Lesson 10.

Principles on Income

Fundamentals of Accountancy, Business,

and Management 2
Accountancy, Business, and Management

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Do you ever wonder where
the government gets funding
for infrastructures and
services to assist its citizens?

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The government can acquire
funding for its operations and
services in various ways. It has
the option to borrow money
from foreign institutions or
banks.

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It also has the power to oblige
its citizens to contribute a
portion of their income
through taxation.

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Quick Look

The Lifeblood of the Government

Taxation ensures that the government can perform its primary and
essential functions. The "Lifeblood Theory" supports this idea. It states
that the government will cease to exist without a taxation system. Under
this theory, tax is considered the blood that gives life to the government.

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Quick Look

The Lifeblood of the Government

The importance of taxation in governance is why every country strives to
improve its taxation system. Tax policies are continuously reviewed and
revised to remain effective despite the changing conditions.

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Quick Look

The Lifeblood of the Government

Professionals who are interested in the field of taxation can either work
for the government, a private company, or a public firm. Wherever they
choose, tax specialists are responsible for ensuring that taxes are
calculated correctly. In connection with this, they must keep up to date
with the latest tax policies and regulations.

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Quick Look

Questions to Ponder
1. What are the different kinds of taxes that you are familiar with?
2. How does the government collect such taxes?
3. For you, why is it important to have a sound system of taxation?

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Learning Competencies

This lesson aims to target the following DepEd competencies:

● Define income and business taxation and its principles and
processes (ABM_FABM12-IIh-j-15).
● Prepare the list of sources of gross income from
compensation and gross income from business, and the
corresponding personal and additional deductions
(ABM_FABM12-IIh-j-16).

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Learning Objectives

At the end of this lesson, you should be able to do the following:

● Define income, income tax, and business tax.
● Describe the importance of deductions in taxation.
● Calculate gross income of different classes of taxpayers.
● Explain the process and importance of taxation.

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Why should businesses adhere to tax laws
and regulations?

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Taxation Tax System

● the system by which the ● What to tax?

government imposes ● Who to tax?
financial obligations ● How much to tax?
upon its citizens ● How to collect the tax?

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Basic Concepts on Taxation

An enforced ● payment of taxes is not

contribution voluntary

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 Basic Concepts on Taxation

● taxes result in an outflow

A payment of money of cash

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 Basic Concepts on Taxation

● Obligation to pay tax

arise from an enacted
Imposed through a law
law-making body ● Laws and regulations
force people to
contribute

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Classification of Taxes

Classification
of Taxes

Scope Subject Matter Burden Amount

Who
administers What is being Who pays the How are taxes
the tax? taxed? taxes? computed?

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 Classification of Taxes (Scope)

National Local

● imposed by the Local

● imposed by the national
Government
government
● examples: amusement
● examples: income tax,
tax, real property tax,
donor's tax, estate tax,
community tax,
value added tax
professional tax, etc.

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Classification of Taxes (Subject Matter)

Property
paid based on the value
Personal/Poll 2 of a property

imposed on any person 1

of certain class residing
within a certain territory
Excise
3 imposed on non-
essential goods

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 Classification of Taxes (Burden)

Direct Indirect

the person or entity to the person/entity to whom

whom the tax is levied it is levied makes the
makes the payment to the payment through a third
government party

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Income Tax vs. VAT

Income Tax VAT

Object of the tax income of the business sale of products/services

Who needs to pay the business owner the final consumer

Who transfers the

payment to the business owner business owner (seller)

government

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 Classification of Taxes (Determination of Amount)

Specified Ad Valorem

Tax rate varies depending

The tax rate is fixed
on the circumstances of the
regardless of the
object being taxed. Example
circumstances.
of this is income tax.

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Stages of Taxation

Imposition Collection
government
actual payment
demands us to
is made
pay

1 2 3

Assessment

tax is computed

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 Tax laws are not retroactive

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Tax laws are generally prospective. Tax laws will take effect on
activities done after the implementation. It cannot be imposed
on previous activities and events. Therefore, if Congress passes
a new tax law, such law will only be used as the basis for
assessment and collection once it takes effect.

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 Introduction to Income Tax

● imposed on any type of

income
● most substantial kind of Income Tax
tax

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 Introduction to Income Tax

Income Tax
What is being taxed? income earned

the entity who earned the income (e.g.,

Who is being taxed? employee, business owner, freelancer,
seller, etc.)

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 Definition of Income

Income Return of Capital

payback of your own

all wealth that flows into contribution (e.g. collection
the taxpayer, excluding of loans, receipt of a
mere return of capital liquidating dividend)

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 Mere Return of Capital

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To further illustrate the meaning of mere return of capital,

assume that your classmate has paid you back ₱110 as
payment for the ₱100 you loaned him/her.

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 Mere Return of Capital

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In this scenario, the ₱100 is the amount of mere return of

capital. The extra ₱10 you received on top of the amount you
loaned your classmate is considered as income (i.e., interest
income).

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 Mere Return of Capital

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Suppose that your classmate paid you back with exactly ₱100.
In that case, you did not gain any income from the activity.

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Types of Income Tax
Income Tax

Subdivided into
three types

Basic Income Final Capital Gains Tax

Tax Withholding Tax
imposed on specific imposed on sale or
imposed on
kinds of passive disposal of capital
ordinary income
income assets

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 Types of Income Tax

Income Tax Basic Income Tax Final Tax Capital Gains Tax
Type of Income
Ordinary income Passive income Capital gains
Subject to Tax
Schedule of
Graduated Rate or
Tax Rate Specified Rates for 15%
Fixed Rate
Final Tax

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 Check Your Progress

1
If you are a company's full-time employee, what tax do you
pay for earning your salary?

Answer area

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Types of Income

Types of Income

Ordinary
Passive Income Capital Gains
Income

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 Types of Income

Examples:

● Compensation
Ordinary Income
● Rent Income
● Partner’s distributive
share

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Types of Income

Examples:

● Interest
● Royalties
Passive Income
● Dividends
● Prizes not more than
₱10,000
● Winnings

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Types of Income

Examples:

Capital Gains
● Shares of Stocks
● Real properties

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 Exclusions from Income

Some receipts and gains are not

treated as income if they are:
● exempted by virtue of law; or
● not within the definition of
income in the context of
taxation.

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Exclusions from Income

1. Proceeds of Life Insurance

2. Amount received by the insured as a return of capital
3. Retirement benefits, pensions, gratuities, etc.
4. Compensation for injuries or sickness.
5. Income exempt under treaty
6. Incomes and gains subject to final tax
7. Miscellaneous items

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 Check Your Progress

2
Why is it important for taxpayers to recognize the exclusions
from income?

Answer area

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Deductions and Taxable Income

pertain to the expenses that

can be deducted from total
Deductions gross income when
computing the total taxable
income

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 Deductions and Taxable Income

The tax due is calculated based on taxable income, and not on

gross income.

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 Deductions and Taxable Income

Itemized Optional
● Ordinary and Necessary Expenses
● Interest Expense
● Depreciation ● 40% of the amount of
● Losses
gross income is
● Bad Debts
● R&D Expenses automatically deducted
● Charitable Contributions ● no need to itemize the
● Pension Trust Contributions
● Tax Expenses
deductions

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 Check Your Progress

3
Why is it important for taxpayers to recognize the income
tax deductions?

Answer area

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Class of Taxpayers

Class Overview

a Filipino, considered resident of the

Resident Citizen (RC)
Philippines

a Filipino, but not considered resident of the

Nonresident Citizen (NRC)
Philippines

an alien, considered resident of the

Resident Alien (RA)
Philippines

Nonresident Alien (NRA) - NRA is further classified into

following:
● Engaged in trade or business (ETB) an alien not residing in the Philippines

● Not engaged in trade or business (NETB)

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Income Inclusions for Each Class of Taxpayer

The table below presents which income will be included as

gross income for each class of taxpayer:
Taxpayer Is the income subject to tax?

RC All income is subject to tax regardless if it is earned within the Philippines or outside the Philippines

NRC Only income earned within the Philippines is subject to tax

RA Only income earned within the Philippines is subject to tax

NRA Only income earned within the Philippines is subject to tax

NRA-ETB Only income earned within the Philippines is subject to tax

NRA-NETB Only income earned within the Philippines is subject to tax

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 Situs of Income

● refers to where the

income is considered
earned
● integral in determining
the correct amount of Situs of Income
income to be included as
taxable for each class of
taxpayer

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Situs of Income

Income Type Basis

Interest the residence of the debtor

Income from the location where the service was rendered

services

Rent income the location where the property or equipment was rented or used

Royalty the location where the right was used

Gain on sale of real the location of the real property

property

Gain on sale of general rule: the place of sale

personal property exception: situs of the gain on shares of stock of a domestic corporation
will be Philippines regardless where the sale took place

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Situs of Income (cont’d)

Income Type Basis

Dividend registration of the corporation

domestic corporation within the Philippines

foreign corporation if the foreign corporation derived less than 50% of its
income from the Philippines, the situs will be outside
the Philippines entirely

NOTE: The income referred to in this section pertains

to the total Gross Income of the foreign corporation for
the past 3 years prior to the declaration of the
dividend.

if 50% or more of the income was derived in the

Philippines, the situs will be partly within the
Philippines and partly outside the Philippines

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Situs of Income (cont’d)

Income Type Basis

Mining location of the mine

Farming location of the farm
Manufacturing the location where the product was produced AND the place of
the sale

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 Check Your Progress

4 What is the relevance of situs of income when paying taxes?

Answer area

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 Introduction to Business Tax

● any tax obligation arising

specifically from business
conduct
● Paid by taxpayers who Business Tax
have a business
● Collected separately from
income tax

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Introduction to Business Tax

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 Introduction to Business Tax

Value Added Tax (VAT)

● imposed on sales of goods and services
● can either be an:
○ Input VAT - VAT on the purchase of goods or services
○ Output VAT - VAT on the sale of goods or services

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 Introduction to Business Tax

Other Percentage Tax (OPT)

● imposed on the sale of goods or services but only against
businesses who are:
○ not VAT registered; and
○ not exempt from business tax i.e., gross receipts of
₱100,000 or less
● 3% total gross receipts

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 Introduction to Business Tax

Excise Tax
● paid in addition to VAT or OPT
● to control the consumption of certain goods
● Examples: liquors, wines, tobacco products, manufacturer
oil and fuels, mineral products, fireworks, yachts, and
other non-essential goods

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 The “SIN” TAX

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The Philippines, in support of Universal Healthcare, imposes

“sin taxes” on alcohol and tobacco products. Through this, the
government aims to increase cigarette tax per pack to ₱45.00
in 2020, with an annual increment of ₱5.00 until it becomes
₱60.00 per pack in 2023 and a 5% annual increase in the
succeeding years. The purpose of the excise tax imposed on
these goods is to collect more revenue for healthcare services
and discourage people from buying unhealthy products.

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 Check Your Progress

5 Compare and contrast VAT and OPT.

Answer area

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Keep in Mind

● Taxation is the system by which the government imposes financial

obligations upon its citizens. Its primary purpose is to raise revenue
to fund its projects and services.
● Income taxes are imposed on all wealth that flows into the taxpayer’s
assets, excluding the mere return of capital. The different types of
income tax include: basic income tax, final tax, and capital gains tax.

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Keep in Mind

● In calculating the amount of taxes due, one must determine first the
amount of taxable income. The tax rates provided by law are
calculated based on the taxable income.

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Keep in Mind

● Taxpayers can choose between two types of deduction methods:

itemized deduction or optional deduction. Itemized deduction
requires the taxpayer to list all items and amounts which shall be
deducted from the gross income. On the other hand, optional
deduction automatically sets the 40% of gross income as deductible.

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Keep in Mind

● Business taxes are tax obligations arising specifically from business

conduct. The types of business tax are Value Added Tax (VAT), Other
Percentage Tax (OPT), and excise taxes.

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Keep in Mind

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 Try This

Identification. Write the correct answer on the space proved.

1. It is the income tax imposed on ordinary income.

Answer area

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 Try This

Identification. Write the correct answer on the space proved.

2. It is a class of taxpayers that is taxed on both income

earned within the Philippines and outside the Philippines.
Answer area

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 Try This

Identification. Write the correct answer on the space proved.

3. It is a type of income generated without the active

participation of the taxpayer.
Answer area

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 Try This

Identification. Write the correct answer on the space proved.

4. It is the income earned in selling capital assets.

Answer area

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 Try This

Identification. Write the correct answer on the space proved.

5. In this stage of taxation, the government demands its

citizens to contribute by means of paying taxes.
Answer area

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 Practice Your Skills
Provide what is being asked for each set of problems.

1. Nina, a resident citizen taxpayer, has provided you with the

following information.
● ₱100,000 gross business income within the Philippines
● ₱50,000 gross business income outside the Philippines
● Director’s fees of ₱40,000

How much is the total gross income to be reported in

Nina’s tax return?

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 Practice Your Skills
Provide what is being asked for each set of problems.

1. How much is the total gross income to be reported in

Nina’s tax return?

Answer area

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 Practice Your Skills
Provide what is being asked for each set of problems.

2. Marco has provided you the following information:

● Gross business income of ₱256,000
● Depreciation of ₱5,000
● Interest of ₱2,000
● Dividend income of ₱500

How much is the gross income?

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 Practice Your Skills
Provide what is being asked for each set of problems.

2. How much is the gross income?

Answer area

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 Challenge Yourself
Answer the following questions:

Explain how the process of taxation works.

Answer area

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 Challenge Yourself
Answer the following questions:

Why are taxes essential?

Answer area

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Photo Credit

Slide 1: Money Grow Gain, by mohamed_hassan is free for commercial use under the Pixabay License via Pixabay.

Slide 3: Questions Question Mark Quiz, by mohamed_hassan is free for commercial use under the Pixabay License via
Pixabay.

Slide 5: Social Security Insurance, by mohamed_hassan is free for commercial use under the Pixabay License via
Pixabay.

Slide 38: Tax invoice Paid, by mohamed_hassan is free for commercial use under the Pixabay License via Pixabay.

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Bibliography

Banggawan, R. Income Taxation: Laws, Principles, and Applications. Baguio City: Rex Excellence Publishing, 2019.

Garcia, E.R. and Tabag, E.D. Income Taxation with Special and Properly Filled BIR Forms. Quezon City: EDT Bookshop,
2020.

Garcia, E.R. and Tabag, E.D. Transfer & Business Taxation with Special Topics and Properly Filled BIR Forms. Quezon City:
EDT Bookshop, 2020.

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