UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

1st Semester
A.Y. 2021-2022

Principles of Income and Business Taxation

Topic: Compensation Income

Learning Outcomes:
A. Tax provisions vs GAAP
B. Concept of Gross income
C. Final Income Taxation
D. Capital Gains Taxation
E. Regular income taxation
F. Value Added Tax
G. Excise tax
H. Percentage taxes
Recall and apply the principles of Income and business taxation.

LEARNING CONTENT

Introduction:
This introductory lesson focuses on reinforcing your prior knowledge on taxation. You have studied Financial
Accounting and Reporting and Intermediate accounting. Recall that income generated from business operation
is subject to tax. It is therefore through this course that we will deal on the overview and application of,
fundamental concepts of the Philippine Income Taxation System. L

Lesson Proper:

IAS 12 INCOME TAXES

IAS 12 prescribes the accounting treatment for income taxes. Income taxes include all domestic and foreign
taxes that are based on taxable profits.

Current tax for current and prior periods is, to the extent that it is unpaid, recognised as a liability. Overpayment
of current tax is recognised as an asset. Current tax liabilities (assets) for the current and prior periods are
measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates
(and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

IAS 12 requires an entity to recognise a deferred tax liability or (subject to specified conditions) a deferred tax
asset for all temporary differences, with some exceptions. Temporary differences are differences between the
tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an
asset or liability is the amount attributed to that asset or liability for tax purposes.

A deferred tax liability arises if an entity will pay tax if it recovers the carrying amount of another asset or
liability. A deferred tax asset arises if an entity:

-will pay less tax if it recovers the carrying amount of another asset or liability; or
-has unused tax losses or unused tax credits.
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 Deferred Tax Liability

Deferred tax liability is the amount of income tax payable in the future periods with respect to a taxable
temporary differences

A deferred tax liability arises from the following:

1. When the accounting income is higher than taxable income because if timing differences.
2. When the carrying amount of an asset is higher than the tax base
3. When the carrying amount of a liability is lower than the tax base.

Deferred Tax Asset

A deferred tax asset is the amount of income tax recoverable in future periods with respect to deductible
temporary difference and operating loss carryforward.

A deferred tax asset arises from the following:

1. When the taxable income is higher than accounting income because of timing difference
2. When the tax base of asset is higher than the carrying amount
3. When the tax base of a liability is lower than the carrying amount

PHILIPPINE INCOME TAXATION

Concept of Gross Income

Elements of Gross Income:

1. Return on Capital
2. Realized Benefit
3. Not Exempted by law contract or treaty

Taxpayers:

A. Individual
1. Resident Citizen- taxable within and without
2. Non Resident Citizen- taxable within
3. Resident Alien- taxable within
4. Non-resident Alien Engage in Trade or Business-Taxable Within
5. Non-resident Alien Not Engage in Trade or Business- Taxable Within
B. Estate
C. Trust
D. Corporation
1. Domestic Corporation- Taxable Within and Without
2. Resident Foreign Corporation- Taxable Within
3. Non-resident Foreign Corporation- Taxable Within

Income Tax Schemes

1. Final Tax
2. Capital Gains Tax
3. Regular Income Tax

Final Income Taxation

- full taxes are withheld by the income payor at source. The payor is required by law to remit the tax
withheld to the government
- What is being received by the payee is the net amount after applicable taxes have been deducted and is
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 not required to file income tax return. That the amount withheld represents the full amount due and is
deemed the final payment.
- It is applicable to certain passive income listed by law. Passive income are those income earned with
minimal or even without active involvement of the taxpayer in the earning process. An example of which
is interest income earned on bank deposits. After making the deposit, the depositor would just wait for
the interest payment date and there goes the income. The interest income net of applicable withholding
taxes will just be credited to his account without exerting any effort in attaining the income. Same theory
applies to dividends from domestic corporations and royalties. Wait for the dividend and royalty
distribution date and voila, interest is earned.
- On the other hand, active income arises from transactions requiring a considerable degree of effort or
undertaking from the taxpayer. Example of which are compensation income, business income,
professional income.

Capital Gains Taxation

- It is imposed on gain realized on the sale, exchange and other dispositions certain capital assets (asset
not used in the ordinary activity of the business, trade or profession).
- It applies only to two types of capital assets (domestics stocks and real property)

Regular Income Taxation

- Anything not taxable under final taxation and capital gains taxation will be covered by regular income
taxation.

Exclusion from Gross Income

1. Life insurance
2. Amounts received by insured as return of premium
3. Gift, bequest, and devises
4. Compensation for inquiries or sickness
5. Income exempt under treaty
6. Retirement benefits, pension, gratuities
7. Miscellaneous items
a) Income derived by foreign government
b) Income derived by the government or its political subdivision
c) Prizes and Awards-in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement
d) Prize and Awards in competition
e) 13th month pay and other benefits (90,000)
f) GSIS, SSS, Medicare, and other Contributions
g) Gains from sale of Bonds, Debentures, or other Certificate of Indebtedness with a maturity
of more than 5 years
h) Gains from redemption of shares in Mutual Fund
i) Income Derived from sale by registered small-scale miner to BSP and to accredited traders
for eventual sale to BSP

Gross Income Formula:

Gross Income XXX

Allowable Deduction XXX
Taxable Income XXX

Individual Taxation:
A. Citizens and Resident Alien
a) In General (Regular Tax)
i. Purely-Compensation Income: Tax Schedule/Graduated Rate
ii. Business/Professional Income
a. Gross Sale/ Receipt + Non-operating Income > VAT threshold ( 3 million) : Graduated
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 rate
b. Gross Sale or Receipt + Non-operating Income < or = VAT threshold ( 3 million) :
either graduated rate or 8% of gross sales or receipts + non-operating income - 250,000
Iii. Mixed Income Earner
1. Compensation Income: Graduated rate
2. Business Income:
a. Gross Sale/ Receipt + Non-operating Income > VAT threshold ( 3
million) :Graduated rate
b. Gross Sale or Receipt + Non-operating Income < or = VAT threshold ( 3 million) :
either graduated rate or 8% of gross sales or receipts + non-operating income

*the 8% is in lieu of graduated tax and OPT

b) Certain Passive Income (Final Tax)

i. Interest from bank deposits, Royalties, Prizes, Winning- 20% FWT
ii. Dividend-10% FWT

c) Capital gains on Sale of Domestic stock outside PSE- 15% net capital gains
d) Capital gains on Sale of Real Property classified as Capital Asset- 6% of higher between GSP and
FMV

B) Non-resident Alien Engaged in Trade or business

a) In General- rules on citizens or resident alien applies
b) Certain passive income
i. Interest, Royalties, Prizes, Winnings- 20%FWT
ii. Dividends 20% FWT
c) Capital gains on Sale of Domestic stock outside PSE- 15% net capital gains
d) Capital gains on Sale of Real Property classified as Capital Asset- 6% of higher between GSP and
FMV
C) Non-resident Alien Not Engaged in Trade or Business
a) In general- 25% FWT
b) Capital gains on Sale of Domestic stock outside PSE- 15% net capital gains
c) Capital gains on Sale of Real Property classified as Capital Asset- 6% of higher between GSP and
FMV

Corporation
A. Domestic Corporation
a) In general:
Before July 1, 2020 (starting January 1, 2009) : 30%
Starting July 1, 2020:
i. Net Taxable Income > 5 million AND/OR total asset (excluding land) > 100 million : 25%
ii. Net Taxable Income < or = 5 million AND total asset (excluding land) < or = 100 million: 20%

Subject to Minimum Tax beginning on the 5th year of operation (beginning of 4th year following the
1st year of operation) of:
a) Before July 1, 2020: 2% of Gross Income
b) July 1, 2020-June 30, 2023: 1% of Gross income
c) After June 30, 2023: 2% of Gross income

b) Proprietary educational institution and Non-profit Hospital

i. (Gross income from unrelated trade, business or activity ÷ Total Gross Income) > 50%: apply
general rule
ii. (Gross income from unrelated trade, business or activity ÷ Total Gross Income) < or = 50%:
a) Before July 1 2020: 10% of taxable income
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 b) July 1, 2020 to June 30, 2023: 1% of taxable income
c) After June 2023: 10% of taxable income
c) Government-owned or Controlled Corporation, Agencies or Instrumentalities
i. GSIS, SSS, PHIC, HDMF, Local water district: Exempt
ii. Others: tax upon income as are imposed upon corporation or association engaged in similar
business, industry or activity
d) Certain Passive Income
i. Interest on Bank Deposits withing the Phillines and Royalties within the Philippines- 20%
FWT
ii. Dividend from Domestic- Exempt

e) Capital gains on Sale of Domestic stock outside PSE- 15% net capital gains
f) Capital gains on Sale of Real Property classified as Capital Asset- 6% of higher between GSP and
FMV

B. Resident Foreign Corporation

a) In general
i. Before July 1 2020 (starting January 1, 2009): 30%
ii. Starting July 1, 2020: 25%

Minimum Tax also applies (rules for Domestic Corporation)

b) International Carrier: 2.5% of Gross Philippine Billings

c) Offshore Banks
i. for Foreign currency transaction: Exempt
ii. For local currency transaction: apply general rule

d) Regional Area Headquarter of Multinational Company: Exempt

e) Regional Operating Head Quarter of Multinational Company
i. Before January 1 2022: 10% of taxable income
ii. Starting January 1, 2022: apply general rule
f) Certain Passive Income:
i. Interest income form bank deposits (within) -20% FWT
ii. Dividend from Domestic Corporation- Exempt
g) Capital gains on sale of Domestic Stock outside PSE-
i. Before April 11, 2021:
a) Net Capital Gains not over 100,000 : 5%
b) PLUS on any amount in excess of 100,000: 10%
ii. Starting April 11, 2021: 15% of Net capital Gains

C. Non-Resident Foreign Corporation

a) In general
i. Before January 1, 2021 (starting January 1, 2009): 30% Final Withholding Tax
ii. Starting January 1, 2021: 25% Final Withholding Tax
b) Non-resident Cinematographic Film Owner, Lessor, Distributor: 25% of Gross Income FWT
c) Non-resident Cinematographic owner or lessor of Vessel Chartered by Philippine National: 4.5% of
Gross income FWT
d) Non-resident Cinematographic owner or lessor of aircraft, machineries, and other Equipment: 7.5%
FWT
e) Certain Passive Income:
i. Interest on foreign loans: 20% FT
ii. Dividend from domestic corporation:
1. With sparing rule: 15%
2. Without sparing rule: 25%
f) Capital Gains on Sale of domestic stock outside PSE
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 i. Before April 11, 2021:
a) Net Capital Gains not over 100,000 : 5%
b) PLUS on any amount in excess of 100,000: 10%
ii. Starting April 11, 2021: 15% of Net capital Gains

BUSINESS TAXATION

VALUE-ADDED TAX

Taxpayer: 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 valueadded tax.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.

Imposition of VAT:
a) On the gross selling price of sale, barter, or exchange of goods or properties in the course of trade or
business
Or
b) On the gross receipts if the sales of services, or in the lease or use of properties in the course of trade
or business
c) On the total value or landed cost, of importation of goods, whether or not in the course of business

Mandatory Registration as VAT payer

1. Gross sales/receipt on all lines of non-exempt businesses for the past 12 months exceed 3,000,000
2. Expected sales/receipts for the next 12 months from all lines of non-exempt business exceed 3,000,000
3. Franchise grantees of radio and/or TV broadcasting whose annual sales for the last taxable year
exceed 10,000,000
Optional Registration
1. Any person who is not subject to mandatory registration
2. Any VAT-registered who has other lines of business which are VAT-exempt.

Tax Consequences

A. VAT-taxable transaction:
1. Sales or leased taxed at 12%
Computation of VAT due:

Output Tax XXX (12% of sales, in general)

Less: Input Tax XXX (12% of purchase, in general)
VAT payable XXX

* seller can carry-over excess input tax to succeeding quarters

2. Sales or leases taxed at 0%
Computation of VAT due:

Output Tax XXX (0% of sales, in general)

Less: Input Tax XXX (12% of purchase, in general)
VAT payable XXX

* seller can claim refund or tax credit for input tax

B. Exempt transaction
-Seller is exempt from VAT
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 - Seller cannot separately bill output tax to his customers
-Seller is not entitled to input tax credit
-Seller shall be liable to VAT if he issues VAT invoice or receipt, but without the benefit of input
tax credit

OTHER PERCENTAGE TAX

A. 3% Gross Receipt Tax (GRT)

a) Requirements:
a) Gross Sales or receipt ≤ 3,000,000; AND
b) Not VAT-registered

Tax rate: 3% of quarterly gross sales or receipts

b) Person Exempt from 3% GRT

1. Self employed individual availing the 8% tax on gross sales
2. Cooperatives (except, sales of goods or service to non-member if the accumulated
reserve and undivided net savings of more than 10 million pesos)
3. Fees, Per diem, allowance, and other income received by corporate directors of which
they are not employees
4. Marginal income earners or individuals who are self-employed and deriving gross
sales/receipts ≤ 100,000 during any 12-month period.
5. Person who are VAT registered
6. Person whose line of business is non-exempt (from VAT) and are NOT VAT-registered
but whose gross annual sales or receipts> 3,000,000

B. Common Carrier’s Tax

Tax rate: 3% of quarterly gross sales or receipts from transportation of passengers,
provided that gross receipts do not exceed minimum levels provided by law

C. Tax on International Carrier (Foreign Carrier)

Tax rate: 3% of quarterly gross receipt from transport of cargo from the Philippines to another
country

D. Franchise tax
Tax rate:
a) Radio and Television broadcasting with gross annua receipt of ≤ 10 Million: 3 % of gross
receipts derived from the business covered by the law granting the franchise
b) Gas and Water utilities: 2% of gross receipts derived from business covered by law
granting the franchise
c) PAGCOR: 5% of gross revenues from gaming operation

E. Overseas Communication Tax

Tax rate: 10% of the amount paid for the service.

F. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions

Tax rate:
a) Interest, commission, discount from lending activities including finance leasing
i. Maturity period ≤ 5 years: 5%
ii. Maturity period > 5 years: 1%

b) Dividend and equity shares and net income of subsidiaries: 0%

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 c) Royalties, rentals of property ( real or personal), and other items of gross income: 7%
d) Net trading gains on foreign currency, debt securities, derivatives, and other similar
financial instruments 7%
G. Tax on Finance Companies
Tax rate:
a) Interest, commission, discount from lending activities including finance leasing
i. Maturity period ≤ 5 years: 5%
ii. Maturity period > 5 years: 1%
b) Gross receipts derived from interest,, commissions, discounts, and all other items
treated as gross income under the Tax Code: 5%

H. Life Insurance Premiums

Tax rate: 2% of gross premium collected

I. Tax on Foreign Insurance Companies

a) Fire, marine, or miscellaneous insurance agent: 4% of total premiums collected
b) For owners of property who obtain insurance directly with foreign companies: 5%

J. Amusement Taxes
a) Cockpits, Cabarets, Night or day Club: 18% of gross receipts
b) Boxing exhibitions: 10% of gross receipts
c) Professional Basketball games: 15% of gross receipts
d) Jai-alai: 30% of gross receipts
e) Race tracks: 30% of gross receipts

K. Winnings
a) Winning in horse race : 10% of winnings or dividend
b) Winnings from double, forecast/quinella, and trifecta bets ins: 4% or winnings or dividends

L. Stock Transaction Tax

a) Sale, Barter, or Exchange of Shares Listed and traded Through the PSE: 6/10 of 1% of the gross
selling price
b) Sale or Exchange through IPO of shares of stock in closely-held corporation
Tax shall be based:
• on the gross selling price or gross value in money of shares of stock sold
• in accordance with the proportion of shares of stock sold to the total outstanding
shares of stock after the listing in the local stock exchange:
a) Up to twenty-five percent: 4%
b) Over twenty-five percent but not over thirty three and one-third
percent: 33 1/3 %: 2%
c) Over thirty-three and one-third percent (33 1/3%): 1%

ACCOUNTING FOR BUSINESS TAX

A. Value-added tax:
do not usually affect Income Statement

Proforma Entries:
1. To record the purchase of goods/raw materials/ service:

Purchases/Inventory/Expense XXX
Input VAT XXX
Cash/Accounts Payable/ Accrued Payable XXX

* Input VAT is like a prepaid asset which is creditable against Output VAT payable
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 2. To record Sales of Goods/ Service

Cash/ Accounts Receivable XXX

Sale/Service Revenue XXX
Output VAT

* Output VAT is a liability account

3. To record payment of VAT

Output VAT XXX

Input VAT XXX
Cash XXX

B. Other percentage Tax

- since it is deductible as expense under tax law, OPT is usually presented as Tax and License Expense
Account

Proforma Entries
1. To record the purchase of goods/raw materials/ service:

Purchases/Inventory/Expense XXX
Cash/Accounts Payable/ Accrued Payable XXX

2. To record the payment of OPT

OPT/Business tax expense XXX

Cash XXX

Note that OPT is presented in the income statement as a expense and deductible against operating
income before income tax. Income Tax Expense is separately presented as a line item in Income
Statement

EXCISE TAX

Purpose of Excise Tax:

1) To raise revenue
2) To curtail the consumption of certain commodities
3) To protect domestic industries

Types of Excise Taxes

A. Specific Tax- excise tax imposed on goods or articles based on weight or volume capacity or any other
physical unit of measurement.
B. Ad Valorem Tax- excise tax imposed on goods or articles based on the selling price or other specified
value of the goods, exclusive of VAT and tariff and customs duties (if imported)

*** END of LESSON 1***

REFERENCES

Textbooks
MACT 1023 | Page 9 of 10
 1. Banggawan, Rex (2019) Income Taxation, Real Excellence Publishing
2. Ampongan, O. (2019), CPA Reviewer in Taxation, Arts Review Center, Inc.
3. Lllamado, C (2019), CPA Reviewer in Taxation, CPAR
4. Tabag, E. (2018), Income Taxation, Maxcore Publishing House.
5. Reyes, Virgilio (2019) Income Taxation

Online Reference

1. TRAIN Law (2020) Income Tax Tables in the Philippines. https://www.pinoymoneytalk.com/new-income-

tax-table-rates-philippines/
2. TRAIN Tax Law: Primer and BIR Sample Computation. https://www.pinoymoneytalk.com/bir-tax-law-
philippines/
3. Income Taxation https://www.bir.gov.ph/index.php/tax-information/income-tax.html
4. www.bir.gov.ph
5. https://www.iasplus.com/en/standards/ias/ias12

This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced or transmitted in any form, in
whole or in part, without expressed written permission.

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