TAXATION MODULE 1

 Exists with indispensible powers “INHERENT POWERS”

o POLICE POWER
o EMINENT DOMAIN
STATE o TAXATION

NATURE OF POLICE POWER

NATURE OF EMINENT DOMAIN

Means (WAYS OF
TAXATION DEFINED COLLECTING AND
Power (INHERENT Process (PASSES APPORTIONING
POWER TO DEMAND LEGISLATIVE THE COST OF
CONTRIBUTION) UNDERTAKING GOV’T AMONG
ENACTMENT OF LAW THOSE
THOUGH CONGRESS THEN PRIVILEGED TO
IMPLEMENTED BY ENJOY ITS
EXECUTIVE BRANCH) BENEFITS)

SIMILARITIES AMONG TAXATION, EMINENT DOMAIN AND POLICE POWERS

1. They are inherent in sovereignty (they can be exercised even without being expressly granted in the Constitution)
2. They are all necessary attributes of sovereignty because there can be no effective government without them.
3. They constitute the three ways by which the state interferes with the private rights and property;
4. They are all legislative in nature and character;
5. They presuppose an equivalent compensation; and
6. The provisions in the constitution are just limitations on the exercise of these powers.

NATURE OF TAXATION
1. Inherent power to sovereignty;
 exists concurrent with 4 elements of a state - people, territory, sovereignty and government
 From the moment a state is born, it automatically possesses the power to collect taxes from its inhabitants.
2. Essentially a legislative function;
 The law-making body of the government (Congress) and its political subdivisions exercise the power of taxation
 The scope of legislative taxing power comprises the following:
o Subject of taxation (person, property, rights, transactions, occupation, etc. to be taxed);
o Amount or rate of the tax (e.g., 5% - 32% for individual’s net taxable income, 30% for corporation’s net taxable income;
12% value-added tax based on sales or gross receipts, etc.)
o Purposes of tax (public purposes);
o Apportionment of tax
o Situs of taxation; and
o Method of tax collection.
3. Non-delegation of Legislative Power to tax
 The power to make tax laws cannot be delegated to other branches of the government.
 The power to make tax laws cannot be exercised by the executive or judicial branch of the government. Therefore
units (LGU), only the legislative branch of the LGU can exercise the power.
 Examples of taxation power that cannot be delegated are the following:
o Power to select the coverage, object or property to be taxed;
o Determining the nature and purpose for which taxes shall be collected;
o Determining the place or situs of tax imposition;
o Fixing the amount to be imposed and tax rates; and
o Granting tax exemption or condonations;
o Setting down rules of taxation in general.
4. For public purposes;
 The power to taxation flows forth the legitimate objective of supporting the service of the government.
 Taxes are used to finance constructions and maintenance of roads; health care, education, security, promotion of
science, commerce, industry and other for the welfare of the general public.
5. Territorial in operation;
 As a rule, the power to tax can only be exercised with in the territorial jurisdiction of a taxing authority, except
when there exists a “private of relationship” between the taxing state and the object of tax based on the tax
principle of reciprocal duties.
6. Tax exemption of government;
  Exemption from taxation is a grant of tax immunity to a particular class of persons or corporations. The state’s
immunity from taxation is inherent its power impose tax.
 Tax exemption applies only to government entities through which the government immediately and directly
exercises its governmental functions like the Armed Forces of the Philippines (AFP).
7. The strongest among the inherent powers of the government;
 Taxation power is the strongest of all inherent powers of the government can either survive or dispense any of its
other powers and functions effectively.
8. Subject to constitutional and inherent limitations.

IMPORTANCE OF TAXATION
 Taxation power exists inseparably with the state. It is essential for the existence of the government. Taxation is
very important for the continuous existence of a nation.
 Even the police power of the government may be exercised through taxation power. Without revenue, there can be
no continuing government without government, there can be no civilization.
BASIS OF TAXATION
1. Principles of Necessity a necessary burden to preserve the state’s sovereignty.
Taxation is the “lifeblood” or the “bread and butter” of the government and every citizen must pay his taxes. Taxes, being
the lifeblood of the government, their prompt and certain availability are of the essence.
2. Principles of Benefits-Received or Benefits-Protection Theory The application of the “benefit-received” is intended for
the general welfare.
a. It does not mean that only those who are able to pay taxes can enjoy the privileges and protection given to a citizen by the
government.
He cannot object to or resist the payment of taxes because no specific personal benefit to him can be pointed out as arising
from tax.
b. The government renders no special or commensurate benefits to any particular property or person.
The only benefits to which the taxpayers is entitled is that derived from his enjoyment of the privileges of living in an organized
society established and safeguard by the devotion of taxes public purposes.

PURPOSES OF TAXATION
1. Revenue purpose.
 The primary purpose of the taxation is to raise revenue by collection funds or property for the support of the
government in promoting the general welfare and protecting its inhabitants.
2. Regulatory Purpose Regulatory purpose, also known as sumptuary is a secondary objective of imposing tax. This
objective of accomplished to
a. Regulate inflation
b. Achieve economic and social stability, and
c. Serve as key instrument for social control.
3. Compensatory Purpose.
 A tax may be used to make up for the benefits received. For example, a tax on gasoline consumed is imposed on
vehicle owners using roads. In the case, the tax is compensatory for the use of road.
OBJECTIVES OF TAXATION
4. Persons, whether natural or juridical persons
a. Natural person – refers to individuals taxpayers.
b. Juridical person – includes corporations, partnership and any association.
5. Properties, whether real, personal, tangible or intangible properties.
a. Real properties – immovable properties such as land and buildings.
b. Personal properties – movable properties such as car and other personal belongings.
c. Tangible properties – that which may be felt or touched and re necessarily corporeal, either real or personal
properties.
d. Intangible properties – properties that are “rights” rather than physical objects. Examples are patents, stocks, bonds,
goodwill, trademarks, franchises, and copyrights.
6. Excise objects, such as;
a. Transaction – the act of conducting activities related to any business or profession. It may involve selling, servicing,
leasing, borrowing, mortgaging, lending
b. Privilege – a benefit derived through gratuitous transfer by fact of death or donation.
c. Right – a power, faculty or demand inherent in one person and incidental to another.
d. Interest – an advantage accruing from anything.

SCOPE OF TAXATION POWER

1. Comprehensive
2. Plenary
3. Unlimited
4. Supreme

LIMITATIONS TO THE POWER OF THE TAXATION Although taxation power is supreme, its exercise is not absolute
because it is subject to inherent and constitutional restrictions. As an inherent power, by its very purpose and nature restrict
taxation. Tax power should be exercised for its very nature purpose and jurisdiction.
While taxation is said to be the power to destroy, it is by no means unlimited. “power to tax is not the power to destroy while
the Supreme Court sits.” If a tax violates the Constitution, such law shall be declared null and void. Any tax law that contradicts
the limitation of taxation is also unconstitutional.

INHERENT LIMITATIONS
Inherent limitations are the natural restrictions to safeguard and ensure that the power of taxation shall be exercised by the
government only for the betterment of the people whose interest should be served, enhanced and protected.
1. Taxes may be lot levied only for public purpose;
2. Being inherently legislative, taxation may not be delegated;
3. Tax power is limited to territorial jurisdiction of the state;
4. Taxation is subject to international comity; and
5. Government entities are generally tax-exempt

CONSTITUTIONAL LIMITATIONS
Constitutional limitations are provisions of the fundamental law of the land that restrict the supreme, plenary, unlimited
and comprehensive power to tax by the state.
As a rule, the Constitution does not require the power to tax on the state. Instead, it simply defines and regulates the exercise of
tax power in order to safeguard and interest of affected taxpayers. It must be remembered that a tax law is of no legal force when
it violates the constitution.
The 1987 Philippine constitution sets limitations in the exercise of the power to tax as follow:
1. Due process of law;
2. Equal protection of laws;
3. Rule of uniformity and equity;
4. Non-impairment of contracts;
5. Origination of appropriation, revenue and tariff bills;
6. President’s power to veto separate items in revenue or tariff bills;
7. Congress granting tax exemption;
8. Exemption from taxation of properties actually, directly and exclusively used for religious, charitable or
educational purposes;
9. No public money shall be appropriated for religious purposes;
10. The power to judicial review;
11. No imprisonment for nonpayment of poll tax; and
12. Tax collection shall generally treat as general funds of the government.

STAGES, ASPECTS OR PROCESSES OF TAXATION

The first two stages of taxation (levy and assessment) are referred to as the impact of taxation, and third phase is referred to as
the incidence of taxation.
Taxation involves three stages, namely:
1. Levy; imposition of taxes involves the passage of tax laws or ordinances through the legislature.
 refers to taxation of the tax policy of the Sovereign State
 scope of legislative taxing power (SSPAAM)
 also involves the granting of tax exemptions, tax amnesties and tax remedies that the government and taxpayers
may avail for the proper implementation of tax measure
 gives the legislature the freedom to choose the objects of taxation provided that the law-making body does not
violate any inherent and constitutional limitations
 cannot be delegated to the executive and judicial branches of the government because by nature it is a legislative
function
2. Assessment;
 involves the act of administration and implementation of the tax laws by the executive through its administrative
agencies as the BIR or Bureau of Customs.
 taxes are self-assessing; taxpayers can compute his taxes by himself
 This process is important in the determination of tax prescription, surcharges and interest to arrive at the specific
sum of tax charged on a person property in accordance to prevailing tax law.
3. Tax payment or collection
 also called “tax collection,” the process of obtaining payment of tax. Payment of tax also includes the option
schemes or remedies as May legally open or available to the taxpayer.

PRINCIPLES OF A SOUND TAX SYSTEM: The principles of fiscal adequacy and theoretical justice represent the nature
of the government’s tax policy and the administrative feasibility represents tax administration. The fundamental principles of a
sound taxation system based on Adam Smith’s Canons of Taxation are
1. Fiscal adequacy states that the sources of revenues of the government should be sufficient to meet the demand of public
expenditures regardless of business condition
2. Equality or Theoretical justice “he who received more should give more.” This principle states that the tax burden must
be proportionate the tax payer’s ability to pay. The contribution of each individual to the government should be fair
enough according to his earnings and wealth.
3. Administrative Feasibility Tax laws must be convenient, just, uniform and effective in their administration – free from
confusion and uncertainty. Their exercise should be convenient as to the place, time and mode of payment, and not
burdensome or discouraging to business. Competent public official must enforce them uniformly.
 Applications of administrative feasibility are
a. Collection of taxes at source (withholding tax)
b. Assigning of duly authorized banks to collect taxes
c. Quarterly filing and payment of income taxes, and
d. Electronic filling of tax returns.

CERTAIN DOCTRINES IN TAXATION (CDEEEIPPSST)

1. Compromises(settlement of dispute) This doctrine provide the compromises are generally allowed and enforceable when
the subject matter thereof is not prohibited from being compromised and the person entering such compromise is duly
authorized to do so.
2. Double taxation- an act of sovereign by taxing twice for the same purpose in the same year
 Indirect Duplicate Taxation - double taxation in broad sense; It extend to all cases in which there is a burden of
two or more pecuniary impositions.
Indirect double taxation may be countered through the application of:
o Tax exemption;
o Reciprocity clause/ tax treaty;
o Tax credit and
o Allowance for deductions such as vanishing deduction in Estate Tax
 Direct Duplicate taxation - double taxation in strict sense; It is prohibited because it comprise imposition of the
same tax on the same property for the same purposes by the same state during the same taxing period. This kind
of double taxation violates the constitutional provision of uniformity and equal protection, as well as the principle
that tax must not be excessive, unreasonable and inequitable. Therefore, such taxation should, whenever and
whenever possible, be avoided to prevent injustice or unfairness.
3. Escape from taxation “A tax evader breaks the law (tax evasion), the tax avoider sidesteps it (tax avoidance)” (Schultz &
Harris, American Public Finance).The “doctrine of escape from taxation” permits the taxpayer to minimize (if not to escape)
payment of tax by lawful means
 Capitalization-price of the property is lowered to accommodate the exclusion of the tax which is expected to be
paid by the seller as a result of the sale transaction
 Exemption from taxation-immunity from tax
o Expressed exemption-statutory laws in nature
 o Implied exemption or by omission-intentional or accidental
o Contractual exemption- lawfully entered by government in contracts under existing laws
 Shifting-transfer of tax burden to other without violating the law ex. Batelec added some charges to its
consumers by adding their tax paid to the electicity
o Forward Shifting – manufacturerdistributorconsumer
o Backward shifting- consumerfactors of production(land, labor, capital, entrepreneur)
o Onward shifting- tax burden is shifted two or more times either forward or backwad
 Tax option-tax payer may choose to pay lower tax rate in some transaction as permitted by Tax Laws
 Tax amnesty- state grants pardon on persons guilty on tax evasion or violation on tax law
 Tax condonation or tax remission-when state desists or refrains from exacting, inflicting or enforcing something
as well as to restore what has already been taken
 Tax evasion – tax dodging-illegal-punishable
 Tax avoidance- tax minimization- legal-unpunishable
 Transformation- producer absorbs the payment of tax to reduce prices and maintain market share
4. Equitable recoupment-when a tax claimed for refund is allowed to be used as payment for unsettled tax liabilities if both
taxes rise from the same transaction wherein overpayment is made and underpayment is due
5. Imprescriptibility of taxes- tax in general are not cancelable otherwise provided by law
6. Prospective application of tax laws – tax must only be applicable and operative after becoming a law
7. Power to destroy- based on MARSHALL DICTUM, the power to tax includes the power to destroy because tax payer has
no option but to pay tax imposed to him
8. Set-off taxes-taxes are not subject to set-off or legal compensation because the government and the taxpayer are not
mutual creditor and debtor of each other
9. Situs of taxation
10. Taxpayer suit-court proceedings, direct illegal disbursement of public funds derived from taxation
ESSENTIAL CHARACTERISTICS OF TAXES (PIPECUEII)
1. Proportionate in character
2. Imposed by legislative body
3. Payable in form of money
4. Enforced contribution
5. Commonly to be paid regular intervals
6. Used for a public purpose
7. Enforced on some person, property or rights
8. Imposed for the purpose of raising revenue
9. Imposed by the sovereign state within its jurisdiction
CLASSIFICATIONS OF TAXES
1. AS TO PURPOSE (RRC)
 REVENUE OR FISCAL (e.g. Income tax, value added tax, and transfer tax).
 REGULATORY, SPECIAL OR SUMPTUARY (e.g. customs duties, Protective tariff on imports to control foreign trade
and excise tax).
 COMPENSATORY
2. AS TO OBJECT OR SUBJECT MATTER (PPE)
 PERSON, POLL, CAPITALIZATION (e.g. Community Tax);
 PROPERTY (e.g. Real Estate Tax);
 EXCISE (e.g. Professional tax, Income Tax, Estate Tax, Donor’s tax and Value-Added Tax).
3. AS TO DETERMINATION OF AMOUNT (AS)
 AD VALOREM These taxes are fixed amounts in proportion to the value of the property with respect to which the tax is
assessed. (e.g. Real Estate Tax, Custom Duties and Excise Tax on fermented liquors, cigars, cigarettes gasoline and
automobiles).
 SPECIFIC It requires independent assessment other than listing a classification of the subject taxed like excise taxes on
distilled spirits, wines, fireworks, and cinematographic films.
4. AS TO WHO BEARS THE BURDEN (DI)
 DIRECT (e.g. Community Tax, Income Tax, Transfer taxes Traveler’s Tax and Corporate Income Tax).
 INDIRECT
5. AS TO SCOPE OF AUTHORITY COLLECTING TAX (NL)
 NATIONAL- (estate and donor’s tax, income, vat, excise customs duties, documentary stamp taxes)
 LOCAL/MUNICIPAL- (community tax, municipal license tax, professional, real estate tax)
6. AS TO RATE OR GRADUATION (PPRDM)
 PROPORTIONAL OR FLAT RATE. The rate of the tax is based on a fixed percentage of the amount of the property, receipt or
other basis to be taxed (e.g. Real estate tax and VAT).
 PROGRESSIVE OR GRADUATED RATE. The rate of the tax increases as the tax base or bracket increases (e.g. Income
Taxes, Estate Taxes and Donor’s Taxes).
 REGRESSIVE RATE. The rate of tax decreases as the tax base or bracket increases. There is no regressive tax in the
Philippines.
 DIGRESSIVE RATE. A fixed rate is imposed on a certain amount but diminishes gradually on sums below it. In digressive
rate, the tax rate is arbitrary because the increase in tax rate is not proportionate to the increase of tax base.
 MIXED TAX. It is a tax system that uses a combination of the different tax rates.

OTHER CHARGES/FEES (CDLMPRSSTT)

CUSTOMS DUTIES-imposed on imported goods
DEBT-obligation to pay or render service
LICENSE FEE-contribution imposed to restrain and regulate businesses
MARGIN FEE-tax on foreign exchange
PENALTY-sanction imposed as a punishment for violation of law
REVENUE-refers to all funds or income derived by the government
SUBSIDY-monetary aid granted or given by the government to an individual or private commercial enterprises
SPECIAL ASSESSMENT- collected by government for reimbursing for construction of public works
TARIFF- schedule of list of rates, duties, or taxes imposed on imported goods
TOLL- compensation for the use of somebody else’s property
 Sample BIR Computations: Taxes of Mixed Income
Earners
Sample Computation: Illustration 1
Mr. Madz, a Financial comptroller of JAC Company, earned annual
compensation in 2018 of P1,500,000.00, inclusive of 13th month and other
benefits in the amount of P120,000.00 but net of mandatory contributions to
SSS and Philhealth. Aside from employment income, he owns a convenience
store, with gross sales of P2,400,000. His cost of sales and operating expenses
are P1,000,000.00 and P600,000.00, respectively, and with non-operating
income of P100,000.00.

Option 1: Eight Percent (8%) income tax rate on Gross Sales

His tax due for 2018 shall be computed as follows if he opted to be taxed at
eight percent (8%) income tax rate on his gross sales for his income from
business:

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00

Taxable Compensation Income P1,410,000.00

Tax due on Compensation:

On P800,000.00 P130,000.00

On excess (P1,410,000 - P800,000) x 30% 183,000.00

Tax due on Compensation Income P313,000.00

(2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00

Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

TOTAL INCOME TAX DUE (Compensation and Business) P513,000.00

Option 1 CONCLUSIONS:
 The option of 8% income tax rate is applicable only to taxpayer’s income
from business, and the same is in lieu of the income tax under the graduated
income tax rates and the percentage tax under Section 116 of the Tax Code,
as amended.
 The amount of P250,000.00 allowed as a deduction under the law for
taxpayers earning solely from self-employment/practice of profession, is not
applicable for mixed-income earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already incorporated in the first tier
of the graduated income tax rates applicable to compensation income.
Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and
other non-operating income
His tax due for 2018 shall be computed as follows if he did not opt for the eight percent
(8%) income tax based on gross sales/receipts and other non-operating income:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00

Taxable Compensation Income P1,410,000.00

Add: Taxable Income from Business -

Gross Sales P2,400,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P1,400,000.00

Less: Operating Expenses 600,000.00

Net Income from Operation P800,000.00

Add: Non-operating Income 100,000.00 900,000.00

Total Taxable Income P2,310,000.0

0

Tax Due:

On P2,000,000.00 P490,000.00

On excess (P2,310,000 - 2,000,000) x 32% 99,200.00

Total Income Tax P589,200.00

Option 2 CONCLUSIONS:
 The taxable income from both compensation and business shall be
combined for purposes of computing the income tax due if the taxpayer chose
to be subject under the graduated income tax rates.
 In addition to the income tax, Mr. Madz is likewise liable to pay
percentage tax of P72,000.00, which is 3% of P2,400,000.00.
Sample Illustration 1 Continued:
On February 7019, taxpayer tendered his resignation to concentrate on his business. His
total compensation income amounted to P150,000.00, inclusive of benefits of
P20,000.00. His business operations for the taxable year 2019 remains the same. He
opted for the eight percent (8%) income tax rate.

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P150,000.00

Less: Non-taxable benefits 20,000.00

Taxable Compensation Income P130,000.00

 Tax Due on Compensation:

On P130,000.00 (not over P250,000.00) P 0.00

Tax due on Compensation Income P 0.00

(2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00

Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

Total Income Tax Due (Compensation and Business) P200,000.00

 The option of 8% income tax rate is applicable only to taxpayer’s income

from business, and the same is in lieu of the income tax under the graduated
income tax rates and the percentage tax under Section 116 of the Tax Code,
as amended.
 The amount of P250,000.00 which is allowed as deduction under the law
for taxpayers earning solely from self-employment/practice of profession, is
not applicable for mixed-income earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already incorporated in the first tier
of the graduated income tax rates applicable to compensation income. The
excess of the P250,000.00 over the actual taxable compensation income is not
creditable against the taxable income from business/practice of profession
under the 80% income tax rate option.
Sample Computation: Illustration 2
Mr. Wayne, an officer of BATS International Corp., earned in 2018 an annual
compensation of P1,200,000.00, inclusive of the 13th month and other benefits in the
amount of P120,000.00. Aside from employment income, he owns a farm, with gross
sales of P3,500,000. His cost of sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of P100.000.00.

His tax due for 2018 shall be computed as follows:

Total compensation income P1,200,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00

Taxable Compensation Income P1,110,000.00

Add: Taxable Income from Business -

Gross Sales P3,500,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P2,500,000.00

Less: Operating Expenses 600,000.00

Net Income from Operations P1,900,000.00

Add: Non-operating Income 100,000.00 2,000,000.00

 Total Taxable Income P3,110,000.0
0

Tax Due:

On P2,000,000.00 P490,000.00

On excess (P3,110,000 - 2,000,000) x 32% 355,200.00

Total Income Tax P845,200.00

CONCLUSION:
The taxpayer has no option to avail of the 8% income tax rate on his income from
business since his gross sales exceed the VAT threshold. However, he is still not subject
to business tax since the nature of his business transactions is VAT exempt.

How to Compute Taxes of Professionals and Self-

Employed
Sample Computation: Illustration 1
Ms. Terry operates a convenience store while she offers bookkeeping services to her
clients. In 2018, her gross sales amounted to P800,000.00, in addition to her receipts
from bookkeeping services of P300,000.00. She already signified her intention to be
taxed at 8% income tax rate in her 1st quarter return.

Her income tax liability for the year will be computed as follows:

Gross Sales - Convenience Store P800,000.00

Gross Receipts - 300,000.00

Bookkeeping

Total Sales/Receipts P1,100,000.00

Less: Amount allowed as deduction 250,000.00

TAXABLE INCOME P850,000.00

TAX DUE (8% of P850,000.00) P68,000.00

CONCLUSIONS:
 The total of gross sales and gross receipts is below the VAT threshold of
P3,000,000.00.
 Taxpayer’s source of income is purely from self-employment, thus she is
entitled to the amount allowed as deduction of P250,000.00 under Sec. 24(A)
(2)(b) of the Tax Code, as amended.
 Income tax imposed herein is based on the total of gross sales and gross
receipts.
 Income tax payment is in lieu of the graduated income tax rates under
subsection (A) hereof and percentage tax due, by express provision of law.

Sample Computation: Illustration 2

Ms. Terry above, failed to signify her intention to be taxed at 8% income tax rate on gross
sales in her initial Quarterly Income Tax Return, and she incurred cost of sales and
operating expenses amounting to P600,000.00 and P200,000.00, respectively, or a total
of P800,000.00, the income tax shall be
computed as follows:
 Gross Sales/Receipts P1,100,000.00

Less: Cost of Sales 600,000.00

Gross Income P500,000.00

Less: Operating Expenses 200,000.00

TAXABLE INCOME P300,000.00

TAX DUE: On excess (P300,000 - P250,000) x 20%) P10,000.00

CONCLUSION: Aside from the income tax due above, Ms. Terry is likewise liable to pay
business tax.

Sample Computation: Illustration 3

Mr. Yoso signified his intention to be taxed at 8% income tax rate on gross sales in his 1st
Quarter Income Tax Return. He has no other source of income, His total sales for the first
three (3) quarters amounted to P3,000,000.00 with 4th quarter sales of P3,500,000.00.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

(8% Rate) (8% Rate) (8% Rate)

Total Sales P500,000.00 P500,000.00 P2,000,000.00 P3,500,000.00

Less: Cost of Sales 300,000.00 300,000.00 1,200,000.00 1,200,000.00

Gross Income P200,000.00 P200,000.00 P800,000.00 P2,300,000.00

Less: Operating Expenses 120,000.00 120,000.00 480,000.00 720,000.00

TAXABLE INCOME P80,000.00 P80,000.00 P320,000.00 P1,580,000.0

0

Computation of Tax Due:

Total Sales P6,500,000.00

Less: Cost of Sales 3,000,000.00

Gross Income P3,500,000.00

Less: Operating Expenses 1,440,000.00

TAXABLE INCOME P2,060,000.00

INCOME TAX DUE:

Tax Due under Graduated Rates P509,200.00

Less: 8% income tax previously paid (Q1 to Q3)* 220,000.00

ANNUAL INCOME TAX PAYABLE P289,200.00

* Computed as: (P3,000,000.00 – P250,000.00) x 8% = P220,000.00

CONCLUSIONS:
 The gross receipts exceeded the VAT threshold of P3,000,000.00.
Taxpayer shall be liable to pay income tax under graduated rates pursuant to
Section 2(A)(2)(a) of the Tax Code, as amended.
 Taxpayer shall be allowed an income tax credit of quarterly payments
initially made under the 8% income tax option computed net of the allowable
deduction of P250,000.00 granted for purely business income.
 Taxpayer is likewise liable for business tax(es), in addition to income tax.
For this purpose, the taxpayer is required to update his registration from non-
VAT to VAT taxpayer. Percentage tax pursuant to Section 116 of the Tax Code,
as amended, shall be imposed from the beginning of the year until taxpayer is
liable to VAT. VAT shall be imposed prospectively.
 Percentage tax due on the non-VAT portion of the sales/receipts shall be
collected without penalty, if timely paid on the due date immediately following
the month/quarter when taxpayer ceases to be a non-VAT.

Sample Computation: Illustration 4

Ms. RSVP is a prominent independent contractor who offers architectural and engineering
services. Since her career flourished, her total gross receipts amounted to P4,250,000.00
for taxable year 2018. Her recorded cost of service and operating expenses were
P2,150,000.00 and P1,000,000.00, respectively.

Her income tax liability will be computed as follows:

Gross Receipts P4,250,000.00

Less: Cost of Service 2,150,000.00

Gross Income P2,100,000.00

Less: Operating Expenses 1,000,000.00

TAXABLE INCOME P1,100,000.00

INCOME TAX DUE:

On P800,000.00 P130,000.00

On excess (P1,100,000.00 - P800,000.00) x 30%) 90,000.00

INCOME TAX DUE P220,000.00

CONCLUSION: The gross receipts exceeded the VAT threshold of P3,000,000.00;

subject to graduated income tax rates; liable for business tax – VAT, in addition to income
tax.

Sample Computation: Illustration 5

In 2018, Mr. Swabe owns a nightclub and videoke bar, with gross sales/receipts of
P2,500,000.00. His cost of sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of P100,000.00.

His tax due for 2018 shall be computed as follows:

TAXABLE INCOME FROM BUSINESS:

Gross Receipts P2,500,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P1,500,000.00

Less: Operating Expenses 600,000.00

Net Income from Operation P900,000.00

 Add: Non-operating Income 100,000.00

TAXABLE INCOME P1,000,000.00

INCOME TAX DUE:

On P800,000.00 P130,000.00

On excess (P1,000,000.00 - P800,000.00) x 30%) 60,000.00

TOTAL INCOME TAX P190,000.00

CONCLUSIONS:
 The taxpayer has no option to avail of the 8% income tax rate on his
income from business since his business income is subject to Other
Percentage Tax under Section 125 of the Tax Code, as amended.
 Aside from income tax, taxpayer is liable to pay the prescribed business
tax, which in this case is percentage tax of 18% on the gross receipts as
prescribed under Sec. 125 of the Tax Code, as amended.

Sample BIR Computations: Taxes of Mixed Income

Earners
Sample Computation: Illustration 1
Mr. Madz, a Financial comptroller of JAC Company, earned annual
compensation in 2018 of P1,500,000.00, inclusive of 13th month and other
benefits in the amount of P120,000.00 but net of mandatory contributions to
SSS and Philhealth. Aside from employment income, he owns a convenience
store, with gross sales of P2,400,000. His cost of sales and operating expenses
are P1,000,000.00 and P600,000.00, respectively, and with non-operating
income of P100,000.00.

Option 1: Eight Percent (8%) income tax rate on Gross Sales

His tax due for 2018 shall be computed as follows if he opted to be taxed at
eight percent (8%) income tax rate on his gross sales for his income from
business:

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00

Taxable Compensation Income P1,410,000.00

Tax due on Compensation:

On P800,000.00 P130,000.00

On excess (P1,410,000 - P800,000) x 30% 183,000.00

Tax due on Compensation Income P313,000.00

 (2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00

Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

TOTAL INCOME TAX DUE (Compensation and Business) P513,000.00

Option 1 CONCLUSIONS:
 The option of 8% income tax rate is applicable only to taxpayer’s income
from business, and the same is in lieu of the income tax under the graduated
income tax rates and the percentage tax under Section 116 of the Tax Code,
as amended.
 The amount of P250,000.00 allowed as a deduction under the law for
taxpayers earning solely from self-employment/practice of profession, is not
applicable for mixed-income earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already incorporated in the first tier
of the graduated income tax rates applicable to compensation income.
Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and
other non-operating income
His tax due for 2018 shall be computed as follows if he did not opt for the eight percent
(8%) income tax based on gross sales/receipts and other non-operating income:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00

Taxable Compensation Income P1,410,000.00

Add: Taxable Income from Business -

Gross Sales P2,400,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P1,400,000.00

Less: Operating Expenses 600,000.00

Net Income from Operation P800,000.00

Add: Non-operating Income 100,000.00 900,000.00

Total Taxable Income P2,310,000.0

0

Tax Due:

On P2,000,000.00 P490,000.00

On excess (P2,310,000 - 2,000,000) x 32% 99,200.00

Total Income Tax P589,200.00

Option 2 CONCLUSIONS:
 The taxable income from both compensation and business shall be
combined for purposes of computing the income tax due if the taxpayer chose
to be subject under the graduated income tax rates.
 In addition to the income tax, Mr. Madz is likewise liable to pay
percentage tax of P72,000.00, which is 3% of P2,400,000.00.
Sample Illustration 1 Continued:
On February 7019, taxpayer tendered his resignation to concentrate on his business. His
total compensation income amounted to P150,000.00, inclusive of benefits of
P20,000.00. His business operations for the taxable year 2019 remains the same. He
opted for the eight percent (8%) income tax rate.

(1) TAX DUE ON COMPENSATION INCOME:

Total compensation income P150,000.00

Less: Non-taxable benefits 20,000.00

Taxable Compensation Income P130,000.00

Tax Due on Compensation:

On P130,000.00 (not over P250,000.00) P 0.00

Tax due on Compensation Income P 0.00

(2) TAX DUE ON BUSINESS INCOME:

Gross Sales P2,400,000.00

Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

Total Income Tax Due (Compensation and Business) P200,000.00

 The option of 8% income tax rate is applicable only to taxpayer’s income

from business, and the same is in lieu of the income tax under the graduated
income tax rates and the percentage tax under Section 116 of the Tax Code,
as amended.
 The amount of P250,000.00 which is allowed as deduction under the law
for taxpayers earning solely from self-employment/practice of profession, is
not applicable for mixed-income earner under the 8% income tax rate option.
 The P250,000.00 mentioned above is already incorporated in the first tier
of the graduated income tax rates applicable to compensation income. The
excess of the P250,000.00 over the actual taxable compensation income is not
creditable against the taxable income from business/practice of profession
under the 80% income tax rate option.
Sample Computation: Illustration 2
Mr. Wayne, an officer of BATS International Corp., earned in 2018 an annual
compensation of P1,200,000.00, inclusive of the 13th month and other benefits in the
amount of P120,000.00. Aside from employment income, he owns a farm, with gross
sales of P3,500,000. His cost of sales and operating expenses are P1,000,000.00 and
P600,000.00, respectively, and with non-operating income of P100.000.00.
His tax due for 2018 shall be computed as follows:

Total compensation income P1,200,000.00

Less: Non-taxable 13th month pay and other benefits-max 90,000.00

Taxable Compensation Income P1,110,000.00

Add: Taxable Income from Business -

Gross Sales P3,500,000.00

Less: Cost of Sales 1,000,000.00

Gross Income P2,500,000.00

Less: Operating Expenses 600,000.00

Net Income from Operations P1,900,000.00

Add: Non-operating Income 100,000.00 2,000,000.00

Total Taxable Income P3,110,000.0

0

Tax Due:

On P2,000,000.00 P490,000.00

On excess (P3,110,000 - 2,000,000) x 32% 355,200.00

Total Income Tax P845,200.00

CONCLUSION:
The taxpayer has no option to avail of the 8% income tax rate on his income from
business since his gross sales exceed the VAT threshold. However, he is still not subject
to business tax since the nature of his business transactions is VAT exempt.