MODULE 1

BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Module 1: Basic Concepts and Principles of Taxation

WHAT’S INSIDE?

This gives you an idea of the skills or competencies

Learning Outcomes you are expected to learn in the module.

This part of the lesson introduces you to the lesson

itself, what to expect, activities to accomplish, allotted
Introduction time and other significant inputs you should know

This is the activity part that would help verify your

previous knowledge of the lesson.
Activity

Analysis This is a question-based part that aims to get elicit

reactions from you.

This section provides a brief discussion of the lesson.

Abstraction This aims to help you discover and understand new
concepts and skills.

This comprises activities for independent practice to

Application solidify your understanding and skills of the topic.

The posttest. This is congruent to the

Module Assessment lessons/competencies and determines whether
learning objectives are met.

Quick Reminders
 Use the module with care.
 Read the instruction carefully before doing each task.
 Observe honesty and integrity in doing the tasks.
 Finish the task at hand before proceeding to the next.
 Enjoy and study well.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Lesson 1: Nature of Taxation Power

Learning Outcomes

At the end of the lesson, the learners are expected to:

 Define taxation
 Enumerate and compare the inherent powers of the state
 Explain the importance of taxation
 Discuss the purpose and objects of taxation
 Explain the limitations to the taxation power

Time Frame

The students are expected to complete this lesson for 2 days.

Introduction

Welcome to the new school year. You are another step closer to the
ultimate goal of a student which is to graduate. But before that, you will have to
endure and conquer the obstacles of one of the many important lesson a
student should know before graduating. Taxation.
In Lesson 1, the nature of taxation power will be discussed. You will be
introduced to the world of taxation. Although this may not be your first time
hearing the word, I am sure some of the ideas in this lesson will be new to you.
You are expected to learn the inherent powers of the state, particulary the
power of taxation. Moreover, you are expected to complete the lesson in a
span of two days.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Activity

Task 1: Self-Assessment
Directions: In your notebook, write everything that you know about taxation or taxes in general. Be
completely honest with your answer as this will help you assess your current knowledge of the topic
that you are going to learn. (100-200 words)

Task 2: What I want to know about the subject matter

Directions: Write everything you want to learn about Taxation. (100-200 words).
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________

Analysis

Directions: Answer the following questions below. Limit your answers to not more than 100 words.

1. Do you think it is important to learn taxation?

Why or why not?

2. Why is taxation vital role in every state?

3. Can a state or a country survive without

taxation? Why or why not?

4 3
Answer Writer clearly answered all
parts of the questions in
complete sentences.
Student referred to the
question in their answer.
Cite Writer cited evidence for all
parts of their answer
directly from the text. It is
clear to the reader to which
part of the text the writer is
referring.
Explain/Expand Writer explained all parts of
their answer in clear terms
to their reader. Writer
expanded their idea beyond
simple answering the
question
Writer answered all parts
of the question in complete
sentences, but the answer
may not be clear.
Writer cited evidence for
some parts of the answer
directly from the text. Some
parts of the answer do not
have evidence.
Writer explained most
parts of their answer in
clear terms. Some parts of
the answer are left
unexplained. Writer may
not have expanded their
idea.
2 1
Writer answered some
parts of the question but
left other parts incomplete.
Answer may not be in
complete sentences.
Writer may have cited
evidence for part of their
answer. Most parts of the
answer do not have
evidence from the text.
Writer explained some
parts of their answer, but
most of the answer does
not have an explanation as
to why the writer believes
that is the answer.
Writer attempted to
answer part of the
question, but the answer
is unclear to the reader
and not in complete
sentences.
Writer did not cite
evidence from the text in
any part of their answer.
Writer did not explain or
expand upon their answer.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Main Content

INHERENT POWERS OF THE STATE

When a Sovereign State is born, it exists with indispensable powers necessary for its survival. These
powers are called “inherent powers”. They exist as essential force in order that a government can
command, maintain peace and order, and survive, irrespective of any Constitutional provision.

INHERENT POWERS OF SOVEREIGN STATE

Police Power Eminent Domain Power Taxation Power

The power to protect
citizens and provide for
safety and welfare of
societySAFETY AND
WELFARE OF SOCIETY
The power to take private The power to enforce
property (with just contributions to support the
compensation) for public government , and other
use AND WELFARE OF inherent powers of the State
SOCIETY AND WELFARE OF

Nature of Police Power

Police power refers to the inherent power of the state to legislate for the protection
of health, welfare and morals of the community.

This power is restricted by the “due process clause” of the Constitution which
provides that person may be deprived of “life, liberty or property, without due process of
law”.

Nature of Eminent Domain

Eminent domain refers to the inherent power of the state to take private property for
public purpose. It is founded upon the idea that the common necessities and interests
of the community transcend individual rights in property.

The Constitution limits the exercise of the power by providing that property may not be
taken without just compensation.

“Just compensation” means paying the owner the full monetary equivalent of the
property taken for public use.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Nature of Taxation Power

The power is an attribute of sovereignty that is exercised by the government for the
betterment of the people within its jurisdiction whose interest should be served,
enhanced and protected.

The nature of tax power includes the following:

1. Inherent power of sovereignty
2. Essentially a legislative function
3. For public purposes
4. Territorial in operation
5. Tax exemption of government
6. The strongest amont the inherent powers of the government
7. Subject to Constitutional and inherent limitations
8.

TaTaxation is defined as
1. A power by which an Independent State, through its law-making
body, raises and accumulates revenue from its inhabitants to pay
the necessary expenses of the government.
2. A process of imposing a charge by governmental authority on Taxation Defined
property, individuals or transactions to raise money for public
purposes
3. A means by which the Sovereign State through its law-making
body demands for revenue in order to support its existence and
carry out its legitimate objectives.

Importance of Taxation

Taxation is very important for the continuous existence of a nation. It is the primary source
of government revenue that is used to effectively and permanently perform government
functions.
Taxation power exists inseparably with the state. It is essential for the existence of the
government. Taxation is exercised to raise revenue for the very existence of the
government to serve the people for whose benefit taxes are collected.
Without taxation, the other inherent powers (police and eminent domain powers) would be
paralyzed. Without revenue, there can be no continuing government. Without government,
there can be no civilization.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Purposes of Taxation

Revenue Purpose Regulatory Purpose Compensatory Purpose

-primary purpose of taxation
is to raise revenue by
collecting fund for the
support of the government
in promoting the general
welfare of its inhabitant
-secondary objective of
imposing tax is to regulate
inflation, achieve economic
and social stability and
serve as key instrument for
social control purpose
-a tax may be used to make
up for the benefit received.
Taxation is a way of giving
back the expected
economic and socia benefits
due to the inhabitants, thus,
it serves a compensatory
purpose

OBJECTS OF
TAXATION

- these refers to the SUBJECT to which taxes are IMPOSED. Generally, taxes are imposed on the
following:

PERSONS PROPERTIES EXCISE OBJECTS

a. natural person- refers a. real properties – a. transactions – the act
to individual taxpayers immovable properties of conducting activitie
such as land and related to any business
b. juridical person –
buildings or profession
includes corporations,
partnerships and any b. personal properties – b. privilege – a benefit
association movable properties such derived through
as car and other gratuitous transfer by
personal belongings fact of death or donation
c. tangible properties- c. right – a power,
that which may be felt or faculty or demand
touched and are inherent in one person
necessarily corporeal, and incidental to another
either real or personal
d. interest – an
properties
advantage accruing from
d. Intangible properties- anything
properties that are
“rights” rather than
physical objects.
Examples are patents,
stocks and franchises
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Limitations to the Power of Taxation

Although taxation power is supreme, its exercise is not absolute because it is subject to INHERENT and
CONSTITUTIONAL limitations.

INHERENT LIMITATIONS CONSTITUTIONAL LIMITATIONS

1. Taxes may be levied only for public
purposes
2. Being inherently legislative, taxation
may not be delegated
3. Tax power is limited to territorial
jurisdiction of the State
4. Taxation is subject to international
comity
5. Government entities are generally tax-
exempt
1. Due process of law
2. Equal protection of law
3. Rule of uniformity and equity
4. Non-impairment of contracts
5. President’s power to veto separate
items in revenue or tariff bills
6. Exemption from property taxation of
religious, charitable or educational entities,
nonprofit cemeteries, chruches and
covents appurtenant thereto
7. No public money shall be appropriated
for religious purposes
8. Majority of all the members of the
Congress required in granting tax
exemption
9. The Congress may not deprive the
Supreme Court of its jurisdiction in all
cases involving the legality of any tax,
impost or assessment or toll or any penalty
imposed in relation to tax
10. No imprisonment for nonpayment of
poll tax
11. Tax collection shall generally be
treated as general funds of the
government

FUN TAX FACT!

Albert Einstein apparently found taxes more inscrutable than
theoretical physics. He once said, “The hardest thing in the
world to understand is the income tax” (that is according to Leo
Mattersdorf)
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Application
My Own Experience
Direction: Now that you have basic ideas about taxation, recall 5 experiences you have with it.

Follow-Up Question: Do you think your experience with tax helped the country in general?. (Limit your
answer to 100-150 words)
_______________________________________________________________
_______________________________________________________________ RUBRICS
_______________________________________________________________
Content 3
_______________________________________________________________
_______________________________________________________________ Organization 2
_______________________________________________________________
_______________________________________________________________ Total 5
_______________________________________________________________
_______________________________________________________________

Closure

Congratulations for almost finishing up your lesson 1. Almost because there’s still a post test
waiting for you. For the next lesson you are going to learn the stages, aspects and processes of
taxation.

Glossary
The following terms used in this module are defined as follows:
Alien- A person who is not a citizen or national of a given country . The term “alien” is synonymous to
“foreign national”.
Revenue (Government) – The money received by the government from taxes and non-tax sources
to enable it to undertake government expenditures.
Sovereign State – a state with borders where people live, and where government makes laws and
talks to other sovereign states.

References
Duncano, D. (2012). National Internal Revenue Code of 1997. National Bookstore. Mandaluyong City,
Philippines.
Valencia E. and Roxas, G. (2013). Income Taxation Principles and Laws with Accounting
Applications. Valencia Educational Supply. Bagui City, Philippines.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Module 1: Basic Concepts and Principles of Taxation

WHAT’S INSIDE?

This gives you an idea of the skills or competencies

Learning Outcomes you are expected to learn in the module.

This part of the lesson introduces you to the lesson

itself, what to expect, activities to accomplish, allotted
Introduction time and other significant inputs you should know

This is the activity part that would help verify your

previous knowledge of the lesson.
Activity

Analysis This is a question-based part that aims to get elicit

reactions from you.

This section provides a brief discussion of the lesson.

Abstraction This aims to help you discover and understand new
concepts and skills.

This comprises activities for independent practice to

Application solidify your understanding and skills of the topic.

The posttest. This is congruent to the

Module Assessment lessons/competencies and determines whether
learning objectives are met.

Quick Reminders
 Use the module with care.
 Read the instruction carefully before doing each task.
 Observe honesty and integrity in doing the tasks.
 Finish the task at hand before proceeding to the next.
 Enjoy and study well.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Lesson 2: Stages, Aspects and Processes of Taxation

Learning Outcomes

At the end of the lesson, the learners are expected to:

 Identify and explain the stages of taxation
 Discuss the situs of taxation
 Identify the characteristics and classifications of taxes

Time Frame

The students are expected to complete this lesson for 2 days.

Introduction

Congratulations for finishing lesson one. Now you will be learning about
the stages, aspects and processes of taxation. You are going to learn how
taxation starts and how it ends. Furthermore, you will also learn the principles
of a perfect tax system as well as the means to escape taxation. Lastly, the
nature and characteristics of taxes will also be discussed.

Learning Tasks
Task 1: Own Diagram
Direction: In your notebook, challenge your imagination by making a diagram of how do you think
taxation begins and ends. Label and make a brief discussion about each process(100-200 words)
Example:
Diagram of a Life Cycle of a Butterfly
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Eggs

Caterpillar
Butterfly
(larva)

Chrysalis
(pupa)

Analysis

Directions: Answer the following questions below. Limit your answers to not more than 100 words.

1. Do you think the Philippines has a perfect tax

system? Why or why not?

2. Would you agree that foreigner should be taxed in

the Philippines if they earn income here?

3. Use your imagination and provide one way to

escape taxation.

4 3
Answer Writer clearly answered all
parts of the questions in
complete sentences.
Student referred to the
question in their answer.
Cite Writer cited evidence for all
parts of their answer
directly from the text. It is
clear to the reader to which
part of the text the writer is
referring.
Explain/Expand Writer explained all parts of
their answer in clear terms
to their reader. Writer
expanded their idea beyond
simple answering the
question
Writer answered all parts
of the question in complete
sentences, but the answer
may not be clear.
Writer cited evidence for
some parts of the answer
directly from the text. Some
parts of the answer do not
have evidence.
Writer explained most
parts of their answer in
clear terms. Some parts of
the answer are left
unexplained. Writer may
not have expanded their
idea.
2 1
Writer answered some
parts of the question but
left other parts incomplete.
Answer may not be in
complete sentences.
Writer may have cited
evidence for part of their
answer. Most parts of the
answer do not have
evidence from the text.
Writer explained some
parts of their answer, but
most of the answer does
not have an explanation as
to why the writer believes
that is the answer.
Writer attempted to
answer part of the
question, but the answer
is unclear to the reader
and not in complete
sentences.
Writer did not cite
evidence from the text in
any part of their answer.
Writer did not explain or
expand upon their answer.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Main Content

The first part of this lesson is about how Taxation starts and ends.
STAGES OF TAXATION
Taxation involves three stages namely:
1. LEVY
Levy or imposition of taxes involves the passage of tax laws or ordinances through legislation. This
is the first step of the Taxation process. Without levy there can be no Taxation.

2. ASSESSMENT
Assessment involves the act of administration and implementation of the tax laws by the executive
through its administrative agencies such as the BIR or Bureau of Customs. The word “assessment”
as used here, means the appraisal and valuation of the subject of taxation.. After levy (which is
again the process of making Taxation laws), assessment follows. To be specific this is when the
taxing authority computes for your tax dues. Thus, the term , assessment.

3. PAYMENT OF TAX
The last stage of taxation is the payment/collection of tax.
Payment of tax is a process involving the act of compliance by the taxpayer in contributing his share
to defray the expenses of the government. It is also called “tax collection”.

The figure below shows how taxation starts and ends.

LEVY ASSESSMENT PAYMENT

PRINCIPLES OF A SOUND TAX SYSTEM

Is there a perfect or flawless tax system? What makes a tax system perfect?
According to Adam’s Smith’s Canons of Taxation, the fundamental of a sound tax system are:
1. Fiscal Adequacy
2. Equality or Theoritical Justice
3. Administrative Feasibility

FISCAL ADEQUACY
This principle states that the sources of revenue (income) of the government should be enough to meet
the demand of public expenditures regardless of business condition. To achieve fiscal adequacy, there
should be a balance between government income and expenses. A balanced budget is achieved when
revenue equals the expenditures.
EQUALITY OR THEORITICAL JUSTICE
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

This principle on the other hand, states that the tax burden must be according to the taxpayer’s ability to
pay. It is based on the philosophy that “he who received more should give more.” The contribution of
each individual to the government should be fair enough according to his earnings and wealth.
ADMINISTRATIVE FEASIBILITY
This principle states that tax laws should be convenient, just, uniform and efffective in their
administration. Their exercise should be convenient as to the place, time and mode of payment and not
burdensome or discouraging to business.
Do you think the Philippines has a sound tax system? You will have to answer that later.

ESCAPE FROM TAXATION

Do YOU think you can escape taxation? The answer is a definite YES.
There are actually ways you can escape the burden of taxation. We call it tax evasion and tax
avoidance.
TAX EVASION
Under this method, the taxpayer uses UNLAWFUL MEANS to evade or lessen the payment of taxes.
This form of tax dodging is PROHIBITED, and therefore, subject to civil and/or criminal penalties.
ExampleS of this method are by not understating sales in your income statement, fabricating of
expenses and etc.
TAX AVOIDANCE
Also called as Tax Minimization. It is reducing or totally escaping payment of taxes through LEGALLY
permissible means. Tax avoidance is valid if used by the taxpayer in good faith. The law does not forbid
it and it does not constitute tax fraud. Examples include tax option, shifting, transformatin and
exemption.

SITUS OF TAXATION
Situs of Taxation refers to the PLACE OF TAXATION or THE STATE or POLITICAL UNIT which has
jurisdiction to impose tax over its inhabitants. This defines boundaries of the taxing power over the objects
of taxation in terms of location whether or not they shall be subject to tax.

SUMMARY APPLICATION
GENERAL RULES OF TAX SITUS

Source or Location of Object

(Taxable?)
Nature of Tax Citizenship Residency W/in the Outside the
Philippines Philippines
I. Income Tax Filipino Resident YES YES
Filipino Nonresident YES NO
Aliens Resident YES NO
Aliens Nonresident YES NO
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

II. Transfer Tax Filipino Resident YES YES

Filipino Nonresident YES YES
Aliens Resident YES YES
Aliens Nonresident YES NO

III. Business Tax YES NO

HOW TO READ THE SITUS?

If the Nature of Tax is INCOME TAX, and your Citizenship is
FILIPINO and you are currently residing in the Philippines,
your INCOME earned within the Philippines and outside the
Philippines is TAXABLE

NATURE OF TAXES
Taxes are forced burdens, charges, exactions, impositions or contributions assessed in accordance with
some reasonable rule for apportionment, by authority of a sovereign state, upon the person, property or
rights exercised, within its jurisdiction, to provide public revenues for the support of the government, the
administration of the law , or the payment of public expenses.

ESSENTIAL CHARACTERISTICS OF TAXES

1. Enforced Contribution – Taxes are not voluntary. It is a mandatory burden that should be paid by the
taxpayer.

2. Imposed by the legislative body – The Congress makes tax laws.

3. Proportionate in character – The “ability to pay principle” is the basic rule in collecting taxes. Those who
earn more contribute more than those with lesser earnings.
4. Payable in the form of money – Money is the preferred payment of taxes. If property is taken to satisfy
tax liability, the property is sold through public auction to satisfy the tax obligation.

5. Imposed for the purpose of raising revenue – Taxes are the primary source of government funds to
finance its expenses and projects.

6. Used for a public purpose – Money is taken from the public so it can be returned to them in the form of
public benefits.

7. Enforced on some persons, properties or rights- Objects of taxation are either tangible or intangible
properties, including business transactions.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

8. Commonly required to be paid at regular intervals- The dates for paying of taxes are fixed by the law to
comply with the principle of administrative feasibility.

9. Imposed by the sovereign state within its jurisdiction- The enforcement of tax is subject to territorial
jurisdiction and international comity.

CLASSIFICATIONS OF TAXES
1. AS TO PURPOSE
a. Revenue or Fiscal
These taxes are imposed solely for the purpose of raising revenue for the government.
(e.g. Income tax, value added tax and transfer taxes)

b. Regulatory, Special or Sumptuary

These taxes are imposed for the purpose of achieving some social or economic goals having no
relation to the raising of revenue (e.g. Customs duties, protective tariff on imports)

c. Compensatory
Taxes may be imposed for the equitable distribution of wealth and income in the society.

2. AS TO OBJECT OR SUBJECT MATTER

a. Personal, Poll or Capitation
These taxes are fixed in amount and imposed on persons residing within a specified territory
regardless of the amount of their property or their occupation or business (e.g. community tax)

b. Property
These taxes are imposed on personal or real property based on its proportionate value in
accordance with some other

c. Excise
These taxes are imposed upon the performance of a right or act, the enjoyment of a privilege or
the engagement in an occupation (e.g. professional tax, income tax, estate tax, donor’s tax and
VAT)

3. AS TO DETERMINATION OF AMOUNT
a. Ad Valorem
These taxes are fixed amounts in proportion to the value of the property with respect to which
the tax is assessed. (e.g. real estate tax, custom duties and excise taxes on liquors, cigars ,
etc.)

b. Specific
These taxes are fixed amounts imposed and based on some standard of weight or
measurement.

4. AS TO WHO BEARS THE BURDEN

a. Direct
These taxes are nontransferable. They are demanded from persons who are bound by law to
pay the tax. (e.g. income tax, transfer taxes)

b. Indirect
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

These taxes are transferable. The liability for the payment of tax falls on one person but the
burden thereof can be shifted or passed to another (e.g VAT)

5. AS TO SCOPE OR AUTHORITY COLLECTING THE TAX

a. National
These taxes are collected by the National Government.(e.g. Estate and Donor’s tax, income tax,
VAT, Excise tax)

b. Local or Municipal
These taxes are collected by the Municipal Government (e.g. Community tax)

6. AS TO RATE OR GRADUATION
a. Proportional or Flat rate
The rate of the tax is based on a fixed percentage of the amount of the property, receipt or other
basis to be taxed (e.g. VAT, real estate tax)

b. Progressive or Graduated rate

The rate of the tax increases as the tax base or bracket increases (e.g. income tax)

c. Regressive rate
The rate of tax decreases as the tax base or bracket increases. There is no regressive tax in the
Philippines

d. Digressive Rate
A fixed rate is imposed on a certain amount but diminishes gradually on sums below it

e. Mixed Tax
It is a tax system that uses a comibination of the different tax rates.

Application

My Neighborhood’s Experience
Direction: Ask around your neighborhood about their experiences with tax or taxation in general. Ask about
what classification of taxes they are paying. Indicate atleast 3 classification of tax (Please ask safely by
observing social distancing protocol. Wear face mask and be safe.) If it is not feasible to ask your neighbor,
you may use social networking sites such as facebook and ask a friend about their experiences and what
kind of taxes they are paying.

My Opinion
Will you ever avoid paying tax in the future? Why or why not?
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION

Closure

Congratulations for completing Module 1. Now that you are equipped with the basics of taxation
you are now ready to conquer Module 2 , which will surely impart a lot of lessons to your mind.
But before that, you will have to hurdle the obstacle of the post assessment below. Good luck!

References
Duncano, D. (2012). National Internal Revenue Code of 1997. National Bookstore. Mandaluyong
City, Philippines.
Valencia E. and Roxas, G. (2013). Income Taxation Principles and Laws with Accounting
Applications. Valencia Educational Supply. Bagui City, Philippines.
 MODULE 1
BASIC CONCEPTS AND PRINCIPLES OF TAXATION
 MODULE 2
CONCEPT OF INCOME

Module 2: CONCEPT OF INCOME

WHAT’S INSIDE?

This gives you an idea of the skills or competencies

Learning Outcomes you are expected to learn in the module.

This part of the lesson introduces you to the lesson

itself, what to expect, activities to accomplish, allotted
Introduction time and other significant inputs you should know

This is the activity part that would help verify your

previous knowledge of the lesson.
Activity

Analysis This is a question-based part that aims to get elicit

reactions from you.

This section provides a brief discussion of the lesson.

Abstraction This aims to help you discover and understand new
concepts and skills.

This comprises activities for independent practice to

Application solidify your understanding and skills of the topic.

The posttest. This is congruent to the

Module Assessment lessons/competencies and determines whether
learning objectives are met.

Quick Reminders
 Use the module with care.
 Read the instruction carefully before doing each task.
 Observe honesty and integrity in doing the tasks.
 Finish the task at hand before proceeding to the next.
 Enjoy and study well.
 MODULE 2
CONCEPT OF INCOME

Lesson 1: Income

Learning Outcomes

At the end of the lesson, the learners are expected to:

 Define income
 Differentiate income from other terms
 Differentiate taxable and nontaxable income

Time Frame

The students are expected to complete this lesson for 2 days

Introduction

Module 2 will introduce you to the Concept of Income. The following

lesson will be crucial for you to learn because this will serve as one of the
foundations for the subject matter. It is important that you are equipped with
the concept of income moving forward.

Activity
Task 1: Self-Assessment
Directions: In your notebook, write everything that you know about income in general. Be
completely honest with your answer as this will help you assess your current knowledge of the
topic that you are going to learn. (50-100 words)
 MODULE 2
CONCEPT OF INCOME

Task 2: Compute the Income

Directions: If you are a working student and is earning, provide details of how you compute your
income. If you are a full time student, provide details of how your family compute income as a
whole. (Amount should not be the exact amount. You can provide imaginary numbers.)

Analysis

Directions: Answer the following questions below. Limit your answers to not more than 100 words.

1. What is/are your experiences in managing your

or someone else’s income?

2. Did you have any idea that income is taxable?

3. Do you think it is necessary to tax your hard-

earned income? Why or why not?

4 3
Answer Writer clearly answered all
parts of the questions in
complete sentences.
Student referred to the
question in their answer.
Cite Writer cited evidence for all
parts of their answer
directly from the text. It is
clear to the reader to which
part of the text the writer is
referring.
Explain/Expand Writer explained all parts of
their answer in clear terms
to their reader. Writer
expanded their idea beyond
simple answering the
question
Writer answered all parts
of the question in complete
sentences, but the answer
may not be clear.
Writer cited evidence for
some parts of the answer
directly from the text. Some
parts of the answer do not
have evidence.
Writer explained most
parts of their answer in
clear terms. Some parts of
the answer are left
unexplained. Writer may
not have expanded their
idea.
2 1
Writer answered some
parts of the question but
left other parts incomplete.
Answer may not be in
complete sentences.
Writer may have cited
evidence for part of their
answer. Most parts of the
answer do not have
evidence from the text.
Writer explained some
parts of their answer, but
most of the answer does
not have an explanation as
to why the writer believes
that is the answer.
Writer attempted to
answer part of the
question, but the answer
is unclear to the reader
and not in complete
sentences.
Writer did not cite
evidence from the text in
any part of their answer.
Writer did not explain or
expand upon their answer.
 MODULE 2
CONCEPT OF INCOME

Main Content

CONCEPT OF INCOME
One popular definition of income is the amount of wealth accumulated plus savings and the value
of personal consumption. (Haig-Simons’ Definition)
The term “income” refers to all EARNINGS derived from service rendered (labor), from capital
(business or investment), or both, including gain derived from sale or exchange of personal or real
property classified as either ordinary or capital asset.

RETURN ON CAPITAL
Since income is commonly defined as all wealth which flows into a person’s hand rather than a
mere RETURN OF CAPITAL, it is, therefore, a RETURN ON CAPITAL. A return of capital happens
when the money you invested return to your pocket. A return on capital happens when the money
you invested gain something. The gain is the INCOME.
A sale does not automatically mean income. To be considered income, the sale must exceed its
related costs. Thus, an income cannot be determined by just receiving cash as a result of sales.
Example.
If a P1,000,000 investment earns P90,000, the return of capital is P1,000,000 and the return on
capital (income) is P90,000.

Distinction between Income and Other Terms

Income vs Capital

Capital is the original investment or fund used in order to generate earnings which is called the income.
Capital is a wealth, while income is the service of wealth. The fact is that property is a tree, income is the
fruit; labor is a tree, income is the fruit.

Income vs Revenue

Income refers to the earnings of individual persons, partnerships, corporation or estate and trust whether or
not subject to tax while Revenue pertains to all funds accruing to the treasury of the government derived
from tax, donation, grants and any other source.

Income vs Receipts

Receipts are considered cash collected over a business period. It may include capital as well as its
earnings, while INCOME refers to the amount after excluding capital invested, cost of goods sold and other
deductions allowed by law.
 MODULE 2
CONCEPT OF INCOME

Nontaxable and Taxable Income

It is important for you to know the difference between taxable and nontaxable income for it will be useful in
the following modules.
Income could be tax-exempt or taxable. Taxable income could either be reportable in the annual tax return
or could be collected with final tax, whichever is applicable.

NONTAXABLE INCOME
In order for an income to be classified as nontaxable, it should be excluded by law or treaty
from taxation. Whenever this kind of income is received, it is no required to be included in the
determination of taxable income; neither shall it be included as part of the gross income.

TAXABLE INCOME
The term “taxable income” means the pertinent items of gross income specified in the Tax
Code less the deductions, if any, and/or personal and additional exemptions authorized by such
types of income by the Tax Code or other special laws.

(The key takeaway here is that TAXABLE INCOME are items of gross income specifically written in the
TAX CODE. Any other income not specified in the tax code as taxable are NONTAXABLE INCOME)

CHARACTERISTICS OF TAXABLE INCOME

- an income to be taxable should have the following characteristics

1. There must be gain or profit

A value is received in the form of cash or its equivalents as a result of rendition of service or
earnings in excess of capital invested. For an income to be taxable, there should always be gain
or profit.

Example:

Mark acquired a car for P900,000 three years ago. The current value of his car right now is
P360,000. He sold his car for P500,000.

Question: Is the sale taxable? Why or why not?

Answer: Yes, the sale is taxable because it has a gain worth P140,000

Price of the car sold P500,000

Less: Current value of the car -360,000
Gain from sale of car P140,000
 MODULE 2
CONCEPT OF INCOME

2. The gain must be realized or received

The realization of gain may take form of actual receipt of cash or may occur as a construction
receipt of income. For an income to be taxable , a gain should be realized (by actually receiving
cash or constructively receiving income)

Example
In 2018, Mr. Takashi, a realtor, purchased property for P1,000,000. At the end of 2019, the
property had a market value of P1,500,000. In 2020, he sold the property for P2,000,000.

Mr. Takashi realized an income worth P1,000,000.

Sale of the property P2,000,000

Less: Cost of the property 1,000,000
Realized income from sale P1,000,000

Application
Task 4
Direction: Ask around your family/neighborhood about what type/classification of income they earn. Write
atleast 5 names (you may not use their full name) and their corresponding type of income, and indicate
whether or not their income is taxable or nontaxable. (Please ask safely by observing social distancing
protocol. Wear face mask and be safe. If going around your neighborhood is not feasible, you may use
social media sites like Facebook and ask your friends about whether or not their income is taxable)

Closure

Congratulations for another lesson learned. Now, you are equipped with the basic knowledge of
what income is and whether or not it is taxable or not. Moving forward you will learn other
sources of income, accounting tax periods and many more in the following lesson. But before
that please answer the post assessment below.

References
Duncano, D. (2012). National Internal Revenue Code of 1997. National Bookstore. Mandaluyong
City, Philippines.
Valencia E. and Roxas, G. (2013). Income Taxation Principles and Laws with Accounting
Applications. Valencia Educational Supply. Bagui City, Philippines.
 MODULE 2
CONCEPT OF INCOME

Module 2: CONCEPT OF INCOME

WHAT’S INSIDE?

This gives you an idea of the skills or competencies

Learning Outcomes you are expected to learn in the module.

This part of the lesson introduces you to the lesson

itself, what to expect, activities to accomplish, allotted
Introduction time and other significant inputs you should know

This is the activity part that would help verify your

previous knowledge of the lesson.
Activity

Analysis This is a question-based part that aims to get elicit

reactions from you.

This section provides a brief discussion of the lesson.

Abstraction This aims to help you discover and understand new
concepts and skills.

This comprises activities for independent practice to

Application solidify your understanding and skills of the topic.

The posttest. This is congruent to the

Module Assessment lessons/competencies and determines whether
learning objectives are met.

Quick Reminders
 Use the module with care.
 Read the instruction carefully before doing each task.
 Observe honesty and integrity in doing the tasks.
 Finish the task at hand before proceeding to the next.
 Enjoy and study well.
 MODULE 2
CONCEPT OF INCOME

Lesson 2: Sources of Income and other Income terms

Learning Outcomes

At the end of the lesson, the learners are expected to:

 Discuss sources of income
 Classify income
 Identify tax accounting periods
 Discuss the methods of reporting income and expenses

Time Frame

The students are expected to complete this lesson for 2 days

Introduction

Module 2 will introduce you to the Concept of Income. The following lesson will be crucial
for you to learn because this will serve as one of the foundation for the subject matter. It is
important that you are equipped with the concept of income moving forward.
 MODULE 2
CONCEPT OF INCOME

Learning Tasks
Task 1: Self-Assessment
Directions: Write the following items to their corresponding source of income.

Dividends from a foreign corporation in the US

Sales from business in Cavite,
Dividends from a foreign corporation in Makati
Receipt from service rendered in Davao
Salary of an OFW in Brunei
Income from sales shipped abroad
Interest from bonds abroad

Income within Income outside Income partly within/outside

Analysis

Directions: Answer the following questions below. Limit your answers to not more than 100 words.

1. Why do you think income from outside the Philippines

should be taxed?

2. What do you think is the most convenient source of

income?

4 3
Answer Writer clearly answered all
parts of the questions in
complete sentences.
Student referred to the
question in their answer.
Cite Writer cited evidence for all
parts of their answer
directly from the text. It is
clear to the reader to which
part of the text the writer is
referring.
Explain/Expand Writer explained all parts of
their answer in clear terms
to their reader. Writer
expanded their idea beyond
simple answering the
question
Writer answered all parts
of the question in complete
sentences, but the answer
may not be clear.
Writer cited evidence for
some parts of the answer
directly from the text. Some
parts of the answer do not
have evidence.
Writer explained most
parts of their answer in
clear terms. Some parts of
the answer are left
unexplained. Writer may
not have expanded their
idea.
2 1
Writer answered some
parts of the question but
left other parts incomplete.
Answer may not be in
complete sentences.
Writer may have cited
evidence for part of their
answer. Most parts of the
answer do not have
evidence from the text.
Writer explained some
parts of their answer, but
most of the answer does
not have an explanation as
to why the writer believes
that is the answer.
Writer attempted to
answer part of the
question, but the answer
is unclear to the reader
and not in complete
sentences.
Writer did not cite
evidence from the text in
any part of their answer.
Writer did not explain or
expand upon their answer.
 MODULE 2
CONCEPT OF INCOME

Main Content

SOURCES OF INCOME
Source is ascribed to the place wherein the income is earned. It is governed by the situs of taxation. This
classification of income is necessary to determine whether such income is subject to tax or not.
It is important to know that income may be earned from (a) within the Philippines; (b) without (outside) the
Philippines; or (c) partly within and partly without (outside) the Philippines.

Sources of Income Income Taxpayers

Earned RC/DC NRC/Aliens/FC
Within the Philippines Taxable Taxable
Without (outside) the Philippines Taxable Nontaxable
Partly within and without Taxable Partly Taxable
RC – Resident Citizen
DC – Domestic Corporation
NRC – Nonresident Citizen
FC – Foreign Corporation

Income from Sources Within the Philippines

Income within comprises earnings from within the Philippine territory. Examples are:
1. Compensation for labor or service derived from Philippine source
2. Interest on bonds, notes, deposits and the like earned in the Philippines
3. Dividends declared received from domestic corporations
4. Rentals and royalties from property located within the Philippines
5. Gains, profits and income rom sale of real property as well as from personal property in the
Philippines

As a rule, if income is derived within the Philippines, such income is taxable within.

Income from Sources Outside the Philippines

Income without refers to earnings coming from outside the Philippines or income derived from foreign
countries. Examples are:
1. Compensation for labor or service rendered by overseas contract workers
2. Interest on bonds, notes, deposits and the like earned abroad
3. Dividends received from nonresident foreign corporations
4. Rentals and royalties from property located outside the Philippines
5. Gains, profits and income from sale of real property as well as from personal property located
outside the Philippines

In general, income earned outisde the Philippines is taxable only when the taxpayer is a resident
Filipino citizen or a Domestic Corporation.

Conversely, earnings derived outside the Philippines by nonresident Filipino citizens and Foreign
Corporations are not subject to tax in the Philippines.
 MODULE 2
CONCEPT OF INCOME

Income Partly Within and Partly Outside the Philippines

Income Partly Within and Partly Without are earnings from sources partly within and parly without the
Philippines includes gains, profits and income derived from:
1. Transportation or other services rendered partly within and partly outside, and
2. Dividend received by a resident citizen from resident foreign corporation

In general, when an income is earned partly from within and without, only income within is taxable in
the Philippines, except if the taxpayer is a resident citizen or domestic corporation. A Filipino
citizen or domestic corporation whose income is derived within and without is generally subject to
tax.

CLASSIFICATIONS OF INCOME

1. Compensation Income – is the gain derived from labor, especially employment (earned from
employer-employee relationship) such as salaries and commissions. Once you graduate and work
as an employee in a company, your income will be called “compensation income”.

2. Profession or Business Income – the value derived from an exercise of profession, business or
utilization of capital including profit or gain derived from sale or conversion of assets. Examples are
net income from business and gain from the sale of assets used in trade or business.
3. Passive Income – an income in which the taxpayer merely waits for the amount to come in.
Examples are interest, prizes and winnings.

4. Capital Gain – an income derived from sale of assets not used in trade or business. Examples are
sale of family home and other capital assets.
All income above could be earned by a person at the same taxable year.
An Income Tax Return (ITR) is a formal statement of the taxpayer’s taxable income and
deductions reported in the BIR prescribed form to be filed and paid quarterly.

For the final quarter (there are four quarters in a year), the Annual Income Tax Return is prepared.

FORMS and VALUATION of Income

Income may be received either in the form of cash, property, service or a combination of the three.

Cash as income pertains to money or money substitutes received as compensation or earnings

derived from labor, practice of profession, and coduct of business. Examples of cash are bills and
coins which are in circulation and legal tender, bank drafts, money order and treasury warrants.

Property as income denotes the right of ownership over a tangible or intangible thing earned as a
result of labor, business or practice of profession. Examples are real estate, stocks, bonds, etc.
 MODULE 2
CONCEPT OF INCOME

Service is a form of income based on performance received in payment for the work previously
rendered by one person to another.

In general, taxable income is valued as follows:

1. Cash received for income earned.
2. Fair value of property received as payment for income earned.
3. Fair value of the service received as payment of income earned.

TAX ACCOUNTING PERIODS

Taxes are commonly required to be paid at regular intervals usually on an annual basis. The dates
for paying taxes are fixed by law. Depending on the nature of your income, the law allows the
following accounting period for tax purposes.

Calendar Period Fiscal Period

A calendar year covers a period A fiscal year covers a period of 12
from January 1 to December 31 of months which ends on the last day
the taxable year. of any month other than December
31

Short Period Variable Period

A short period covers a period A variable year covers a period
less than 12 months. that varies depending on the
nature of the income earned. It
may be monthly, quarterly , and
etc.

METHODS OF REPORTING INCOME AND EXPENSES

The question now is how would you record or report your income and expenses ? The timing when income
was earned or expense was incurred is important. In the Philippines, accountants may choose between the
following methods of accounting in reporting income and expenses, namely (a) cash method, (b) accrual
method and (c) special methods

CASH METHOD
Cash method generally reports income upon cash collection and reports expenses upon payment.

ACCRUAL METHOD
Accrual method generally reports income when earned and reports expenses when incurred. This will be
highlighted in the following lessons

SPECIAL METHODS
 MODULE 2
CONCEPT OF INCOME

The taxpayer may use special methods of reporting income when the nature of its operation is peculiar to
the business industry.
The following are special methods in reporting income:
1. Installment
2. Deferred payment
3. Long-term construction contract classified into:
a. Completed contract method
b. Percentage of completion method
4. Farming, categorized as follows:
a. Cash basis
b. Accrual basis
c. Crop basis
Special methods will not be given much importance in this lesson because the whole subject would be
focus on accrual and cash method of reporting income and expenses.

Application
Task 4
Direction: You are required to write as many examples of income you can write. You should also indicate
the origin or source of the income. (Minimum of 10 items)
Example. Service income from services performed in Tagum (within the Philippines)

Closure

Congratulations for another lesson learned. You successfully finished module 2. Moving forward
you will learn about gross compensation income and gross income from businesses. But before
that please answer the post assessment below.

Glossary
The following terms used in this module are defined as follows:
.Corporation – a company or group of people authorized to act as a single entity and recognized
as such in law
 MODULE 2
CONCEPT OF INCOME

References
Duncano, D. (2012). National Internal Revenue Code of 1997. National Bookstore. Mandaluyong
City, Philippines.
Valencia E. and Roxas, G. (2013). Income Taxation Principles and Laws with Accounting
Applications. Valencia Educational Supply. Bagui City, Philippines.
 MODULE 3
CONCEPT OF INCOME

Module 3: GROSS INCOME

WHAT’S INSIDE?

This gives you an idea of the skills or competencies

Learning Outcomes you are expected to learn in the module.

This part of the lesson introduces you to the lesson

itself, what to expect, activities to accomplish, allotted
Introduction time and other significant inputs you should know

This is the activity part that would help verify your

previous knowledge of the lesson.
Activity

Analysis This is a question-based part that aims to get elicit

reactions from you.

This section provides a brief discussion of the lesson.

Abstraction This aims to help you discover and understand new
concepts and skills.

This comprises activities for independent practice to

Application solidify your understanding and skills of the topic.

The posttest. This is congruent to the

Module Assessment lessons/competencies and determines whether
learning objectives are met.

Quick Reminders
 Use the module with care.
 Read the instruction carefully before doing each task.
 Observe honesty and integrity in doing the tasks.
 Finish the task at hand before proceeding to the next.
 Enjoy and study well.
 MODULE 3
CONCEPT OF INCOME

Lesson 1: Gross Compensation Income

Learning Outcomes

At the end of the lesson, the learners are expected to:

 Define gross income
 Discuss different types of gross compensation income

Time Frame

The students are expected to complete this lesson for 1 day

Introduction

In this lesson, gross compensation income will be discussed. The following lesson will be
important for you to learn because this will become a guide once you step into the professional
world someday.

Activity
Task 1: Self-Assessment
Directions: Mr. Romualdez needs your help in solving for his gross compensation income for the
year 2018. (This is an assessment task. Use any knowledge you have about gross compensation
income.)
The following items are reported by Mr. Romualdez.
Salary for a year 112,000 Hazard pay 4,600
Thirteenth month pay 10,500 Emergency pay 3,500
Overtime pay 1,620 Other allowances 6,000
Tips during the year 4,340
Availed vacation leave pay 2,140
 MODULE 3
CONCEPT OF INCOME

Analysis
Directions: Answer the following questions below. Limit your answers to not more than 100 words.

1. How do you think the government came up with the

idea of imposing tax to compensation income?

2. What makes compensation income taxable?

Main Content

GROSS INCOME DEFINED

Gross income means the pertinent items of income referred to in Section 32 (A) of the Tax Code. It
includes all income from whatever source(unless exempt from tax by law) including, but not limited
to, the following items:
1. Compensation for services in whatever form paid including fees, salaries and wages,
commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Gains from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partners’ distributive share from the net income of general professional partnership
 MODULE 3
CONCEPT OF INCOME

GROSS COMPENSATION INCOME

Gross compensation income means any remuneration for rendering personal services.
Generally, compensation income Is obtained from an employer-employee relationship. An
income earned by a cashier in a shopping mall is compensation income. An income earned by a
teller in the bank is a compensation income.

When does an Employer-Employee Relationship Exist?

Generally, an employer-employee relationship exists when the person for whom services are
rendered has the right to control and direct the individual who performs the services, not only as to
the result in accomplishing the work but also as to the details and means by which that result is
accomplished.
Classification of Gross Compensation Income
The gross compensation income may be classified as follows:
1. Basic salary or wage
Salary refers to earnings received periodically for a regular work other than manual labor, such
as a monthly salary of an employee.

Wages , on the other hand, are earnings received usually according to specified intervals of
work, as by the hour, day, or week. An example is a carpenter’s daily wage.

2. Honoraria are payments given in recognition for services performed for which established
practice discourages charging a fixed fee. The honorarium of a guest lecturer is an example.

3. Fixed or variable allowances are allowances given to public officer or employee in addition to
the regular compensation fixed for his position or office. Example is the PERA given to
government employees monthly
4. Commission is usually a percentage of total sales or on certain quota of sales volume attained
as part of incentive such as sales commission
5. Fees are received by an employee for the services rendered to the employer including a
director’s fee of the company, fees paid to public officials, such as clerks of court or sheriffs for
services rendered in the performance of their official duty over and above their regular salaries.
6. Tips and gratuities are income given by customers to an employee serving them.
7. Hazard or emergency pay is an additional payment received due to workers’ exposure to
danger or har while working. This is normally added to the basic salary together with the
overtime pay and night differential pay to arrive at gross salary.
8. Retirement pay refers to a lump sum payment received by an employee who has served a
company for a considerable period of time and has decided to withdraw from work into privacy.
9. Separation pay refers to a lump sum payment received by an employee who decided to resign
from his work. It is taxable if the resignation is voluntary. Nontaxable if otherwise.
10. Pension is a stated allowance paid regularly to a person on his retirement or to his dependents
on his death, in consideration of past services, meritorious work, age, loss, or injury.
 MODULE 3
CONCEPT OF INCOME

11. Thirteenth month pay and other benefits. As a general rule, thirteent month pay and other
benefits are not taxable if the total amount received is P90,000 or less. Any amount exceeding
P90,000 is taxable.
12. Fringe benefits and de minimis are any good, service or other benefit furnished or granted by
an employer, in cash or in kind, in addition to basic salaries of an individual employee. This will
be discussed thoroughly in the following lessons.
13. Overtime pay refers to premium payment received for working beyond regular hours of work
which is included in the computation of gross salary of employee.

Practice Problem (Computation for compensation income)

Miss Pina Palad, single, reported the following income for the taxable year 200A:
Salary for the year P200,000
13th month pay 10,000
Honorarium as a speaker 5,000
Commissions 20,000
Interest income 12,000
Royalties 10,000
HOW MUCH IS THE COMPENSATION INCOME OF MISS PINA PALAD?

Solution:
Salary P200,000
13th month pay 10,000
Honorarium 5,000
Commission 20,000
TOTAL COMPENSATION P235,000

Note: Interest income and royalties are not compensation income, therefore, they are not included in the
computation of gross compensation income.

FUN TAX FACT!

Albert Einstein apparently found taxes more inscrutable than
theoretical physics. He once said, “The hardest thing in the
world to understand is the income tax” (that is according to Leo
Mattersdorf)

.
 MODULE 3
CONCEPT OF INCOME

Application
Direction: Solve for the gross compensation income.
PROBLEM 1
Marky Cece has earned the following income in 200A:
Salary as a professor P270,000
Honorarium as CPA-speaker 150,000
Per diem as a board of director 130,000
Thirteenth month pay 21,000
First prize in essay writing contest 20,000
Income from sales of goods 110,000

How much is the gross compensation income of Marky Cece?

Closure

Congratulations for another lesson learned. You successfully lesson 1. Moving forward you will
learn about gross income from businesses. But before that please answer the post assessment
below.

Glossary
The following terms used in this module are defined as follows:
Annuities – a fixed sum of money paid to someone each year, typically for the rest of their life
Royalties – payments to an owner for the ongoing use of their asset or property such as patents,
copyrighted works or natural resources

Reference
Duncano, D. (2012). National Internal Revenue Code of 1997. National Bookstore. Mandaluyong
City, Philippines.
Valencia E. and Roxas, G. (2013). Income Taxation Principles and Laws with Accounting
Applications. Valencia Educational Supply. Bagui City, Philippines.
LESSON 6: TAXATION ON INDIVIDUALS
Classification of Individual taxpayers

For purpose of income tax, individual taxpayers are classified as follows:

1. Resident Citizen- An individual whose residence is within the Philippines and who is
a citizen thereof.

2. Non resident citizen – is a citizen who established to the satisfaction of the

Commissioner the fact of his physical presence abroad, with a definite intention to
reside therein.

3. Resident alien – means any individual whose residence is within the Philippines and
who is not a citizen thereof

4. Nonresident alien- mean an individual whose residence is not within the Philippines
and who is not a citizen thereof. A non resident citizen alien is further classified into:

a. engaged in trade or business in the Philippines (ETB)

b. Not engaged in trade or business in the Philippines (NETB)

General Principles of income taxation on individuals

1. A resident citizen is taxable only on income derived from sources within and without
the Philippines;

2. A nonresident citizen is taxable only on income derived from sources within the
Philippines;

3. A citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker is taxable only on income from sources within the Philippines

4. An alien individual, whether a resident or not in the Philippines is taxable only on

income derived from sources within the Philippines.

Individual taxpayer Income within Income without

1. Resident citizen Taxable Taxable
2. Resident Alien Taxable Not Taxable
3. Non resident citizen Taxable Not Taxable
4. Non resident alien (ETB) Taxable Not Taxable
5. Non resident alien Taxable Not Taxable
(NETB)

Take note that a minimum wage earner is tax exempt.

LESSON 6: TAXATION ON INDIVIDUALS
Section 3 of Revenue Regulations 08-18

Individual Citizen and Individual Resident Alien of the Philippines- In general, the
income tax on the individual’s taxable income shall be computed based on the
following schedule
LESSON 6: TAXATION ON INDIVIDUALS
Examples:

a. If Mr. Sanchez has a taxable income of 200,000 for the year 2021 , how much would
be its tax due?

Answer: Zero , Mr Sanchez is tax exempt

b. If Mr. Sanchez has a taxable income of 300,000 for 2021, how much would be its tax
due?

Answer: 300,000

Tax on 250,000 (250,000) 0

Tax due 50,000 x 15%= 7,500

c. If Mr. Sanchez has a taxable income of P500,000 for 2021, how much would be its
tax due?

Answer: 500,000

Tax on 400,000 (400,000) 30,000

100,000 x 25% 25,000

Tax due 55,000

d. If Mr. Sanchez has a taxable income of 2,500,000 for 2021, how much would be its
tax due?

Answer: 2,500,000

Tax on 2 million (2,000,000) 490,000

500,000 x 32% 160,000

Tax due 650,000

More examples:

An individual taxpayer has the following income and expense during the year:

Compensation income, Philippines 500,000

Other income, USA 200,000

Expense, Philippines 50,000

Expenses, USA 20,000

LESSON 6: TAXATION ON INDIVIDUALS

a. Taxpayer is a resident citizen

Compensation income, PHils 500,000

Other income USA 200,000

Expenses, Phils (50,000)

Expenses, USA (20,000)

Taxable income 630,000

630,000

Tax on 400,000 (400,000) 30,000

230,000 x 25% 57,500

Tax due 87,500

b. Tax payer is a non-resident citizen

Compensation income, PHils 500,000

Expenses, Phils (50,000)

Taxable income 450,000

450,000

Tax on 400,000 (400,000) 30,000

50,000 x 25% 12500

42,500

c. Tax payer is a Resident Alien, same result to letter b 42,500

d. Tax payer is a Non resident Alien same, same result to letter b 42,500
LESSON 6: TAXATION ON INDIVIDUALS

PASSIVE INCOME

Passive income are income subject to final withholding tax and shall not be included
in the gross income of the taxpayer

Passive Income

Interest from any currency bank 20%

deposit
Yield or any other monetary benefit 20&
form deposit sustitutes and from trust
funds and similar arrangements
Royalties 20%

Royalties on books and other literary 10%

works and musical composition
Prizes 20%

Prizes amounting to P10,000 or less Exempt

Winnings

Philippines Charity Sweepstakes 20%

winnings and Lotto Winnings
Cash and Property Dividends 10%

Capital Gains from shares of stock not 15%

traded in stock exchange
Capital gains from sale of real property 6%
located in the Philippines

Example:

Compute the final tax due on the following

Tax due

1. Royalties on books is P50,000

Solution: 50,000 x 10% P5,000

2. Prizes amounting to P9,500 Exempt

3. PCSO winnings amounting to P500,000

Solution: 500,000 x 20% P100,000

LESSON 6: TAXATION ON INDIVIDUALS
EXERCISES:

I. Sheryl had the following income and expenses:

Compensation income, Philippines 320,000

Other income, Canada 100,000

Expenses, Philippines 70,000

Expense, Canada 30,000

Compute for the following tax due if Sheryl is a

a. Resident Citizen

b. Non-Resident Citizen

c. Resident Alien

d. Non-Resident Alien

(show your solution)

II. Mr. Brendan, had the following data for the taxable year 2020

Gross Income, Philippines P550,800

Gross Income, US 413,000

Expenses, Philippines 388,000

Expenses, USA 325,000

a. If the taxpayer is a resident citizen of the Philippines, his taxable income is?

___________________________________________________________________________

b. How much is his tax due? _________________

c. If the taxpayer is a citizen of the Philippines with residence in US, the taxable income
is ____________________________

d. His tax due is? ___________________

LESSON 6: TAXATION ON INDIVIDUALS
III.Passive Income: Identification of Tax Rate and Tax due

Assume that the taxpayer is Resident Citizen Tax Rate Tax due

1. Royalties from invention, P150,000

2. Sweepstakes winnings, P10,000,000

3. Prize in amateur contest, P8,000

4. Interest from a BPI Savings deposit, P75,000

5. Bingo winnings at Robisnons Manila, P50,000