INCOME

and
BUSINESS TAXATION
 OBJECTIVES:
1. Define income and business taxation
and its principles and processes.
2. Explain the principles and purposes of
taxation.
 A. Definition of TAXATION
“taxation” Latin word “taxationem” which means
“a rating, valuing, or appraisal”

- the process or means by which the sovereign,

through its law-making body, raises income to
defray the necessary expenses of government.
- cited by Atty. Hector De Leon (American Jurisprudence)
Taxation is the process by which
the government collects revenue
in order to pay for its expenses.
Taxes are revenue of the
government that funds
government expenditures and
programs.
 ➢ are the amount collected
from the constituents by
virtue of the taxation power
of the state.
➢ it is an involuntary fee or
Taxes charge that is required from
individuals, corporations, or
properties.
➢ failure to pay taxes is
punishable by law.
Governing tax law in the Philippines is the
National Internal Revenue Code of 1997.

Bureau of Internal Revenue (BIR) is the

primary implementing agency in charge of
tax collections.
 B. Nature of Taxation
1. Inherent in sovereignty
- the power is inherent as an incident necessary to
the existence of every government.
2. Legislative
- known as the Congress, it makes laws to limit the
power of taxation. Taxes created by law-makers
(i.e. Congressmen and Senators) are generally
called national taxes.
Local Government Units (LGU) are expressly
granted powers to tax those within their local
territories, classified as local taxes and are
applicable only to those who reside within the
boundaries of the LGU’s authority.

3. Subject to constitutional and inherent limitations

“the power to tax involves the power to destroy”
 Some inherent limitations:

1. Tax must be imposed for a public purpose;

2. Limited to only those within the taxing state’s
territory;
3. Exemption of the government entities performing
governmental functions from taxation;
4. The state cannot tax the property of foreign
sovereigns.
 C. Purpose of Taxation
“ Always a public purpose”
1. Revenue or Fiscal Purpose – used to provide for
various public services to promote the welfare of
the people.

2. Non-Revenue or Regulatory – used to regulate the

behavior of people towards a particular purpose the
gov’t. seeks to achieve.
Secondary to raising funds, taxation is
also used for the following:
a. To provide incentive and support to
small-scale and startup businesses
through tax exemptions.
b. To protect domestic and local industries
against foreign competitions through
imposition of custom duties and tariffs on
imported goods;
c. To reduce inequalities in wealth and
income of individuals and businesses
by imposing higher taxes to those who
earn more and imposing less taxes to
those who earn less (progressive
taxation);
d. To prevent inflation by increasing taxes
or ward off depression by decreasing
taxes.
Theory and Basis
of Taxation
Lifeblood Doctrine
▪ constitutes the theory of taxation which
states that the existence of a government in
every state is a necessity and the
government cannot continue to exist
without the means to defray its expenses.
▪ Therefore, the government has the rights to
compel its citizens to contribute in order to
preserve the state’s sovereignty and safety.
▪ This theory is also known as the necessity
principle. The basis of taxation is founded on the
reciprocal duties of protection and support
between the state and its people.

▪ In return for the taxpayer’s contribution, he/she

enjoys the privileges and protection granted to
him/her by the government. This is the so-called
benefits-received principle or the reciprocity
principle.
 ➢A tax system of any state is a
complex system composed of
different laws, guidelines, and
rules to follow.
PRINCIPLES
OF A SOUND ➢Countries around the world
TAX SYSTEM implement different tax systems
based on their needs and fiscal
requirements. However, the
different tax systems share
common principles.
Basic principles of a sound or a good tax system may be
summarized in three crucial points:
 ➢this means that the sources of
revenue and funds should be
sufficient to meet the
requirements and demands of
government spending and
1. Fiscal public expenditures.
Adequacy ➢in theory, the government must
not incur any deficit as a budget
deficit will paralyze the
government’s ability to deliver
the essential public services to
its people.
 ➢also known as equality, the
tax burden imposed to the
taxpayer should be based
2. Theoretical on his/her ability to pay
Justice
➢it also suggests that the
taxing system must not be
oppressive, unjust, and
confiscatory.
 a. Horizontal equity means that
taxpayers in similar financial
condition or taxpayers who earn the
same level of income should pay the
2-Important similar amount of taxes.
concepts of b. Vertical equity means that taxes
this levied should be applied in
principle proportion to the earning capacity
of the taxpayers. Taxpayers earning
more should pay more than those
earning less.
 ➢ the tax laws should be capable of
convenient, just and effective
administration. As such, the tax laws must
be clear and easily understood, capable
of uniform enforcement, and convenient
3. Administrative as to time, place, and manner of payment.
Feasibility
➢ levying of taxes should not create any
inconvenience to the taxpayer. For
instance, the Bureau of Internal Revenue
implements the electronic Filing and
Payment System (e-FPS) and eBIR Forms
in order to improve efficiency and give
convenience when paying taxes.
 DEFINITION,
PROCESS, AND
Lesson
PRINCIPLES OF
No. 2 INCOME TAXES &
BUSINESS TAXES
➢ Taxpayers earn different types of income
and the treatment for each income also
varies.
➢ The tax rate for each income category also
varies.

➢ This will all depend on the classification of

the taxpayers and their respective income
category.
 Taxes imposed in the Philippines

1. Income Tax- e.g. Regular, MCIT, Capital Gains

Tax, Final Income Tax
2. Business Tax – e.g VAT, OPT, Excise Tax
3. Transfer Tax – e.g. Estate Tax, Donor’s Tax
4. Documentary Tax – e.g. DST
Passive Income
▪Interest income earned from the bank in general – 20%
of gross earnings
▪Royalty income in general – 20%; except royalty for
literary works of individual taxpayer – 10% of gross
earnings
▪Dividend income of individuals – 10% of gross earnings;
dividend income of corporation – tax exempt in general
▪Winnings in general – 20% of the gross earnings.
 ➢ is a tax computed based on a
person’s income/profit arising from
property, practice of profession,
employment, or trade or business

1. ➢ is generally considered as a
privilege tax. It is not levied on the
INCOME person, property, funds, or profits as
TAX such but on the right or the privilege
of the person to receive
compensation, income, or profit

➢ is usually based on the annual or

yearly income of the taxpayer.
PRINCIPLES - Income Taxation
Regular income taxation applies to all items of income
except those that are subject to final tax, capital gains
tax, and special tax regimes. According to Section 23
of the NIRC, the following are the general principles of
Income Taxation in the Philippines:
1. A citizen of the Philippines residing therein is taxable
on all income derived from sources within and
without the Philippines.
2. A nonresident citizen is taxable only on income
derived from sources within the Philippines.
3. An individual citizen of the Philippines who is working and
deriving income from abroad as an overseas contract
worker is taxable only on income derived from sources
within the Philippines: Provided, that a seaman who is a
citizen of the Philippines and who receives compensation
for services rendered abroad as a member of the
complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract
worker.

4. An alien individual, whether a resident or not of the

Philippines, is taxable only on income derived from
sources within the Philippines.
5. A domestic corporation is taxable on all
income derived from sources within and
without the Philippines

6. A foreign corporation, whether engaged or

not in trade or business in the Philippines is
taxable only on income derived from sources
within the Philippines.
Classification
of Income Tax
 ➢ is the tax paid by
persons earning
compensation
a. Individual
income, business or
Income Tax
professional
income, or passive
income
 ➢ is the tax paid by corporations
(both domestic and foreign) which
conduct business in the country

➢ this is a tax computed on their

b. Corporate yearly profits
Income Tax
➢ a corporation is a separate
juridical entity created by
operation of law and is granted
some of the rights and privileges
of a human being
 ➢is a tax levied on the
privilege to enter into
business

2. ➢usually forms part of the

BUSINESS selling price or the cost of the
product or item sold
TAX
➢this is sometimes referred to
as sales tax and includes:
Principles- Business Taxation
1. Any person who in the course of trade or business,
sells, barters, exchanges, leases goods or properties,
renders services, and any person who imports goods
shall be subject to the value-added tax (VAT).
➢ There shall be levied, assessed, and collected on every
sale, barter or exchange of goods or properties, value
added tax equivalent to twelve percent (12%) of the
gross selling price or gross value in money of the goods
or properties sold, bartered, or exchanged, such tax to
be paid by the seller or transferor.
2. Any person whose gross sales or receipts are
below the ₱3,000,000 is thresh exempt from the
payment of value-added tax.
➢ Any person who is not a VAT registered person
shall pay a tax equivalent to three percent (3%) of
his/her gross quarterly sales or receipts:
Provided, that cooperatives, and beginning
January 1, 2019, self-employed and professionals
with total annual gross sales and/or gross receipts
not exceeding Five hundred thousand pesos
(₱500,000) shall be exempt from the three percent
(3%) gross receipts tax herein imposed
3. Excise taxes apply to goods manufactured or produced
in the Philippines for domestic sales or consumption or
for any other disposition and to things imported as well
as services performed in the Philippines.
➢ The excise tax imposed herein shall be in addition to the
value-added tax imposed under Title IV. Excise taxes are
generally paid by the producer or manufacturer of
domestic or local articles, or by the importer or owner in
case of imported goods.
➢ Excise taxes are imposed on specific products such as
alcohol products, tobacco products, petroleum products,
minerals and mineral products, automobiles and other
motor vehicles, and non-essential goods.
1. Value –added tax (VAT)
➢ is a business tax imposed and collected from the
seller in the course of trade or business

➢ is levied repeatedly at every point of sale until it

ultimately reaches the final consumer. It is an
indirect tax so it can be passed on to consumers

➢ in the Philippines, the VAT is usually computed at

12% and is mostly included in the selling price of
the goods or services
BIR Form 2550M - Monthly Value-Added Tax
Declaration

When to File/Pay?
VAT-Manual Filing
- Not later than the 20th day following the end
of each month Through Electronic Filing and
Payment System (eFPS)
2. Percentage Tax
➢ is a business tax imposed on businesses
with gross annual sales and/or receipts
not exceeding ₱3,000,000 and
businesses that are not VAT registered
or are VAT-exempt

➢ this is computed at 3% of the gross

sales or gross receipts.
➢ When to File/Pay?

Within twenty-five (25) days after the end of

each taxable quarter
➢ BIR Form 2551Q - Quarterly Percentage
Tax Return
Note:
"No payment" returns filed late will result on
imposition by the RDO of penalties, which shall be
paid at the concerned AAB.
3. Excise Tax
➢ is a business tax on the production, sale or
consumption of a commodity in a country

➢ it applies to goods manufactured or

produced in the Philippines for domestic
sale or consumption or for any other
disposition and to imported goods
 MAJOR CLASSIFICATION OF EXCISABLE ARTICLES
AND RELATED CODAL SECTION

1. Alcohol Products (Sections 141-143)

a. Distilled Spirits (Section 141)
b.Wines (Section 142)
c. Fermented Liquors (Section 143)
2. Tobacco Products (Sections 144-146)
a. Tobacco Products (Section 144) b
b.Cigars & Cigarettes (Section 145)
c. Inspection Fee (Section 146)
3. Petroleum Products (Section 148)

4. Miscellaneous Articles (Section 149-150)

a.Automobiles (Section 149)
b.Non-essential Goods (Section 150)
c.Non-essential Service (Section 150-A) - RA 10963
[TRAIN Law))
d.Sweetened Beverages (Section 150-B)-(RA 10963
[TRAIN Law])

5. Mineral Products (Sections 151)

➢Excise taxes are imposed on specific products
such as alcohol products, tobacco products,
petroleum products, minerals and mineral
products, automobiles and other motor vehicles,
and non-essential goods.

➢In addition, by virtue of RA 10963 or the TRAIN

Law, sweetened beverages (such as juice and soft
drinks) and invasive cosmetic procedures are
now subject to excise tax.
➢Excise taxes apply to goods manufactured or
produced in the Philippines for domestic sales or
consumption or for any other disposition and to
things imported as well as services performed in the
Philippines.
➢ The excise tax imposed herein shall be in addition
to the value-added tax imposed under Title IV.

➢Excise taxes are generally paid by the producer or

manufacturer of domestic or local articles, or by the
importer or owner in case of imported goods.
Excise tax may either be:

a.Specific excise tax based on weight, volume

capacity, or any other physical unit or
measure

b. Ad valorem excise tax based on the

assessed value of an item, good or
commodity
TIME OF PAYMENT:
In General
➢ On domestic products
Before removal from the place of
production
➢ On imported products
Before release from the customs’
custody