Income and
Business
Taxation
What is taxation?
•Taxation is a system of
raising money to finance
government expenditures.
All governments require
payments of money-taxes-
from its people.
Essential Characteristics of Tax
1. It is an enforced contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons or property.
5. It is levied by the state which has jurisdiction
over the person or property
6. It is levied by the law-making body of the
state
“Lifeblood Theory” like blood which acts as a
support to every human organ so it
could perform every duty inside the body, tax acts
as the blood which supports government
and state. The government cannot continue to
perform its basic functions of serving and
protecting its people without means to pay for its
expenses. Consequently, the state has the
right to compel all its citizens and property within its
limits to contribute.
BASIS OF TAXATION. “BENEFITS-RECEIVED
PRINCIPLE” reciprocal duties of protection and
support between the state and its inhabitants.
• The state collects taxes from the subjects of
taxation in order that it may be able to perform
the functions of government.
• The citizens, on the other hand pay taxes in
order that they may be secured in the enjoyment
of the benefits of organized society.
The 3 Inherent powers of the State
1. The Police Power.
It is the power of the state for promoting
public welfare by restraining and
regulating the use of liberty and
property. It may be exercised
only by the government. The property
taken in the exercise of the power is
destroyed because it is noxious or
intended for a noxious purpose.
2. Power of taxation
It is the power by which the
State raises revenue to
defray the necessary
expenses of the government.
2. Power of Eminent
Domain
It is the power of the State
to acquire private property
for public purpose upon
payment of just
compensation.
Types of Taxes:
INCOME TAXES
(Compensation, Business income and some
Passive income only)
BUSINESS TAXES
(VAT and Percentage Tax only)
Types of Taxes:
INCOME TAX (Compensation, Business income and some
Passive income only)
is a tax on a person's income, emoluments, profits
arising from property, practice of profession, conduct of
trade or business or on the pertinent items of gross
income specified in the Tax Code of 1997 (Tax Code),
as amended, less the deductions if any, authorized for
such types of income, by the Tax Code, as amended,
or other special laws.
Who are required to pay income tax in the
Philippines?
Individuals
• Resident citizens receiving income from sources within or
outside the Philippines
Employees deriving purely compensation income from two or
more employers, concurrently or successively at any time during
the taxable year.
Employees deriving purely compensation income regardless of
the amount, whether from a single or several employers during
the calendar year, the income tax of which has not been
withheld correctly (i.e. tax due is not equal to the tax withheld)
resulting to collectible or refundable return.
Self-employed individuals receiving income from the
conduct of trade or business and/or practice of profession.
Individuals deriving mixed income, i.e., compensation
income and income from the conduct of trade or business
and/or practice of profession.
Individuals deriving other non-business, non-professional
related income in addition to compensation income not
otherwise subject to a final tax.
Individuals receiving purely compensation income from a
single employer, although the income of which has been
correctly withheld, but whose spouse is not entitled to
substituted filing.
Who are required to pay income tax in the
Philippines?
Individuals
• Non-resident citizens receiving income
from sources within the Philippines.
• Aliens, whether resident or not, receiving
income from sources within the Philippines.
Non-Individuals
• Corporations including partnerships, no matter
how created or organized.
• Domestic corporations receiving income from
sources within and outside the Philippines.
• Foreign corporations receiving income from
sources within the Philippines.
• Estates and trusts engaged in trade or
business.
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.
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.
• 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.
• Income tax is computed at the end of the year based
on all compensation income derived during the year.
Taxable Income
-is a gross income minus the
deductions allowed by law.
Taxable income is the amount
on which the tax is computed.
The following are allowed deductions from
gross income:
1. Contributions for the following:
• Social Security System(SSS) ;
• Government Service Insurance System (GSIS);
• Philippine Health Insurance Corporation
(Philhealth);
• Home Development Mutual Fund (HDMF) or
popularly known as Pag-Ibig(Pagtutulungan sa
Kinabukasan: Ikaw,Bangko,Industria at Gobyerno) ;
• Union dues
The following are allowed deductions from
gross income:
2. Compensation for Injuries or Sickness-
received through Accident or Health
Insurance or under Workmen’s
Compensation Act.
Illustration:
Mr. A’s pay slip for the month shows the
following:
Salary Php 26,000
SSS Contribution 581
PhilHealth contribution 325
Pag-IBIG contribution 100
Union dues 50
Requirement: How much Mr. A’s taxable income?
Solution:
Salary Php 26,000
SSS Contribution (581)
PhilHealth contribution (325)
Pag-IBIG contribution (100)
Union dues (50)
Taxable Income Php 24,944
Tax Due
-the individual taxpayer’s
income tax due (i.e., the amount
of tax to be paid to the
government) is computed using
the tax table below:
Example:
The taxable income is Php 560,000.
How much is the tax due?
Solution:
Tax on Php 400,000 Php 30,000
Add: Tax on excess [25% x (560,000 -400,000)] 40,000
Tax due Php 70,000
Try This!
The taxable income is Php
4,970,000. How much is the tax
due?
Illustration: How much is Mr. A’s tax due?
Information on Mr. A’s salary for the
year is as follows:
Salary Php 312,000
SSS contribution 6,972
Philhealth contribution 3,900
Pag-IBIG contribution 1,200
Union dues 600
Solution:
Salary Php 312,000 Mr. A’s tax due is computed
SSS contribution (6,972) as follows:
Philhealth contribution (3,900) Tax on Php 250,000 Php 0
Pag-IBIG contribution (1,200)
Union dues (600)
Add: Tax on excess [20% x (299,328-250,000)] 9,866
Taxable income Php 299, 328 Tax due 9,866
Tax Reform for Acceleration and
Inclusion (TRAIN) – Revenue
Regulations No. 8-2018 on
Income Tax.
The Law took effect on January 1, 2018. The TRAIN
aims to make the Philippine Tax System simpler,
fairer, and more efficient to promote investments,
create jobs and reduce poverty. The Tax Reform for
Acceleration and Inclusion (TRAIN) or the Republic
Act No. 10963 was signed into law by President
Rodrigo Duterte on December 19, 2017 and
implemented on January 1, 2018. It was the initial
package of the Comprehensive Tax Reform
Program, which aims to rationalize the Philippine
tax system.
Individuals Earning Purely Compensation Income.
1. Minimum wage earners (MWE) shall be exempt
from income tax:
a. statutory minimum wage b. holiday pay
c. overtime pays d. night shift differential pays and
e. hazard pays
Minimum wage earners shall be exempt from the payment
of income tax on their statutory minimum wage rates. The
holiday pay, overtime pay, night shift differential pay and
hazard pay received by such earner are likewise exempt.
2. Husband & wife shall compute their individual
income tax separately based on their
respective taxable income;
Individuals Earning Purely Compensation Income – Individuals earning
purely compensation income shall be taxed based on the graduated
income tax rates
prescribed.
Income tax of mixed income earners
For mixed income earners (earning both
compensation income and income from business
and/or practice of profession), their income taxes
shall be:
1. For income from compensation: based on
graduated income tax rates for individuals,
AND
2. For income from business and/or practice of
profession:
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.
• 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.
A taxpayer who initially presumed that the gross
sales/receipts for the taxable year and other non-
operating income will not exceed the ₱3,000,000.00
VAT threshold but has actually exceeded the same
during the taxable year, shall
• immediately update registration to reflect the
change in tax profile from non-VAT to a VAT
taxpayer;
• update registration immediately within the month
following the month the sales/receipts exceeded the
VAT threshold;
• be liable to VAT prospectively starting on the first
day of the month following the
month when the threshold is breached;
A VAT taxpayer who did not exceed the VAT
threshold within the immediately preceding three (3)
year period, may opt to be a non-VAT taxpayer and
avail of the 8% income tax rate option:
• update the registration records on or before the first
quarter of a taxable year to reflect the change in
registration
• remain liable for VAT for as long as there is no update of
registration and VAT- registered invoices/receipts are
continuously issued
WHAT IS THE ANNUAL INCOME TAX RETURN?
The Income Tax Return (ITR) that most people refer to is
the annual tax form that individuals file every April 15th of
the following year. This form summarizes all the income
(or loss) and individual incurred for the past year.
With the new Tax Reform Law (TRAIN), there are now 3
types of forms available to file an annual ITR. Note that all
these forms are new forms that were just recently
launched.
o Form 1700 – this form will be used by an
individual with no other sources of income other
than employment
o Form 1701 – this form will be used by a mixed-
income individual or if you have chosen Graduated
Tax rate with an Itemized Deduction Method
o Form 1701A – this form will be used if an
individual is earning purely business income or
income from your profession
Under the new TRAIN law, those who earn less
than ₱250,000.00 annually are exempt from paying
income tax returns. So, if an individual fall under this
bracket, he/she don’t have to pay annual ITR – still
have to file.
If an individual has an annual income more than
₱250,000.00, the TRAIN law gives two options for
filing and computing your taxes. He/she can either
follow the 3% percentage + income tax (use the
graduated income tax table) or use the new 8%
Gross Receipt Tax.
Computation of Income Tax Payable of Individuals
(resident and non-resident citizens)
A. Based on Graduated Income Tax Rate
In Graduated Income Tax Rate, an individual need
to check first whether he/ she is on Itemized
Deduction or Optional Standard Deduction (OSD).
• OSD – allows an individual to claim a deduction of 40%
from his/her gross sales or receipts for the quarter
• Itemized Deduction – he/she must identify and deduct
all the ordinary and necessary expenses from his/her
gross income. These expenses must attribute to the
development, management, and operation of his/her
business-like travel and salaries
In 8% Income Tax Rate, the first thing we have to
consider is to know whether the
individual earnings come solely from business or
profession, or if it comes from
compensation (basically if the individual has an
employer) and business/ profession. After
which, an individual can apply the formula table
which is applicable to him/her.
As you can see, the ₱250,000.00 deduction is NOT
applied for Mixed-Income Earners. The reason for
this is because the ₱250,000.00 has already been
deducted from the tax due based on compensation
so it no longer applies to the tax from your business.
We have to note that the 13th month pay and other
equivalent benefits shall not be subject to tax for a
maximum of ₱90,000.00. This new amount is
relative increase from the previous tax exclusion
rate of ₱82,000.00. Anything beyond the maximum
exclusion rate of ₱90,000.00 must be included in
the computation of the employee’s gross income for
the taxable year. This was amended by Republic Act
No. 10963 or the TRAIN law on January
2018.
Example:
Ms. Leia is employed in LAQ Corporation and is
also a part-time real estate agent for
a real estate broker. In addition to the SMW of
₱180,000 she received from her employer, she
likewise received ₱75,000 as commissions from her
real estate dealings for the year 2018.
Compute for the tax due.
Illustration: Computation
The amount subject to income tax and withholding
tax shall be computed depending on the
income tax regime selected by Ms. Leia, since she
is qualified to avail of such option (income
from business/practice of profession did not exceed
₱3,000,000) and such option was
reflected in the payee’s sworn declaration given by
the taxpayer to the payor/withholding tax
agent-real estate broker, as follows:
Withholding of Taxes on Compensation
Withholding Tax on Compensation is the tax
withheld from income payments to individuals
arising from an employer-employee relationship.
Employers are basically required to deduct and
withhold tax from the compensation or salary paid to
employees.
The computation of the deductible tax depends
on whether an employee is paid daily, weekly,
semi-monthly, or monthly. It is given by the
following formula:
Taxable Income = Taxable Earnings - Non
taxable deductions
Taxable earnings include the following:
• Basic Pay + Overtime Pay + Night Differential
– Late and Undertime –Absences + Taxable
Allowances +/- Salary Adjustments
Nontaxable Deductions are comprised of the
following:
• SSS or GSIS Contribution + Philhealth
contribution + Pag-ibig Contribution
(mandatory amount only for HDMF contribution)
Example:
Let’s try computing for the tax deduction for
monthly wage earners. Let’s project that
the employee’s monthly taxable earnings for the
payroll period is ₱100,000.00. The nontaxable
deductions would be SSS (₱ 581.30), Philhealth
(₱ 550.00), and HDMF (₱100.00). Hence the total
nontaxable income will amount to ₱ 1,231.30.
Task 1
Direction: Compute for the withholding tax for
weekly wage earners.
For instance, employee’s weekly taxable
earnings for the payroll period are ₱10,000.00.
The non-taxable deductions would amount to
the following: SSS – ₱ 363.30; PhilHealth –
₱125.00; HDMF – ₱100.00
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