.00
Over P2,000,000.00 but not over P8,000,000.00
Over P8,000,000.00
0%
20% of the excess over P250,000.00
P30,000.00 + 25% of the excess over P400,000.00
P130,000.00 + 30% of the excess over P800,000.00
P490,000.00 + 32% of the excess over P2,000,000.00
P2,410,000.00 + 35% of the excess over P8,000,000.00

B. For purely Self-employed and professionals

If gross sales/receipts and other non-operating income do not exceed the P3,000,000.00 VAT
threshold, the taxpayer may opt to be taxed at:
 8% of gross sales/receipts and other non-operating income in excess of P250,000.00 in lieu
of the Graduated Income Tax rates and percentage tax; or
 New Graduate Income Tax schedule in (A) above.
 Income Taxation 25

Illustrative Problem (Continuation)

Using the same information on Mr. Bayani’s taxable income computed using itemized deduction,
compute his tax due using the New Graduated Income Tax rates under the TRAIN law if he is a:
1. Resident Citizen
2. Non-resident Citizen
3. Resident Alien
4. Non-resident Alien ETB
5. Non-resident Alien NETB
6. Resident Citizen (assuming he signified to the BIR to be taxed using the 8% income tax rate)

Answer # 1 [Resident Citizen - Taxable Income is P655,000.00: Over 400,000.00 bracket]

Fixed Rate P 30,000.00
Excess Over 400K (25% Rate) 63,750.00
Tax Due 93,750.00

Answer # 2 [Non-resident Citizen - Taxable Income is P391,000.00: Over 250,000.00 bracket]

Fixed Rate P 0.00
Excess Over 250K (20% Rate) 28,200.00
Tax Due 28,200.00

Answer # 3 [Resident Alien - Taxable Income is P391,000.00: Over 250,000.00 bracket]

Fixed Rate P 0.00
Excess Over 250K (20% Rate) 28,200.00
Tax Due 28,200.00

Answer # 4 [NRAETB Taxable Income is P391,000.00: Over 250,000.00 bracket]

Fixed Rate P 0.00
Excess Over 250K (20% Rate) 28,200.00
Tax Due 28,200.00

Answer # 5 [NRANETB - Taxable Income is P1,466,000.00: Over 800,000.00 bracket]

Fixed Rate P 130,000.00
Excess Over 800K (30% Rate) 199,800.00
Tax Due 329,800.00

Answer # 6 [Resident Citizen - Gross Sales & other income is P2,336,000.00, deducted by
250,000.00]
Gross Sales & Other Inc in excess of 250K P 2,086,000.00 (2,336,000.00 - 250,000.00)
Multiplied by 8% X .08
Tax Due 166,880.00
 Income Taxation 26

Note 1 Only those SEP whose annual gross receipts or sales and other income are below the VAT
threshold of 3 Million can exercise the 8% flat tax rate option. Moreover, this option is not available to
a VAT-registered taxpayer regardless of the amount of his gross receipts or sales and other income.
Note 2 The taxpayer must signify this intention to avail the 8% income tax rate option to the BIR in the
1st quarter percentage and/or income tax return or on the initial quarter return of the taxable year after
the commencement of a new business/practice of profession.

C. Mixed income earners shall be taxed as follows:

 On their compensation income – New Graduated Income Tax schedule (A) above;
 On their income from the conduct of trade or business or practice of profession:
 If below the VAT threshold - 8% of gross sales/receipts and other non-operating income
in lieu of the New Graduated Income Tax schedule in (A) above or percentage tax or, at
the option of the taxpayer;
 If exceeding the VAT threshold - at New Graduated Income Tax schedule in (A) above.

Illustrative Problem
The following information relates to Mr. Leo Ong during the taxable year 2021. Leo is a Filipino
citizen.
He received an annual salary net of mandatory benefits of P540,000.00 as the chief legal council
in a government office. He also owns a law firm with a gross receipts of P2,500,000.00 and related
operating expenses of 1,235,000.00.
He is married and has two children.
Compute his taxable income and tax due for being a mixed-income earner in the following cases:
1. Leo opted to use the New Graduated Income Tax schedule for both of his income
2. Leo opted to use the New Graduated Income Tax schedule for his compensation income and 8%
for his professional income

Answer # 1
Annual Salary (net of mandatory benefits) P 540,000.00
Gross Receipts from practice of Profession 2,500,000.00
Total Gross Income 3,040,000.00
Less: Operating Expenses 1,235,000.00
Total Taxable Income P 1,805,000.00

Fixed Rate P 130,000.00

Excess Over 800K (30% Rate) 301,500.00
Total Tax Due 431,500.00
 Income Taxation 27

Answer # 2
Annual Salary (net of mandatory benefits) P 540,000.00
Taxable compensation income P 540,000.00

Fixed Rate P 30,000.00

Excess Over 400K (25% Rate) 35,000.00
Tax Due on compensation income 65,000.00

Gross Receipts P 2,500,000.00

Multiplied by 8% X .08
Tax Due on self-employment income 200,000.00
Total Tax Due 265,000.00

Note: The amount of P250,000.00 is no longer allowed to be deducted in the taxpayer’s self-
employment income in arriving at the Tax due since such amount is already deducted in
computing his taxable compensation income.

End of Unit 3

LET’S LEARN MORE!

 Watch in Youtube:
 Which countries have the highest taxes?
https://www.youtube.com/watch?v=SWwy7EfxlS0
 The Progressive Income Tax: A Tale of Three Brothers
https://www.youtube.com/watch?v=S6HEH23W_bM

LET’S Do THIS!
Exercise 1 Computation
Compute the Tax Due using the New Graduated Income Tax Schedule for the following Taxable
Income below:
1. 3,502,904.00
2. P8,589,000.00
3. 1,492,590.00
4. P415,590.00
5. 5,569,960.00
6. P250,000.00
7. P689,005.00
8. P850,490.00
 Income Taxation 28

9. P800,000.00
10. P198,000.00

Exercise 2 Problem Solving

Instruction: Compute what is required in the problem and show your solutions.
The following are the data of Mr. Mark Dullano during the taxable year 2021.

Source of Income PHILIPPINES ABROAD

Gross Sales 1,685,000.00 845,900.00
Cost of Sales 616,400.00 475,910.00
Operating Expense 149,850.00 116,050.00
Other Income (Non-business 46,500.00 0.00
related)

Required: Compute the Taxable Income using itemized deduction of Mr. Mark Dullano if he is a:
a) Resident Citizen (using Optional Standard Deduction)
b) Resident Citizen (using Itemized Deduction)
c) Non-resident Alien Engaged in Trade or Business (using Itemized Deduction)
d) Resident Alien (using Optional Standard Deduction)
e) Non-resident Alien Not Engaged in Trade or Business (using Itemized Deduction)

Exercise 3 Problem Solving

Instruction: Compute what is required in the problem and show your solutions
Mr. Butch Chokoy is a Filipino, he received an annual salary (net of mandatory benefits) of
P440,000.00 as a medical technologist in a provincial hospital in Batangas. He also owns a Piggery
business with a gross sales of P1,589,000.00 and related cost of sales and business expenses of
P603,030.00. Compute his taxable income and tax due if:
1. Mr. Chokoy opted to use the New Graduated Income Tax schedule for both of his income
2. Mr. Chokoy opted to use the New Graduated Income Tax schedule for his compensation income
and 8% tax rate for his business income

Exercise 4 Problem Solving

Instruction: Compute what is required in the problem and show your solutions.
The following information relates to Mr. Adjie Segovia, a business man for the taxable year 2021.
He owns a fruit stand business and a karaoke bar & restaurant in Cavite, Philippines and a coffee
shop business in Taiwan.
The total gross sales of his fruit stand business amounted to P580,000.00, while his karaoke bar &
restaurant in Cavite had a gross sales of P588,125.00. The combined cost of sales of the two
businesses is 359,960.00 and related operating expenses of the two businesses is P257,890.00.
 Income Taxation 29

His coffee shop business in Taiwan had a gross sales of P567,904.00, cost of sales of 213,000.00
and operating expenses of P101,930.00.
He is married to Cherry a Filipina. They four (4) dependents.
Required: Compute for the following:
a. The Taxable Income and Tax Due using itemized deduction of Adjie if he is a Filipino Citizen who
stays most of the time during the taxable year.
b. The Taxable income and Tax due using itemized deduction of Adjie if he is an Indonesian who
stayed for 200 days in the Philippines
c. The Taxable Income and Tax due using itemized deduction of Adjie if he is an Australian who
stayed for one month and 20 days in the Philippines
d. The Taxable Income and Tax due using itemized deduction of Adjie if he is an OFW and he has a
new baby named Leoric and his son Noel turned 21 this year.
e. The Taxable Income and Tax due of Adjie if he is a resident citizen but he opt to use the Optional
Standard Deduction (OSD) in lieu of the itemized deduction for his business expenses.

Exercise 5 Problem Solving

Instruction: Compute what is required in the problem and show your solutions
Mr. Carl August owns a Pharmacy and an apartment in the Philippines. He also owns a minibar in
Wuhan China.
Gross Sales from Business in the Philippines 1,560,000.00
Rental Income 56,000.00
Other Income in the Philippines (non-business related) 37,667.00
Cost of Sales from Business in the Philippines 485,000.00
Operating Expenses of Business in the Philippines 211,211.00
Gross Sales from Business in China 511,100.00
Cost of Sales from Business in China 222,555.00
Operating Expenses of Business in China 76,235.00
Required: Compute the Taxable Income using Itemized Deduction and Tax Due of Mr. August is:
a. Resident Citizen
b. Non-resident Citizen
c. Resident Alien
d. Non-resident Alien ETB
e. Non-resident Alien NETB
f. Resident Citizen (assuming Mr. August opted to use the OSD instead of the itemized deduction)
g. Resident Alien (assuming Mr. August opted to use the OSD instead of the itemized deduction)
h. Resident Citizen (assuming Mr. August opted to use the 8% flat tax rate)