LESSON THREE: CLASSIFICATION OF TAXES

NAME: ________________________________ DATE: __________________

STUDENT NO.: ___________________________

ASSESSMENT2
General Guidelines in the Application of Personal Income Tax

Read each statement carefully and complete the correct thought of each statement by
encircling the letter of the correct answer. If the score obtained is 70 percent or better,
proceeding to learn the lesson is not necessary. However, if the score obtained is below 70
percent, continuing to discover the module thoroughly is recommended.

1. __________ tax is imposed upon persons within the territorial jurisdiction of the state to
raise adequate revenue for the expenditures of the government.
A. Income
B. Community
C. Real Property
D. National
2. In determining the applicable tax rate for the income of self-employed or professional
individuals, the threshold to be considered is __________.
A. Php 1,919,500.00
B. Php 3,000,000.00
C. Php 3,500,000.00
D. Php 250,000.00
3. When income is derived from being compensation income earner, the income will be taxed
using the __________.
A. Regular Personal Income Tax Rates
B. Fixed Income Tax Rates
C. 8 percent of the Gross Sales or Gross Receipts
D. Compensation Income Tax Rates
4. __________ income is derived from rendering professional expertise and services like
medical and legal services.
A. Compensation C. Business
B. Professional D. Passive
5. Considering the classification of the taxpayers as to residency, citizenship, and sources of
income, income tax is imposed on the __________ of resident citizens, resident aliens, non-
resident citizens, and non-resident aliens engaged in business in the Philippines. On the other
hand, it is imposed on the __________ of non-resident aliens not engaged in business in the
Philippines.
A. Income; Taxable Income
B. Gross Income; Net Income
C. Net Income; Gross Income
D. Taxable Income; Income

ANSWERKEY
1 A 3 A 5 C
2 B 4 B
 LESSON 3
General Guidelines in the Application of Personal Income Tax

Income tax, as defined, is imposed upon persons within the territorial jurisdiction of
the state to raise adequate revenue for the expenditures of the government. Particularly,
income tax is a tax on income, either gross or net, realized during the taxable year.

In the Philippines, income tax is imposed on the taxable net income of (1)
compensation income earners, (2) self-employed or professionals under which gross sales
or gross receipts exceed the Php 3,000,000.00 threshold, and (3) to mixed earners in
relation to income earned as (3.1) compensation income earner and to income realized
from being (3.2) self-employed or professional with gross sales or gross receipts of Php
3,000,000.00 or above. On the other hand, income tax is imposed on the gross sales or
gross receipts of (1) self-employed or professionals under which gross sales or gross
receipts amounted to Php 3,000,000.00 or below. Likewise, relative to income realized by
a (2) mixed earner from being (2.1) self-employed or professional with Php 3,000,000.00
or below gross sales or gross receipts, gross sales or gross receipts shall be used as a
basis.

Moreover, considering the classification of the taxpayers as to residency,

citizenship, and sources of income, income tax is imposed on the net income of (1)
resident citizens, (2) resident aliens, (3) non-resident citizens, and (4) non-resident aliens
engaged in business in the Philippines. On the other hand, it is imposed on the gross
income of (1) non-resident aliens not engaged in business in the Philippines.

As to taxability of income, the following requisites must be observed: (1) there must
be a gain or profit whether in cash or its equivalent; (2) the gain must be realized or
received; and (3) the gain must not be excluded by law or international treaty from taxation.
Likewise, based on the source, income is classified into three categories, as follows: (1)
income from sources within the Philippines; (2) income from sources without the
Philippines; and (3) income from sources partly within and partly without the Philippines.
 All in all, the imposition of income tax is intended to raise revenue to defray the
expenses of the government and to mitigate the evils arising from the inequalities of wealth
by a progressive scheme of taxation which places the burden on those who are best able
to pay.

Presented below are the summary guidelines relative to the application of personal
income tax considering factors of residency, citizenship, and sources of income.

Summary Rules on Personal Income Tax

Taxable Gross Income. This pertains to the total amount of income earned or
received without considering any deductions or exemptions.
Taxable Net Income. This pertains to the amount of excess of the gross income
over the amount of the deduction and exemptions permitted by law.
Tax Guideline for Compensation Income Earners

*This table is denoted as Regular Personal Income Tax Rates (PIT).

In utilizing the regular personal income tax rates, the following procedures need to
be considered: (1) determine the amount of the taxable net income; (2) using the tax rates
or the tax table as the reference, locate the level or bracket of income where the taxable
net income is included; (3) after locating, use the applicable tax rate for the level or bracket
of income in order to compute the basic income tax due.

In example, assuming taxable net income of Php 1,500,000.00, the level or

bracket of income is Level 4 with applicable tax rate of Php 102,500.00 plus 25 percent of
the excess over Php 800,000.00. Thus, using the rates, the tax due will be computed.

Taxable Net Income = Php 1,500,000.00

Level or Bracket of Income = 4 (102,500 + 25% of excess over 800,000)
Computation:
Tax Guideline for Self-employed and Professionals

For the rate of tax of self-employed or professionals whose gross sales or gross
receipts amounted to Php 3,000,000.00 or below, the taxpayer shall have the option to
avail the regular personal income tax rates or the rate of 8 percent of gross sales or
gross receipts in excess over Php 250,000.00. Whereas, one option shall be elected by
the taxpayer during the first quarter of the taxable year. Failure to indicate or signify the
intention will mean the utilization of Option 1 or the application of the regular personal
income tax rates.
Tax Guideline for Mixed Income Earners

It can be noted that under the professional or business income, if the income
amounted to Php 3,000,000.00 or below the threshold, the mixed earner has two options
of which Option 2 provides the application of 8 percent of the gross sales or gross
receipts not considering the Php 250,000.00 deduction as this amount is already used or
applied to the compensation income.

Types of Taxable Income

For the purpose of taxation, the following types of taxable income are identified
and defined, as follows:
Ordinary Income. This income pertains to compensation income, professional
income, or business income.
Compensation Income. This income is earned or arises out of an employee-
employer relationship.
Professional Income. This income is derived from rendering professional
expertise and services like medical and legal services.
Business Income. This income is obtained from profits in engaging in trade or
business.
Passive Income. This income is earned without any action on the part of the
taxpayer. The taxpayer merely waits for the income to be received or realized.
Examples include interest income, royalty income, other winnings, and dividends
received by shareholders.
Capital Gains. This income pertains to gains from selling of capital assets.
 ACTIVITY
General Guidelines in the Application of Personal Income Tax

• Activity 1
Create a diagram which will depict the general guidelines on the application of
personal income tax based on the types of taxpayers as to compensation income
earners, self-employed of professionals, and mixed earners.

• Activity 2
Given the taxable net income, complete the table below by identifying the level or
bracket of income and by computing the tax due. Show supporting computation.