INCOME AND
BUSINESS TAXATION
At the end of this chapter, the
learners should be able to:
• Define income and business
taxation and its principles and
processes.
Explain the principles and purposes
of taxation.
Prepare the list of sources of
gross income from
compensation and gross
income from business and the
corresponding deductions.
I. Principles of Taxation
• Governing tax law in the Philippines is
the National Internal Revenue Code of
1997. The Bureau of
Internal Revenue (BIR) is the primary
implementing agency of this law.
• Taxation is the process by which the
government collects revenue in order to
pay for its expenses.
• Income tax is defined as the tax on the
net income or the entire income realized
in one taxable year.
What is Taxation
Taxation is the
process by which our
government, through
our lawmakers, raises
income to pay its
necessary expenses.
Who are required to pay income
tax in the Philippines? (Section 23
of the National Internal Revenue
Code [NIRC] of 1997
A citizen of the Philippines, living in the
Philippines, is taxable on all income
earned inside and outside the
Philippines;
- A non-resident citizen is taxable only
on income earned in the Philippines;
(- An OFW is taxable only on income
earned in the Philippines.
- A foreigner living in the Philippines is
taxable only on income earned in the
Philippines.
- A domestic corporation is taxable on
all income derived from sources inside
and outside the Philippines; and
- A foreign corporation is taxable only
on the income derived inside the
Philippines.
It is often quoted that there are only
two permanent things in this world,
Change and Taxes
Paying taxes is one of the basic
responsibilities of every individual
According to
Benjamin Franklin,
nothing is certain in
this world except
death and taxes.
The Congress, through
our senators and
congressman, passes
tax laws. Tax law give
the government the
authority to collect the
necessary taxes from its
constituents.
II. List of sources of gross income:
(NIRC 1997 Chapter 6 Section 32 A)
• Compensation for services in
whatever form paid, including, but
not limited to fees, salaries, wages,
commissions, and similar items;
• Gross income derived from the
conduct of trade or business or the
exercise of a profession;
• Gains derived from dealings in
property; (Note: subject to 6%
capital gains tax for individuals and
for corporation if land and building
Interests; (Note: generally subject to 20% final
withholding tax)
• Rents;
• Royalties; (Note: generally subject to 20%
final withholding tax,10% if from books and
literary works) • Dividends;
(Note: generally subject to 10% final
withholding tax for individuals, tax exempt for
corporation)
• Annuities;
• Prizes and winnings; (Note: generally
subject to 20% final withholding tax, except
those that are tax exempt based on specific
criteria in the law)
• Pensions; and
• Partner's distributive share from the net
income of the general professional
PURPOSES OF TAXATION
Taxation has primary &
secondary purposes.
1. The primary purpose of
taxation is to provide the
proper funding needed to
run the government.
The money collected from
taxes will finance and
promote the general
welfare of the people. It will
also used to pay the
salaries of the police and
military forces that guard
our territories and maintain
peace & order.
There are various secondary purposes
of taxation
a. Imposition of high custom
duties or taxes on imported
goods ensures that local
products remain
competitive. Additional taxes
would increase the prices of
imported goods.
b. Imposing progressive
taxes will reduce wealth
and income inequality in
the country.
A progressive system of
taxation means that
those who earn more will
be subjected to higher
income taxes.
c. Increasing taxes could
help the government
mitigate the effects of an
impending inflation.
Inflation is a situation
wherein the purchasing
power of the peso due to
rising of commodities.
Inflation may arise due to
excess money supply in
hands of people. Seller
are tempted to increase
the price of goods and
services because they
know that people have
excess money.
Increasing the amount of
taxes collected from the
people reduces their
disposable income and the
amount of money in their
hands. This forces the
sellers to lower the prices
of goods and services,
Otherwise, they are left
with unsold inventories.
This technique can be
used by the government
to curb or stop a possible
inflation in the country.
Basic Principles of a Sound Tax System
1. Fiscal Adequacy
The government should
ensure that the amount
or revenue collected
would be enough to
shoulder different
government expenses.
This would entail proper
planning and budgeting on
the part of the government
officials concerned.
2. Theoretical Justice.
The burden of taxation
should be proportionate to
the ability of the tax payer
to pay it. It should be
noted that proportionality
does not necessary mean
equality in the amount of
taxes to be paid.
2. Administrative feasibility.
The tax laws promulgated
by the government should
be capable or just and
equitable administration.
The tax laws should be
clear to the taxpayers and
ca be easily implemented
by the tax authorities.
Kinds of Income
Individuals can earn from
at least three kinds of
income:
1. compensation income,
2. business income and 3.
passive income
1. Compensation Income
This is income received by
employees working for
different companies.
This is usually in the
form of salaries,
bonuses, and
allowances.
2. Business Income
This is the income
generated by an
entrepreneur or by different
professionals like lawyers,
doctors, and accountants
(professional income) They
do not work as employees
of other people
3. Passive Income
These are income
generated by different
investment made by an
individual.
For the purpose of compensation
income and business income
(taken together will be called as
gross income), the following
formula will be used: Gross
Income-Allowable Deduction =
Taxable Income
The taxable income will be then be
subjected to this schedule rate to
compute for the IT payable to BIR.
THANK
YOU
