SELF-PACED LEARNING MODULE

COLLEGE DEPARTMENT

MODULE 1
Subject:

INCOME TAXATION

AISAT COLLEGE – DASMARIÑAS, INC.

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 Unit Income Taxation
Module Introduction to Taxation
AE26-IT Income Taxation Units: 3 Page |2

INFORMATION SHEET PR-1.1.1

“INTRODUCTION TO INCOME TAXATION”

DEFINITION OF TAX

Taxes are revenue of the government that funds government expenditures and programs.

TAXATION

Taxation is the imposition of a mandatory levy on the citizens and/or the businesses of a country by
their government. In almost every country, the government derives a majority of its revenues for
financing public services from taxation. Most individuals will feel the impact of quite a number of taxes
during their lifetimes. In addition, taxes have become a powerful instrument for policymakers around
the world to use in attaining economic and social goals.

All earnings citizens of the Philippines, whether from compensation or business, are required to pay
taxes.

I. Principles of Taxation
• Governing tax law in the Philippines is the National Internal Revenue Code of 1997. The Bureau of
Internal Revenue (BIR) is the primary implementing agency of this law.
• Taxation is the process by which the government collects revenue in order to pay for its expenses.
• Income tax is defined as the tax on the net income or the entire income realized in one taxable year.

Who are required to pay income tax in the Philippines? (Section 23 of the National Internal Revenue
Code [NIRC] of 1997)

o A citizen of the Philippines, living in the Philippines, is taxable on all income earned inside and
outside the Philippines;
o A non-resident citizen is taxable only on income earned in the Philippines; - An OFW is taxable
only on income earned in the Philippines.
o A foreigner living in the Philippines is taxable only on income earned in the Philippines.
o A domestic corporation is taxable on all income derived from sources inside and outside the
Philippines; and
o A foreign corporation is taxable only on the income derived inside the Philippines.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

QUARTER MODULE 1st
1 1 Meeting MS. EMERITA S. MERCADAL MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Income Taxation
Module Introduction to Taxation
AE26-IT Income Taxation Units: 3 Page |3

TIP: Philippine individual income tax is progressive. The tax rate increases as the tax base increases
which means that tax payers with more capacity to pay will pay more taxes.

II. List of sources of gross income: (NIRC 1997 Chapter 6 Section 32 A)

• Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,
commissions, and similar items;
• Gross income derived from the conduct of trade or business or the exercise of a profession;
• Gains derived from dealings in property; (Note: subject to 6% capital gains tax for individuals and for
corporation if land and building is not used in business)
• Interests; (Note: generally subject to 20% final withholding tax)
• Rents;
• Royalties; (Note: generally subject to 20% final withholding tax,10% if from books and literary
works)
• Dividends; (Note: generally subject to 10% final withholding tax for individuals, tax exempt for
corporation)
• Annuities;
• Prizes and winnings; (Note: generally subject to 20% final withholding tax, except those that are tax
exempt based on specific criteria in the law)
• Pensions; and
• Partner's distributive share from the net income of the general professional partnership.

TIPS:
 The list of gross income enumerates the sources of income for both individuals and businesses.
Except for compensation and income derived from trade or business, other income sources are
generally subject to final withholding tax on passive income. These income sources are
subjected to regular income tax rate only if the source did not meet the exact specifications of
income subject to final tax as expressed in the law.

 There is a misconception that individual income taxation is about compensation income. But
this is not true. An individual may be generating income from compensation (as an employee)
and business (for part time services or consultation services). Also, an individual may also be
generating solely business income if his or her business is legally organized as a sole
proprietorship or a general professional partnership. In such cases that business income is part
of an individual tax payer’s income, the tax rate is based on the individual’s progressive income
tax rate.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

QUARTER MODULE 1st
1 1 Meeting MS. EMERITA S. MERCADAL MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Income Taxation
Module Introduction to Taxation
AE26-IT Income Taxation Units: 3 Page |4

III. Compensation Income

• Employed individuals that earn compensation income pay their income taxes
monthly. Employers withhold the income tax of their employees from their monthly
gross income and remit these sums to the BIR.
• All individual taxpayers are granted a personal exemption of P 50,000. Additional
exemptions of ₱ 25,000 are given for each qualified dependent but only up to four
dependents. For husband and wives with children, only one spouse can claim the
additional exemption. The husband is deemed head of the family and will claim the
deduction unless he explicitly waves his right in favor of his wife.
• Withholding income tax for employees:
- Employers are required by law to withhold income tax dues from their
employees’ salary.
- It is implemented because employees might not have sufficient cash to pay
for their income tax dues if aggregated to a one time annual payment.
- The withholding tax deduction is computed based on the employee’s gross
compensation (net of mandatory contributions to SSS or GSIS, Philhealth
and Pag-ibig Fund), tax status, timing of compensation payments and using
the published BIR withholding tax table.
• Income tax is computed at the end of the year based on all compensation income
derived during the year.
- Taxable income is computed after deducting personal and additional
exemptions.
- Applicable tax rate is applied on the taxable income to get the tax due.
- The total income tax withheld by the employer is deducted from the tax
due to get remaining tax liability by the employee.
• Taxpayers who derive their income solely from compensation are required to file
BIR Form 1700 as their income tax returns. However, to give relief to these
taxpayers, the employee may present BIR Form 2316 as their income tax return. BIR
Form 2316 is a statement issued by the employer and signed by the employee but
not filed with the BIR. This is referred to as substituted filing.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

QUARTER MODULE 1st
1 1 Meeting MS. EMERITA S. MERCADAL MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Income Taxation
Module Introduction to Taxation
AE26-IT Income Taxation Units: 3 Page |5

IV. Business Income

• The tax payments of a business organized as a sole proprietorship are made in the name of its
owner. The owner is considered an individual taxpayer who derived income from business. He is
required to file BIR Form 1701.
• Businesses may settle their income tax liabilities and submit their income tax returns (tax form)
to the government three months and fifteen days from the close of the year. For a business that follows
a calendar year, the date of settlement is April 15.
- Some businesses pay income tax on a quarterly basis based on their quarter-end income.
Quarterly payments are due sixty days following the close of the first three quarters of the year.
Two approaches for the computation of income tax for the business:
- Itemized deduction. Use the itemized expenses in the income statement. The business should
have a complete set of accounting books and supporting receipts for the deductions that were itemized
on the tax form.
- Optional standard deduction scheme. Deductions are up to a maximum of 40% of “gross
receipts”. “Gross receipts” is equal to net sales plus other taxable income. This means that the business
taxable income is equivalent to 60% of gross receipts.
• “Mixed Income Earner” is a compensation-earner who at the same time is engaged in business
or practice of profession. A taxpayer deriving mixed income will also use BIR Form 1701.

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

QUARTER MODULE 1st
1 1 Meeting MS. EMERITA S. MERCADAL MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Income Taxation
Module Introduction to Taxation
AE26-IT Income Taxation Units: 3 Page |6

SELF-CHECK QUESTIONS PR-1.1.1.

“INTRODUCTION TO TAXATION “

Directions:

A. Identification: Answer the following questions based on how you understand the topic
discussed.

____________________ 1. Revenue of the government that funds government expenditures and

programs.

____________________ 2. Process by which the government collects revenue in order to pay for its
expenses.
____________________3. Defined as the tax on the net income or the entire income realized in one
taxable year.

____________________ 4. Any lawful organization that seeks profit by providing needed goods and
services

____________________5. A compensation-earner who at the same time is engaged in business or

practice of profession

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

QUARTER MODULE 1st
1 1 Meeting MS. EMERITA S. MERCADAL MR. WILBERT A. MAÑUSCA
Subject Teacher School Director
 Unit Income Taxation
Module Introduction to Taxation
AE26-IT Income Taxation Units: 3 Page |7

SELF-CHECK QUESTIONS PR-1.1.1.

“INTRODUCTION TO TAXATION “

Directions:

A. Identification: Answer the following questions based on how you understand the topic
discussed.

TAXES _ 1. Revenue of the government that funds government expenditures and programs.

TAXATION 2. Process by which the government collects revenue in order to pay for its
expenses.

INCOME TAX 3. Defined as the tax on the net income or the entire income realized in one
taxable year.

BUSINESS 4. Any lawful organization that seeks profit by providing needed goods and services

MIXED INCOME EARNER 5. A compensation-earner who at the same time is engaged in business or
practice of profession

SUBJECT TEACHER: APPROVED FOR IMPLEMENTATION:

QUARTER MODULE 1st
1 1 Meeting MS. EMERITA S. MERCADAL MR. WILBERT A. MAÑUSCA
Subject Teacher School Director