Fundamentals of Accountancy, Business, and Management 2 PDF

Fundamentals of Accountancy, Business, and Management 2 Quarter 2 – Module 8: Fundamentals of Taxation Fundamentals of Accountancy, Business, and Management 2 Alternative Delivery Mode Quarter 2 – Module 8: Fundamentals of Taxation First Edition, 2020 Republic Act 8293, section 176...

Fundamentals of Accountancy, Business, and Management 2 Quarter 2 – Module 8: Fundamentals of Taxation Fundamentals of Accountancy, Business, and Management 2 Alternative Delivery Mode Quarter 2 – Module 8: Fundamentals of Taxation First Edition, 2020 Republic Act 8293, section 176 states that: No copyright shall subsist in any work of the Government of the Philippines. However, prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. Borrowed materials (i.e., songs, stories, poems, pictures, photos, brand names, trademarks, etc.) included in this book are owned by their respective copyright holders. Every effort has been exerted to locate and seek permission to use these materials from their respective copyright owners. The publisher and authors do not represent nor claim ownership over them. Published by the Department of Education Secretary: Undersecretary: Assistant Secretary: Development Team of the Module Author: Joeve Grace G. Natividad Editor: Rowena S. Carillo Reviewers: Terence Adelle D. Lumangyao, Mary Grace A. Laurel Lupe Geonanga, and Mayleen Joy V. Fariñas Illustrator: Joeve Grace G. Natividad Layout Artist: Felizardo S. Valdez III Management Team: Ma. Gemma M. Ledesma Josilyn S. Solana Elena P. Gonzaga Donald T. Genine Ma. Roselyn J. Palcat Novelyn M. Vilchez Elleda E. De la Cruz Rosemarie D. Aclan Arthur J. Cotimo Felizardo S. Valdez III Marve E. Gelera Printed in the Philippines by ________________________ Department of Education – Bureau of Learning Resources (DepEd-BLR) Office Address: Duran Street, Iloilo City_______________________ _________________________________________ Telefax: (033)336-2816, (033)509-765__________________ E-mail Address: [email protected]_______________________  Fundamentals of Accountancy, Business, and Management 2 Quarter 2 – Module 8: Fundamentals of Taxation Introductory Message For the facilitator: Welcome to the Fundamentals of Accountancy, Business and Management 2 Alternative Delivery Mode (ADM) Module on Fundamentals of Taxation! This module was collaboratively designed, developed and reviewed by educators both from public and private institutions to assist you, the teacher or facilitator in helping the learners meet the standards set by the K to 12 Curriculum while overcoming their personal, social, and economic constraints in schooling. This learning resource hopes to engage the learners into guided and independent learning activities at their own pace and time. Furthermore, this also aims to help learners acquire the needed 21st century skills while taking into consideration their needs and circumstances. In addition to the material in the main text, you will also see this box in the body of the module: Notes to the Teacher This contains helpful tips or strategies that will help you in guiding the learners. As a facilitator you are expected to orient the learners on how to use this module. You also need to keep track of the learners' progress while allowing them to manage their own learning. Furthermore, you are expected to encourage and assist the learners as they do the tasks included in the module. 2 For the learner: Welcome to the Fundamentals of Accountancy, Business and Management 2 Alternative Delivery Mode (ADM) Module on Fundamentals of Taxation! The hand is one of the most symbolized part of the human body. It is often used to depict skill, action and purpose. Through our hands we may learn, create and accomplish. Hence, the hand in this learning resource signifies that you as a learner is capable and empowered to successfully achieve the relevant competencies and skills at your own pace and time. Your academic success lies in your own hands! This module was designed to provide you with fun and meaningful opportunities for guided and independent learning at your own pace and time. You will be enabled to process the contents of the learning resource while being an active learner. This module has the following parts and corresponding icons: What I Need to Know This will give you an idea of the skills or competencies you are expected to learn in the module. What I Know This part includes an activity that aims to check what you already know about the lesson to take. If you get all the answers correct (100%), you may decide to skip this module. What’s In This is a brief drill or review to help you link the current lesson with the previous one. What’s New In this portion, the new lesson will be introduced to you in various ways such as a story, a song, a poem, a problem opener, an activity or a situation. What is It This section provides a brief discussion of the lesson. This aims to help you discover and understand new concepts and skills. What’s More This comprises activities for independent practice to solidify your understanding and skills of the topic. You may check the answers to the exercises using the Answer Key at the end of the module. What I Have Learned This includes questions or blank sentence/paragraph to be filled into process what you learned from the lesson. What I Can Do This section provides an activity which will help you transfer your new knowledge or skill into real life situations or concerns. 3  Assessment This is a task which aims to evaluate your level of mastery in achieving the learning competency. Additional Activities In this portion, another activity will be given to you to enrich your knowledge or skill of the lesson learned. This also tends retention of learned concepts. Answer Key This contains answers to all activities in the module. At the end of this module you will also find: References This is a list of all sources used in developing this module. The following are some reminders in using this module: 1. Use the module with care. Do not put unnecessary mark/s on any part of the module. Use a separate sheet of paper in answering the exercises. 2. Don’t forget to answer What I Know before moving on to the other activities included in the module. 3. Read the instruction carefully before doing each task. 4. Observe honesty and integrity in doing the tasks and checking your answers. 5. Finish the task at hand before proceeding to the next. 6. Return this module to your teacher/facilitator once you are through with it. If you encounter any difficulty in answering the tasks in this module, do not hesitate to consult your teacher or facilitator. Always bear in mind that you are not alone. We hope that through this material, you will experience meaningful learning and gain deep understanding of the relevant competencies. You can do it! 4  What I Need to Know This module was designed and written with you in mind. It is here to help you understand the fundamentals of taxation. The scope of this module allows you to use it in many different learning situations. The language used recognizes your diverse vocabulary level. The lessons are arranged to follow the standard sequence of your course. The module is divided into three lessons, namely: Lesson 1 – The Principles and Purposes of Taxation Lesson 2 – Definition, Principles and Processes of Income Taxes and Business Taxes Lesson 3 – Computation of the Gross Taxable Income and Tax Due of Individual Taxpayers After going through this module, you are expected to: 1. explain the principles and purposes of taxation ( ABM_FABM12- IIh-j-19); 2. define income and business taxation and its principles and processes (ABM_FABM12- IIh-j-13); 3. explain the procedures in the computation of the gross taxable income and tax due (ABM_FABM12- IIh-j-13). 5  What I Know The following items and questions are related to taxation. Read each item carefully and choose the letter that corresponds to the correct answer. Write the letter of your choice on a separate sheet. 1. Which of the following is/are the nature of the power of taxation? I. It is an inherent attribute of sovereignty. II. It is legislative in character. III. It is regarded as comprehensive, unlimited, plenary, and supreme. A. I and III only B. II and III only. C. I and II only D. I, II and III. 2. The following statements are TRUE about taxation, EXCEPT? A. The power of taxation may be exercised by the government, its political subdivisions, and even private entities. B. Generally, there is no limit on the amount of tax that may be imposed. C. The money contributed as tax becomes part of the public funds. D. The power of tax is subject to certain constitutional limitations. 3. This refers to the characteristic of taxes which means assessed with some reasonable rule of apportionment. A. Due process B. Theoretical justice C. Equal protection D. Uniformity 4. Which of the following guidelines are followed by accountants in preparing accounting records for taxation purposes? A. Generally Accepted Accounting Principles (GAAP) B. National Internal Revenue Code (NIRC) C. Philippine Financial Reporting Standards (PFRS) D. Philippine Auditing Standards (PAS) 5. The primary purpose of taxation is also referred to as: A. regulatory purpose of taxation B. compensatory purpose of taxation C. revenue purpose of taxation D. sumptuary purpose of taxation 6 6. Which of the following statements is NOT correct? A. The government automatically possesses the power to collect taxes from its inhabitants. B. The government can enforce contribution upon its citizens only when the Constitution grants it. C. Taxation power exists inseparably with the state. D. The state has the supreme power to command and enforce contribution from the people within its jurisdiction. 7. Which of the following states the primary purpose of taxation? A. To support the government in financing its multifarious activities B. To provide incentive and support to preferred pioneering industries by giving tax exemptions C. To reduce inequalities in wealth and income by imposing progressively higher tax rates D. To protect local enterprises against foreign competition through imposition of custom duties and tariff on imported goods. 8. The following are principles of a sound tax system, except one. Which one is it? A. Fiscal Adequacy B. Equality C. Administrative Feasibility D. Uniformity 9. Which statement below expresses the lifeblood theory? A. The assessed taxes must be enforced by the government. B. The underlying basis of taxation is government necessity, for without taxation, a government can neither exist nor endure. C. Taxation is an arbitrary method of exaction by those who are in the seat of power. D. The power of taxation is an inherent power of the sovereign to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues. 10. The ability-to-pay theory is the groundwork for which principle of taxation? A. Fiscal Adequacy B. Equality C. Administrative Feasibility D. Uniformity 7  Lesson The Principles and Purposes 1 of Taxation Almost every day, we are dealing with the concept of taxes. Buying or selling products involves taxes. Eating out with friends, watching movies in cinemas, saving money in banks, and even joining raffle draws will require you to pay taxes. In this lesson, you will be learning what taxation is, its principles, and purposes. What’s In In Araling Panlipunan, you have encountered that the state has three (3) inherent powers. Below are statements that describe each of the three (3) powers of the state. Identify the state power being described by choosing from the answers in the box. Choices may be used more than once. Write the letter of the correct answer on your answer sheet. 1. It is the power of the state to promote public welfare through restraining and regulating both liberty and property of the people. 2. It refers to the power of the state to seize or take private properties for public use as long as the government provides just compensation. 3. It is the power of the state to impose duties or obligations upon entities under its jurisdiction. 4. It refers to the powers of the state exercised by the legislative and executive branches through enactment and enforcement of laws. 5. It is the power of the state to forcibly take someone’s private property such as land or building and use it for public purposes. A. POLICE POWER B. POWER OF EMINENT DOMAIN C. POWER OF TAXATION 8  What’s New As mentioned in the previous section of this module, one of the three inherent powers of the state is the power of taxation. This topic introduces the basic concepts and fundamentals of income taxation of individuals deriving income from compensation, business, and other sources. Before we proceed to the principles and purposes of a sound tax system, let us first define some terminologies that you will encounter in the next lessons. We will also learn the theory and basis of taxation. Basic Terminologies Defined Taxation is a system of compulsory contributions levied by the government or other qualified body to its constituents, to corporations, and property to fund public expenditures. It may also be defined as the inherent power of the state to raise income and demand enforced contributions in order to finance government projects and expenses. Taxes are the amount collected from the constituents by virtue of the taxation power of the state. It is an involuntary fee or charge that is required from individuals, corporations, or properties. Failure to pay taxes is punishable by law. Theory and Basis of Taxation The 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. 9  What is It Now that you have an overview of what taxation is about, let us now determine its basic principles and purposes. PRINCIPLES OF A SOUND TAX SYSTEM A tax system of any state is a complex system composed of different laws, guidelines, and rules to follow. Countries around the world implement different tax systems based on their needs and fiscal requirements. However, the different tax systems share common principles. The basic principles of a sound or a good tax system may be summarized in three crucial points: Fiscal Adequacy Theoretical Administrative Justice Feasibility Figure 1. The Principles of Taxation 1. Fiscal Adequacy. This means that the sources of revenue and funds should be sufficient to meet the requirements and demands of government spending and public expenditures. 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. 2. Theoretical Justice. Also known as equality, the tax burden imposed to the taxpayer should be based on his/her ability to pay. It also suggests that the taxing system must not be oppressive, unjust, and confiscatory. Two important concepts of this principle is horizontal equity and vertical equity. a. Horizontal equity means that taxpayers in similar financial condition or taxpayers who earn the same level of income should pay the similar amount of taxes. b. Vertical equity means that taxes levied should be applied in proportion to the earning capacity of the taxpayers. Taxpayers earning more should pay more than those earning less. 10  This is the reason of the proportional and progressive tax system of the Philippines where individuals or businesses who earn more should pay more taxes. 3. Administrative Feasibility. 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 as to time, place, and manner of payment. 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. PURPOSES OF TAXATION Taxation is a necessity for every government since the taxes are the source of life of every state. The purposes of taxation may be divided into two categories: Revenue Regulatory Purpose Purpose Figure 2. Purposes of Taxation 1. Revenue or Fiscal Purpose. This is the primary purpose of taxation. The government collects taxes in order to raise enough revenues to finance or defray government expenditures and multifarious activities. This way, the government is able to promote public welfare and safety through its programs and projects. 2. Non-revenue or Regulatory. 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); and d. To prevent inflation by increasing taxes or ward off depression by decreasing taxes. 11  What’s More The following statements explain the principles and purposes of taxation. Read each statement carefully and write R if the statement is correctly stated and write W if otherwise. Use a separate sheet of paper for your answers. 1. Fiscal adequacy is a principle of taxation which implies that taxes should be ample to support the needs of the state. 2. The principle of equity means that every individual in a certain country should pay the same amount of taxes. 3. According to the principle of administrative feasibility, the tax system may be complicated as long as it can generate sufficient amount of taxes. 4. The ability-to-pay principle means that taxes to be levied must be in proportion to the capacity and wealth of the taxpayer. 5. The Electronic Filing and Payment System (e-FPS) developed and maintained by the Bureau of Internal Revenue (BIR) is the agency’s initiative in connection with the principle of administrative feasibility. 6. One of the fiscal purposes of taxation is to regulate all businesses operating in the country. 7. The primary purpose of taxation, also known as the revenue purpose, is to generate enough money for the programs and projects of the government. 8. The progressive tax system implemented by the government is one of the regulatory purposes of taxation. 9. One of the purposes of taxation is to encourage foreign companies to operate in the country by imposing tariffs and custom duties on imported products. 10. The revenue purpose of taxation is to achieve some social or economic end, regardless of whether revenues are raised or not. 12  What I Have Learned Taxation is a process or means by which the lawmaking body of the State raises income to defray government expenditures. The taxation power of the government is inherent to its sovereignty. The fundamental theory of the power to tax by the government is the Lifeblood Doctrine or the Necessity Theory and the basis for taxation is the Reciprocity Theory or the Benefits-received Principle. Taxation has three principles: 1) fiscal adequacy or the sufficiency of the taxes collected; 2) theoretical justice or the ability-to-pay principle; and 3) administrative feasibility or the effectiveness and convenience of its implementation. The purposes of taxation may be revenue or regulatory. The primary purpose is to raise revenue. This is also referred to as the fiscal purpose. The secondary purpose, or the regulatory purpose, is intended to achieve some social or economic end such as protective tariffs or incentive and support. What I Can Do The lifeblood doctrine of taxation explains that taxes are crucial and requisite to the continued existence of the government. Choose one from the following pairs of words and explain why they are comparable and analogous to the relationship of taxes and the government. 1. Human being and blood 2. Plants and the sun 3. Cellphone and battery 4. Car and fuel 13  Assessment Answer the following questions in your own words. Write your answers on a separate sheet of paper. 1. What is meant by fiscal adequacy? 2. How can the government achieve fiscal adequacy? 3. How do you understand equality in taxation? 4. What does administrative feasibility imply? 5. What does revenue purpose of taxation mean? Why is it considered as the primary purpose of taxation? 6. What are the secondary or regulatory purposes of taxation? Additional Activities Tax vs. Other Fees. In taxation, there are terms or items which are sometimes mistaken as a form of tax. However, these terms do not have the same meaning as tax, per se. Based on your understanding about taxes and taxation, distinguish tax from other similar items by answering the activity below. Choose the correct word found inside the parenthesis that will make the statement correct. Write your answers on a separate sheet of paper. 1. A ____________ (debt, tax) is generally based on contract, can be assigned to other persons and may be paid in kind while a ____________(debt, tax) is based on law, cannot be assigned, and is generally payable in money. 2. ______________ (Tax, License fee) is levied for revenue and involves the exercise of the taxing power while ______________ (tax, license fee) is imposed for regulation and involves the exercise of police power. 3. A ______________ (tax, license fee) is imposed before engaging in a business or a profession, thus it is a pre-activity imposition, while a ______________ (tax, license fee) is imposed after the commencement of a business or profession or a post-activity imposition. 4. A ______________ (toll, tax) is a demand of proprietorship that is paid for the use of one’s property and may be imposed by the state and private individuals or entities while a ______________ (toll, tax) is a demand of sovereignty which is paid in support of the government and may be imposed only by the State. 14 5. A person cannot be imprisoned by nonpayment of ______________ (debt, tax) but can be imprisoned for not paying his/her ________________ (debt, tax). 6. _______________ (Taxes, Penalties) are imposed for violations of laws or as punishment of a wrong doing while ______________ (taxes, penalties) are imposed to raise funds for nation-building. 7. _______________ (Revenues, Taxes) refer to the amount imposed by the government to individuals, businesses, and properties based on necessity while ________________ (revenues, taxes) refer to all income collections of the government from different sources. 8. A ________________ (tax, special assessment) is levied only on land and is intended to compensate the government for the increase in the value of the land due to a public improvement while a ______________ (tax, special assessment) is levied on persons, properties, or exercise of privilege. 9. ________________ (Tax, Special assessment) attaches to the land and does not become a personal liability of the owner while ________________ (tax, special assessment) is a personal liability of the person assessed. 10. ______________ (Custom duties, Taxes) are amounts imposed on all persons, property, or entities that receive protection and services from the government while ________________ (custom duties, taxes) are impositions on imported or exported goods only. 15  16 What I Know Assessment 1. C 6. B Answers may vary for each learner. 2. A 7. A 3. B 8. D Possible Answers: 1. Fiscal adequacy is a principle of taxation which means 4. B 9. B 444161/ that taxes should be sufficient or enough to defray 5. C 10. B https://www.nav.com/blog/profitability-ratios-types-of-profitability-ratios- government expenses and needs. 2. The government can achieve fiscal adequacy by example.html What’s In imposing additional taxes or raising tax rates when the https://study.com/academy/lesson/profitability-ratio-definition-formula-analysis- ratios/ situation or circumstances demand. 1. A 3. Equality or theoretical justice depends on the ability https://corporatefinanceinstitute.com/resources/knowledge/finance/efficiency- 2. B to pay of the taxpayers. It means that the taxes they pay ory,ratio%2C%20and%20receivables%20turnover%20ratio. 3. C should be in proportion to their income or wealth. Those who have higher income pay higher taxes and those who %20the%20short%2Dterm.&text=Efficiency%20ratios%20include%20the%20invent 4. A have low income pay lower taxes. measure.asp#:~:text=Efficiency%20ratios%20measure%20a%20company's,or%20in 5. B 4. Administrative feasibility implies that the https://www.investopedia.com/ask/answers/040715/what-do-efficiency-ratios- implementation of the tax system and collection of taxes What’s More what-they-tell-you.aspx should be as simple and practical as possible. It should not add burden to the taxpayers. https://www.investopedia.com/financial-edge/0910/6-basic-financial-ratios-and- 1. R 6. W 5. The revenue purpose of taxation means that the https://www.accountingtools.com/articles/2017/5/13/liquidity-ratios 2. W ratios/ 7. R government should be able to raise enough funds for 3. W 8. R public expenditures. It is the primary purpose of https://corporatefinanceinstitute.com/resources/knowledge/finance/financial- 4. R 9. W taxation since taxes are necessary for governments to https://www.inc.com/encyclopedia/financial-ratios.html 5. R 10. W run. 6. The secondary purpose of taxation is regulatory in https://www.myaccountingcourse.com/financial-ratios/interest-coverage-ratio debttoequity-ratio.asp nature and includes the following: What I Can Do a. To provide incentive and support to small-scale and https://www.investopedia.com/ask/answers/062714/what-formula-calculating- startup businesses through tax exemptions; Answers of learners may vary depending https://www.investopedia.com/terms/d/debtequityratio.asp b. To protect domestic and local industries against on their interpretation. foreign competitions through imposition of custom finances/pages/financial-ratios-4-ways-assess-business.aspx duties and tariffs on imported goods; https://www.bdc.ca/en/articles-tools/money-finance/manage- Possible Answer: c. To reduce inequalities in wealth and income of https://www.readyratios.com/reference/debt/debt_to_equity_ratio.html 1. Car and Fuel. The car represents individuals and businesses by imposing higher https://efinancemanagement.com/financial-analysis/efficiency-ratios the government and the fuel taxes to those who earn more and imposing less https://www.investopedia.com/terms/a/activityratio.asp represents the taxes that the taxes to those who earn less (progressive taxation); and ver%20ratios%20or%20operating%20efficiency%20ratios. people pay. Fuel is needed for the d. To prevent inflation by increasing taxes or ward off %20capital%20or%20assets.&text=They%20are%20also%20known%20as%20turno car to start running. Without it, depression by decreasing taxes. ratios/#:~:text=Activity%20ratios%20are%20financial%20metrics,employing%20its the car won’t be able to function https://corporatefinanceinstitute.com/resources/knowledge/finance/activity- properly. In the same way, taxes Additional Activities also fuels the government so that https://www.demonstratingvalue.org/resources/financial-ratio-analysis it can perform its functions and 1. debt; tax 80600.html serve its purpose. 2. Tax; license fee https://smallbusiness.chron.com/importance-ratio-analysis-financial-planning- 3. license fee; tax https://www.educba.com/importance-of-ratio-analysis/ 4. toll; tax analysis/financial-ratio-analysis-definition-importance-and-limitations/7230 5. debt; tax https://www.accountingnotes.net/financial-management/financial-ratio- 6. Penalties; tax Accounting Principles, 12th Edition by Jerry Weygandt, et al. 7. Taxes; revenues Fundamentals of ABM 2 Teacher’s Guide 8. special assessment; tax K to 12 MELCs in Fundamentals of ABM 2 9. Special assessment; tax K to 12 Curriculum Guide in Fundamentals of ABM 2 10. taxes; custom duties References Answer Key  What I Know The following statements are about income and business taxation. Read each item carefully and write TRUE if you believe that the statement is correct, and write FALSE if otherwise. Write your answers on a separate sheet. 1. Income tax is a privilege tax not directly levied on persons, properties, funds, or profits but on the right of the person to receive income or profits. 2. Under the National Internal Revenue Code (NIRC), gross income is the same as taxable income. 3. Income tax is both imposed on businesses and individuals. 4. The corporate income tax paid by corporations is an example of a business tax. 5. Philippines has the lowest corporate income tax rate in South East Asia. 6. The business income is the tax base when computing for the percentage tax. 7. Business taxes are taxes levied on the privilege to enter into business. 8. All Filipino citizens are subject to income tax on income within and outside the Philippines. 9. Business taxes are only paid by both the sellers and buyers. 10. An Overseas Contract Worker (OCW) is exempt from income tax for his/her earnings outside the Philippines. 17  Lesson Definition, Processes, and Principles of Income Taxes 2 and Business Taxes The National Internal Revenue Code (NIRC) provides that a tax shall be imposed on the taxable income of every individual. The Philippine’s taxation system is adopting progressive rates on taxes based on the ability to pay principle. 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. In Southeast Asia, the Philippines has the highest income tax rates as compared to its neighboring countries and states. What’s In Previously, you have learned about the principles and purposes of taxation in general. As a review, fill in the blanks with the correct word/s to complete the statements. Write your answers on a separate sheet of paper. 1. One of the principles of taxation is to ensure fairness and equity in the implementation of the taxation process. This is referred to as ___________. 2. ____________ means that the tax laws should be capable of effective and efficient administration to encourage compliance. 3. ____________ is a principle which ensures that the government earns enough so as not to hamper its delivery of essential public services. 4. The primary purpose of taxation is to raise enough revenue for government expenditures. This is also known as the ____________ purpose of taxation. 5. Imposing custom duties and tariffs on imported goods to protect local businesses is an example of the ____________ purpose of taxation. 18  What’s New Mr. Mat Iyaga, a Filipino seafarer, is a crew member of a vessel engaged exclusively in international trade. He also owns a small grocery store in his hometown which is managed by his mother. Is his income as a seafarer taxable? How about the income from his business? What is It The Philippine Tax System has different classifications of taxes: income taxes, business taxes, transfer taxes, and documentary taxes. These taxes are computed based on the different tax bases and have also different rates. In this lesson, the discussion will be focused only on the basics of income taxes and business taxes. All other taxes will be discussed in taxation subject when you go to college. DEFINITION Income Tax is a tax computed based on a person’s income, compensation, or profit arising from property, practice of profession, employment, or trade or business. Income tax is generally considered as a privilege tax. It is not levied on the person, property, funds, or profits as such but on the right or the privilege of the person to receive compensation, income, or profit. Income tax is usually based on the annual or yearly income of the taxpayer. Income Tax may be classified further depending on the nature of the taxpayer. It can either be: 1. Individual Income Tax – is the tax paid by persons earning compensation income, business or professional income, or passive income. 2. Corporate Income Tax – is the tax paid by corporations (both domestic and foreign) which conduct business in the country. This is a tax computed on their yearly profits. Recall that 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. 19 Business tax, on the other hand, is a tax levied on the privilege to enter into business. Business tax usually forms part of the selling price or the cost of the product or item sold. This is sometimes referred to as sales tax and includes: 1. Value –added tax (VAT) – is a business tax imposed and collected from the seller in the course of trade or business. It 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. 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. 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. 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. PROCEDURES/PROCESSES Filing of BIR returns may be done manually, using electronic Filing and Payment System (eFPS) or eBIR forms. This module will only discuss manual filing of tax returns. Income tax returns are usually filed on an annual basis. Income tax is also computed annually. On the other hand, business taxes are generally computed and withheld or collected at the point of sale in the case of VAT and percentage tax or at the end of production in the case of excise tax. The seller then remits the taxes withheld to the BIR on a monthly or quarterly basis. The following sections will discuss the procedures to be followed when filing tax returns for both income taxes and business taxes. 20 c Figure 1. Procedures for Filing Income Tax Returns 21 c Figure 2. Procedures for Filing Business Tax Returns 22 c 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; and 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. Business Taxation The NIRC does not specifically provide the general principles for business taxation as the business taxes mentioned earlier are discussed individually in different sections of the Code. However, the following can be summarized from Title IV – Value Added Tax, Title V – Other Percentage Taxes, and Title VI – Excise Taxes on Certain Goods of the Tax Code. 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 threshold is 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 (P500,000) shall be exempt from the three percent (3%) gross receipts tax herein imposed. 23 2 c  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. 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. For more information, you may read on the National Internal Revenue Code available on the BIR website (www.bir.gov.ph). What’s More Based on the principles of income taxation, identify whether the following taxpayers are taxable on their income within and without. Copy the items below and check the correct column or columns that properly corresponds to the taxability of the following taxpayers. Philippine World Taxpayer Income Income (Within) (Without) 1. Juan, 56, a resident citizen 2. Gina, 45, a non-resident citizen 3. Dwayne, 28, a resident alien 4. Martha, 32, an OFW 5. Chen, businessman, a non-resident alien 6. ABKD Corp, a domestic corporation 7. ZYX, Inc., a foreign corporation with branch in the Philippines 8. AMD Company, a foreign corporation engaged exclusively in international trade 9. APO Merchandising, a domestic corporation with branches abroad 10. Andrew, seaman, member of a vessel engaged exclusively in international trade 24 3 c  What I Have Learned Income tax is a tax levied on the right or privilege of earning income or profit arising from property, practice of profession, trade, or business. It can be levied on individuals or corporations. Business tax, sometimes referred to as sales tax, is levied on the right to engage in business or trade and usually forms part of the selling price or the cost of the product. Examples are VAT, percentage tax and excise tax. The processes and procedures of filing of income tax are dependent on the classification of taxpayer. Business tax is generally withheld at source and is paid by the seller to the BIR. The filing procedures vary depending on the systems used by the taxpayer: manual filing, eFPS filing or use of eBIR forms. The procedures for each system can be found on the BIR website (www.bir.gov.ph). What I Can Do Read and analyze the following independent situations below. Identify whether the following cases conform to the principles of income and business taxation or not by answering YES or NO. Also, provide justifications for your answers. 1. Eli Marketing is a merchandiser of shoes and bags. Recently, the store has sold a bag with a gross selling price of ₱1,000. However, on the official receipt issued by Eli Marketing, the total amount paid by the customer was ₱1,120. Is Eli Marketing correct for charging the customer an additional of ₱120 for the price of the bag? Why? 2. Drinks N More, a VAT registered merchant, is a retailer of powdered and liquid fruit juices produced by Juice Ko, Inc. The powdered and liquid fruit juices are subject to excise tax. Should Drinks N More pay the excise tax on the powdered and liquid juices that they sell? Why? 25 4 c  3. Mabinuligon Cooperative has an annual gross receipts from its mini-grocery store and other businesses amounting to ₱467,900. The cooperative is a non-VAT registered entity. Its bookkeeper claims that since the cooperative is a non-VAT entity, it is liable to a 3% percentage tax on its gross receipts. Is the claim of the bookkeeper valid? Why? 4. Lucas is an overseas contract worker earning ₱1,200,000 per year. He has also a business in the Philippines which earns ₱600,000 annually. Since the deadline for filing the tax returns and paying the tax due is nearing, Lucas went to his friend, Peter, who is also a business owner. According to Peter, both the ₱1.2M and the ₱600,000 income of Lucas are taxable. Is Peter correct? Why? Assessment Each item below relates to the definition of income and business taxation and their processes and principles. Read each item carefully and choose the letter that corresponds to the correct answer. Write the letters of your choice on a separate sheet of paper. 1. Which of the following statements correctly define income taxation? A. It is levied directly on the income or profit of a person or a corporation. B. It is levied on the right or privilege to earn income or profit from trade or practice of profession. C. It is levied on the right to engage in business or trade. D. It is a tax levied on Filipino citizens only. 2. A business tax includes all of the following, except one. Which one is it? A. value-added tax B. excise tax C. corporate income tax D. percentage tax 3. Excise tax is payable _____________________. A. within 25 days following the close of the taxable year B. every 15th day of the 4th month following the close of the taxable year C. every April 15 of the calendar year D. before the items or products are removed from the place of production 26 5 c 4. According to the principles of income taxation, which of the following taxpayers is taxable for their income outside the country? A. a foreign corporation B. a non-resident citizen C. a resident alien D. a domestic corporation 5. Which of the following BIR Forms should be used by non-individual taxpayers when filing for income tax returns? A. eBIR Form 1700 B. eBIR Form 1701 C. eBIR Form 1702 D. eBIR Form 1703 6. BIR Form 2200 is used for the payment of _________________. A. percentage tax B. excise tax C. final tax D. value-added tax 7. When should individuals earning purely compensation income as employees file their income tax return? A. on or before December 31 B. on or before August 15 C. on or before May 15 D. on or before April 15 8. Which of the following statements is TRUE about percentage tax? A. It is paid by all retailers and merchandisers. B. It is imposed on producers or manufacturers of local or domestic products. C. It is paid by VAT-exempt or non-VAT registered entities or individuals. D. It is imposed in addition to the value-added tax. 9. Which of the following procedures is true to all types of taxes when filing tax returns? A. Appropriate BIR Forms should filled-out and accomplished in three copies. B. BIR Forms should be filed on or before the 15 th day of April. C. All taxpayers should use the same BIR Forms for all types of transactions. D. Taxpayers should pay their tax due in BIR Offices only. 10. Which of the following statements is FALSE about the value-added tax (VAT)? A. It is an indirect tax which is passed on to consumers. B. It is paid by producers, manufacturers, wholesalers, and retailers. C. It is computed at 12% of the gross selling price of an item. 27 6 c  D. It is computed at 3% of the gross selling price of an item. Additional Activities Watch the BIR 2015 Tax Campaign video, “Angat Pa, Pinas!” using the link provided in the box below. After watching the video, answer the questions that follow: https://www.youtube.com/watch?v=12p_vmjrhQw 1. What is your reaction after watching the video? 2. What is the main theme of the video? 3. In your own ways, how can you help ensure that taxes are paid and used correctly? 28 7  8 29 What I Know Assessment 1. TRUE 6. FALSE 1. B 2. FALSE 7. TRUE 2. C 3. TRUE 8. FALSE 3. D 4. FALSE 9. TRUE 4. D 5. FALSE 10. TRUE 5. C 6. B What’s In 7. D 8. C 1. Equality/theoretical justice 9. A 2. Administrative feasibility 10. D 3. Fiscal Adequacy 4. Revenue/Fiscal Additional Activities 5. Non-revenue/regulatory/secondary Answers may vary for every learner. What’s More What Can I Do Answers may vary for every learner. Possible Answers: 1. YES. Value-added tax of 12% is an indirect tax that is added to the selling price of the item sold. 2. NO. Drink N More is not liable for the excise tax because it is not the manufacturer/ producer of the juice. The appropriate part that should pay the excise tax is Juice Ko, Inc. 3. NO. According to Title V of the NIRC, cooperatives whose income do not exceed ₱500,000 shall be exempt from the 3% percentage tax. 4. NO. Since Lucas is an OCW, he is only taxable for his income within the Philippines which is ₱600,000. Answer Key  What I Know Read and analyze the problem carefully and answer the questions that follow: Mr. Pedro Manansala, a minimum wage earner has a total compensation income for 2019 amounting to ₱230,000. This includes his 13th month pay of ₱16,000 and other bonuses of ₱22,000. His mandatory contributions such as SSS, Philhealth and Pag-IBIG (HDMF) total to ₱5,000. Aside from his basic wage, Pedro also earned an additional pay of ₱150,000 from his overtime pay and holiday pay. 1. What is the Total Compensation Income of Mr. Manansala? 2. How much is the total deductions from Mr. Manansala’s income? 3. How much is his taxable income? 4. How much is his income tax due? 30  Lesson Computation of the Gross Taxable Income and Income Tax 3 Due on Individual Taxpayers As mentioned in Lesson 1, taxes are the lifeblood of the government. The government has the right to collect as much taxes as it wants as long as it is necessary, justifiable, and constitutional. Taxation has two aspects: levy and collection. Levying or imposition of the tax requires legislative intervention. As such, in the Philippines, it is the duty of the Congress to levy taxes. Collection of the tax levied, on the other hand is an administrative function. It includes assessment and determining the taxes payable of the taxpayers as well as the collection of the corresponding payments. Generally, this function is usually done by the executive branch, specifically the Bureau of Internal Revenue. However, the computation of the income tax due may also be done by tax accountants or may be self-directed as long as you have knowledge of its procedures and guidelines, but still subject to the evaluation of the BIR. This lesson presents the procedures in determining the taxable income and income tax due of an individual taxpayer. What’s In For the following items, write O if the statement is correctly stated and write X if otherwise. 1. Percentage tax is a tax imposed on non-VAT registered or VAT-exempt entities. 2. Excise tax is imposed on all goods and services produced or consumed in the country. 3. Income tax paid by corporations is an example of a business tax. 4. Income tax is levied on both individuals and businesses. 5. A resident alien is taxable on his/her income within and outside the Philippines. 6. Only the Philippine income of domestic corporations are subject to income tax. 7. Resident citizens are taxable for both their Philippine income and world income. 31  What’s New In computing for the income tax due of individual taxpayers, it is important to know the classification of the taxpayer first, as well as their sources of income – whether from within the Philippines or outside – because not all individual taxpayers are taxed on all their income. In order to compute the income tax due of the taxpayer, the first step is to classify the taxpayers according to their citizenship and residence. The following are the classifications of the individual taxpayers: 1. Citizens Under the Constitution, citizens are those: ✓ who are citizens of the Philippines at the time of adoption of the Constitution on February 2, 1987; ✓ whose fathers and mothers are citizens of the Philippines; ✓ born before January 17, 1973 of Filipino mothers who elected Filipino citizenship upon reaching the age of majority; and ✓ who are naturalized in accordance with the law. Citizens can be further classified into: a. Resident citizen – a Filipino citizen residing in the Philippines b. Non-resident citizen – a Filipino citizen who is not physically residing in the country during the taxable year, due to immigration or employment, or any other reasons 2. Alien a. Resident alien – an individual residing in the Philippines but is not a citizen thereof b. Non-resident alien – an individual who is not residing in the Philippines and who is not a resident thereof After classifying the taxpayers, the following general rules for individual income taxpayers apply: Taxable on Income Individual Taxpayers Within Without Resident citizen ✓ ✓ Non-resident citizen ✓ Resident alien ✓ Non-resident alien ✓ 32 Based on the table, only resident citizens are taxable on their income within (in the Philippines) and without (outside the country). The other classifications of taxpayers will only be taxable on their incomes within the Philippines. This was also stated in the principles of income taxation as discussed in the previous lesson. Regular income taxation will be based on the active income of these taxpayers. The second step in the computation of the income tax due is determining the gross income of the taxpayer. Gross income may be derived mainly (but not limited to) from three (3) sources: 1. compensation income or remunerations earned under an employer-employee relationship such as salaries, wages, bonuses and other benefits; 2. business income or income arising from habitual engagement in any commercial activity involving regular sales of goods or services; and 3. non-operating income which involves all other incomes that do not fall under the previous two categories such as gains from dealing with properties, passive income not subject to final tax, casual or one-time income, etc. This lesson will only deal with resident citizens as taxpayers and compensation income as the source of gross income. The computations presented in this module is pursuant to Tax Reform for Acceleration and Inclusion (TRAIN) law or RA 10963 which was signed into law last December 19, 2017. What is It Consider the following illustration: Illustration 1. Rosario San Pedro, single and a resident citizen, is a minimum wage earner (MWE) with a gross compensation income for the year 2018 of ₱180,000. She works as a finance assistant of BIG Corporation in the Philippines. In addition to her basic salary, Ms. San Pedro also earned a 13th month pay of ₱15,000, overtime pay amounting to ₱100,000, night shift differential of ₱30,000, and holiday pay of ₱25,000. Ms San Pedro also paid for her mandatory contributions in Social Security System (SSS), Philhealth, and Pag-IBIG totaling to ₱6,000. How much is her taxable income and income tax due? In order to determine the income tax due of any taxpayer, the following steps are to be followed: Step 1. Identify the classification of the taxpayer. In the illustration, it was mentioned that Ms. San Pedro is a resident citizen. Thus, the classification of the taxpayer is a resident citizen. In which case, she is taxable on her income within and without. 33 Step 2. Determine the sources of income of the taxpayer. Using the same illustration, the sources of income of Ms. San Pedro is purely compensation income. Step 3. Add all the gross income/earnings/receipts (derived from different sources, if applicable) of the taxpayer to arrive at the total compensation income. In the case of Ms. San Pedro, the following are her gross income: Basic Salary ₱ 180,000 13th month pay 15,000 Overtime pay 100,000 Night shift differential 30,000 Holiday pay 25,000 Total Compensation Income ₱ 350,000 Step 4. Determine the taxable income of the taxpayer by deducting the mandatory contributions (to SSS, GSIS, Philhealth, and Pag-IBIG) and the non-taxable income (13th month pay and other benefits) of the taxpayer from the Total Compensation Income. Total Compensation Income ₱ 350,000 Less: Mandatory Contributions 6,000 Non-taxable Income* 15,000 ( 21,000) Taxable Income ₱ 329,000 *Non-taxable income refers to additional compensation (aside from basic salary) received by an employee which includes 13th month pay and other bonuses/benefits which should not exceed the exclusion threshold of ₱90,000. Any amount in excess of the exclusion threshold shall be subject to income tax. Step 5. Compute for the income tax due/liability of the taxpayer (using the tax table). Tax Due EXEMPT The final step is to compute for the income tax payable of the taxpayer using the table as provided in RA 10963. However, in our illustration, Ms. San Pedro has no income tax due as she is exempted from income tax because she is a minimum wage earner. With the implementation of RA 10963 (TRAIN Law), the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 11-2018 which provides that for minimum wage earners, their statutory minimum wage, holiday pay, overtime pay, night shift differential pay, and hazard pay shall be exempt from income tax and withholding tax. Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the mandatory non-taxable amount of ₱90,000, taxable allowances, and other taxable income earned by a minimum wage earner shall, however, be subject to withholding tax using the revised withholding tax table under the TRAIN Law. 34 Illustration 2. Mr. Jose Gantimpala, 33, Filipino, single, is a regular employee of Wise Marketing. He receives an annual salary of ₱300,000. For 2019, he also earned an overtime pay of ₱50,000 and hazard pay of ₱57,250. He also received his 13th month pay of ₱25,000 as well as other benefits amounting to ₱72,000. His mandatory contributions are as follows: SSS ₱ 9,600 Philhealth 4,125 Pag-IBIG (HDMF) 1,200 Total ₱14,925 Compute for the taxable income and income tax due of Mr. Gantimpala. Solution: Basic Salary ₱ 300,000 Overtime pay 50,000 Hazard pay 57,250 13th month pay 25,000 Other Benefits 72,000 Total Compensation Income 504,250 Less: Mandatory Contributions 14,925 Non-taxable Income* 90,000 ( 104,925) Taxable Income ₱ 399,325 *The total non-taxable income of Mr. Gantimpala is ₱97,000 (₱25,000+₱72,000). However, the exclusion threshold is only up to ₱90,000. Therefore, the amount to be deducted should only be ₱90,000. Since Mr. Gantimpala is not a minimum wage earner, his income is subject to income tax. To compute for his income tax due, we will use the following tax table as provided by RA 10963. Revised Income Tax Table under TRAIN Law (effective 2018-2022) Taxable Income Tax Rate Not over ₱250,000 0% Over ₱250,000 but not over ₱400,000 20% of the excess over ₱250,000 Over ₱400,000 but not over ₱800,000 ₱30,000 + 25% of the excess over ₱400,000 Over ₱800,000 but not over ₱2 million ₱130,000 + 30% of the excess over ₱800,000 Over ₱2 million but not over ₱8 million ₱490,000 + 32% of the excess over ₱2 million Over ₱8 million ₱2.41 million + 35% of the excess over ₱8 million Mr. Gantimpala’s taxable income is ₱399,325 which falls under this range: Over ₱250,000 but not over ₱400,000 20% of the excess over ₱250,000 35 Computing his tax due, we get: On the first ₱250, 000 0 On the excess over ₱250, 000 (₱399,325-250,000) x 20% ₱ 29,865 Income tax due/payable ₱ 29,865 Therefore, the income tax payable of Mr. Gantimpala is ₱29,865. Illustration 3. Mrs. Rhea Alvarez, married and a resident citizen, is a regular employee of Health is Wealth Company. She receives monthly salary of ₱52,000 or ₱624,000 annually. For 2019, she has also received her 13th month pay and other benefits amounting to ₱109,000. Her mandatory contributions are as follows: SSS ₱ 9,600 Philhealth 8,250 Pag-IBIG (HDMF) 1,200 Total ₱19,050 Required: Compute for the taxable income and income tax due of Mrs. Alvarez. Solution: Basic Salary ₱ 624,000 13th month pay and other benefits 109,000 Total Compensation Income 733,000 Less: Mandatory Contributions 19,050 Non-taxable Income 90,000 ( 109,050) Taxable Income ₱ 623,950 Computing her tax due, we get: On the first ₱400, 000 ₱ 30,000 On the excess over ₱400, 000 (₱623,950-400,000) x 25% 55,988 Income tax due/payable ₱ 85,988 What’s More Read the case inside the box and apply the procedures for the computation of the taxable income and income tax due on the case. Copy the template given and supply the missing information as needed to prepare a schedule of the computation of the taxable income and the income tax due. Use a separate sheet of paper for your answers. 36 Case: Mr. Arnold Cruz, 43, Filipino, is working in Builders Construction as an architect. He receives a monthly salary of ₱60,000. For 2019, he received ₱38,000 for his hazard pay. In addition, he receives bonuses including his 13th month pay totaling to ₱87,000. His mandatory contributions for the year amounts to ₱21,200. Basic Annual Salary ? 13th month pay and other benefits ? Hazard pay ? Total Compensation Income ? Less: Mandatory Contributions ? Non-taxable Income ? Taxable Income ? Income tax due/payable ? What I Have Learned In computing the income tax due of an individual taxpayer, the following steps are followed: Step 1. Identify the classification of the taxpayer. Step 2. Determine the sources of income of the taxpayer. Step 3. Add all the gross income/earnings/receipts (derived from different sources, if applicable) of the taxpayer to arrive at the total compensation income. Step 4. Determine the taxable income of the taxpayer by deducting the mandatory contributions (to SSS, GSIS, Philhealth, and Pag-IBIG) and the non- taxable income (13th month pay and other benefits) of the taxpayer from the Total Compensation Income. Step 5. Compute for the income tax due/liability of the taxpayer (using the tax table). Generally, minimum wage earners are exempt from income tax. However, they are taxable on their 13th month pay and other benefits that exceeds the exclusion threshold of ₱90,000. Non-taxable income refers to additional compensation (aside from basic salary) received by an employee which includes 13th month pay and other bonuses/benefits which should not exceed the exclusion threshold of ₱90,000. Any amount in excess of the exclusion threshold shall be subject to income tax. 37  What I Can Do The following information was given for Ms. Ligaya Yap, 28, a resident citizen and a regular government employee. Basic monthly salary ₱28,000 13 month pay th 28,000 Bonuses and other benefits 59,000 Mandatory contributions: GSIS (computed at 9% of the basic monthly salary) Philhealth (computed at 1.375% of basic monthly salary) Pag-IBIG (computed at 2% of ₱5,000 per month) Required: On a separate sheet of paper, answer the following questions: 1. How much is Ligaya’s basic annual salary? 2. What is Ligaya’s total compensation income? 3. How much is Ligaya’s total mandatory contributions per year? 4. How much should be deducted as non-taxable income? 5. What is Ligaya’s taxable income? 6. How much is Ligaya’s income tax due? Assessment Applying the steps in computing the taxable income and income tax due, answer the following multiple-choice items. Write the letter of the correct answer on your answer sheet. Use the following information to answer questions 1-4. Mr. A is a resident citizen earning purely compensation income. For the taxable year 2019, he earned a gross income amounting to ₱390,000. This included his 13th month pay of ₱30,000. In addition, he also received an overtime pay of ₱36,000 and other benefits amounting to ₱21,000. Mr. A’s mandatory contribution totaled to ₱18,000. 1. Mr. A’s total compensation income is B. ₱477,000 E. ₱447,000 F. ₱417,000 G. ₱426,000 38 2. How much is Mr. A’s non-taxable income? A. ₱57,000 B. ₱90,000 C. ₱51,000 D. ₱69,000 3. The taxable income of Mr. A is A. ₱378,000 B. ₱369,000 C. ₱408,000 D. ₱399,000 4. How much is the income tax due of Mr. A? A. ₱32,000 B. ₱29,800 C. ₱25,600 D. ₱23,800 For numbers 5-7, use the following information: Ms. B, is a resident citizen who has a gross compensation income of ₱550,000 inclusive of 13th month pay and other bonuses amounting to ₱175,000. Her mandatory contributions total to ₱28,000 a year. 5. How much is Ms. B’s taxable income? B. ₱522,000 E. ₱697,000 F. ₱347,000 G. ₱432,000 6. Which tax rate should Ms. B use in computing for her income tax? E. 20% of the excess over ₱250,000 F. ₱30,000 + 25% of the excess over ₱400,000 G. ₱130,000 + 30% of the excess over ₱800,000 H. ₱490,000 + 32% of the excess over ₱2 million 7. What is Ms. B’s income tax due? A. ₱19,400 B. ₱38,000 C. ₱104,250 D. ₱36,400 Use the following information for numbers 8-10. Mr. M, a resident citizen is working for a Philippine company. His annual salary totals to ₱250,000. In addition, he earns an overtime pay of ₱72,000, hazard pay of ₱36,000, holiday pay ₱24,000, and his bonuses total to ₱75,000. Mr. M also pays his mandatory contribution amounting to ₱9,600 per year. Mr. M is a minimum wage earner. 39  8. What is Mr. M’s total compensation income? A. ₱250,000 B. ₱346,000 C. ₱457,000 D. ₱325,000 9. How much is Mr. M’s total deductions from his compensation income? A. ₱99,600 B. ₱84,600 C. ₱75,000 D. ₱ 9,600 10. How much is Mr. M’s income tax liability? A. ₱24,480 B. ₱32,850 C. ₱14,280 D. None Additional Activities Malaya prepared her income tax return (ITR) for the year 2019. Upon filing her ITR to the BIR, it was returned by the BIR employee and she was asked to check the information that she provided because it had some errors. The following information was taken from the ITR of Malaya: Annual Salary ₱ 480,000 Overtime pay 70,000 Holiday pay 22,500 13th month pay 40,000 Other Benefits 92,000 Total Compensation Income 704,500 Less: Mandatory Contributions 52,650 Non-taxable Income 132,000 ( 184,650) Taxable Income ₱ 519,850 On the first ₱250, 000 0 On the excess over ₱250, 000 (₱519,850-250,000) x 20% ₱ 53,970 Income tax due/payable ₱ 53,978 Required: Compute the correct taxable income and income tax due that should be reflected in Malaya’s 2019 ITR. 40  41 What I Know What Can I Do 1. ₱380,000 1. ₱336,000 2. ₱43,000 2. ₱423,000 3. ₱337,000 4. None. Mr. Manansala is exempted 3. ₱36,060 from income tax. 4. ₱87,000 What’s In 5. ₱299,940 1. O 6. X 6. ₱9,998 2. X 7. O 3. X 4. O 5. X Assessment What’s More 1. B 2. C 3. A 4. C 5. D 6. B 7. B 8. C 9. B 10. D Additional Activities Answer Key References K to 12 Curriculum Guide in Fundamentals of ABM 2 K to 12 MELCs in Fundamentals of ABM 2 Fundamentals of ABM 2 Teacher’s Guide Accounting Principles, 12th Edition by Jerry Weygandt, et al. Income Taxation (Made Easy), 17 th Edition by Win Ballada, et al. National Internal Revenue Code (NIRC) RA 10963 (TRAIN Law) www.bir.gov.ph https://www.bahandigroup.com/single-post/2018/10/15/TAX-EXEMPTION-OF- MINIMUM-WAGE- EARNERS#:~:text=Revenue%20Regulations%20(RR)%20No.,income%20tax%20and %20withholding%20tax.&text=11%2D2018%20is%20a%20welcome%20developme nt%20for%20minimum%20wage%20earners. https://sites.google.com/site/lawpinoy/tax1 https://lawphil.net/courts/bm/barQ/2012/taxQ.html http://tax71.blogspot.com/2009/06/aspects-of-taxation-basic-principles- of.html?m=1 https://www.freshbooks.com/hub/taxes/an-excise-tax https://www.slideshare.net/churp27/principles-of-income-taxation 42 For inquiries or feedback, please write or call: Department of Education - Bureau of Learning Resources (DepEd-BLR) Ground Floor, Bonifacio Bldg., DepEd Complex Meralco Avenue, Pasig City, Philippines 1600 Telefax: (632) 8634-1072; 8634-1054; 8631-4985 Email Address: [email protected] * [email protected]