Income and

Business Taxation
Taxation is the process by
which our government,
through our lawmakers,
raises income to pay its
necessary expenses.
 Theses can be classified into primary and secondary purposes:
1. The primary purposes of taxation is to provide the proper
funding needed to run the government.
2. There are various secondary purposes of taxation:
a. By imposing high customs duties or taxes on imported goods,
local products made in the Philippines would remain
competitive. Additional taxes would jack up the prices of the
imported goods.
b. By imposing progressive taxes, it will reduce the inequalities
between the wealth and income of our people. A progressive
system of taxation means that those who can earn more will be
subjected to higher income taxes.
c. By increasing taxes, the government may mitigate the effect of
an impending inflation. Inflation is a situation wherein the
purchasing power of the peso will go down due to rising prices of
commodities.
1. Fiscal Adequacy – The government should make
sure that the amount of revenue collected
would be enough to shoulder the different
expenses incurred by it. This would entail proper
planning and budgeting on the part of our
government officials concerned.
2. Theoretical Justice – The burden of taxation
should be proportionate to the ability of the
taxpayer to pay it. It should be noted that
proportionality does not necessarily mean
equality in the amount of taxes to be paid.
3. Administrative Feasibility – The tax laws being
promulgated by our government should be
capable of just and equitable administration.
1. Eminent Domain – This is the power of the
government to take private property, upon
payment of just compensation, to be used
for a public purpose.
2. Police Power – This is the power of our
government to make laws that will promote
public health, morals, safety and welfare of
the people.
3. Taxation – This the power of the
government to collect taxes that will be
used to finance the different projects
needed by the people.
 The two biggest classification of income
taxpayers are the:
a. Individuals, and the
b. Corporations
 For income tax purposes, individuals can be
further classified into four, namely:
a. Resident Citizen – is a person who is a
Filipino citizen and who lives or resides here
in the Philippines
b. Non-resident citizen – is a person who is a
citizen of another foreign country and does
not also reside here in the Philippines.
c. Resident alien – is a person who is a citizen
of another foreign country but resides here
in the Philippines during the taxable year.
d. Non-resident alien – is a person who is a
citizen of another foreign country and does
not also reside here in the Philippines.
 They can be further classified as one who is either:
1. Engaged in trade or business (NRA-ETB)
2. Not engaged in trade or business (NRA-NETB)

A non-resident alien individual is considered to be

engaged in trade or business if he shall go here in
the Philippines and stay here for a total period of
more than 180 days during the calendar year. If this
qualification is not met by a non-resident alien, he
will be considered as not being engaged in trade or
business.
 Individuals can earn from at least three kinds of
income:
1. Compensation Income – This is the income
being received by employees working for
different companies. This is usually in the form
of salaries, bonuses and allowances.
2. Business or Professional Income – This is the
income generated by entrepreneurs (business)
or by different professionals like lawyers,
doctors and accountants (professional income).
They do not work as employees of other
people.
3. Passive Income - Theses are income generated
by different investments made by the
individual.
 Forpurposes of compensation income and
business income (taken together will be called
as gross income), the following formula will be
used : Gross Income – Allowable Deductions = Taxable Income
The taxable income will then be subjected to this schedular
rate to compute for the income tax payable to the BIR:

Over Not Over Tax Plus Of excess over

10,000 5%
10,000 30,000 P500 10% P10,000
30,000 70,000 P2,500 15% P30,000
70,000 140,000 P8,500 20% P70,000
140,000 250,000 P22,500 25% P140,000
250,000 500,000 P50,000 30% P250,000
500,000 P125,000 32% P500,000
 Itshould be noted that the aforementioned
formula is only applicable to residents,
citizens and non-resident aliens engaged in
trade or business. NRA-NETB are to be
subjected to a 25% final withholding tax from
sources within the Philippines.
 Tax from passive income will be computed
separately. They will be subjected to a final
withholding tax rate and will no longer be
subjected to the schedular income tax table
above. The final tax rates will be further
discussed in the latter part of this chapter.
 The allowable deductions for qualified
individuals would depend on the kind of
income earned by him:
1. If he is earning purely compensation
income:
a. Basic personal exemption
b. Additional personal exemption
c. Premium payments on health and
hospitalization insurance.
2. If he is earning business or professional
income only, the following are allowed
deductions:
a. Regular expenses incurred by the business
b. Interest expense
c. Taxes expense
d. Losses
e. Bad debts expense
f. Depreciation and depletion expense
g. Charitable contributions
h. Research and development expenses
i. Basic personal exemptions
j. Additional personal exemptions
k. Premium payment on health insurance
 Forthe premium payment on health
insurance, there is a limit of P2,400 per
family or P200 per month. The qualified
individual must further prove that his family
has a gross income of not more than P250,000
for the taxable year. In cases where the
taxpayer is married, only the spouse who is
claiming the additional exemption for the
children can avail of the deduction.
 These are amounts that can be deducted from
certain individuals’ gross income before it will
be subjected to the income tax table. It can be
classified into basic personal exemptions and
additional exemptions for dependent children.
a. Basic personal exemption
All kinds of individuals, except those classified
as non-resident alien not engaged in trade or
business, are allowed a basic personal
exemption of P50,000 per year.
This is applicable to qualified individuals,
whether single, married, or a widow/widower.
An NRA-ETB is entitled to personal exemption as
long as the following requisites are present:
a. The foreign country of the non-resident alien has a
tax law that grants personal exemptions to Filipinos
who are also non-residents of that country. This is
known as the concept of reciprocity.
b. The NRA files a true and accurate statement of all
his income derived in the Philippines.
The amount of allowable personal exemption for
NRA-ETB is the lower between the amount allowed
under Philippines tax law that grants personal
exemption being given by such NRA’s foreign
country to Filipinos classified as NRA in such foreig
n country.
 There was a time in the history of Philippines
tax law when there is a difference between
the personal exemptions allowed for single,
married, and persons considered as head of
the family. There is no such distinction
nowadays. The allowed personal exemption
is P50,000.

As to the additional exemptions, the

following rules on change of status will be
followed:
1. If the taxpayer would have an additional child
born during the year, the taxpayer may
immediately claim the additional personal
exemption during the year.
2. If the taxpayer’s dependent reaches 21 years
old, marries, dies or was gainfully employed
during the taxable year, that taxpayer may still
claim additional person exemption, but up to
the current year only. The taxpayer may no
longer Avail of such additional personal
exemption in the following year.
a. Additional personal exemption
Qualified individuals may avail of additional
exemption worth P25,000 for every dependent
child. This can be availed up to four dependent
children of P100,000 per year only.
 In case of married individual, the
additional personal exemption can be
claimed by only one of the spouses. The
husband is usually the proper claimant of
these additional personal exemptions, unless
he is unemployed, or he expressly waived his
right to claim the personal exemptions.
If the spouses are legally separated, the
spouse who has custody of the children will
have the right to claim the personal
exemptions. Nonetheless, the total
additional exemption to be availed by both
spouses should not exceed the maximum
limit provided by the law which is P100,000.
 Qualification For Dependents
The following are the qualifications before a
child may be considered a dependent for tax
purposes:
a. Must be a legitimate, illegitimate or legally
adopted child of the taxpayer.
b. Must be chiefly dependent upon the
taxpayer and still living with them.
c. Must not be more than 21 years old,
unmarried and is not gainfully employed.
d. Though more than 21 years old, is
incapable of self support because of mental
or physical defect.
 A person is considered to be chiefly dependent
upon another if the parent provided over 50% if
the dependent’s daily needs or financial support.
Only legally adopted children are considered.
Children by natural adoption (without proper
papers) are not to be considered.
It is not required that the dependent is living
with the taxpayer at all times. The parents could
be away sometimes for a business trip. The
children could live in another place temporarily
because of a visit or demands of school.
It should also be noted that non-resident aliens
(both ETB or NETB) are not entitled to additional
personal exemptions.