INCOME AND

BUSINESS TAXATION
DETERMINING INCOME TAX DUE FOR INCOME
DERIVED FROM COMPENSATION
PRE-ASSESSMENT
TEST
 PRE-ASSESSMENT TEST
1. Taxation is the process by which our government raises income to pay its necessary
_________.
a. Taxes c. Income
b. Expenses d. Asset

2. This is a kind of income received by employees working in different companies. This is

often in the form of salaries, bonuses, and allowances.
a. Police power c. Compensation income
b. Passive income d. Gross Income

3. The primary purpose of taxation is to provide the proper needed to run the
government.
a. Expense c. Assets
b. Compensation d. Funding

4. This is the power of the government to take private property, upon payment of
just compensation, to be used for a public purpose.
a. Police power c. Administrative Feasibility
b. Eminent Domain d. People Powe
5. The power of the government to collect taxes that will be used to finance the different projects
needed by the people.
a. Police Power c. Administrative Feasibility
b. Eminent Domain d. People Power

6. These are amounts that can be deducted to certain individuals from their gross income
before it will be subjected to the income tax.
a. Income tax c. Personal Exemption
b. Eminent Domain d. Compensation

7. The burden of taxation should be proportionate to the ability of the taxpayer to pay it. What
principle is this?
a. Administrative Feasibility c. Theoretical Justice
b. Fiscal Adequacy d. None of the above

8. This is the power of our government to make laws that will promote public health,
morals, safety, and welfare of the people.
a. Police power c. Administrative Feasibility
b. Eminent Domain d. People Powe
9. He or she is a citizen of a foreign country but resides here in the Philippines during the taxable
year.
a. Resident Alien
b. Non-resident Alien
10. He or she is a citizen of a foreign country and does not reside here in the Philippines.
a. Resident alien
b. Non-resident alien
LESSON
OBJECTIVES
The students should be able to

01 differentiate between gross income and

taxable income.

The students should be able to define

02 key tax terms such as income,

deductions, credits, and exemptions.

03 The students should be able to define

compensation income.
INTRODUCTION
INTRODUCTION
It is often quoted that there are only two permanent
things in this world, change and taxes. Paying taxes is one
of the basic responsibilities of every individual. In this
lesson, you will be get a bird’s eye view on one of the
important powers of our government.

According to Benjamin Franklin, nothing is certain in this world

except death and taxes. Just like death, we can’t avoid paying
taxes. For example, in buying your daily necessities, you are
already paying taxes in the form of value added tax. If you are
an employee, you have to pay your withholding taxes. If you
own a business, you will have to pay your income taxes.
 TAXATION
Just like in an organization, people are important in the government. The principle why individuals
create business is not only for profit motive but to provide the necessity of the people. In this sense,
businesses and individuals make economic progress. However, for the government to continuously
provide the long-term economic security for these businesses, government needs funds to support
projects for the welfare of the people. And one way to make funds is through taxation.
DEFINITION OF
TAXATION
"Taxation is the process by which our government, through
our lawmakers, raises funds to pay its necessary expenses."
(Beticon, Domingo and Yabut, 2016)

Our Congress, which is composed of the House of Senate

and House of Representatives, is the lawmaking body who
enacts tax laws.
 THREE INHERENT
POWERS OF THE
GOVERNMENT
1. EMINENT DOMAIN 2. POLICE POWER
It is the power of the government It is the power of the government
to take private property, upon to make laws that will promote
payment of just compensation, to public health, morals, safety, and
be used for a public purpose. welfare of the people.
3. TAXATION
It is the power of the government
to collect taxes that will be used
to finance different projects
needed by the people

Example: If the govemment sees that a

property or a site is needed for the
construction of a public road or public
hospital, they can pay for just
compensation for that said property.
 ESSENTIAL
CHARACTERISTICS OF TAX
1. IT IS AN ENFORCED CONTRIBUTION
Tax is not voluntary; however, people are required
to pay when the capacity is seen.
2. IT IS LEVIED BY THE LAW-MAKING BODY
In the Philippines, that is the Congress who
enacts tax laws.
3. IT IS PROPORTIONATE IN CHARACTER
The Ability to Pay principle applies. The rich
citizens should pay more than the ordinary citizens.
 ESSENTIAL
CHARACTERISTICS OF TAX, CONT.
4. IT IS GENERALLY PAYABLE IN MONEY.
an exaction to be discharge alone in money which must be
in legal tender.

5. IT IS IMPOSED FOR THE PURPOSE OF RAISING REVENUES.

to fund government expenditures.

6. IT IS USED FOR PUBLIC PURPOSE

Collections are made for the betterment of a country's
economy and welfare of the public.
 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.
 PRINCIPLES OF TAXATION
Who are required to pay income tax in the Philippines? (Section 23
of the National Internal Revenue Code [NIRC] of 1997).
1. A citizen of the Philippines, living in the Philippines, is
taxable on all income earned inside and outside the
Philippines
2. A non-resident citizen is taxable only on income
earned in the Philippines:
3. An OFW is taxable only on income earned in the
Philippines
 PRINCIPLES OF TAXATION
4. A foreigner living in the Philippines is taxable only on
income earned in the Philippines
5. A domestic corporation is taxable on all income derived
from sources inside and outside the Philippines; and
6. A foreign corporation is taxable only on the income
derived inside the Philippines.
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;
LIST OF SOURCES OF GROSS INCOME:
(NIRC 1997 CHAPTER 6 SECTION 32 A) CONT.
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.
 COMPENSATION
INCOME
Subject to monthly income taxes for employees in the Philippines.
Employers withhold taxes from their employees' monthly gross
income, remitting to the Bureau of Internal Revenue (BIR).

Philippine income tax is progressive. Taxpayers with higher

capacity pay more. There is a personal exemption of P50,000,
and additional exemptions of P25,000 per qualified dependent
(up to 4 dependents). For married couples, only one spouse can
claim it.
 COMPENSATION
INCOME CONT.

Withholding income tax is mandatory for employers, calculated based on the

employee's gross compensation, tax status, and other factors. This ensures
that employees can meet their income tax obligations without a one-time
annual payment.

At the end of the year, income tax is computed based on all compensation
income, deducting personal and additional exemptions. Its total, withheld by
the employer, is then subtracted from the tax due to find the remaining tax
liability for the employee. Tax rate is applied to the taxable income to get
the tax due.
 COMPENSATION
INCOME CONT.

Taxpayers relying on compensation income must file BIR Form 1700 as their
income tax return. Employees may substitute it with BIR Form 2316 which is a
statement issued by the employer, signed by the employee, but not filed with
the BIR.
 COMPENSATION
INCOME CONT.

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.
 COMPENSATION
INCOME CONT.

Withholding income tax for employees: (cont.)

Income tax is computed at the end of the year based on all compensation
income derived during the year.
1. Taxable income is computed after deducting personal and additional
exemptions.
2. Applicable tax rate is applied on the taxable income to get the tax
due.
3. The total income tax withheld by the employer is deducted from the
tax due to get remaining tax liability by the employee
 COMPENSATION
INCOME CONT.

Withholding income tax for employees: (cont.)

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
 TAXABLE INCOME
& TAXABLE DUE
A. COMPENSATION INCOME
Gross compensation (salary and other bonuses)
Less: Statutory contributions (SSS or GSIS. PhilHealth and Pag-ibig Fund)
= Gross compensation, net of statutory payments

Less: 13th month pay and other bonuses that are exempted from income tax
= Gross taxable compensation income

Less: Personal (P 50.000 per tax payer) and additional deductions (P 25,000 per
qualified dependent, max of 4)
= Net taxable compensation income
 TAXABLE INCOME
& TAXABLE DUE CONT.
A. COMPENSATION INCOME
 TAXABLE INCOME
& TAXABLE DUE CONT.
A. COMPENSATION INCOME
Example:
Juan Dela Cruz generated annual compensation income of P615,000. Statutory payments are
as follows: SSS – P 6,975.60; Philhealth - P 5,250; Pag-ibig Contribution – P 1,200. Total:
P 13,425.60 Tax exempt 13th month pay and other bonuses – P 50,000. (Note: Maximum tax
exempt 13th month and other bonuses is P 82,000 per Revenue Regulation 3-2015).
Gross compensation (salary and other bonuses) 615,000.00
Less: Statutory contributions (SSS or GSIS,
Philhealth and Pag-ibig Fund)
13,425.60

Less: Tax exempt 13th month bonus 60,000.00

Gross Taxable Compensation Income 541,574.40

 TAXABLE INCOME
& TAXABLE DUE CONT.
SCENARIO 1: JUAN DELA CRUZ IS SINGLE WITH NO QUALIFIED DEPENDENT
Gross Taxable Compensation Income 541,574.40
Less: Personal deduction
50,000.00
Net Taxable Compensation Income 491,574.40

From tax table, tax due for P491,574.40 is computed as follows:

P50,000 + 30% of the excess over P 250,000
P 50,000 + 30% (P491,574.40 - P250,000) = P122,472.32
(Note: This is not the tax payable by the individual. Compare this with the amount that the employer withheld. Any
difference is the tax liability payable on April 15. Generally, if the employer correctly withheld during the year and
there are no changes in the tax status and tax base during the year, the amount withheld will be equal to the tax due.
However, there will be a difference if there are changes in the taxability of the tax payer (single to married, changes in
number of qualified dependents) and change in tax base (i.e. increase in salary)
 TAXABLE INCOME
& TAXABLE DUE CONT.
SCENARIO 2: JUAN DELA CRUZ IS MARRIED WITH 3 QUALIFIED DEPENDENTS
Gross Taxable Compensation Income 541,574.40
Less: Personal deduction 50,000.00
Less: Additional deduction (P25,000.00 X 3) 75,000.00
Net Taxable Compensation Income 416,574.40

From tax table, tax due for P416,574.40 is computed as follows:

P 50,000 + 30% of the excess over P 250,000
P 50,000 + 30% (P416,574.40 - P 250,000) = P99,972.32
 TAXABLE INCOME
& TAXABLE DUE CONT.
SCENARIO 2: JUAN DELA CRUZ IS MARRIED WITH 3 QUALIFIED DEPENDENTS

What if the employer withheld a total of P95,000?

Then on April 15 on the subsequent year, the employee will pay an

additional P4,972.32. But this does not happen often. Normally, the
employers compute for the annual tax due based on the actual gross
compensation income at the end of the year. Any additional tax
payment may be deducted from the December compensation.
 SHORT
RECITATION
 THANK YOU FOR

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