Republic of the Philippines

North Eastern Mindanao State University

Cantilan Campus, Surigao del Sur
Website: www.sdssu.edu.gov.ph

TAXATION
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Republic of the Philippines

Surigao del Sur State University
Rosario, Tandag City, Surigao del Sur 8300
Telefax No. 086-214-4221
Website: www.sdssu.edu.gov.ph

DISLCAIMER

This module is a compilation of the works from internet sources,

manuals, and books from different authors and will be used for
educational purposes only. Due recognition is given to the authors who
are the source of some parts found in this module. The compiler / owner
does not claim copyrights to any part taken from other sources.

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Republic of the Philippines

Surigao del Sur State University
Rosario, Tandag City, Surigao del Sur 8300
Telefax No. 086-214-4221
Website: www.sdssu.edu.gov.ph

AGREEMENT

I _________________________, have chosen to complete the following actions.

1. I will follow all the policies in this course

2. I will answer the activities with all work completed
3. I should be responsible for my own learning
4. I will submit my module on time

I am taking part in this learning contract because the strategies listed here will help me to
learn the material and perform well in this course

Signature over Printed name

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What this Module is all about?

Lesson I. Introduction to Taxation

 Definition, Scope and Limitation of Taxation

 Taxes, Tax Laws and Tax Administration

Lesson II: Introduction to Income Taxation

 The concept of income tax

 Types of Income Taxpayers

 General Rules in Income Taxation

Lesson III: Taxation Schemes, Periods, Methods and Reporting

 Income Taxation Schemes

 Accounting Period

 Accounting Methods

 Tax Reporting

 Payment of Taxes

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MODULE 1. TAXATION
Intended Learning Outcomes
With the help of this module, the students will be able to:
 Discuss the concept, scope and limitations of Taxation and its necessity
for every government.
 Demonstrate knowledge on types of taxation schemes, accounting
period, accounting methods and tax returns.
 Comprehend and demonstrate knowledge on tax, its elements, and
classifications.
 Explain the concept of gross income and elaborate the types of income
taxpayers.

2 INTRODUCTION TO INCOME TAXATION

THE CONCEPT OF INCOME TAX

An income tax is one levied on the income from property or an occupation. It is a direct tax upon
the thing called income.
It is imposed upon persons within the jurisdiction of the state to raise revenue for the support of
the government.

PURPOSE OF INCOME TAX

The imposition of the income tax is intended:
1. To raise revenue to defray the expenses of the government; and
2. To mitigate the evils arising from the inequalities of wealth by a progressive scheme of
taxation which places the burden on those best able to pay.

BASIS IN IMPOSING INCOME TAX

The right of the government to tax income emanates from its partnership in the production of
income by providing the protection, resources, incentive, and the proper climate for such
production.
The levy, as in other taxes, is premised upon two basic tax principles, namely:
a. Benefits-received theory – the payment of taxes is based upon the benefits received from
public services, such as the government protection of life, property and other rights.

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b. Ability to pay theory – support of the government should be provided by the taxpayers based
on their relative abilities to share in the tax burden.

MEANING OF INCOME
 Income means all wealth which flows into the taxpayer other than a mere return of capital.
 Income is a gain derived from labor or capital, or both labor and capital, and includes the
gain derived from the sale or exchange of capital assets.
 Income is the amount of money coming to a person or corporation within a specified time,
whether as payment for services, interest, or profit form investment.

REQUISITES FOR TAXABILITY OF INCOME

1. There must be a gain or profit whether in cash or its equivalent.
2. The gain must be realized or received.
3. The gain must not be excluded by law or international treaty from taxation.

SITUS OF TAXATION
The situs of the income is the place of the income or the country which has jurisdiction to impose
the tax. For income tax purpose, income may be taxed in one or more or all of the following
places or countries –
1. The place where the taxpayer is a citizen;
2. The place where the taxpayer is a resident; and
3. The place where the income is earned or derived.

INCOME TAX SYSTEM OF THE PHILIPPINES

The income tax system of the Philippines may be characterized under two general categories,
namely:
1. Gross income taxation, whereby a final tax is imposed on the gross amount of specified
types of income, such as interest income, royalty, prizes, dividends and capital gains.

2. Net income taxation, whereby certain deductions are allowed and subtracted from the
aggregate of incomes not subject to final tax and the tax computed is based on the resulting
net income therefrom,

TYPES OF TAXABLE INCOME

1. Ordinary Income – such as the following:
a. Compensation income – earned or arises out of an employer-employee relationship;
b. Professional income – derived from professional services like medical and legal services;

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c. Business income – obtained from profits in engaging in trade or business.

2. Passive Income – earned without any action on the part of the taxpayer. The taxpayer merely
waits for the income to be received or realized. Examples include interest income and
dividends received by shareholders.

3. Capital gains – gains from selling capital assets. Capital assets are assets not used in
business, trade or profession. Capital gains taxation is applicable only on certain capital gains
listed by the law. You may visit the National Internal Revenue Code for the list.

PERSONS SUBJECT TO INCOME TAX

Taxpayer Defined
The term taxpayer means any person subject to income tax imposed by the Tax Code.

Classification of Taxpayers
For income tax purposes, taxpayers are classified generally as follows:
1. Individuals
2. Corporations
3. Partnerships
4. Estates and Trust

INDIVIDUALS
Individual taxpayers are further classified into the following categories:
A. Resident citizen – A Filipino citizen residing in the Philippines. A resident citizen is taxable
on all income derived from sources within and without the Philippines.

B. Non-resident citizen
1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with a definite intention to reside therein;
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for an employment on a permanent basis;
3. A citizen of the Philippines who works and derives income form abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year;
4. A citizen who has been previously considered as non-resident citizen and who arrives in
the Philippines at anytime during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident citizen for the taxable year in
which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
A non-resident citizen is taxable only on income derived from sources within the Philippines.

C. Resident Alien – an individual who is residing in the Philippines but is not a citizen thereof,
such as:

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1. An alien who lives in the Philippines without definite intention as to his stay; or
2. One who comes to the Philippines for a definite purpose which in its nature would require
an extended stay and to that end makes his home temporarily in the Philippines, although
it may be his intention at all times to return to his domicile abroad;
A resident alien is taxable only on income derived from sources within the Philippines.

D. Non-resident Alien – an individual who is not residing in the Philippines and who is not a
citizen thereof.
1. Non-resident aliens engaged in business – aliens who stayed in the Philippines for an
aggregate period of more than 180 days during the year

2. Non-resident aliens not engaged in business – include:

a. Aliens who come to the Philippines for a definite purpose which in its nature may be
promptly accomplished;
b. Aliens who shall come to the Philippines and stay therein for an aggregate period of not
more than 180 days during the year.

E. Minimum Wage Earners (MWEs)

MWEs are those working in the private and public sectors and who are paid the statutory
minimum wage as determined by the Tripartite Minimum Wage Board.
MWEs shall be exempt from the payment of the income tax based on their statutory minimum
wage rates. The holiday pay, overtime pay, night shift differential pay, and hazard pay received
by such MWE are likewise exempt from income tax.

CORPORATIONS
The term “corporation”, for tax purposes, shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts, association, or insurance companies. The term
shall not include general professional partnerships and a joint venture or consortium formed for
the purpose of undertaking construction projects engaging in petroleum, coal, geothermal, and
other energy operations pursuant to an operating consortium agreement under a service contract
with the government.
A. Domestic Corporation
A domestic corporation is a corporation that is organized in accordance with Philippines laws. A
domestic corporation is taxable on all income derived from sources within and without the
Philippines.

B.Foreign Corporation
A foreign corporation is one organized under a foreign law. Foreign corporations are classified
as follows:
1. Resident foreign corporation (RFC) – a foreign corporation which operates and conducts
business in the Philippines through a permanent establishment. A RFC is taxable only on
oncome derived from sources within the Philippines.

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2. Non-resident foreign corporation (NRFC) – a foreign corporation which does not operate or
conduct business in the Philippines. A NRFC is taxable only on income derived from sources
within the Philippines.

SUMMARY
The tables below show the summary of taxability of the different types of taxpayers.
Individual Taxable on income earned
Taxpayers Within Without
Resident Citizen * *
Non-resident Citizen *
Resident Alien *
Non-resident Alien *

Corporate Taxable on income earned

Taxpayers Within Without
Domestic Corporation * *
Resident Corporation *
Non-resident Corporation *

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