Fundamentals

of
Accountancy, Business &
Management

2
Fundamentals of ABM 2 by: Ferrer & Millan
 Chapter 10
Income and Business Taxation 

Learning Objectives
1. Define income and business taxation and its
principles and processes.
2. Prepare the list of sources of gross income from
compensation and gross income from business.
3. Explain the principles and purposes of taxation.
4. Distinguish individual from business taxation.
5. Compute the gross taxable income and tax due.

Fundamentals of ABM 2 by: Ferrer & Millan

 Taxation
• Taxation is the process by which a
government, through its lawmaking body,
imposes charges on its inhabitants to raise
money for public use.

Fundamentals of ABM 2 by: Ferrer & Millan

 Purposes of Taxation
• Primary purpose - to raise revenue that will
be used in defraying government expenses.
• Secondary - used to achieve certain social
and economic objectives, such as:
– regulate inflation
– minimize the adverse effects of certain
activities
– equitable distribution of wealth

Fundamentals of ABM 2 by: Ferrer & Millan

 Nature of Taxation
a. Inherent power - taxation is one of the 3
inherent powers of a sovereign state
b. Legislative - tax laws must first be enacted
before taxes can be imposed.
c. Subject to constitutional and inherent
limitations

Fundamentals of ABM 2 by: Ferrer & Millan

Theory and basis of taxation
a. Reciprocal duties of protection and
support – the government protects the
welfare of its people, in return, the people
support the government.
b. Benefits received principle – taxes are used
for the benefit of the public.

Fundamentals of ABM 2 by: Ferrer & Millan

 Aspects of taxation
a. Levy – tax laws, specifying the object and
amount of taxation, are enacted.
b. Collection ­– the tax laws are implemented
and administered.

Fundamentals of ABM 2 by: Ferrer & Millan

Principles of a sound tax system
a. Fiscal adequacy – revenues should be
sufficient to defray expenditures.
b. Theoretical justice – taxes are
proportionate to the taxpayer’s ability to
pay.
c. Administrative feasibility – tax laws can
be implemented efficiently and effectively,
avoiding unnecessary inconvenience and
confusion on the part of the taxpayers.

Fundamentals of ABM 2 by: Ferrer & Millan

 Characteristics of tax
a. It is mandatory.
b. It levied by the lawmaking body.
c. It is imposed primarily to raise revenues
for the government.
d. It is generally payable in money.
e. It is proportionate in character.
f. It is levied on persons and property (or the
exercise of a right or privilege) over which
the taxing authority has jurisdiction.
g. It is levied for public purposes.
Fundamentals of ABM 2 by: Ferrer & Millan
Tax distinguished from Other Fees

Fundamentals of ABM 2 by: Ferrer & Millan

Tax distinguished from Other Fees

Fundamentals of ABM 2 by: Ferrer & Millan

 Income Tax vs. Business Tax
• Income tax is a tax on a person’s income
derived from employment, business, trade,
practice of profession, or from property,
after excluding the deductions allowed
under the law.

• Business tax is a tax on the production,

sale, or consumption of goods and services,
leasing of property, or other business
activities.
Fundamentals of ABM 2 by: Ferrer & Millan
 Classification of Individual Income Taxpayers
1. Resident citizen – a Filipino citizen residing permanently
in the Philippines.  
2. Non-resident citizen – a Filipino citizen residing
permanently abroad or works abroad most of the time
(i.e., at least 183 days during the taxable year).
3. Resident alien – a foreigner residing in the Philippines.
4. Non-resident alien – a foreigner not residing in the
Philippines.

• Resident citizens are taxed on all income they derive from

sources within and outside the Philippines.
• Nonresident citizens and aliens are taxed only on income
they derive within the Philippines.
Fundamentals of ABM 2 by: Ferrer & Millan
 Income Taxation
• Income includes all inflows of wealth to the
taxpayer other than those that represents a
mere return of capital.
• Gross income refers to all income derived
from whatever source. Examples:
a. Compensation income
b. Business income
c. Passive income

Fundamentals of ABM 2 by: Ferrer & Millan

Gross Compensation Income
Compensation income is income that is
typically derived from employment. Examples:
salaries and wages

Fundamentals of ABM 2 by: Ferrer & Millan

 Taxable income
• Taxable income is gross income minus the
deductions allowed by law.
• Examples of allowed deductions from gross
income:
a. SSS or GSIS contributions
b. PhilHealth contributions
c. Pag-IBIG contributions
d. Union dues

Fundamentals of ABM 2 by: Ferrer & Millan

 Rounding-off of Centavos
• For less than 0.50 centavos, drop or omit
the centavos.
• For 0.50 centavos and above, round up to
the next peso.

Fundamentals of ABM 2 by: Ferrer & Millan

Other Forms of Compensation
1. Fixed or Variable Allowances – e.g., RATA, COLA, and the like.
2. 13th month pay
3. Christmas bonus
4. De Minimis Benefits
5. Overtime pay
6. Hazard pay
7. Commission
8. Fees
9. Honoraria
10. Vacation and sick leaves
11. Retirement pay
12. Separation pay
13. Compensation paid in kind

Fundamentals of ABM 2 by: Ferrer & Millan

 Taxation of 13th month pay
• Thirteenth month pay is not taxable up to
₱90,000. Any excess over this amount is
taxable.

Fundamentals of ABM 2 by: Ferrer & Millan

Taxation of Christmas bonus
a. Non-performance based bonus - combined
with the 13th month pay and subjected to
the total limit of ₱90,000. Any excess over
this amount is taxable.
b. Performance based bonus - if received
under CBA and productivity incentive
schemes, is not taxable up to a limit of
₱10,000 (see discussion on ‘de minimis’
benefits below).

Fundamentals of ABM 2 by: Ferrer & Millan

De Minimis Benefits

Fundamentals of ABM 2 by: Ferrer & Millan

Tax on “13th month pay and Other benefits”

Fundamentals of ABM 2 by: Ferrer & Millan

 Gross Business Income
Business income is income derived from trade,
business, or practice of profession (or simply,
income from self-employment).

Fundamentals of ABM 2 by: Ferrer & Millan

Deductions from Gross Business Income
1. Itemized deductions; or
2. Optional standard deduction (OSD)

Fundamentals of ABM 2 by: Ferrer & Millan

 Itemized Deductions
• Ordinary and necessary trade, business or
professional expenses
• Interest expense
• Taxes
• Losses
• Bad debts
• Depreciation
• Depletion
• Charitable and other contributions
• Research and development
• Pension trust
Fundamentals of ABM 2 by: Ferrer & Millan
Optional standard deduction (OSD)
OSD is computed as forty percent (40%) of net
sales, without deducting cost of sales.

Fundamentals of ABM 2 by: Ferrer & Millan

Optional Eight percent (8%) Tax
Self-employed individuals whose gross sales
or gross receipts and other non-operating
income do not exceed the ₱3,000,000 VAT
threshold have the option to avail of the eight
percent (8%) tax on gross sales or gross
receipts and other non-operating income in
excess of two hundred fifty thousand pesos
(₱250,000) in lieu of the graduated income tax
rates (i.e., based on the tax tables) and
percentage tax.
Fundamentals of ABM 2 by: Ferrer & Millan
 Income Tax Return (ITR)
• Taxpayers are required to file an income tax
return (ITR) with the BIR when paying taxes,
except when the taxpayer is specifically
exempted by law from such filing.
• The annual ITR is required to be filed on or
before May 15 of the year following the
taxable year.

Fundamentals of ABM 2 by: Ferrer & Millan

Taxpayer Identification Number (TIN)
Every taxpayer is required to register once
with the BIR and obtain one (1) Tax
Identification Number (TIN). A taxpayer
obtaining more than one TIN for
himself/herself is punishable by law through
monetary fine and/or imprisonment.

Fundamentals of ABM 2 by: Ferrer & Millan

 Withholding taxes
Employers are required to withhold taxes on
employees’ compensation. This means that
the salaries or wages received by the
employee as “take-home pay” is already net
of the related income tax.

Fundamentals of ABM 2 by: Ferrer & Millan

 Passive income
• Passive income can be broadly defined as
income earned without actively working for
it. Passive income is typically subject to
final tax.

Fundamentals of ABM 2 by: Ferrer & Millan

Fundamentals of ABM 2 by: Ferrer & Millan
 Business Taxation
• Annual registration - ₱500 annual
registration fee for every separate place of
business.
• Value-Added Tax (VAT)
• Percentage Tax
• Excise Tax

Fundamentals of ABM 2 by: Ferrer & Millan

 Value-Added Tax (VAT)
Value-Added Tax (VAT) is imposed on “any
person who, in the ordinary course of
business, sells, barters, exchanges, leases
goods or properties, renders services, and any
person who imports goods.” (NIRC Sec. 105)

Fundamentals of ABM 2 by: Ferrer & Millan

 Characteristics of VAT
a. It is a consumption tax – a tax imposed on
the consumption of goods or services in
the Philippines, including importation of
goods.
b. It is a form of sales tax – the tax is based
on sale price.
c. It is an indirect tax – it can be shifted or
passed on to the buyer.

Fundamentals of ABM 2 by: Ferrer & Millan

 Payment of VAT
• A business is required to pay VAT if:
a. it is VAT-registered; or
b. it has annual total sales or receipts that
exceed ₱3,000,000; or
c. there are reasonable grounds to believe
that its annual total sales or receipts
will exceed ₱3,000,000.

Fundamentals of ABM 2 by: Ferrer & Millan

 Output and Input VAT
• Output VAT - 12% of the gross selling price
of the good or service.
• Input VAT - 12% of purchases or payments
to other VAT-registered businesses.
• VAT payable = Output VAT – Input VAT

Fundamentals of ABM 2 by: Ferrer & Millan

Zero-rated and VAT-exempt sales
• Zero-rated sales are those that are subject
to zero percent (0%) output VAT but the
business can still claim the related input
VAT.
• VAT-exempt sales are those that are not
subject to an output VAT but the business
cannot claim the related input VAT.  

Fundamentals of ABM 2 by: Ferrer & Millan

 Percentage Tax
• Generally, a business that is exempt from
paying VAT is required to pay percentage
tax, which is typically computed as 3% of
the gross selling price of a good or service.

Fundamentals of ABM 2 by: Ferrer & Millan

Keeping of books of accounts
• All taxpayers are required to maintain
appropriate bookkeeping records.
• Taxpayers with gross annual sales or
receipts exceeding ₱3,000,000 are required
to have their books of accounts audited
annually by a CPA.

Fundamentals of ABM 2 by: Ferrer & Millan

Issuance of Receipts or Commercial/Sales Invoices

• All taxpayers are required to issue a BIR-

registered receipt or commercial/sales
invoice at the point of sale if the services
rendered or goods sold are valued at ₱100
or more.
• Receipts or invoices shall be kept for a
period of 3 years.

Fundamentals of ABM 2 by: Ferrer & Millan

 Penalties
• Tax evasion (tax dodging) – occurs when a
taxpayer avoids paying his/her taxes using
illegal means (e.g., non-declaration or under-
declaration of taxable income).
• Tax avoidance – occurs when a taxpayer
minimizes his/her exposure to taxes through
legal means (e.g., careful tax planning).

• Monetary fines or penalties consist of

surcharge and interest.

Fundamentals of ABM 2 by: Ferrer & Millan

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Fundamentals of ABM 2 by: Ferrer & Millan

 END

Fundamentals of ABM 2 by: Ferrer & Millan