INCOME AND BUSINESS TAXATION

TAXATION – is the process by which our government, through our lawmakers, raises income to
pay its necessary expenses.

PURPOSE OF TAXATION

1. The primary purpose of taxation is to provide proper funding needed to run the
government.
2. There are various secondary purposes of taxation:
a. By imposing high customs duties and taxes on imported goods, local products made
in the Philippines would remain competitive.
b. By imposing progressive taxes, it will reduce the inequalities between the wealth and
income of our people.
c. By increasing taxes, the government may mitigate the effect of an impending
inflation.

INFLATION – situation wherein the purchasing power of the peso will go down due to rising
prices of commodities.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal Adequacy
 The government should make sure that the amount of revenue collected would be
enough to shoulder the different expenses incurred by it.
2. Theoretical Adequacy
 The burden of taxation should be proportionate to the ability of the taxpayer to pay it.
3. Administrative Feasibility
 The tax laws being promulgated by our government should be capable of just and
equitable administration.

3 INHERENT POWERS OF THE GOVERNMENT

1. Eminent Domain
 This is the power of the government to take private property to be used for a public
purpose.
2. Police Power
 This is the power of our government to make laws that will promote public health,
morals, safety and welfare of the people.
3. Taxation
 The power of the government to collect taxes that will be used to finance the different
projects needed by the people.
INCOME TAXATION

The two biggest classification of income taxpayers are the:

a. Individuals
b. Corporations

Individuals can be further classified into four:

a. Resident citizen
 Filipino citizen
 lives and resides here in the Philippines
b. Non-resident citizen
 Filipino citizen
 does not also reside here in the Philippines
 OFWs
c. Resident alien
 citizen of another foreign country
 resides here in the Philippines (during the taxable year)
d. Non-resident alien
 citizen of another foreign country
 does not reside here in the Philippines

NRA can be further classified as one who is either:

1. Engaged in trade or business (NRA-ETB)

He shall go here for a total period of more than 180 days during the calendar
year
2. Not engaged in trade or business (NRA-NETB)
Came to the Philippines and stayed for not more than 180 days during the
calendar year.

Only resident citizens are taxable on income derived from sources within and outside the
Philippines. The other three are to be taxed arising from sources within the Philippines.

KINDS OF INCOME

1. Compensation Income
This is the income being received by employees working for different companies.
This is usually in the form of salaries, bonuses and allowances.
2. Business or Professional Income
This is the income generated by entrepreneurs (business) 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 investments made by the individual.

For purposes of compensation income and business income (taken together will be called as
gross income), the following formula will be used:

Gross Income – Allowable Deductions = Taxable income

The taxable income will then be subjected to this scheduler rate to compute for the income tax
payable to the BIR:

Over Not Over Tax Plus Of excess over

10000 5%
10000 30000 Php 500 10% Php 10000
30000 70000 Php 2500 15% Php 30000
70000 140000 Php 8500 20% Php 70000
140000 250000 Php 22500 25% Php 140000
250000 500000 Php 50000 30% Php 250000
500000 Php 125000 32% Php 500000

ALLOWABLE DEDUCTIONS

The allowable deduction for qualified individuals would depend on the kind of income
earned by him.

PERSONAL EXEMPTIONS

These are amounts that can be deducted from certain individuals’ gross income before it will be
subjected to the income tax table.

a. Basic personal exemptions

- All kinds of individual except those classified as non-resident alien
- Php 50,000 a year

An NRA-ETB is entitled to personal exemption as long as the following requisites are

present:

 The foreign country of the NRA has a tax law that grants personal exemptions to
Filipinos who are also non-residents of that country. This is known as the concept of
reciprocity.
 The NRA files are true and accurate statement of all his income derived in the
Philippines.

b. Additional exemptions for dependent children

- Php 25,000 for every dependent child
- Up to four dependent children only or Php 100,000 per year only
The personal exemption is allowed to qualified individuals whether single, married or a
widow/widower.

CHANGE OF STATUS

Rules on change of status (Additional Exemption)

1. If the taxpayer would have an additional child born during the year, the taxpayer may
immediately claim the additional personal exemption during the year.
2. If the taxpayer’s dependent reaches 21 years old, marries, dies or was gainfully
employed during the taxable year, the taxpayer may still claim additional personal
exemption, but up to the current year ONLY.

QUALIFICATIONS FOR DEPENDENTS

a. Must be a legitimate, illegitimate or legally adopted child of the taxpayer

b. Must be chiefly dependent upon the taxpayer and still living with them
c. Must not be more than 21 years old, unmarried and is not gainfully employed
d. Though more than 21 years old, is incapable of self-support because of mental or
physical defect

SUMMARY OF ALLOWABLE DEDUCTIONS FOR EVERY INDIVIDUAL

INDIVIDUAL BASIC PERSONAL ADDITIONAL PERSONAL

EXEMPTION EXEMPTION
Resident Citizen Allowed Allowed
Non-resident citizen Allowed Allowed
Resident alien Allowed Allowed
NRA-ETB with reprocity Allowed Not Allowed
NRA-ETB without reprocity Not Allowed Not Allowed
NRA-NETB Not Allowed Not Allowed

EXAMPLES:

1. Mr. A, single and a resident citizen

Basic personal exemption Php 50000

Additional personal exemption 0

2. Mr. B, married and a non-resident citizen

Basic personal exemption Php 50000

Additional personal exemption 0
3. Ms. D, legally separated and a NRA-ETB. His foreign country is giving a Php 42000
personal exemption to Filipinos

Basic personal exemption Php 42000

Additional personal exemption 0

NRA-ETB that has reciprocity clause may avail of basic personal exemption. The lower
amount between the Philippine tax law (Php 50000) and the foreign tax law (Php 42000)
will be used.

4. Mr. E, same as Ms. D, but the foreign country is giving a Php 57000 personal exemption
to Filipinos residing therein

Basic personal exemption Php 50000

Additional personal exemption 0

NRA-ETB that has reciprocity clause may avail of basic personal exemption. The lower
amount between the Philippine tax law (Php 50000) and the foreign tax law (Php 57000)
will be used.

5. Mr. G, a resident citizen and married with 3 legitimate children

Basic personal exemption Php 50000

Additional personal exemption Php 75000

Qualified individuals can avail of a Php 25000 additional personal exemption per
dependent child.

6. Mr. H, a resident citizen and married with 9 illegitimate children

Basic personal exemption Php 50000

Additional personal exemption Php 100000

The allowable deduction for the additional personal exemption is limited to only four
dependent children or Php 100000.

7. Mr. I, a resident citizen with 2 legally adopted and 3 naturally adopted children

Basic personal exemption Php 50000

Additional personal exemption Php 50000

Only legally adopted children can be considered in the computation for the additional
personal exemption.

8. Mr. J, a resident citizen and supporting his unemployed brother and his minor nephew

Basic personal exemption Php 50000

 Additional personal exemption 0

Only qualified dependent children can be considered for the purpose of computing the
additional personal exemption.

9. Mr. N, an NRA-NETB, single and with 4 dependent children

Basic personal exemption 0

Additional personal exemption 0

NRA-NETB cannot avail either the basic personal exemption or the additional personal
exemption.

10. Mr. O, a resident citizen, has 2 children at the start of the year. During the year, the
eldest child married, the second child died, and his wife gave birth to their third child

Basic personal exemption Php 50000

Additional personal exemption Php 75000

FOR THE CURRENT TAXABLE YEAR ONLY, it would not matter that the eldest child
married and the second child died. As to the third child, the taxpayer can already avail of
another Php 25000 additional personal exemption.