Fundamentals of

Accountancy, Business,
and Management 2
Quarter 2 – Module 8:
Fundamentals of Taxation
Fundamentals of Accountancy, Business, and Management 2
Alternative Delivery Mode
Quarter 2 – Module 8: Fundamentals of Taxation
First Edition, 2020

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Published by the Department of Education

Secretary:
Undersecretary:
Assistant Secretary:

Development Team of the Module

Author: Joeve Grace G. Natividad
Editor: Rowena S. Carillo
Reviewers: Terence Adelle D. Lumangyao, Mary Grace A. Laurel
Lupe Geonanga, and Mayleen Joy V. Fariñas
Illustrator: Joeve Grace G. Natividad
Layout Artist: Felizardo S. Valdez III
Management Team: Ma. Gemma M. Ledesma
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Elena P. Gonzaga
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Novelyn M. Vilchez
Elleda E. De la Cruz
Rosemarie D. Aclan
Arthur J. Cotimo
Felizardo S. Valdez III
Marve E. Gelera

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 Fundamentals of
Accountancy, Business,
and Management 2
Quarter 2 – Module 8:
Fundamentals of Taxation
Introductory Message
For the facilitator:

Welcome to the Fundamentals of Accountancy, Business and Management 2

Alternative Delivery Mode (ADM) Module on Fundamentals of Taxation!

This module was collaboratively designed, developed and reviewed by educators both
from public and private institutions to assist you, the teacher or facilitator in helping
the learners meet the standards set by the K to 12 Curriculum while overcoming
their personal, social, and economic constraints in schooling.

This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration their
needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of
the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to manage
their own learning. Furthermore, you are expected to encourage and assist the
learners as they do the tasks included in the module.

2
For the learner:

Welcome to the Fundamentals of Accountancy, Business and Management 2

Alternative Delivery Mode (ADM) Module on Fundamentals of Taxation!

The hand is one of the most symbolized part of the human body. It is often used to
depict skill, action and purpose. Through our hands we may learn, create and
accomplish. Hence, the hand in this learning resource signifies that you as a learner
is capable and empowered to successfully achieve the relevant competencies and
skills at your own pace and time. Your academic success lies in your own hands!

This module was designed to provide you with fun and meaningful opportunities for
guided and independent learning at your own pace and time. You will be enabled to
process the contents of the learning resource while being an active learner.

This module has the following parts and corresponding icons:

What I Need to Know This will give you an idea of the skills or
competencies you are expected to learn in the
module.

What I Know This part includes an activity that aims to

check what you already know about the
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.

What’s In This is a brief drill or review to help you link

the current lesson with the previous one.

What’s New In this portion, the new lesson will be

introduced to you in various ways such as a
story, a song, a poem, a problem opener, an
activity or a situation.

What is It This section provides a brief discussion of the

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

What’s More This comprises activities for independent

practice to solidify your understanding and
skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.

What I Have Learned This includes questions or blank

sentence/paragraph to be filled into process
what you learned from the lesson.

What I Can Do This section provides an activity which will

help you transfer your new knowledge or skill
into real life situations or concerns.

3
 Assessment This is a task which aims to evaluate your
level of mastery in achieving the learning
competency.

Additional Activities In this portion, another activity will be given

to you to enrich your knowledge or skill of the
lesson learned. This also tends retention of
learned concepts.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in developing

this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of the
module. Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities
included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.

We hope that through this material, you will experience meaningful learning and
gain deep understanding of the relevant competencies. You can do it!

4
 What I Need to Know

This module was designed and written with you in mind. It is here to help you
understand the fundamentals of taxation. The scope of this module allows you to use
it in many different learning situations. The language used recognizes your diverse
vocabulary level. The lessons are arranged to follow the standard sequence of your
course.

The module is divided into three lessons, namely:

• Lesson 1 – The Principles and Purposes of Taxation
• Lesson 2 – Definition, Principles and Processes of Income Taxes and
Business Taxes
• Lesson 3 – Computation of the Gross Taxable Income and Tax Due of
Individual Taxpayers

After going through this module, you are expected to:

1. explain the principles and purposes of taxation ( ABM_FABM12- IIh-j-19);
2. define income and business taxation and its principles and processes
(ABM_FABM12- IIh-j-13);
3. explain the procedures in the computation of the gross taxable income and
tax due (ABM_FABM12- IIh-j-13).

5
 What I Know

The following items and questions are related to taxation. Read each item
carefully and choose the letter that corresponds to the correct answer. Write
the letter of your choice on a separate sheet.

1. Which of the following is/are the nature of the power of taxation?

I. It is an inherent attribute of sovereignty.
II. It is legislative in character.
III. It is regarded as comprehensive, unlimited, plenary, and supreme.

A. I and III only B. II and III only.

C. I and II only D. I, II and III.

2. The following statements are TRUE about taxation, EXCEPT?

A. The power of taxation may be exercised by the government, its political

subdivisions, and even private entities.
B. Generally, there is no limit on the amount of tax that may be imposed.
C. The money contributed as tax becomes part of the public funds.
D. The power of tax is subject to certain constitutional limitations.

3. This refers to the characteristic of taxes which means assessed with some
reasonable rule of apportionment.

A. Due process B. Theoretical justice

C. Equal protection D. Uniformity

4. Which of the following guidelines are followed by accountants in

preparing accounting records for taxation purposes?

A. Generally Accepted Accounting Principles (GAAP)

B. National Internal Revenue Code (NIRC)
C. Philippine Financial Reporting Standards (PFRS)
D. Philippine Auditing Standards (PAS)

5. The primary purpose of taxation is also referred to as:

A. regulatory purpose of taxation B. compensatory purpose of taxation

C. revenue purpose of taxation D. sumptuary purpose of taxation

6
6. Which of the following statements is NOT correct?

A. The government automatically possesses the power to collect taxes from

its inhabitants.
B. The government can enforce contribution upon its citizens only when the
Constitution grants it.
C. Taxation power exists inseparably with the state.
D. The state has the supreme power to command and enforce contribution
from the people within its jurisdiction.

7. Which of the following states the primary purpose of taxation?

A. To support the government in financing its multifarious activities

B. To provide incentive and support to preferred pioneering industries by
giving tax exemptions
C. To reduce inequalities in wealth and income by imposing progressively
higher tax rates
D. To protect local enterprises against foreign competition through
imposition of custom duties and tariff on imported goods.

8. The following are principles of a sound tax system, except one. Which one
is it?

A. Fiscal Adequacy B. Equality

C. Administrative Feasibility D. Uniformity

9. Which statement below expresses the lifeblood theory?

A. The assessed taxes must be enforced by the government.

B. The underlying basis of taxation is government necessity, for without
taxation, a government can neither exist nor endure.
C. Taxation is an arbitrary method of exaction by those who are in the seat
of power.
D. The power of taxation is an inherent power of the sovereign to impose
burdens upon subjects and objects within its jurisdiction for the
purpose of raising revenues.

10. The ability-to-pay theory is the groundwork for which principle of

taxation?

A. Fiscal Adequacy B. Equality

C. Administrative Feasibility D. Uniformity

7
 Lesson
The Principles and Purposes
1 of Taxation

Almost every day, we are dealing with the concept of taxes. Buying or selling
products involves taxes. Eating out with friends, watching movies in cinemas, saving
money in banks, and even joining raffle draws will require you to pay taxes.

In this lesson, you will be learning what taxation is, its principles, and
purposes.

What’s In

In Araling Panlipunan, you have encountered that the state has three (3) inherent
powers. Below are statements that describe each of the three (3) powers of the
state. Identify the state power being described by choosing from the answers in the
box. Choices may be used more than once. Write the letter of the correct answer on
your answer sheet.

1. It is the power of the state to promote public welfare through restraining and
regulating both liberty and property of the people.
2. It refers to the power of the state to seize or take private properties for public
use as long as the government provides just compensation.
3. It is the power of the state to impose duties or obligations upon entities
under its jurisdiction.
4. It refers to the powers of the state exercised by the legislative and executive
branches through enactment and enforcement of laws.
5. It is the power of the state to forcibly take someone’s private property such
as land or building and use it for public purposes.

A. POLICE POWER

B. POWER OF EMINENT DOMAIN

C. POWER OF TAXATION

8
 What’s New

As mentioned in the previous section of this module, one of the three inherent
powers of the state is the power of taxation. This topic introduces the basic
concepts and fundamentals of income taxation of individuals deriving income from
compensation, business, and other sources. Before we proceed to the principles
and purposes of a sound tax system, let us first define some terminologies that you
will encounter in the next lessons. We will also learn the theory and basis of
taxation.

Basic Terminologies Defined

Taxation is a system of compulsory contributions levied by the government or

other qualified body to its constituents, to corporations, and property to fund
public expenditures. It may also be defined as the inherent power of the state to
raise income and demand enforced contributions in order to finance government
projects and expenses.

Taxes are the amount collected from the constituents by virtue of the taxation
power of the state. It is an involuntary fee or charge that is required from
individuals, corporations, or properties. Failure to pay taxes is punishable by law.

Theory and Basis of Taxation

The Lifeblood Doctrine constitutes the theory of taxation which states that the
existence of a government in every state is a necessity and the government cannot
continue to exist without the means to defray its expenses. Therefore, the
government has the rights to compel its citizens to contribute in order to preserve
the state’s sovereignty and safety. This theory is also known as the necessity
principle.

The basis of taxation is founded on the reciprocal duties of protection and support
between the state and its people. In return for the taxpayer’s contribution, he/she
enjoys the privileges and protection granted to him/her by the government. This is
the so-called benefits-received principle or the reciprocity principle.

9
 What is It

Now that you have an overview of what taxation is about, let us now determine its
basic principles and purposes.

PRINCIPLES OF A SOUND TAX SYSTEM

A tax system of any state is a complex system composed of different laws,

guidelines, and rules to follow. Countries around the world implement different tax
systems based on their needs and fiscal requirements. However, the different tax
systems share common principles. The basic principles of a sound or a good tax
system may be summarized in three crucial points:

Fiscal
Adequacy

Theoretical Administrative
Justice Feasibility

Figure 1. The Principles of Taxation

1. Fiscal Adequacy. This means that the sources of revenue and funds should
be sufficient to meet the requirements and demands of government spending
and public expenditures. In theory, the government must not incur any
deficit as a budget deficit will paralyze the government’s ability to deliver the
essential public services to its people.
2. Theoretical Justice. Also known as equality, the tax burden imposed to the
taxpayer should be based on his/her ability to pay. It also suggests that the
taxing system must not be oppressive, unjust, and confiscatory. Two
important concepts of this principle is horizontal equity and vertical equity.
a. Horizontal equity means that taxpayers in similar financial
condition or taxpayers who earn the same level of income should
pay the similar amount of taxes.
b. Vertical equity means that taxes levied should be applied in
proportion to the earning capacity of the taxpayers. Taxpayers
earning more should pay more than those earning less.

10
 This is the reason of the proportional and progressive tax system of the
Philippines where individuals or businesses who earn more should pay more
taxes.

3. Administrative Feasibility. The tax laws should be capable of convenient, just

and effective administration. As such, the tax laws must be clear and easily
understood, capable of uniform enforcement, and convenient as to time,
place, and manner of payment. Levying of taxes should not create any
inconvenience to the taxpayer. For instance, the Bureau of Internal Revenue
implements the electronic Filing and Payment System (e-FPS) and eBIR
Forms in order to improve efficiency and give convenience when paying
taxes.

PURPOSES OF TAXATION

Taxation is a necessity for every government since the taxes are the source of life of
every state. The purposes of taxation may be divided into two categories:

Revenue Regulatory
Purpose Purpose

Figure 2. Purposes of Taxation

1. Revenue or Fiscal Purpose. This is the primary purpose of taxation. The

government collects taxes in order to raise enough revenues to finance or
defray government expenditures and multifarious activities. This way, the
government is able to promote public welfare and safety through its
programs and projects.
2. Non-revenue or Regulatory. Secondary to raising funds, taxation is also
used for the following:

a. To provide incentive and support to small-scale and startup

businesses through tax exemptions;
b. To protect domestic and local industries against foreign competitions
through imposition of custom duties and tariffs on imported goods;
c. To reduce inequalities in wealth and income of individuals and
businesses by imposing higher taxes to those who earn more and
imposing less taxes to those who earn less (progressive taxation); and
d. To prevent inflation by increasing taxes or ward off depression by
decreasing taxes.

11
 What’s More

The following statements explain the principles and purposes of taxation.

Read each statement carefully and write R if the statement is correctly stated and
write W if otherwise. Use a separate sheet of paper for your answers.

1. Fiscal adequacy is a principle of taxation which implies that taxes should

be ample to support the needs of the state.
2. The principle of equity means that every individual in a certain country
should pay the same amount of taxes.
3. According to the principle of administrative feasibility, the tax system
may be complicated as long as it can generate sufficient amount of taxes.
4. The ability-to-pay principle means that taxes to be levied must be in
proportion to the capacity and wealth of the taxpayer.
5. The Electronic Filing and Payment System (e-FPS) developed and
maintained by the Bureau of Internal Revenue (BIR) is the agency’s
initiative in connection with the principle of administrative feasibility.
6. One of the fiscal purposes of taxation is to regulate all businesses
operating in the country.
7. The primary purpose of taxation, also known as the revenue purpose, is
to generate enough money for the programs and projects of the
government.
8. The progressive tax system implemented by the government is one of the
regulatory purposes of taxation.
9. One of the purposes of taxation is to encourage foreign companies to
operate in the country by imposing tariffs and custom duties on imported
products.
10. The revenue purpose of taxation is to achieve some social or economic
end, regardless of whether revenues are raised or not.

12
 What I Have Learned

• Taxation is a process or means by which the lawmaking body of

the State raises income to defray government expenditures. The
taxation power of the government is inherent to its sovereignty.
• The fundamental theory of the power to tax by the government is
the Lifeblood Doctrine or the Necessity Theory and the basis for
taxation is the Reciprocity Theory or the Benefits-received
Principle.
• Taxation has three principles: 1) fiscal adequacy or the sufficiency
of the taxes collected; 2) theoretical justice or the ability-to-pay
principle; and 3) administrative feasibility or the effectiveness and
convenience of its implementation.
• The purposes of taxation may be revenue or regulatory. The
primary purpose is to raise revenue. This is also referred to as the
fiscal purpose. The secondary purpose, or the regulatory purpose,
is intended to achieve some social or economic end such as
protective tariffs or incentive and support.

What I Can Do

The lifeblood doctrine of taxation explains that taxes are crucial and requisite to
the continued existence of the government. Choose one from the following pairs of
words and explain why they are comparable and analogous to the relationship of
taxes and the government.

1. Human being and blood

2. Plants and the sun
3. Cellphone and battery
4. Car and fuel

13
 Assessment

Answer the following questions in your own words. Write your answers on a
separate sheet of paper.

1. What is meant by fiscal adequacy?

2. How can the government achieve fiscal adequacy?
3. How do you understand equality in taxation?
4. What does administrative feasibility imply?
5. What does revenue purpose of taxation mean? Why is it considered as the
primary purpose of taxation?
6. What are the secondary or regulatory purposes of taxation?

Additional Activities

Tax vs. Other Fees. In taxation, there are terms or items which are sometimes
mistaken as a form of tax. However, these terms do not have the same meaning as
tax, per se. Based on your understanding about taxes and taxation, distinguish tax
from other similar items by answering the activity below.

Choose the correct word found inside the parenthesis that will make the statement
correct. Write your answers on a separate sheet of paper.

1. A ____________ (debt, tax) is generally based on contract, can be assigned to

other persons and may be paid in kind while a ____________(debt, tax) is
based on law, cannot be assigned, and is generally payable in money.
2. ______________ (Tax, License fee) is levied for revenue and involves the
exercise of the taxing power while ______________ (tax, license fee) is imposed
for regulation and involves the exercise of police power.
3. A ______________ (tax, license fee) is imposed before engaging in a business or
a profession, thus it is a pre-activity imposition, while a ______________ (tax,
license fee) is imposed after the commencement of a business or profession
or a post-activity imposition.
4. A ______________ (toll, tax) is a demand of proprietorship that is paid for the
use of one’s property and may be imposed by the state and private
individuals or entities while a ______________ (toll, tax) is a demand of
sovereignty which is paid in support of the government and may be imposed
only by the State.

14
5. A person cannot be imprisoned by nonpayment of ______________ (debt, tax)
but can be imprisoned for not paying his/her ________________ (debt, tax).
6. _______________ (Taxes, Penalties) are imposed for violations of laws or as
punishment of a wrong doing while ______________ (taxes, penalties) are
imposed to raise funds for nation-building.
7. _______________ (Revenues, Taxes) refer to the amount imposed by the
government to individuals, businesses, and properties based on necessity
while ________________ (revenues, taxes) refer to all income collections of the
government from different sources.
8. A ________________ (tax, special assessment) is levied only on land and is
intended to compensate the government for the increase in the value of the
land due to a public improvement while a ______________ (tax, special
assessment) is levied on persons, properties, or exercise of privilege.
9. ________________ (Tax, Special assessment) attaches to the land and does not
become a personal liability of the owner while ________________ (tax, special
assessment) is a personal liability of the person assessed.
10. ______________ (Custom duties, Taxes) are amounts imposed on all persons,
property, or entities that receive protection and services from the
government while ________________ (custom duties, taxes) are impositions on
imported or exported goods only.

15
 16
What I Know
Assessment
1. C 6. B Answers may vary for each learner.
2. A 7. A
3. B 8. D Possible Answers:
1. Fiscal adequacy is a principle of taxation which means
4. B 9. B
444161/
that taxes should be sufficient or enough to defray
5. C 10. B
https://www.nav.com/blog/profitability-ratios-types-of-profitability-ratios-
government expenses and needs.
2. The government can achieve fiscal adequacy by
example.html
What’s In imposing additional taxes or raising tax rates when the
https://study.com/academy/lesson/profitability-ratio-definition-formula-analysis-
ratios/ situation or circumstances demand.
1. A 3. Equality or theoretical justice depends on the ability
https://corporatefinanceinstitute.com/resources/knowledge/finance/efficiency-
2. B to pay of the taxpayers. It means that the taxes they pay
ory,ratio%2C%20and%20receivables%20turnover%20ratio.
3. C should be in proportion to their income or wealth. Those
who have higher income pay higher taxes and those who
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4. A
have low income pay lower taxes.
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5. B
4. Administrative feasibility implies that the
https://www.investopedia.com/ask/answers/040715/what-do-efficiency-ratios-
implementation of the tax system and collection of taxes
What’s More
what-they-tell-you.aspx
should be as simple and practical as possible. It should
not add burden to the taxpayers.
https://www.investopedia.com/financial-edge/0910/6-basic-financial-ratios-and-
1. R 6. W 5. The revenue purpose of taxation means that the
https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios
2. W ratios/ 7. R government should be able to raise enough funds for
3. W 8. R public expenditures. It is the primary purpose of
https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-
4. R 9. W taxation since taxes are necessary for governments to
https://www.inc.com/encyclopedia/financial-ratios.html
5. R 10. W run.
6. The secondary purpose of taxation is regulatory in
https://www.myaccountingcourse.com/financial-ratios/interest-coverage-ratio
debttoequity-ratio.asp nature and includes the following:
What I Can Do a. To provide incentive and support to small-scale and
https://www.investopedia.com/ask/answers/062714/what-formula-calculating-
startup businesses through tax exemptions;
Answers of learners may vary depending
https://www.investopedia.com/terms/d/debtequityratio.asp
b. To protect domestic and local industries against
on their interpretation. foreign competitions through imposition of custom
finances/pages/financial-ratios-4-ways-assess-business.aspx
duties and tariffs on imported goods;
https://www.bdc.ca/en/articles-tools/money-finance/manage-
Possible Answer: c. To reduce inequalities in wealth and income of
https://www.readyratios.com/reference/debt/debt_to_equity_ratio.html
1. Car and Fuel. The car represents individuals and businesses by imposing higher
https://efinancemanagement.com/financial-analysis/efficiency-ratios
the government and the fuel taxes to those who earn more and imposing less
https://www.investopedia.com/terms/a/activityratio.asp
represents the taxes that the taxes to those who earn less (progressive taxation);
and
ver%20ratios%20or%20operating%20efficiency%20ratios.
people pay. Fuel is needed for the
d. To prevent inflation by increasing taxes or ward off
%20capital%20or%20assets.&text=They%20are%20also%20known%20as%20turno
car to start running. Without it, depression by decreasing taxes.
ratios/#:~:text=Activity%20ratios%20are%20financial%20metrics,employing%20its
the car won’t be able to function
https://corporatefinanceinstitute.com/resources/knowledge/finance/activity-
properly. In the same way, taxes Additional Activities
also fuels the government so that
https://www.demonstratingvalue.org/resources/financial-ratio-analysis
it can perform its functions and 1. debt; tax
80600.html
serve its purpose. 2. Tax; license fee
https://smallbusiness.chron.com/importance-ratio-analysis-financial-planning-
3. license fee; tax
https://www.educba.com/importance-of-ratio-analysis/
4. toll; tax
analysis/financial-ratio-analysis-definition-importance-and-limitations/7230
5. debt; tax
https://www.accountingnotes.net/financial-management/financial-ratio-
6. Penalties; tax
Accounting Principles, 12th Edition by Jerry Weygandt, et al.
7. Taxes; revenues
Fundamentals of ABM 2 Teacher’s Guide
8. special assessment; tax
K to 12 MELCs in Fundamentals of ABM 2
9. Special assessment; tax
K to 12 Curriculum Guide in Fundamentals of ABM 2
10. taxes; custom duties
References
Answer Key
 What I Know

The following statements are about income and business taxation. Read each item
carefully and write TRUE if you believe that the statement is correct, and write
FALSE if otherwise. Write your answers on a separate sheet.

1. Income tax is a privilege tax not directly levied on persons, properties, funds,
or profits but on the right of the person to receive income or profits.
2. Under the National Internal Revenue Code (NIRC), gross income is the same
as taxable income.
3. Income tax is both imposed on businesses and individuals.
4. The corporate income tax paid by corporations is an example of a business
tax.
5. Philippines has the lowest corporate income tax rate in South East Asia.
6. The business income is the tax base when computing for the percentage tax.
7. Business taxes are taxes levied on the privilege to enter into business.
8. All Filipino citizens are subject to income tax on income within and outside
the Philippines.
9. Business taxes are only paid by both the sellers and buyers.
10. An Overseas Contract Worker (OCW) is exempt from income tax for his/her
earnings outside the Philippines.

17
 Lesson Definition, Processes, and
Principles of Income Taxes
2 and Business Taxes
The National Internal Revenue Code (NIRC) provides that a tax shall be imposed on
the taxable income of every individual. The Philippine’s taxation system is adopting
progressive rates on taxes based on the ability to pay principle.

Taxpayers earn different types of income and the treatment for each income also
varies. The tax rate for each income category also varies. This will all depend on the
classification of the taxpayers and their respective income category.

In Southeast Asia, the Philippines has the highest income tax rates as compared to
its neighboring countries and states.

What’s In

Previously, you have learned about the principles and purposes of taxation in
general. As a review, fill in the blanks with the correct word/s to complete the
statements. Write your answers on a separate sheet of paper.

1. One of the principles of taxation is to ensure fairness and equity in the

implementation of the taxation process. This is referred to as ___________.
2. ____________ means that the tax laws should be capable of effective and
efficient administration to encourage compliance.
3. ____________ is a principle which ensures that the government earns
enough so as not to hamper its delivery of essential public services.
4. The primary purpose of taxation is to raise enough revenue for
government expenditures. This is also known as the ____________ purpose
of taxation.
5. Imposing custom duties and tariffs on imported goods to protect local
businesses is an example of the ____________ purpose of taxation.

18
 What’s New

Mr. Mat Iyaga, a Filipino seafarer, is a crew member of a vessel engaged exclusively
in international trade. He also owns a small grocery store in his hometown which is
managed by his mother. Is his income as a seafarer taxable? How about the income
from his business?

What is It

The Philippine Tax System has different classifications of taxes: income

taxes, business taxes, transfer taxes, and documentary taxes. These taxes are
computed based on the different tax bases and have also different rates.

In this lesson, the discussion will be focused only on the basics of income
taxes and business taxes. All other taxes will be discussed in taxation subject when
you go to college.

DEFINITION

Income Tax is a tax computed based on a person’s income, compensation, or

profit arising from property, practice of profession, employment, or trade or
business. Income tax is generally considered as a privilege tax. It is not levied on
the person, property, funds, or profits as such but on the right or the privilege of
the person to receive compensation, income, or profit. Income tax is usually based
on the annual or yearly income of the taxpayer.

Income Tax may be classified further depending on the nature of the

taxpayer. It can either be:

1. Individual Income Tax – is the tax paid by persons earning compensation

income, business or professional income, or passive income.

2. Corporate Income Tax – is the tax paid by corporations (both domestic

and foreign) which conduct business in the country. This is a tax
computed on their yearly profits. Recall that a corporation is a separate
juridical entity created by operation of law and is granted some of the
rights and privileges of a human being.

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Business tax, on the other hand, is a tax levied on the privilege to enter into
business. Business tax usually forms part of the selling price or the cost of the
product or item sold. This is sometimes referred to as sales tax and includes:

1. Value –added tax (VAT) – is a business tax imposed and collected from the
seller in the course of trade or business. It is levied repeatedly at every point
of sale until it ultimately reaches the final consumer. It is an indirect tax so
it can be passed on to consumers. In the Philippines, the VAT is usually
computed at 12% and is mostly included in the selling price of the goods or
services.

2. Percentage tax – is a business tax imposed on businesses with gross annual

sales and/or receipts not exceeding ₱3,000,000 and businesses that are not
VAT-registered or are VAT-exempt. This is computed at 3% of the gross sales
or gross receipts.

3. Excise tax – is a business tax on the production, sale or consumption of a

commodity in a country. It applies to goods manufactured or produced in
the Philippines for domestic sale or consumption or for any other disposition
and to imported goods. Excise tax may either be:

a. Specific – excise tax based on weight, volume capacity, or any other

physical unit or measure.

b. Ad valorem – excise tax based on the assessed value of an item, good

or commodity.

PROCEDURES/PROCESSES

Filing of BIR returns may be done manually, using electronic Filing and
Payment System (eFPS) or eBIR forms. This module will only discuss manual filing
of tax returns.

Income tax returns are usually filed on an annual basis. Income tax is also
computed annually.

On the other hand, business taxes are generally computed and withheld or
collected at the point of sale in the case of VAT and percentage tax or at the end of
production in the case of excise tax. The seller then remits the taxes withheld to
the BIR on a monthly or quarterly basis.

The following sections will discuss the procedures to be followed when filing
tax returns for both income taxes and business taxes.

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Figure 1. Procedures for Filing Income Tax Returns

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Figure 2. Procedures for Filing Business Tax Returns

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PRINCIPLES

Income Taxation

Regular income taxation applies to all items of income except those that are subject
to final tax, capital gains tax, and special tax regimes. According to Section 23 of
the NIRC, the following are the general principles of Income Taxation in the
Philippines:

1. A citizen of the Philippines residing therein is taxable on all 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. An individual citizen of the Philippines who is working and deriving income
from abroad as an overseas contract worker is taxable only on income derived
from sources within the Philippines: Provided, That a seaman who is a citizen
of the Philippines and who receives compensation for services rendered abroad
as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker;
4. An alien individual, whether a resident or not of the Philippines, is taxable
only on income derived from sources within the Philippines;
5. A domestic corporation is taxable on all income derived from sources within
and without the Philippines; and
6. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the
Philippines.

Business Taxation

The NIRC does not specifically provide the general principles for business
taxation as the business taxes mentioned earlier are discussed individually in
different sections of the Code. However, the following can be summarized from
Title IV – Value Added Tax, Title V – Other Percentage Taxes, and Title VI –
Excise Taxes on Certain Goods of the Tax Code.

1. Any person who, in the course of trade or business, sells, barters,

exchanges, leases goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT). There shall be
levied, assessed and collected on every sale, barter or exchange of goods or
properties, value-added tax equivalent to twelve percent (12%) of the gross
selling price or gross value in money of the goods or properties sold, bartered
or exchanged, such tax to be paid by the seller or transferor.
2. Any person whose gross sales or receipts are below the ₱3,000,000 threshold is
exempt from the payment of value-added tax. Any person who is not a VAT-
registered person shall pay a tax equivalent to three percent (3%) of his/her
gross quarterly sales or receipts: Provided, that cooperatives, and beginning
January 1, 2019, self-employed and professionals with total annual gross
sales and/or gross receipts not exceeding Five hundred thousand pesos
(P500,000) shall be exempt from the three percent (3%) gross receipts tax
herein imposed.

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 3. Excise taxes apply to goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition and to things
imported as well as services performed in the Philippines. The excise tax
imposed herein shall be in addition to the value-added tax imposed under
Title IV. Excise taxes are generally paid by the producer or manufacturer of
domestic or local articles, or by the importer or owner in case of imported
goods. Excise taxes are imposed on specific products such as alcohol
products, tobacco products, petroleum products, minerals and mineral
products, automobiles and other motor vehicles, and non-essential goods. In
addition, by virtue of RA 10963 or the TRAIN Law, sweetened beverages
(such as juice and soft drinks) and invasive cosmetic procedures are now
subject to excise tax.

For more information, you may read on the National Internal Revenue Code
available on the BIR website (www.bir.gov.ph).

What’s More

Based on the principles of income taxation, identify whether the following taxpayers
are taxable on their income within and without. Copy the items below and check
the correct column or columns that properly corresponds to the taxability of the
following taxpayers.
Philippine World
Taxpayer Income Income
(Within) (Without)
1. Juan, 56, a resident citizen
2. Gina, 45, a non-resident citizen
3. Dwayne, 28, a resident alien
4. Martha, 32, an OFW
5. Chen, businessman, a non-resident alien
6. ABKD Corp, a domestic corporation
7. ZYX, Inc., a foreign corporation with
branch in the Philippines
8. AMD Company, a foreign corporation
engaged exclusively in international trade
9. APO Merchandising, a domestic
corporation with branches abroad
10. Andrew, seaman, member of a vessel
engaged exclusively in international trade

24
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 What I Have Learned

• Income tax is a tax levied on the right or privilege of earning

income or profit arising from property, practice of profession,
trade, or business. It can be levied on individuals or corporations.
• Business tax, sometimes referred to as sales tax, is levied on the
right to engage in business or trade and usually forms part of the
selling price or the cost of the product. Examples are VAT,
percentage tax and excise tax.
• The processes and procedures of filing of income tax are
dependent on the classification of taxpayer.
• Business tax is generally withheld at source and is paid by the
seller to the BIR.
• The filing procedures vary depending on the systems used by the
taxpayer: manual filing, eFPS filing or use of eBIR forms. The
procedures for each system can be found on the BIR website
(www.bir.gov.ph).

What I Can Do

Read and analyze the following independent situations below. Identify whether the
following cases conform to the principles of income and business taxation or not by
answering YES or NO. Also, provide justifications for your answers.

1. Eli Marketing is a merchandiser of shoes and bags. Recently, the store has
sold a bag with a gross selling price of ₱1,000. However, on the official
receipt issued by Eli Marketing, the total amount paid by the customer was
₱1,120. Is Eli Marketing correct for charging the customer an additional of
₱120 for the price of the bag? Why?
2. Drinks N More, a VAT registered merchant, is a retailer of powdered and
liquid fruit juices produced by Juice Ko, Inc. The powdered and liquid fruit
juices are subject to excise tax. Should Drinks N More pay the excise tax on
the powdered and liquid juices that they sell? Why?

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 3. Mabinuligon Cooperative has an annual gross receipts from its mini-grocery
store and other businesses amounting to ₱467,900. The cooperative is a
non-VAT registered entity. Its bookkeeper claims that since the cooperative
is a non-VAT entity, it is liable to a 3% percentage tax on its gross receipts.
Is the claim of the bookkeeper valid? Why?
4. Lucas is an overseas contract worker earning ₱1,200,000 per year. He has
also a business in the Philippines which earns ₱600,000 annually. Since the
deadline for filing the tax returns and paying the tax due is nearing, Lucas
went to his friend, Peter, who is also a business owner. According to Peter,
both the ₱1.2M and the ₱600,000 income of Lucas are taxable. Is Peter
correct? Why?

Assessment

Each item below relates to the definition of income and business taxation and their
processes and principles. Read each item carefully and choose the letter that
corresponds to the correct answer. Write the letters of your choice on a separate
sheet of paper.

1. Which of the following statements correctly define income taxation?

A. It is levied directly on the income or profit of a person or a corporation.

B. It is levied on the right or privilege to earn income or profit from trade
or practice of profession.
C. It is levied on the right to engage in business or trade.
D. It is a tax levied on Filipino citizens only.

2. A business tax includes all of the following, except one. Which one is it?

A. value-added tax B. excise tax

C. corporate income tax D. percentage tax

3. Excise tax is payable _____________________.

A. within 25 days following the close of the taxable year

B. every 15th day of the 4th month following the close of the taxable year
C. every April 15 of the calendar year
D. before the items or products are removed from the place of production

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4. According to the principles of income taxation, which of the following
taxpayers is taxable for their income outside the country?

A. a foreign corporation B. a non-resident citizen

C. a resident alien D. a domestic corporation

5. Which of the following BIR Forms should be used by non-individual

taxpayers when filing for income tax returns?

A. eBIR Form 1700 B. eBIR Form 1701

C. eBIR Form 1702 D. eBIR Form 1703

6. BIR Form 2200 is used for the payment of _________________.

A. percentage tax B. excise tax

C. final tax D. value-added tax

7. When should individuals earning purely compensation income as employees

file their income tax return?

A. on or before December 31 B. on or before August 15

C. on or before May 15 D. on or before April 15

8. Which of the following statements is TRUE about percentage tax?

A. It is paid by all retailers and merchandisers.

B. It is imposed on producers or manufacturers of local or domestic
products.
C. It is paid by VAT-exempt or non-VAT registered entities or individuals.
D. It is imposed in addition to the value-added tax.

9. Which of the following procedures is true to all types of taxes when filing tax
returns?

A. Appropriate BIR Forms should filled-out and accomplished in three

copies.
B. BIR Forms should be filed on or before the 15 th day of April.
C. All taxpayers should use the same BIR Forms for all types of
transactions.
D. Taxpayers should pay their tax due in BIR Offices only.

10. Which of the following statements is FALSE about the value-added tax
(VAT)?

A. It is an indirect tax which is passed on to consumers.

B. It is paid by producers, manufacturers, wholesalers, and retailers.
C. It is computed at 12% of the gross selling price of an item.

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 D. It is computed at 3% of the gross selling price of an item.

Additional Activities

Watch the BIR 2015 Tax Campaign video, “Angat Pa, Pinas!” using the link
provided in the box below. After watching the video, answer the questions that
follow:

https://www.youtube.com/watch?v=12p_vmjrhQw

1. What is your reaction after watching the video?

2. What is the main theme of the video?
3. In your own ways, how can you help ensure that taxes are paid and used
correctly?

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What I Know Assessment
1. TRUE 6. FALSE 1. B
2. FALSE 7. TRUE 2. C
3. TRUE 8. FALSE 3. D
4. FALSE 9. TRUE 4. D
5. FALSE 10. TRUE 5. C
6. B
What’s In 7. D
8. C
1. Equality/theoretical justice 9. A
2. Administrative feasibility 10. D
3. Fiscal Adequacy
4. Revenue/Fiscal
Additional Activities
5. Non-revenue/regulatory/secondary
Answers may vary for every learner.
What’s More
What Can I Do
Answers may vary for every learner.
Possible Answers:
1. YES. Value-added tax of 12% is an indirect
tax that is added to the selling price of the
item sold.
2. NO. Drink N More is not liable for the excise
tax because it is not the manufacturer/
producer of the juice. The appropriate part
that should pay the excise tax is Juice Ko,
Inc.
3. NO. According to Title V of the NIRC,
cooperatives whose income do not exceed
₱500,000 shall be exempt from the 3%
percentage tax.
4. NO. Since Lucas is an OCW, he is only
taxable for his income within the Philippines
which is ₱600,000.
Answer Key
 What I Know

Read and analyze the problem carefully and answer the questions that follow:

Mr. Pedro Manansala, a minimum wage earner has a total compensation income
for 2019 amounting to ₱230,000. This includes his 13th month pay of ₱16,000 and
other bonuses of ₱22,000. His mandatory contributions such as SSS, Philhealth
and Pag-IBIG (HDMF) total to ₱5,000. Aside from his basic wage, Pedro also earned
an additional pay of ₱150,000 from his overtime pay and holiday pay.

1. What is the Total Compensation Income of Mr. Manansala?

2. How much is the total deductions from Mr. Manansala’s income?
3. How much is his taxable income?
4. How much is his income tax due?

30
 Lesson Computation of the Gross
Taxable Income and Income Tax
3 Due on Individual Taxpayers
As mentioned in Lesson 1, taxes are the lifeblood of the government. The government
has the right to collect as much taxes as it wants as long as it is necessary, justifiable,
and constitutional.

Taxation has two aspects: levy and collection. Levying or imposition of the tax
requires legislative intervention. As such, in the Philippines, it is the duty of the
Congress to levy taxes. Collection of the tax levied, on the other hand is an
administrative function. It includes assessment and determining the taxes payable
of the taxpayers as well as the collection of the corresponding payments. Generally,
this function is usually done by the executive branch, specifically the Bureau of
Internal Revenue. However, the computation of the income tax due may also be done
by tax accountants or may be self-directed as long as you have knowledge of its
procedures and guidelines, but still subject to the evaluation of the BIR.

This lesson presents the procedures in determining the taxable income and income
tax due of an individual taxpayer.

What’s In

For the following items, write O if the statement is correctly stated and write X if
otherwise.

1. Percentage tax is a tax imposed on non-VAT registered or VAT-exempt

entities.
2. Excise tax is imposed on all goods and services produced or consumed in
the country.
3. Income tax paid by corporations is an example of a business tax.
4. Income tax is levied on both individuals and businesses.
5. A resident alien is taxable on his/her income within and outside the
Philippines.
6. Only the Philippine income of domestic corporations are subject to
income tax.
7. Resident citizens are taxable for both their Philippine income and world
income.

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 What’s New

In computing for the income tax due of individual taxpayers, it is important to

know the classification of the taxpayer first, as well as their sources of income –
whether from within the Philippines or outside – because not all individual
taxpayers are taxed on all their income.

In order to compute the income tax due of the taxpayer, the first step is to classify
the taxpayers according to their citizenship and residence. The following are the
classifications of the individual taxpayers:

1. Citizens
Under the Constitution, citizens are those:
✓ who are citizens of the Philippines at the time of adoption of the
Constitution on February 2, 1987;
✓ whose fathers and mothers are citizens of the Philippines;
✓ born before January 17, 1973 of Filipino mothers who elected Filipino
citizenship upon reaching the age of majority; and
✓ who are naturalized in accordance with the law.

Citizens can be further classified into:

a. Resident citizen – a Filipino citizen residing in the Philippines

b. Non-resident citizen – a Filipino citizen who is not physically residing in
the country during the taxable year, due to immigration or employment,
or any other reasons

2. Alien
a. Resident alien – an individual residing in the Philippines but is not a
citizen thereof
b. Non-resident alien – an individual who is not residing in the Philippines
and who is not a resident thereof

After classifying the taxpayers, the following general rules for individual income
taxpayers apply:

Taxable on Income
Individual Taxpayers
Within Without
Resident citizen ✓ ✓
Non-resident citizen ✓
Resident alien ✓
Non-resident alien ✓

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Based on the table, only resident citizens are taxable on their income within (in the
Philippines) and without (outside the country). The other classifications of
taxpayers will only be taxable on their incomes within the Philippines. This was
also stated in the principles of income taxation as discussed in the previous lesson.
Regular income taxation will be based on the active income of these taxpayers.

The second step in the computation of the income tax due is determining the gross
income of the taxpayer. Gross income may be derived mainly (but not limited to)
from three (3) sources:

1. compensation income or remunerations earned under an employer-employee

relationship such as salaries, wages, bonuses and other benefits;
2. business income or income arising from habitual engagement in any
commercial activity involving regular sales of goods or services; and
3. non-operating income which involves all other incomes that do not fall under
the previous two categories such as gains from dealing with properties,
passive income not subject to final tax, casual or one-time income, etc.

This lesson will only deal with resident citizens as taxpayers and compensation
income as the source of gross income. The computations presented in this module
is pursuant to Tax Reform for Acceleration and Inclusion (TRAIN) law or RA 10963
which was signed into law last December 19, 2017.

What is It

Consider the following illustration:

Illustration 1. Rosario San Pedro, single and a resident citizen, is a minimum

wage earner (MWE) with a gross compensation income for the year 2018 of
₱180,000. She works as a finance assistant of BIG Corporation in the Philippines.
In addition to her basic salary, Ms. San Pedro also earned a 13th month pay of
₱15,000, overtime pay amounting to ₱100,000, night shift differential of ₱30,000,
and holiday pay of ₱25,000. Ms San Pedro also paid for her mandatory
contributions in Social Security System (SSS), Philhealth, and Pag-IBIG totaling to
₱6,000. How much is her taxable income and income tax due?

In order to determine the income tax due of any taxpayer, the following steps are to
be followed:

Step 1. Identify the classification of the taxpayer.

In the illustration, it was mentioned that Ms. San Pedro is a resident citizen. Thus,
the classification of the taxpayer is a resident citizen. In which case, she is taxable
on her income within and without.

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Step 2. Determine the sources of income of the taxpayer.

Using the same illustration, the sources of income of Ms. San Pedro is purely
compensation income.

Step 3. Add all the gross income/earnings/receipts (derived from different sources, if
applicable) of the taxpayer to arrive at the total compensation income.

In the case of Ms. San Pedro, the following are her gross income:

Basic Salary ₱ 180,000

13th month pay 15,000
Overtime pay 100,000
Night shift differential 30,000
Holiday pay 25,000
Total Compensation Income ₱ 350,000

Step 4. Determine the taxable income of the taxpayer by deducting the mandatory
contributions (to SSS, GSIS, Philhealth, and Pag-IBIG) and the non-taxable income
(13th month pay and other benefits) of the taxpayer from the Total Compensation
Income.

Total Compensation Income ₱ 350,000

Less: Mandatory Contributions 6,000
Non-taxable Income* 15,000 ( 21,000)
Taxable Income ₱ 329,000

*Non-taxable income refers to additional compensation (aside from basic salary)

received by an employee which includes 13th month pay and other bonuses/benefits
which should not exceed the exclusion threshold of ₱90,000. Any amount in excess
of the exclusion threshold shall be subject to income tax.

Step 5. Compute for the income tax due/liability of the taxpayer (using the tax table).

Tax Due EXEMPT

The final step is to compute for the income tax payable of the taxpayer using the
table as provided in RA 10963. However, in our illustration, Ms. San Pedro has no
income tax due as she is exempted from income tax because she is a minimum wage
earner.

With the implementation of RA 10963 (TRAIN Law), the Bureau of Internal Revenue
(BIR) issued Revenue Regulations (RR) No. 11-2018 which provides that for
minimum wage earners, their statutory minimum wage, holiday pay, overtime pay,
night shift differential pay, and hazard pay shall be exempt from income tax and
withholding tax. Additional compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the mandatory non-taxable amount of ₱90,000,
taxable allowances, and other taxable income earned by a minimum wage earner
shall, however, be subject to withholding tax using the revised withholding tax
table under the TRAIN Law.

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Illustration 2. Mr. Jose Gantimpala, 33, Filipino, single, is a regular employee of
Wise Marketing. He receives an annual salary of ₱300,000. For 2019, he also
earned an overtime pay of ₱50,000 and hazard pay of ₱57,250. He also received his
13th month pay of ₱25,000 as well as other benefits amounting to ₱72,000. His
mandatory contributions are as follows:
SSS ₱ 9,600
Philhealth 4,125
Pag-IBIG (HDMF) 1,200
Total ₱14,925

Compute for the taxable income and income tax due of Mr. Gantimpala.

Solution:
Basic Salary ₱ 300,000
Overtime pay 50,000
Hazard pay 57,250
13th month pay 25,000
Other Benefits 72,000
Total Compensation Income 504,250
Less: Mandatory Contributions 14,925
Non-taxable Income* 90,000 ( 104,925)
Taxable Income ₱ 399,325

*The total non-taxable income of Mr. Gantimpala is ₱97,000 (₱25,000+₱72,000).

However, the exclusion threshold is only up to ₱90,000. Therefore, the amount to be
deducted should only be ₱90,000.

Since Mr. Gantimpala is not a minimum wage earner, his income is subject to
income tax. To compute for his income tax due, we will use the following tax table
as provided by RA 10963.

Revised Income Tax Table under TRAIN Law

(effective 2018-2022)
Taxable Income Tax Rate
Not over ₱250,000 0%
Over ₱250,000 but not over ₱400,000 20% of the excess over ₱250,000
Over ₱400,000 but not over ₱800,000 ₱30,000 + 25% of the excess over ₱400,000
Over ₱800,000 but not over ₱2 million ₱130,000 + 30% of the excess over ₱800,000
Over ₱2 million but not over ₱8 million ₱490,000 + 32% of the excess over ₱2 million
Over ₱8 million ₱2.41 million + 35% of the excess over ₱8 million

Mr. Gantimpala’s taxable income is ₱399,325 which falls under this range:
Over ₱250,000 but not over ₱400,000 20% of the excess over ₱250,000

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Computing his tax due, we get:

On the first ₱250, 000 0

On the excess over ₱250, 000
(₱399,325-250,000) x 20% ₱ 29,865
Income tax due/payable ₱ 29,865

Therefore, the income tax payable of Mr. Gantimpala is ₱29,865.

Illustration 3. Mrs. Rhea Alvarez, married and a resident citizen, is a regular

employee of Health is Wealth Company. She receives monthly salary of ₱52,000 or
₱624,000 annually. For 2019, she has also received her 13th month pay and other
benefits amounting to ₱109,000. Her mandatory contributions are as follows:
SSS ₱ 9,600
Philhealth 8,250
Pag-IBIG (HDMF) 1,200
Total ₱19,050

Required: Compute for the taxable income and income tax due of Mrs. Alvarez.

Solution:

Basic Salary ₱ 624,000

13th month pay and other benefits 109,000
Total Compensation Income 733,000
Less: Mandatory Contributions 19,050
Non-taxable Income 90,000 ( 109,050)
Taxable Income ₱ 623,950

Computing her tax due, we get:

On the first ₱400, 000 ₱ 30,000

On the excess over ₱400, 000
(₱623,950-400,000) x 25% 55,988
Income tax due/payable ₱ 85,988

What’s More

Read the case inside the box and apply the procedures for the computation of the
taxable income and income tax due on the case. Copy the template given and
supply the missing information as needed to prepare a schedule of the computation
of the taxable income and the income tax due. Use a separate sheet of paper for
your answers.

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Case: Mr. Arnold Cruz, 43, Filipino, is working in Builders
Construction as an architect. He receives a monthly salary of ₱60,000.
For 2019, he received ₱38,000 for his hazard pay. In addition, he
receives bonuses including his 13th month pay totaling to ₱87,000. His
mandatory contributions for the year amounts to ₱21,200.

Basic Annual Salary ?

13th month pay and other benefits ?
Hazard pay ?
Total Compensation Income ?
Less: Mandatory Contributions ?
Non-taxable Income ?
Taxable Income ?
Income tax due/payable ?

What I Have Learned

• In computing the income tax due of an individual taxpayer, the following steps are
followed:
Step 1. Identify the classification of the taxpayer.
Step 2. Determine the sources of income of the taxpayer.
Step 3. Add all the gross income/earnings/receipts (derived from different
sources, if applicable) of the taxpayer to arrive at the total compensation income.
Step 4. Determine the taxable income of the taxpayer by deducting the
mandatory contributions (to SSS, GSIS, Philhealth, and Pag-IBIG) and the non-
taxable income (13th month pay and other benefits) of the taxpayer from the
Total Compensation Income.
Step 5. Compute for the income tax due/liability of the taxpayer (using the tax
table).
• Generally, minimum wage earners are exempt from income tax. However, they are
taxable on their 13th month pay and other benefits that exceeds the exclusion
threshold of ₱90,000.
• Non-taxable income refers to additional compensation (aside from basic salary)
received by an employee which includes 13th month pay and other
bonuses/benefits which should not exceed the exclusion threshold of ₱90,000.
Any amount in excess of the exclusion threshold shall be subject to income tax.

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 What I Can Do

The following information was given for Ms. Ligaya Yap, 28, a resident citizen and a
regular government employee.

Basic monthly salary ₱28,000

13 month pay
th 28,000
Bonuses and other benefits 59,000
Mandatory contributions:
GSIS (computed at 9% of the basic monthly salary)
Philhealth (computed at 1.375% of basic monthly salary)
Pag-IBIG (computed at 2% of ₱5,000 per month)

Required: On a separate sheet of paper, answer the following questions:

1. How much is Ligaya’s basic annual salary?

2. What is Ligaya’s total compensation income?
3. How much is Ligaya’s total mandatory contributions per year?
4. How much should be deducted as non-taxable income?
5. What is Ligaya’s taxable income?
6. How much is Ligaya’s income tax due?

Assessment

Applying the steps in computing the taxable income and income tax due, answer
the following multiple-choice items. Write the letter of the correct answer on your
answer sheet.

Use the following information to answer questions 1-4.

Mr. A is a resident citizen earning purely compensation income. For the taxable
year 2019, he earned a gross income amounting to ₱390,000. This included his
13th month pay of ₱30,000. In addition, he also received an overtime pay of ₱36,000
and other benefits amounting to ₱21,000. Mr. A’s mandatory contribution totaled
to ₱18,000.

1. Mr. A’s total compensation income is

B. ₱477,000 E. ₱447,000
F. ₱417,000 G. ₱426,000

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2. How much is Mr. A’s non-taxable income?

A. ₱57,000 B. ₱90,000
C. ₱51,000 D. ₱69,000

3. The taxable income of Mr. A is

A. ₱378,000 B. ₱369,000
C. ₱408,000 D. ₱399,000

4. How much is the income tax due of Mr. A?

A. ₱32,000 B. ₱29,800
C. ₱25,600 D. ₱23,800

For numbers 5-7, use the following information:

Ms. B, is a resident citizen who has a gross compensation income of

₱550,000 inclusive of 13th month pay and other bonuses amounting to
₱175,000. Her mandatory contributions total to ₱28,000 a year.

5. How much is Ms. B’s taxable income?

B. ₱522,000 E. ₱697,000
F. ₱347,000 G. ₱432,000

6. Which tax rate should Ms. B use in computing for her income tax?

E. 20% of the excess over ₱250,000

F. ₱30,000 + 25% of the excess over ₱400,000
G. ₱130,000 + 30% of the excess over ₱800,000
H. ₱490,000 + 32% of the excess over ₱2 million

7. What is Ms. B’s income tax due?

A. ₱19,400 B. ₱38,000
C. ₱104,250 D. ₱36,400

Use the following information for numbers 8-10.

Mr. M, a resident citizen is working for a Philippine company. His annual

salary totals to ₱250,000. In addition, he earns an overtime pay of ₱72,000,
hazard pay of ₱36,000, holiday pay ₱24,000, and his bonuses total to
₱75,000. Mr. M also pays his mandatory contribution amounting to ₱9,600
per year. Mr. M is a minimum wage earner.

39
 8. What is Mr. M’s total compensation income?

A. ₱250,000 B. ₱346,000
C. ₱457,000 D. ₱325,000

9. How much is Mr. M’s total deductions from his compensation income?

A. ₱99,600 B. ₱84,600
C. ₱75,000 D. ₱ 9,600

10. How much is Mr. M’s income tax liability?

A. ₱24,480 B. ₱32,850
C. ₱14,280 D. None

Additional Activities

Malaya prepared her income tax return (ITR) for the year 2019. Upon filing her ITR
to the BIR, it was returned by the BIR employee and she was asked to check the
information that she provided because it had some errors. The following
information was taken from the ITR of Malaya:

Annual Salary ₱ 480,000

Overtime pay 70,000
Holiday pay 22,500
13th month pay 40,000
Other Benefits 92,000
Total Compensation Income 704,500
Less: Mandatory Contributions 52,650
Non-taxable Income 132,000 ( 184,650)
Taxable Income ₱ 519,850

On the first ₱250, 000 0

On the excess over ₱250, 000
(₱519,850-250,000) x 20% ₱ 53,970
Income tax due/payable ₱ 53,978

Required: Compute the correct taxable income and income tax due that should be
reflected in Malaya’s 2019 ITR.

40
 41
What I Know What Can I Do
1. ₱380,000 1. ₱336,000
2. ₱43,000
2. ₱423,000
3. ₱337,000
4. None. Mr. Manansala is exempted 3. ₱36,060
from income tax.
4. ₱87,000
What’s In
5. ₱299,940
1. O 6. X
6. ₱9,998
2. X 7. O
3. X
4. O
5. X Assessment
What’s More 1. B
2. C
3. A
4. C
5. D
6. B
7. B
8. C
9. B
10. D
Additional Activities
Answer Key
References

K to 12 Curriculum Guide in Fundamentals of ABM 2

K to 12 MELCs in Fundamentals of ABM 2
Fundamentals of ABM 2 Teacher’s Guide
Accounting Principles, 12th Edition by Jerry Weygandt, et al.
Income Taxation (Made Easy), 17 th Edition by Win Ballada, et al.
National Internal Revenue Code (NIRC)
RA 10963 (TRAIN Law)
www.bir.gov.ph
https://www.bahandigroup.com/single-post/2018/10/15/TAX-EXEMPTION-OF-
MINIMUM-WAGE-
EARNERS#:~:text=Revenue%20Regulations%20(RR)%20No.,income%20tax%20and
%20withholding%20tax.&text=11%2D2018%20is%20a%20welcome%20developme
nt%20for%20minimum%20wage%20earners.
https://sites.google.com/site/lawpinoy/tax1
https://lawphil.net/courts/bm/barQ/2012/taxQ.html
http://tax71.blogspot.com/2009/06/aspects-of-taxation-basic-principles-
of.html?m=1
https://www.freshbooks.com/hub/taxes/an-excise-tax
https://www.slideshare.net/churp27/principles-of-income-taxation

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For inquiries or feedback, please write or call:

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Meralco Avenue, Pasig City, Philippines 1600

Telefax: (632) 8634-1072; 8634-1054; 8631-4985

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