Chapter 11: income taxation

Introduction
• Taxation, an inherent power of the sovereign.
• It is the enforce proportional contributions or charge from persons
and property levied.
• Purpose is raising revenue to carry out the legitimate object of the
government.
• It is essential because the government can neither exist nor endure
without taxation.

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The concept of Income
1. Why is income subject to tax?
2. What is income for taxation purposes?

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 Income
- Is refer as the best measure to taxpayers’ ability to pay tax.
 Ability to pay theory
- States that a taxpayer should required to contribute
based on their relative capacity to sacrifice for the support of
the government.

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Income is for taxation purpose of…
• According to the NIRC (National internal revenue code) the tax
concept of income is referred to as “Gross Income”.
• A taxable item of income is referred to as “item of gross income” or
“inclusion in gross income”.
Gross Income
- Any inflow of wealth to the taxpayer from whatever source, legal
or illegal that increases net worth.

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Gross income include:
• Income from employment, trade, business pr exercise of profession.
• Income from properties and other sources, such as dealings in
properties and other regular or casual transaction.
Taxable Income
- Under NIRC, refers to certain items of gross incomes less
deductions and personal exemptions allowable by law.

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Under the NIRC Under the TRAIN Law
Gross Income XX Gross Income XX
Less: Deductions Less: Deduction (XX)
And Personal Exemptions (XX) Taxable Income XX
Taxable Income XX

NIRC = National Internal Revenue Code

TRAIN Law = Tax Reform for Acceleration and Inclusion Law

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ELEMENTS OF GROSS INCOME
• It is a return on capital that increases net worth.
• It is a realized benefit.
• It is not exempted by law, contract or treaty.

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 Return on capital
Example:
Gossip Company purchased CCTV for 2,000
and sold them for 3,000.

Selling Price 3,000 -Total Return

Cost 2,000 -Return of capital
Mark-up 1,000 - Return on capital

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Income tax
- A tax that Governments impose on income generate by businesses
and individual within their jurisdiction.
- Generally it computed as the product of a tax rate times the taxable
income.
 IMPORTANT TERMS
• Assesse – Means a person by whom any tax or any other sum of money is
payable under this act. In simple term it is the “Tax Payer”.
• Assessment year & Previous year – Assessment Year means the period starting
from April and ending on March 31 of the next year. And the Previous Year means
the financial year immediately before the assessment year.

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Ex.

Previous Assessment Previous Assessment

year Year year year
2018 - 19 2019 - 20 2019 - 20 2020 - 21

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Tax base
• The total amount of income, property, assets, consumption, transactions, or other
economic activity subject to taxation by a tax authority.
• A narrow tax base is non-neutral and inefficient.
• A broad tax base reduces tax administration costs and allows more revenue to be
raised at lower rates.
The tax base is what gets taxed, and the tax rate is the fraction of the base that is
collected by taxation.
 Federal income tax base
-includes all types of income such as wages, interest and dividends, and capital gains.

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• INDIVIDUAL INCOME TAX
. Persons subject to the individual income tax
For income tax purposes, individual taxpayers are classified
into:
a. Citizen
1. Resident citizen - is a citizen of the Philippines who has a permanent
home or place in the Philippines.
2. Non-resident citizen – is a citizen of the Philippine who establish the
fact of his/her physical presence abroad with the definite intention to reside
therein. Leave the country to reside abroad, either as an immigration or for
employment on a permanent basis.

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B. Alien
1. Resident alien – An individual who is not a citizen of the Philippines but
whose residence is within the Philippines.
2. Non-residence alien – an individual who is not citizen of the Philippines
and whose residence is not within the Philippines.

 INCOME TAX RATES

I. For individual Citizens and Resident Aliens Earning Purely Compensation
income and Individual Engaged in Business and Practices of Profession.
A. Graduated Income Tax Rate under section 24 of the code of 1997, As amended
by Republic Act No. 10960

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Income Tax Rate 2018
Amount of Net Taxable Income Rate

Over But Not Over

- P250,000 0%

P250,000 P400,000 20% of the excess over P250,000

P400,000 P800,000 P30,000 + 25% of the excess over P400,000
P800,000 P2,000,000 P130,000 + 30% of the excess over P800,000
P2,000,000 P8,000,000 P490,000 + 32% of the excess over P2,000,000
P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

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Income Tax Rate 2023

Amount of Net Taxable Income Rate

Over But Not Over

- P250,000 0%

P250,000 P400,000 15% of the excess over P250,000

P400,000 P800,000 P22,500 + 20% of the excess over P400,000
P800,000 P2,000,000 P102,500 + 25% of the excess over P800,000
P2,000,000 P8,000,000 P402,500 + 30% of the excess over P2,000,000
P8,000,000 P2,202,500+ 35% of the excess over P8,000,000

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REAL PROPERTY TAXATION
- A tax paid on property owned by an individual or other legal
entity, such as a corporation.
- Property tax is a real state ad-valorem tax, which can be
considered a regressive tax.
- Includes the Interest, Benefits and rights inherent in ownership.
• These rights involve the right to possess, sell, lease and enjoy land.
• The real property is classified as residential, commercial, agricultural,
industrial or special purposes based on its use. The following are
taxable, not hereinafter specifically exempted.

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• Residential

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• Commercial

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• Industrial

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Property Tax vs. Real Estate Tax

• Real estate tax is a property tax. However, that’s not true the other
way around. Not all property taxes are real estate taxes.
• The difference:
Real estate taxes are taxes on real property only; property taxes
can include both real property and tangible personal property.

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 REAL PROPETY TAX EXEMPTIONS

• Real property owned by the Republic of the Philippines or any of its political
subdivision except when the beneficial use thereof has been granted, for consideration
or otherwise, to a taxable person;
• Charitable institutions, churches, personages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable or educational purposes;
• All machineries and equipment that are actually, directly and exclusively used by local
water districts and government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and transmission of electric power;
• All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and
• Machinery and equipment used for population control and environment protection.

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REGRESSIVE
- Refers to a tax that is applied uniformly regardless of income.
- This taxes take a larger percentage of income from low-income earners than from
middle- and high-income earners. As such, the tax burden decreases with
regressive taxes as income rises.

 Common form of regressive:

• Sales tax
• Payroll tax

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PROGRESSIVE TAX
• It imposes a lower tax rate on low-income earners and a higher tax
rate on those with a higher income.

Advantage:
- progressive tax system reduces the tax burden on the people who can least
afford to pay. That leaves more money in the pockets of low-wage earners, who are
likely to spend more of it on essential goods and stimulate the economy in the
process.
Disadvantage:
- Critics of progressive taxes consider them to be a disincentive to success. They
also oppose the system as a means of income redistribution, which they believe
punishes the wealthy, upper class, and even the middle class, unfairly.

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Forecasting
- A technique for making predictions of the direction of future trends
based on analysis of past and present data.
- Businesses use forecasting to determine how to allocate their
budgets or plan for anticipated expenses for an upcoming period.

 Forecasting methods
1. Qualitative methods
2. Quantitative methods

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1. Qualitative methods
- Also known as judgmental methods.
- It offers subjective results, as it is comprised of
personal judgements by experts or forecasters.
- A forecasts are often biased because they are based on
expert’s knowledge, experience and rely on data.
Ex.
• Interviews
• Market research
• Surveys

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2. Quantitative methods
- A mathematical process making it consistent and
object oriented.
- It drives away from basing the results on opinion
and feelings, instead of utilizing large of data and
figures.

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Process of Forecasting

Step 1. Develop the basis of forecasting.

Step 2. Estimate the future operation of the business.
Step 3. Regulate the forecast
Step 4. Review the process

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Benefits of forecasting
• Help to predict the future
• Good for customers
• Keep a company up-to-date
• Learn from past Experience
• Receiving Financing

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