Tax – compulsory contribution that people pay to the government, which is used to pay for expenses.

INHERENT POWER OF THE GOVERNMENT:

1. Eminent Domain- power of the government takes over privately owned land, matters relating to the
payment of just compensation being used for public considerations
2. Police Power- power of the government to make policies that encourage the public’s health, morality,
protection, and the well –being of the people
3. Taxation – ability of the government to collect taxes which is used to fund the various projects needed by
the people. The process by which our government, through our lawmakers, raises income to pay its
necessary expenses.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. FISCAL ADEQUACY – revenues should be adequate to sustain government spending
2. THEORETICAL JUSTICE – taxes are fair and reasonable to the capabilities of the taxpayer to pay.
3. ADMINISTRATIVE FEASIBILITY – tax legislation is enforced efficiently and effectively, preventing future
complication and uncertainty on the aspect of tax-paying citizens.

WHY DO WE PAY TAXES?

a. Provides funds to support the government to improve people’s general welfare.
b. Managing inflation
c. Helping to reduce the negative impacts
d. Reasonable distribution of income

INCOME TAXATION
Income Taxes – the imposition of taxes on the income of individuals derived from compensation, business
trade, self-employed, or practice of a profession or from property less deductions authorized by the law. The term
gross income refers to the taxpayer’s income for taxation purposes.

SOURCES OF GROSS INCOME

1. Compensation Income – your parents, relatives, or friends received by being an employee working for
different companies. Aside from salaries and wages, gross compensation income may also be in the form of
any of the following:
OTHER FORMS OF COMPENSATION TAXABLE
INCOME
Fixed or Variable Allowances Taxable (representation, cost of living allowance) except for
government employees (PERA)
13th Month Pay More that P 90,000
Christmas Bonus  Non-performance based combine in 13th-month pay, more than
P 90,000
 If under collective bargaining agreement (CBA) over P 10,000
De Minimis Benefit (see table below)
Overtime Pay All taxable (meal allowance used for OT, see De Minimis Benefits)
Hazard Pay All taxable
Commission All taxable
Fees All taxable
Paid Vacation and Sick leave All taxable (unused leave see table for De Minimis Benefits)
Retirement Pay Not taxable unless paid by SSS, GSIS, or United Stated Veterans
Administration. Funded by a private employer approved by BIR. 10
years employed by the same employer, at least 50 years old, first
time to avail.
Separation Pay If voluntarily, but if not, all causes beyond the employee’s control
are not taxable ( e.g. death, sickness)
 Compensation paid in kind Taxable based on their fair market value unless it qualifies under
De Minimis Benefits

De Minimis Benefits – non taxable benefits, allowances or perks given by employers to their employees,
which are of relatively small value or a minimal amount.
De Minimis Benefits Non-taxable limit
a. Monetized unused vacation leaves (private 10 days
employees)
b. Monetized value of vacation and sick leave None
(government employees)
c. Medical cash allowance to dependents P 125 per month
d. Rice subsidy P 1,500 per month
e. Uniform and clothing P 5,000 per year
f. Actual medical benefits P 10,000 per year
g. Laundry Allowance P 300 per month
h. Employee’s achievement award P10,000
i. Gifts (Christmas and Anniversary) P5,000 per year
j. Daily meal allowance for overtime work 25% of the basic minimum wage
k. CBA and productivity incentive schemes P 10,000 per year

2. Business Income – income generated by an entrepreneur or by different professionals like lawyers, doctors,
and accountants (professional income). They do not work as employees of other people, they were so-called
self-employed individuals. Self-employed individuals who derived their income purely from business are
charged with tax.
Gross Sales/Receipts TAX RATE
Not exceeding P 3 million Option 1. Graduated income tax (IT) schedule (either
itemized deductions or Optional Standard
Deduction)
Option 2. 8% income tax on gross sales or gross
receipts over P 250,000
Above P 3 million Graduated income tax (IT) schedule
Computation of business income
Gross sales XX (a) Cost of sales computation
Less: Sales returns, Beginning inventory XX
(XX)
allowances and discounts
Add: Net Purchase (XX)
Net Sales XX
Total Goods Available XX
Less: Cost of Sales (a) (XX)
Less Ending inventory (XX)
Gross Income from
XX
Business COST OF SALE XX

An individual taxpayer deriving business income is allowed to deduct from his/her gross business income,
either one of the following:
1. Itemized deductions
Expenses Taxes Bad Debts Depletion of Oil Charitable
and Gas Wells and Contributions and
Mines Other
Contributions
Interest Expense Loses Depreciation Pension Trusts Research and
Development
Expense
 2. Optional standard deduction (OSD)
Instead of the itemized deductions, the taxpayer may choose to deduct the OSD, which is calculated as
40% of net sales, without deducting the cost of sales. Under the computation of the Business Income
Tax Rate, there is another option. Suppose you do not opt to use the graduated income tax rate and
the percentage tax. This option is what we call “Optional Eight Percent (8%) Tax”. A tax of 8% charge
on gross sales or gross receipts and other non-operating income of more than P 250,000.

3. Mixed Income – an individual taxpayer who receives both compensation and business income.
Type of Income TAX RATE
Compensation Income 1. Graduated income tax (IT) schedule
Income from Business or Practice of Professions
Not exceeding P 3 million Option 1. Graduated income tax (IT) schedule (either itemized
deductions or Optional Standard Deduction)
Option 2. 8% income tax on gross sales or gross receipts over P
250,000
Above P 3 million Graduated income tax (IT) schedule

4. Passive Income – income generated by different investments made by an individual (such as interest
income, royalty income prizes and winnings, and cash or property dividend income). It will not be
subjected to the scheduler rate anymore but to specific final tax rates that should be remembered.

SELECTED EXAMPLES OF PASSIVE INCOME FINAL TAX RATE ( for a resident

citizen)
Interest income from bank deposits 20%
Interest income from foreign currency deposits 15%
Royalties, except on books, as well as other literary works, and 10%
mutual compositions
Prize and winnings above P 10,000 20%
Note:
a. Prizes below P10,000 are included in income subject
to the tax table
b. Winning from PCSO and Lotto below P10,000 are
exempt
Cash or property dividends received by an individual from a 10%
domestic corporation
A partner’s share in the after-tax profit of a partnership 10%
(except a general professional partnership)

PRIMARY BUSINESS INTERNAL REVENUE TAXES

Under the Tax Code, 3 Primary Business COMPUTATION OF TAX
Tax
Value-added tax  12% of the gross selling price of the goods or services, which is
Required if: called the output VAT
a. It is VAT registered  VAT registered business is allowed to deduct any input VAT
b. Annual total sales or receipts that computed as 12% of purchases
exceed P3,000,000 Example:
Sale price to customer (P10,000) Output (10,000x12%) 1,200
Purchase price form supplier (P6,000) Input (6,000x12%) (720)
Net VAT to be remitted to the BIR 480
Percentage Tax  Non VAT registered business required to pay a 3% of gross
sales or receipts
 Effective January 1, 2019, self-employed/professionals’annual
gross sales or gross receipts not exceeding P500,000 are
exempt
Excise Tax Several schedules for excise tax, brief information will be provided
only: The two kinds of excise tax namely
a. Specific Tax – imposed based on weight or volume capacity
b. Ad valorem tax – imposed and based on selling price

REGISTRATION FOR TIN (TAXPAYER IDENTIFICATION NUMBER)

Source of Income BIR Form No. Date of Registration
Compensation 1902 Within 10 days from employment
Business/Mixed 1901 On or before the commencement
business
Business Annual Registration Fee 0605 On or before January 31 of the
current year

COMPUTATION OF GROSS TAXABLE INCOME AND TAX DUE

Tax Schedule- gross income minus the deductions allowed by law.
Taxable income – amount on which the tax is computed
Tax Due – amount of tax to be paid to the government by a taxpayer

INDIVIDUAL TAXPAYERS
INDIVIDUAL CLASSIFICATION SOURCE OF INCOME
Within the Phil. Outside the Phil
1. Resident Citizen Filipino citizen who lives
or resides here in the / X
Phil.
2. Non-resident Filipino citizen to a
Citizen foreign country and does / X
not reside in the Phil
3. Resident alien A citizen of another
foreign country but / X
resides in the Phil
4. Non-resident (NRA-ETB) who stays in
alien the Phil for more than
/ X
180 days during the
calendar period
(NRA-NETB) stays less
than 180 days in the Phil

TAX TABLE
COMPUTATION OF GROSS TAXABLE INCOME AND TAX DUE
Illustration 1: COMPENSATION INCOME
Mrs. Maldita payslip shows the following:
Salary P 25,000
SSS Contirbution 581
PhilHealth contribution 325
PAG-IBIG contribution 100
Solution:
Salary
SSS Contirbution
PhilHealth contribution
PAG-IBIG contribution
Taxable Income

Illustration 2: COMPENSATION INCOME WITH EXCESS

Salary P 350,000
SSS Contirbution 6972
PhilHealth contribution 3900
PAG-IBIG contribution 1200
Solution:
Salary
SSS Contirbution
PhilHealth contribution
PAG-IBIG contribution
Taxable Income

Illustration 3.a: COMPENSATION WITH OTHER FORMS OF COMPENSATION INCOME

13th month pay P 24,000
Christmas Bonus (non-performanced based) 6,000
Rice subsidy 21,600
Uniform allowance 7,000
Laundry allowance 2,400
Productivity bonus (received under CBA and 5,000
productivity incentive schemes)
Solution :
Step 1: Determine the excess de minimis benefits
Amounr Received Non-taxable Excess

Total
Step 2: Add excess de minimis benefits to 13th month pay and other benefits and determine the excess
over the P90,000 limit
Illustration 3.b: COMPENSATION WITH OTHER FORMS OF COMPENSATION INCOME
Regular Monthly Salary
Basic Monthly Salary P100,000
Cost of living (COLA) per month 6,000
Medical cash allowance to employee’s dependents 1,500
per month
Rice Subsidy per month 2,000
Laundry allowance per month 1,000
Annual benefits
13th moth pay (equal to 1 month basic salary) P100,000
Christmas bonus ( non-performance based) 50,000
Uniform allowance 6,000
Solution:
Step 1: Step 1: Determine the excess de minimis benefits
Amount Received Non taxable Excess

Total

Step 2&3 : Add excess de minimis benefits to 13th month pay and other benefits and determine the excess
over the P90,000 limit

Step 4: Gross Compensation income/ Taxable Income and tax due

Basic Salary (100,000x12)
COLA (6,000 x 12 mos)
Taxable 13th month pay and other benefits
Gross Compensation Income
Tax on P800,000
Ad: tax on excess ( 25% x (1,363,900-800,000))
Tax Due

Illustration 3.c: Illustration 3.b: COMPENSATION WITH OTHER FORMS OF COMPENSATION INCOME
Basic Salary P 290,000
Overtime Pay 9,200
Daily meal allowance for overtime pay (3 meals at P50/meal; the basic minimum 150
wage is P300)
Reimbursement for transportation costs in relation to overtime work 210
Fees as a director 15,000
Honorarium as guest speaker 6,000
Paid vacation leaves taken during the year (included in the salary) 8,000
th
13 month pay 25,000
Solution:
Step 1: Determine the excess de minimis benefits
Amount Received Non taxable Excess

Total

Step 2&3 : Add excess de minimis benefits to 13th month pay and other benefits and determine the excess
over the P90,000 limit

Step 4: Gross Compensation income/ Taxable Income and tax due

Basic Salary
Overtime pay
Fees as director
Honorarium as guest speaker
Tax on P250,000
Add: Tax on excess (15%(320,000-250,000))
Tax Due

Illustration 4: GROSS BUSINESS INCOME

Accounts Dr Cr
Sales P990,000
Sales Returns and Allowances P200,000
Inventory, beg 40,000
Purchases 100,000
Commissions expense 30,000
Communication, Light and Water 10,000
Depreciation Expense 50,000
Insurance Expense 15,000
Office Supplies Expense 15,000
Rent Expense 40,000
Salaries Expense 400,000
Taxes and licenses 20,000
Transportation expenses 10,000
Totals P730,000 P990,000
Additional information: ending inventory per physical count is P60,000
Solutions: Itemized deductions
Sales
Sales Returns and Discounts
NET SALES
Inventory, beg.
Purchases
TOTAL GOODS AVAILABLE FOR SALE
Inventory, end
COST OF GOODS SOLD
GROSS INCOME FROM BUSINESS
LESS: ITEMIZED DEDUCTIONS
Commissions expense
Communication, Light and Water
Depreciation Expense
Insurance Expense
Office Supplies Expense
Rent Expense
Salaries Expense
Taxes and licenses
Transportation expenses
Total Expenses
TAXABLE INCOME
Tax on P250,000 based on Tax Table
TAX DUE

Solutions: Optional Standard Deductions (OSD)

Sales
Sales Returns and Discounts
NET SALES
Less: Optional Standard Deduction (790,000x40%)
TAXABLE INCOME
Tax on P250,000 based on Tax Table
Add: tax on excess (20%x(474,000-400,000))
TAX DUE

Illustration 5: MIXED INCOME

Alejo is an engineer of a construction company and earns a net of compensation income of P550,000 in
2023. Alejo also has a registered business under his name that makes P250,000 in 2023. He chose to be
taxed at an 8% income tax rate for his business.
Solution for compensation income:
Tax on P400,000 based on Tax Table
Add: tax on excess (20% x (550,000-400,000))
TAX DUE
Solution for business income:
Business Income
Less: Amount allowed as a deduction
Total taxable business income
INCOME TAX DUE
Illustration 6: PASSIVE INCOME
Mr. Pogi, a resident, earns the following passive income, gross of final taxes:
Interest income from peso bank deposit P 2,000
Royalties from invention 2,000,000
Prize won on a singing contest 100,000
Winnings from Lotto 400,000
Cash dividend from a domestic corporation 50,000

Solution:
Passive Income Amount Final Tax Final Tax
Rate
Interest income from peso bank deposit P 2,000
Royalties from invention 2,000,000
Prize won on a singing contest 100,000
Winnings from Lotto 400,000
Cash dividend from a domestic corporation 50,000
Totals

Total Passive Income

Less: Total Final Tax
Net Amount Received