Senior High School

Fundamentals of Accountancy,
Business and Management 2
Module 12:
Income and Business Taxation

AIRs - LM
LU_FABM 2_Module 12
 FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 2
Module 12: Income and Business Taxation
Second Edition, 2021

Copyright © 2021
La Union Schools Division
Region I

All rights reserved. No part of this module may be reproduced in any form without written
permission from the copyright owners.

Development Team of the Module

Author: Clarita C. Montemayor

Editor: SDO La Union, Learning Resource Quality Assurance Team
Content Reviewer: Rudyna Minasalvas
Language Reviewer: Liza Antolin
Illustrator: Ernesto F. Ramos, Jr.
Design and Lay-out: Hermogenes T. Diaz

Management Team:

Atty. Donato D. Balderas, Jr.

Schools Division Superintendent
Vivian Luz S. Pagatpatan, Ph.D
Assistant Schools Division Superintendent
German E. Flora, Ph.D, CID Chief
Virgilio C. Boado, Ph.D, EPS in Charge of LRMS
Lorna O. Gaspar, EPS in Charge of ABM
Michael Jason D. Morales, PDO II
Claire P. Toluyen, Librarian II

Printed in the Philippines by: _________________________

Department of Education – SDO La Union

Office Address: Flores St. Catbangen, San Fernando City, La Union
Telefax: 072 – 205 – 0046
Email Address: [email protected]

LU_FABM 2_Module 12
 Senior High School

Fundamentals of Accountancy,
Business and Management 2
Module 12:
Income and Business Taxation

LU_FABM 2_Module 12
 Introductory Message
This Self-Learning Module (SLM) is prepared so that you, our dear learners,
can continue your studies and learn while at home. Activities, questions, directions,
exercises, and discussions are carefully stated for you to understand each lesson.

Each SLM is composed of different parts. Each part shall guide you step-by-
step as you discover and understand the lesson prepared for you.

Pre-tests are provided to measure your prior knowledge on lessons in each

SLM. This will tell you if you need to proceed on completing this module or if you
need to ask your facilitator or your teacher’s assistance for better understanding of
the lesson. At the end of each module, you need to answer the post-test to self-check
your learning. Answer keys are provided for each activity and test. We trust that you
will be honest in using these.

In addition to the material in the main text, Notes to the Teacher are also
provided to our facilitators and parents for strategies and reminders on how they can
best help you on your home-based learning.

Please use this module with care. Do not put unnecessary marks on any part
of this SLM. Use a separate sheet of paper in answering the exercises and tests. And
read the instructions carefully before performing each task.

If you have any questions in using this SLM or any difficulty in answering the
tasks in this module, do not hesitate to consult your teacher or facilitator.

Thank you.

LU_FABM 2_Module 12
 Target

The Tax Reform for Acceleration and Inclusion (TRAIN) Law or Republic Act
No. 10963, is the initial package of the Comprehensive Tax Reform Program (CTRP)
in the Philippines. TRAIN consists of revisions to the National Internal Revenue Code
of 1997, or the Tax Code, which took effect on January 2018, lowered personal
income tax rates (PIT), estate tax, donor’s tax, value-added tax (VAT), documentary
stamp tax (DST) and the excise tax of petroleum products, automobiles, sweetened
beverages, cosmetic procedures, coal, mining, and tobacco.
Source: https://en.m.wikipedia.org/wiki/Tax_Reform_for_Acceleration_and_Inclusion_Law#:text=The

All earnings citizens of the Philippines, whether from compensation or

business, are required to pay taxes. Taxes are the revenue of the government that
funds government expenditures and programs. There are three types of taxes namely;
proportional tax, progressive tax, and regressive tax. The proportional tax imposes
the same percentage of taxation on everyone regardless of income. The progressive
tax imposes a higher percentage rate of taxation on those with higher incomes. The
regressive tax imposes a higher percentage rate of taxation on low incomes than on
high incomes.

A failure to pay, along with evasion of or resistance to taxation, is punishable

by law. Taxes imposed at the national level are collected by the Bureau of Internal
Revenue (BIR), while those imposed at the local level (provincial, city, municipal,
barangay) are collected by a local treasurer’s office.

This module will provide you with information and an understanding of the
sound principles of taxation and processes.

After going through this module, you are expected to attain the following
objectives:

Learning Competency
• Define income and business taxation and its principles and processes.
(ABM_FABM12-IIh-j-15)
Subtasks:
1. Define tax and taxation.
2. Name the principles of taxation, the sources of gross income from
compensation and gross income from a business.

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LU_FABM 2_Module 12
 Jumpstart

Activity 1. Read and understand each statement carefully. Write TRUE if the
statement is correct or FALSE if the statement is incorrect. Use a separate
sheet for your answers.

______1. A Filipino citizen residing in the Philippines has levied taxes for income
derived inside the Philippines only.

______2. A taxpayer deriving mixed-income will also use BIR Form 1701.

______3. The Philippine individual income tax is characterized by increasing the tax
rate as the tax base increases.

______4. Compensation income refers to the income derived by an employee.

______5. Philippine individual income tax is progressive-the tax rate increases as

the tax base increases.

______6. The proportional tax imposes the same percentage of taxation on everyone
regardless of income.

______7. Income is considered realized for tax purposes when the earning process is
complete or virtually complete and exchange has taken place.

______8. For income tax purposes, the source of the service income is important for
the taxpayer, who is a Filipino citizen residing in Metro Manila.

______9. A resident citizen who falls under the classification of minimum wage
earners are required to file an income tax return.

_____10. Income from the performance of services is treated as income from within
the Philippines, if the service is performed in the Philippines.

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 Discover

INCOME AND BUSINESS TAXATION

Taxation is the process by which the government collects revenue in order to

pay for its expenses. The primary purpose of taxation is to provide funds or property
with which to promote the general welfare of its citizens and to enable it to finance
its multifarious activities.

Governing tax law in the Philippines is the National Internal Revenue Code of
1997. The Bureau of Internal Revenue (BIR) is the primary implementing agency of
this law.

Income tax is defined as the tax on the net income or the entire income
realized in one taxable year.

Principles of Taxation

There are two (2) principles of taxation. These are the Benefit Received
Principle and Ability to Pay Principles.

1. Benefit Received Principle receive states that the citizens of the country
who benefits from the goods and services should pay in proportion to the amount of
benefits they received.

2. Ability to Pay Principle states that citizens should be taxed according to

their ability to pay. The more money you have, the more money you should pay.

Principles of a Sound Tax System

There are three (3) principles of a sound tax system: (1) Fiscal adequacy; (2)
Equality or theoretical justice; and (3) Administrative feasibility.

1. Fiscal adequacy is the amount of tax collected that should be enough to

be spent by the government in providing service to the people. Creating new taxes or
by merely changing the rates applicable to existing taxes.

2. Equality or theoretical justice is based on the ability to pay theory. The

more money you have, the more taxes you pay.

3. Administrative feasibility the taxation system must be easy to enforce.

The collection system must not be hard for both the government and the people.
Each tax should be clear and plain to the taxpayer, capable of uniform enforcement,
convenient as to time, place, and manner of payment, and not unduly burdensome
upon or discouraging to business activity.
Source: https://www.britannca.com/topic/taxation/Princples-of-taxation
https://www.bir.gov.ph/index.php/tax-code.html

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Who is required to pay income tax in the Philippines? (Section 23 of the
National Internal Revenue Code [NIRC] of 1997)

• A citizen of the Philippines residing therein is taxable on all income derived

from sources within and without the Philippines;
• A non-resident citizen is taxable only on income derived from sources within
the Philippines;
• An OFW is taxable only on income earned in the Philippines.
• A foreigner living in the Philippines is taxable only on income earned in the
Philippines.
• A domestic corporation is taxable on all income derived from sources inside
and outside the Philippines; and
• A foreign corporation is taxable only on the income derived inside the
Philippines.

List of sources of gross income: (NIRC 1997 Chapter 6 Section 32 A)

• Compensation for services in whatever form paid, including, but not limited
to fees, salaries, wages, commissions, and similar items;
• Gross income derived from the conduct of a trade or business or the exercise
of a profession;
• Gains derived from dealings in property; (Note: subject to 6% capital gains tax
for individuals and corporation if land and building is not used in business)
• Interests; (Note: generally subject to 20% final withholding tax)
• Rents;
• Royalties; (Note: generally subject to 20% final withholding tax,10% if from
books and literary works)
• Dividends; (Note: generally subject to 10% final withholding tax for
individuals, tax-exempt for a corporation)
• Annuities;
• Prizes and winnings; (Note: generally subject to 20% final withholding tax,
except those that are tax-exempt based on specific criteria in the law)
• Pensions; and
• Partner's distributive share from the net income of the general professional
partnership
Source: https://www.bir.gov.ph/index.php/tax-code.html
Commission on Higher Education (2016). Fundamentals of Accountancy, Business and Management 2
Teacher’s Guide (pp. 171-175). Quezon City, Philippines.

Compensation Income
• Employed individuals that earn compensation income pay their income taxes
monthly. Employers withhold the income tax of their employees from their
monthly gross income and remit these sums to the BIR.
• The basic personal exemption and additional exemptions of individual
taxpayers are removed.

• Withholding income tax for employees:

➢ Employers are required by law to withhold income tax dues from their
employees’ salaries.
➢ It is implemented because employees might not have sufficient cash to pay
for their income tax dues if aggregated to a one-time annual payment.
➢ The withholding tax deduction is computed based on the employee’s gross
compensation (net of mandatory contributions to SSS or GSIS, Philhealth,

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LU_FABM 2_Module 12
 and Pag-ibig Fund), tax status, the timing of compensation payments, and
using the published BIR withholding tax table.

• Income tax is computed at the end of the year based on all compensation
income derived during the year.
➢ The applicable tax rate is applied to the taxable income to get the tax due.
➢ The total income tax withheld by the employer is deducted from the tax
due to get remaining tax liability by the employee.

• Taxpayers who derive their income solely from compensation are required to
file BIR Form 1700 as their income tax returns. However, to give relief to these
taxpayers, the employee may present BIR Form 2316 as their income tax
return. BIR Form 2316 is a statement issued by the employer and signed by
the employee but not filed with the BIR. This is referred to as substituted filing.

Business Income

• The tax payments of a business organized as a sole proprietorship are made

in the name of its owner. The owner is considered an individual taxpayer who
derived income from the business. He is required to file BIR Form 1701.

• The deadline for filing of declaration estimated income for the current taxable
year is on or before May 15 of the same taxable year. The payment of the four
installments shall be: First – May 15; Second – August 15; Third – November
15 and Fourth – on or before May 15 of the following calendar year when the
final adjusted income tax return is due to be filed.
• Some businesses pay income tax every quarter based on their quarter-end
income. Quarterly payments are due sixty days following the close of the first
three quarters of the year.

• When the tax due is over ₱2,000, the individual taxpayer may elect to pay the
tax in two equal installments. The first installment shall be paid at the time
the return is filed and the second installment is paid on or before October 15
following the close of the calendar year.

Two approaches for the computation of income tax for the business:
➢ Itemized deduction. Use the itemized expenses in the income statement.
The business should have a complete set of accounting books and
supporting receipts for the deductions that were itemized on the tax form.

➢ Optional standard deduction scheme. Deductions are up to a maximum

of 40% of “gross receipts”. “Gross receipts” is equal to net sales plus other
taxable income. This means that the business taxable income is equivalent
to 60% of gross receipts.

❖ Mixed-Income Earners are those who derive income from business or practice
of profession and compensation income. If the taxpayer uses graduated income
tax rates, then he/she simply has to combine his/her income and run through
the graduated income tax table. A taxpayer deriving mixed-income will also use
BIR Form 1701.
Source: https://www.bir.gov.ph/index.php/tax-code.html
Commission on Higher Education (2016). Fundamentals of Accountancy, Business and Management
2 Teacher’s Guide (pp. 171-175). Quezon City, Philippines.

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 Explore

Activity 2. Read! Stop! Think!

Directions: Read, understand and analyze the scenario below. Elaborate and
justify your answer. Use a separate sheet for your answers. Your task will be
graded base on the following rubric:

5 points= the answer is complete

4 points = the answer is missing slight details
3 points = the answer is missing multiple details;
2 points = content suggests a lack of preparation or comprehension
1 point = content only marginally related to the question / prompt

Scenario. Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a non-
resident citizen.

a) If the goods were produced from Ms. B's factory in the Philippines, is Ms. B's
income from the sale to Ms. C taxable in the Philippines? Explain.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________

b) If Ms. B is an alien individual and the goods were produced in her factory in
China, is Ms. B's income from the sale of the goods to Ms. C taxable in the
Philippines? Explain.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________

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LU_FABM 2_Module 12
 Deepen

Activity 3. Read! Analyze!

Directions: Read, understand, and analyze the scenario below. Elaborate and
justify your answers. Use a separate sheet for your answers. Your task will be
graded base on the following rubric:
5 points= the answer is complete
4 points = the answer is missing slight details
3 points = the answer is missing multiple details;
2 points = content suggests a lack of preparation or comprehension
1 point = content only marginally related to the question / prompt

Scenario. ABM Inc. Is a Philippine corporation engaged in architectural design,

engineering, and construction work. Its principal office is located in Quezon City but
it has various infrastructure projects in the country and abroad. One of the policies
of the company is that the employees’ salaries are paid in the currency of the country
where they are assigned. Determine whether the compensation they received from
ABM Inc. In 2018 is taxable under Philippine laws and whether they are required to
file tax returns with the BIR.

a. Nelly Patac, a Filipino accountant in ABM accounting department in the Quezon

City office and married to a Filipino engineer also working in ABM Inc.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

b. Kit Tan, a Chinese national who heads the ABM Inc design department in its
Quezon City office.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

c. Gigi Teryo, a Filipino engineer in the ABM Inc. Engineering department who was
hired to work at the principal office last January 2018. In January 2019, she
was assigned to the company’s project in Saudi Arabia, which project is expected
to be completed in December 2021.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

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LU_FABM 2_Module 12
 Gauge

Directions: Read each statement carefully and use a separate sheet of paper
for your answers.

1. An example of a tax where the concept of progressivity finds application is the:

A. Income tax on individuals.
B. Excise tax on petroleum products.
C. Value-added tax on certain articles.
D. Amusement tax on boxing exhibitions.

2. Allan Jacob, a French citizen permanently residing in the Philippines, received

several items during the taxable year. Which among the following is NOT
subject to Philippine income taxation?
A. Interests from his deposits in a local bank of foreign currency earned
abroad converted to Philippine pesos.
B. Gains derived from the sale of his condominium unit located in The Fort,
Taguig City to another resident alien.
C. Consultancy fees received for designing a computer program and
installing the same in the Shanghai facility of a Chinese firm.
D. Dividends were received from an American corporation that derived 60%
of its annual gross receipts from Philippine sources for the past 7 years.

3. Income from the performance of services is treated as income from within the
Philippines, if:
A. The service is performed in the Philippines;
B. The recipient of service income is a resident of the Philippines.
C. The contract calling for the performance of services is signed in the
Philippines;
D. The payment of compensation for the service is made in the Philippines;

4. Income is considered realized for tax purposes when:

A. The taxpayer retires from the business without approval from the BIR.
B. The earning process is complete or virtually complete and exchange has
taken place.
C. It is recognized as revenue under accounting standards even if the law
does not do so.
D. The taxpayer has been paid and has received in cash or near cash the
taxable income.

LU_ FABM 2_Module 12

5. For income tax purposes, the source of the service income is important for the
taxpayer, who is a:
A. Domestic corporation.
B. Filipino citizen residing in Makati City;
C. Non-resident Filipino citizen working residing in London, United
Kingdom;
D. Japanese citizen who is married to a Filipino citizen and residing in their
family home located Fort Bonifacio, Taguig City;

For items 6-10. Indicate whether each of the following individuals is required
or not required to file an income tax return:

____________6. Filipino citizens residing outside the Philippines on his income from
sources outside the Philippines.

____________7. Resident alien on income derived from sources within the

Philippines.

____________8. Resident citizen earning purely compensation income from two

employers within the Philippines, whose income taxes have been
correctly withheld.

____________9. Resident citizen who falls under the classification of minimum wage
earners.

___________10. Non-resident alien engaged in trade or business or in the exercise of

profession in the Philippines.

LU_ FABM 2_Module 12

LU_ FABM 2_Module 12
10
JUMPSTART (ACTIVITY 1)
TRUE or FALSE
1. TRUE 6. TRUE
2. TRUE 7. TRUE
3. TRUE 8. FALSE
4. TRUE 9. FALSE
5. TRUE 10. TRUE
EXPLORE (ACTIVITY 2)
a. Yes, the income of Ms. B from the sale of ready-to-wear goods to Ms. C is taxable. A non-resident
citizen is taxable only on income derived from sources within the Philippines. In line with the source
rule of income taxation, since the goods are produced and sold within the Philippines, Ms. B’s
Philippine-sourced income is taxable in the Philippines.
b. Yes, but only a proportionate part of the income. Gains, profits and income from the sale of
personal property produced by the taxpayer without and sold within the Philippines, shall be
treated as derived partly from sources within and partly without the Philippines.
DEEPEN (ACTIVITY 3)
a. Yes, A resident citizen is subject to income tax within or without the Philippines and thus required
to file tax return with the BIR.
b. Yes, A resident alien engage in trade or business in the Philippines is subject to income tax and
required to file tax return with the BIR.
c. Yes, Subject to income tax being resident of the Philippines and required to file income tax return
with the BIR.
GAUGE
1. A 6. Not Required
2. C 7. Required
3. A 8. Required
4. B 9. Not Required
5. C 10. Required
Answer Key
References
BOOK

• Commission on Higher Education (2016). Fundamentals of Accountancy,

Business and Management 2 Teacher’s Guide (pp. 171-175). Quezon City,
Philippines.

LINKS

• Tax Code – Bureau of Internal Revenue, Retrieved April 21, 2021 from
https://www.bir.gov.ph/index.php/tax-code.html

• Tax Reform for Acceleration and Inclusion Law, Retrieved May 07, 2021 from
https://en.m.wikipedia.org/wiki/Tax_Reform_for_Acceleration_and_Inclusion
_Law#:text=The

• Taxation/Definition, Purpose, Importance & Types, Retrieved May 08, 2021

from https://www.britannca.com/topic/taxation/Princples-of-taxation

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 For inquiries or feedback, please write or call:

Department of Education – SDO La Union

Curriculum Implementation Division
Learning Resource Management Section
Flores St. Catbangen, San Fernando City La Union 2500
Telephone: (072) 607 - 8127
Telefax: (072) 205 - 0046
Email Address:
[email protected]
[email protected]

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LU_ FABM 2_Module 12