INCOME TAXATION
the earning process.
 Final income tax – interest
 Capital gain tax (CGT) – specific,
weighted average, fifo methods
 Regular income tax – individual earning
purely from compensation and business
(yearly).
INCOME TAX SCHEMES
An item of gross income is taxable in any of
these tax schemes.
1. Final Income Taxation
2. Capital Gains Taxation
3. Regular Income Taxation
1. Final Income Taxation
- Net of taxes
- Income taxpayer does not need to file ITR
- Final withholding tax system
2. Capital Gains Taxation
- Gain on the sale, exchange, and other
disposition of capital assets.
- Income taxpayer files ITR
- Domestic Stocks and Real properties
3. Regular Income Taxation
- Taxable income not subject to FIT and CGT are
subject to RIT.
PASSIVE INCOME VS. ACTIVE INCOME
 Passive incomes (Minimal Effort) are
earned with very minimal or even without
the active involvement of the taxpayer in
- Interest income from banks
- Dividends from DC
- Royalties.
 Active incomes or Regular incomes (Extra
Effort) arise from transactions requiring a
considerable degree of effort or
undertaking from the taxpayer.
- Compensation Income
- Business Income
- Professional Income
(Notes)
A. Certain Passive Income
- Net of taxes
- NRA, NETB, NRFC  25%
B.
- Assets  Ordinary Assets (Regular Income
Tax) – used in the business
 Capital Assets (Subject to CGT) – not
used in the business
Ordinary Assets
* Stocks, Inventories, Real properties
* Machines that depreciate
Capital Assets
* Domestic Stocks
* Real property assets (Personal Assets)
CAPITAL ASSETS VS. ORDINARY ASSETS
Assets that are used in business such as;
 Stock in trade of a taxpayer or other real
property of a kind which would properly be
included in the inventory of the taxpayer if
on hand at the close of the accounting
year.
 Real property held by the taxpayer
primarily for sale to customers in the
ordinary course of his trade or business.
  Real property used in trade or business of
a character which is subject to the
allowance for depreciation.
 Real property used in trade or business of
the taxpayer.
Any asset other than ordinary business. Capital
assets are:
 Personal (non-business) assets of
individual taxpayers.
 Business assets of any taxpayers which
are;
o Final assets – such as cash,
receivables, prepaid expenses,
and investments.
o Intangible assets – such as
patents, copyrights, leasehold
rights, and franchise rights.
TAXABLE YEAR
1. Calendar year = individual taxpayer (no option)
2. Fiscal year = corporate taxpayer (DC, RFC,
NRFC, w/ option)
DEADLINE OF FILING THE INCOME TAX
RETURN
Under the NIRC, the return is due for filing on the
fifteenth day of the fourth month following the
close of the taxable year of the taxpayer. The
regular tax due is payable upon filing of the
income tax return.
(Notes)
- 15 days after the 1st quarter of the taxable year
- April 15
INSTANCES OF SHORT ACCOUNTING
PERIOD
 Newly commenced business – The
accounting period covers the date of the
start of the business until the designated
year-end of the business.
(1st year of operation or short-term)
Illustration
Palawan Inc. started business operations on
June 30, 2021, and opted to use the calendar
year of the accounting period.
 Dissolution of the business – The
accounting period covers the start of the
current year to the date of dissolution of
the business.
Illustration
Tawi-tawi Inc. is in the fiscal year of the
accounting period ending every March 31. It
ceased business operation on August 15, 2021.
 Under NIRC, dissolving corporations
shall file their return within 30 days from
the cessation of activities or 30 days
from the approval or merger by the SEC
in the case of a merger.
CHANGE OF ACCOUNTING PERIOD BY
CORPORATE TAXPAYERS
The taxing period covers the start of the previous
accounting period up to the designated year-end
of the new accounting period.
BIR approval is required in changing an
accounting period. It is NOT automatic.
DEATH OF THE TAXPAYER
 The accounting period covers the start of
the calendar year until the death of the
taxpayer.
 It must be noted that the cut-off of income
must be made at the date point of death
because properties such as income
accruing before death are part of the
estate of the decedent in Estate Taxation
while those income accruing after death
are not part thereof. Hence, it is
mandatory for the accounting period of the
taxpayer to be terminated exactly at the
date of death.
TERMINATION OF THE ACCOUNTING
PERIOD OF THE TAXPAYER BY THE
COMMISSIONER OF THE INTERNAL
REVENUE
  The accounting period covers the start of
the current year until the date of the
termination of the accounting period.
 Payable immediately
FINAL INCOME TAX
 Final income taxation is characterized by
final taxes wherein full taxes are withheld
by the income payor at the source. The
payor is the one required by law to remit
the tax to the government.
 Consequently, the recipient income
taxpayer does not need to file income tax
returns because the withheld tax
constitutes the full tax due and is therefore
deemed final payments
 Final Taxation applies only to certain
passive income listed below. Not all items
of passive income are subject to final tax.
PASSIVE INCOME SUBJECT TO FINAL TAX
 Interest or yield from bank deposits or
deposit substitutes.
 Domestic dividends, in general.
 Dividend income from a Real Estate
Investment Trust.
 Interest income on tax-free corporate
covenant.
 Bonds
 Share in the net income of a business
partnership, taxable association, joint
ventures, joint accounts, or co-ownership.
 Royalties, in general
 Winnings
 Informer’s tax reward
 Prizes exceeding P10,000
The final withholding system is inherently
territorial. It applies only to certain passive
income earned from sources within the
Philippines.
RATIONALE OF FINAL INCOME TAXATION
 The final withholding tax is built upon
taxpayer and government convenience
that relieves the taxpayer of the obligation
to file an income tax return. This is very
convenient for taxpayers who are limited
by distance, time and cost to comply.
 For the government, the final withholding
system is the most convenient and
effective in collecting taxes on income
where there is a high risk of non-
compliance or tax evasion. Under the
NIRC, tax is imposed on certain passive
income and upon non-resident persons
not engaged in business in the
Philippines.
PASSIVE INCOME
 Items of passive income are earned with
very minimal involvement from the
taxpayer and are generally irregular in
timing and amount. Unlike items of active
income, they are not usually specifically
monitored by taxpayers.
 When it’s recorded by the taxpayer, their
existence can be difficult to predict while
the accrued amount may be difficult to
determine. Thus, the final withholding tax
income is the most favorable scheme in
taxing items of passive income.
FEATURES OF FINAL INCOME TAXATION
* Final tax
* Tax withholding at source
* Territorial Imposition
* Imposed on certain passive income and
persons not engaged in business in the
Philippines.
FINAL TAX ON INDIVIDUALS AND
CORPORATION
Unless otherwise indicated, the final tax rates to
be discussed in the following sections apply to all
taxpayers. Individuals and Corporations other
than:
a. Non-resident alien not engaged in trade or
business and
b. Non-resident foreign corporation
(Notes) DIVIDEND INCOME
RC  world income  Taxable  Domestic corporation – presumed
earned within
NRC
 Foreign corporation
RA  RFC – Depends on the
predominance test
NRA-ETB  NRFC – earned abroad
NRA-NETB Predominance test – need to compare 3 years
DC  world income  Taxable prior to the year that the taxpayers received the
income.
RFC
- If less than 50 – without
NRFC
- if more than dividend income – with
* Benefit received theory
Merchandising Income - earned where the
* Ability to pay property is sold.
SITUS OF INCOME - Sold in the PH – within
The place of taxation of income is the jurisdiction - Sold outside – without
that has the authority to impose tax upon the
income. Manufacture Income – where the goods are
manufactured
SITUS OF INCOME VS. SOURCE OF
INCOME - earned where the goods are manufactured and
sold.
Situs of Income
INTEREST INCOME OR YIELD
Income Situs Rule
Interest income or yield from local currency bank
Types of income Situs deposits, deposit substitutes, trust funds, and
- Interest Income  Debtor’s Residence similar arrangements are subject to final tax as
follows.
- Royalties  Where the intangible is
employed Local Currency Deposits

- Rent Income  Location of the property

- Service Income  Place where the service is
rendered
Other Income Situs Rule
Gain or Sale of Properties
 Personal properties
 Domestic securities – presumed
earned in the Philippines. Note:
 Other personal properties – earned 1. The final tax on deposits applies only to those
in the place where the property is made with banks.
sold.
 Real properties – earned where the 2. NRA-NETBs and NRFCs are subject to the
property is located. 25% general final tax on their interest income.
 Final Tax Withheld P 4,000
3. Short-term deposits – are those made for less Illustration 3. Bank Negro incurs the following
than 5 years. interest in its savings and time deposit accounts
from the following deposits:
4. Long-term deposits or investment certificates –
refer to the certificate of time deposit or Resident individual P 600,000
investment in the form of savings, common or
Resident and Domestic 800,000
individual trust funds, deposit substitutes,
Corporations
investment management accounts, and other
investments with a maturity of not less than 5 Non-resident aliens – NETB 200,000
years.
Non-resident corporations 100,000
Illustration 1. A taxpayer earned the following
interest income from various time deposits: Total accrued interest expense P 1,700,000

6–month time deposit P 8,000 Required:

2–year time deposit 12,000 Compute the total final income tax to be withheld
by Bank Negro.
6–year time deposit 40,000
Solution: 3
Total Interest Income P 60,000
Required: Compute the final tax if the taxpayer
is an individual and if a corporation.
Solution: 1
Individual Taxpayer
6-month time deposit  8,000 x 20%  1,600
2-year time deposit  12,000 x 20%  2,400
6-year time deposit  Exempt  0 SAVINGS OR TIME DEPOSITS WITH
COOPERATIVES ARE NOT SUBJECT TO
Total Interest Income P 4,000 FINAL TAX.
Solution: 1 The final tax is limited to banks and shall not be
Corporate Taxpayer applied with time and savings account deposits
maintained by members with cooperatives and
6-month time deposit  8,000 x 20%  1,600 by primary cooperatives with their federations.
2-year time deposit 12,000 x 20%  2,400 (Dumaguete Cathedral Credit Cooperative vs.
6-year time deposit 40,000 x 20%  8,000 CIR, GR 182722)

Total Interest Income P 12,000 CAPITAL GAINS TAX

Illustration 2. A resident taxpayer received
P16,000 interest income from a bank. Determine
the final tax withheld at the source.
Solution: 2
Gross Interest Income  16,000/80%  20,000
Multiply by: Final Tax Rates 20%
Capital Gains Tax is a tax imposed on the gains
presumed to have been realized by the seller
from the sale, exchange, or other disposition of
capital assets located in the Philippines, including
“Pacto de retro sales” (buy back sale) and other
forms of conditional sale.
CAPITAL ASSETS VS. ORDINARY ASSETS
Ordinary assets are: - OG - Subject to RIT

 Assets held for sale – such as inventory - CG – General Rule: Regular income tax
 Assets held for use – such as supplies
- Exception Rule: Capital gains tax
and items of property plant and equipment
like buildings, property improvements, and CAPITAL GAINS SUBJECT TO CAPITAL
equipment. GAINS TAX
Business is habitual engagement in a There are only 2 types of capital gains subject to
commercial activity involving the regular sale of capital gains tax:
goods or services for a profit. Non-profit entities
are not businesses. 1. Capital gains on the sale of domestic stocks
sold directly to the buyer
ASSET CLASSIFICATION IS RELATIVE
2. Capital gains on the sale of real properties not
The classification of assets or properties as used in business
ordinary assets or capital assets does not
depend upon the nature of the property but upon SCOPE OF CAPITAL GAINS TAXATION
the nature of the taxpayer’s business and its
usage by the business.
- Stock buy and sell – ordinary
- stock for personal – capital
ASSET CLASSIFICATION RULE
A. A property purchased for future use in
business is an ordinary asset.
B. Discontinuing the active use of the property CAPITAL GAIN ON THE SALE, EXCHANGE,
does not change its character previously AND OTHER DISPOSITION OF DOMESTIC
established as a business property. STOCKS DIRECTLY TO THE BUYER

- if engaged in real estate business – ordinary Domestic Stocks – earned here in the PH

- if not, 2 years will be a capital asset Domestic stocks are evidence of ownership or
rights to ownership in a domestic corporation
c. Depreciable asset – ordinary regardless of its features, such as:
d. Real properties used by an exempt corporation 1. Preferred stocks (participative, cumulative,
in its exempt operations – capital etc.)
- if not exempt – ordinary 2. Common stocks
e. Transferred by sale depends on the 3. Stock rights
beneficiary.
4. Stock options
TYPES OF GAINS IN DEALINGS WITH
PROPERTIES 5. Stock warrants
6. Unit of participation in any association,
recreation, or amusement club polo or similar
1. Ordinary Gain/Capital Gain – arises from the clubs)
sale, exchange, and other disposition including
pacto de retro sales and other conditional sales MODES OF DISPOSING DOMESTIC
of ordinary assets/capital assets. STOCKS
Shares of stocks may be sold, exchanged, or
disposed of:
1. Through the Philippine Stock Exchange
- Stock transaction tax 60% of 1% (selling price)
2. Directly to the buyer
- a capital gain of 15% (gain)

WHAT IS THE TAX BASIS OF STOCKS?

If acquired by purchase, the tax basis is the cost
of the property which will be determined by the ff.
methods in descending order of priority:
 Specific identification – if the shares can
be specifically identified.
 Moving average methods – if books of
accounts are maintained by the seller
where transaction of every particular stock
is recorded.
 First-in, first-out method - if the stocks
cannot be specifically identified.
 CHARACTERISTICS OF REGULAR INCOME
TAX
 General coverage
 A net income tax
 An annual tax
 Progressive or Proportional tax
THE REGULAR INCOME TAX MODEL
Gross Income – Inclusions _________
Less: Allowable Deductions _________
Taxable Income _________
Gross Income Consists of the major topics:

 Exclusions from gross income

 Inclusions from gross income
 Special topics
GROSS INCOME
1. Compensation Income
2. Income from the Business
3. Professional Income
4. Other Income
ALLOWABLE DEDUCTIONS
Simply “deductions” are expenses of the conduct
of business or exercise of profession.
1. Itemized Deductions
 Interest Expense
 Taxes
 Losses
 Bad Debts
REGULAR INCOME TAXATION  Depreciation
 Depletion
The regular income tax is the general rule in  Charitable and other contributions
income taxation that covers all other income such  Contributions to pensions and trusts
as:  Research and development costs
 Other ordinary and necessary trade,
 Active Income
Business, or Professional expenses
 Other Income
o Gains from dealings in properties If not directly connected with the selling of goods
not subject to CGT or rending of services, these items of expenses
o Other passive income not subject are classified as “Regular allowable itemized
to Final Tax deductions”
2. Optional Standard Deductions
3. Non-taxable Compensation
 Mandatory Compensation
 Remuneration received as incidents of
employment
 De minimis benefits
 13th-month pay and other benefits
 Certain benefits of minimum wage earners
TAXABLE INCOME OF PURE
COMPENSATION INCOME EARNER
Gross Income – Inclusions _________
Less: Non-taxable Compensation _________
Taxable Income _________
COMPENSATION INCOME
All remuneration for services performed by an
employee for his/her employer under an
employer-employee relationship, unless
specifically excluded by the code. O.
Types of employees as to function
1. Managerial
2. Supervisory
3. Rank and File
MINIMUM WAGE EARNER
A minimum wage earner refers to a worker in the
private sector paid the statutory minimum wage
or to an employee in the public sector with a
compensation income of not more than the
statutory minimum wage in the non-agricultural
sector where he/she is assigned.
GROSS COMPENSATION INCOME
Generally, includes all remunerations received
under an employer-employee relationship.
Gross Compensation Income _________
Less: Non-taxable compensation _________
Taxable Compensation _________
SUPPLEMENTARY COMPENSATION
 Overtime Pay
 Hazard Pay
 Night shift differential pay
 Holiday pay
 Commissions
 Fees including the director’s fee
 Emoluments or honoraria
 Taxable retirement and separation pay
 Value of living quarters or meals
 Gains on the exercise of stock options
 Profit sharing and taxable bonuses
DE MINIMIS BENEFITS
Facilities or privileges furnished or offered by an
employer to his/her employees that are relatively
small value and are offered or furnished by the
employer merely as a means of promoting the
health, goodwill contentment or efficiency or
his/her employee.
(Notes)
 De minimis Benefit – implemented on
January 1, 2018. If the receivables of an
individual are more than the ceiling
amount, the remaining excess will be
added to the 13th-month pay and other
benefits. If the total of other benefits is
more than 90,000 pesos, the remaining
excess is taxable.
DE MINIMIS BENEFITS
1. Monetized unused vacation leave credit of
private employees not exceeding 10 days during
the year.
2. Monetized value of vacation and sick leave
credits paid to government officials or
employees. (no limit)
3. Medical cash allowance to dependents of
employees not exceeding 1,500 per employee
per semester or 250 per month.
4. Medical assistance shall not exceed 10,000
pesos per annum.
5. Uniform and clothing allowance shall not
exceed 6,000 per annum.
6. Rice subsidy of 2,000 or 1 sack of 50kg rice
per month amounting to not more than 2,000 per
month or 24,000 per year.
7. Laundry allowance shall not exceed to 300 per
month or 3,600 per year.
8. Awards like cash or GC if it is taxable, but in Taxable DMB - 0
the form of tangible like service award is not
taxable. Therefore, shall not exceed 10,000 per
year.
9. Gifts like during Christmas or events shall not 3.)
exceed 5,000 pesos per year.
13th-month pay 35,000
10. Collective bargaining agreement (CBA) plus
productivity incentives shall not exceed to 10,000 Taxable DMB 0
per year. Taxable OB 0
11. Meals allowance (overtime meals) 25% of 4.)
minimum wage for region bases.
Total Compensation 489,500
Problem 1:
Less: Deductions
Basic Salary 380,000
MC – 28,700
Overtime Pay 22,500
DMB - 52,000
13th-month pay 35,000
OB- 35,000
De minimis Benefits 52,000
 (-) 115,700
Mandatory Contribution 28,900
Taxable Income 373,800
Required:
1. Total compensation income
2. Taxable De minimis Benefits as “other
benefits”
3. Taxable other benefits
4. Taxable Income
5. Tax Due
Solution
1.)
Basic Salary P 380,000
Overtime Pay 22,500
13th-month pay 35,000
De minimis Benefits 52,000
Total Compensation P 489,500
2.)
De minimis benefits 52,000
(assume it didn’t reach the ceiling amount since
it’s not stated)
 Mandatory Contribution 39,260
Commissions 50,000

5.) Required:
Taxable Income = 373,800 1. Total compensation income
Old Tax____________________________ 2. Taxable De minimis Benefits as “other
benefits”
Basic tax - 50,000
3. Taxable other benefits
Tax rate – (373,800-250,000)x30% = 37,140
4. Taxable Income
Tax due - 87,140
5. Tax Due
2018_______________________________
Solution
Basic tax - 0
1.)
Tax rate – (372,800-250,000)x20% = 24,760
Basic Salary P 600,000
Tax due - 24,760
Overtime Pay 33,250
2023_______________________________
13th-month pay 100,000
Basic tax - 0
De minimis Benefits 93,000
Tax rate – (372,800-250,000)x15% = 18,570
Commissions 50,000
Tax due - 18,570
Total Compensation P 876,250
2.)
Problem 2:
Rice Subsidy 11,000
Basic Salary 600,000
Uniform Allowance 4,000
Overtime Pay 33,250
Medical Cash Allowance 2,000
13th-month pay 50,000
Medical Assistance 10,000
14th-month pay 50,000
CBA & PID 1,000
Uniform Allowance 10,000
Taxable DMB P 28,000
Rice Subsidy 35,000
3.)
Medical Cash Allowance 5,000
13th-month pay 50,000
Medical Assistance 20,000
14th-month pay 50,000
Laundry Allowance 2,000
Taxable DB 128,000
Awards 5,000
Non-Taxable amount (90,000)
Gifts 5,000
Taxable OB 38,000
CBA 5,000
Productivity Incentives 6,000
 Inventory – Beginning 300,000
Purchases 2,000,000
Purchase return & allowances 150,000
4.) Freight-in 200,000
Total Compensation 876,250 Inventory – End 800,000
Less: Deductions Interest Expense 50,000
MC – 39,260 Taxes 35,000
DMB - 65,000 Admin & Selling Expense 190,000
OB- 90,000 Depreciation 60,000
(-) 194,260 Required:
Taxable Income 681,990 1. Net Sales
5.) Answer it! 2. Net purchases
Taxable Income = 3. Total goods available for sale
Old Tax____________________________ 4. Cost of goods sold
Basic tax - 5. Gross profit
Tax rate – (373,800-250,000)x30% = 6. Business expense
Tax due - - Itemized deduction
2018_______________________________ - Optional standard deduction
Basic tax - 7. Net taxable income
Tax rate – (372,800-250,000)x20% = 8. Tax due
Tax due - Solution
2023_______________________________ Gross sales 4,000,000

Less: SD 250,000
Basic tax -
SR 100,000 350,000
Tax rate – (372,800-250,000)x15% =
Net Sales 3,650,000
Tax due –
Purchases 2,000,000

Add: Freight-in 200,000

TAXPAYER EARNING PURELY FROM Total 2,200,000

BUSINESS Less: PD 0
A taxpayer had the ff. data for the year 2021 PRA 150,000 150,000

Gross sales 4,000,000 Net purchases 2,050,000

Add: Inventory-Beg. 300,000

Sales discount 250,000
Total goods available for sale 2,350,000
Sales returns & allowances 100,000
Less: Inventory-End 800,000
Cost of goods sold 1,550,000

Gross profit 2,100,000

__________________________________________________

Interest Expense 50,000

Taxes 35,000

A&S expense 190,000

Depreciation 60,000

Itemized Deduction 335,000

__________________________________________________

Gross Sales 4,000,000

X 40%

OSD 1,600,000

7.1)
Net taxable income
Gross Profit 2,100,000
Less: Itemized Deduction 335,000
Taxable Income 1,765,000
8.1)
2018-2022
Basic tax 130,000
Tax rate – (1,765,000 – 800,000)x30% 289,500
Tax due 419,500
7.2)
Net taxable income
Gross sales 4,000,000
Less: OSD 1,600,000
Net taxable income 2,400,000
8.2)
2018-2022
Basic tax 490,000
Tax rate – (2,400,000-2,000,000)x32% 128,000
Tax due 618,000