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INCOME TAXATION

Topic: 1. Personal Income tax
2. Corporation income tax

What is income tax?
An income tax is a tax charged on individuals or entities that varies with their respective income or profits. Many jurisdictions refer to income tax on business entities as company’s tax or corporate tax. Partnerships generally are not taxed; rather, the partners are taxed on their share of partnership items. Taxes imposed at the national level are collected by the Bureau of Internal Revenue (BIR), while those imposed at the local level such as provincial, city, municipal, barangay are collected by a local treasurer’s office.

Taxation – is the most influential and powerful in the government, without taxation our government will not survive because taxes is the strength or they call it the lifeblood of the government. It is the imposition of financial charges or other levies upon taxpayer by a state such that failure to pay is punishable by law.

These are the basic types of taxation:

1. Personal Income Tax – charge on incomes of individuals, households, partnerships and sole proprietorships
2. Corporation Income Tax – charge on profit of earnings of incorporated firms.

Constitution of the Philippines and Three Republic Acts:
1. Article VI, Section 28 of the Constitution states that the rule of taxation shall be uniform and equitable and that Congress shall evolve a progressive system of taxation.
2. National law: National Internal Revenue Code—enacted as Republic Act No. 8424 or the Tax Reform Act of 1997 and subsequently amended by Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act of 2017.
3. Local laws—major sources of revenue for the local government units (LGUs) are the taxes collected by virtue of Republic Act No. 7160 or the Local Government Code of 1991 and those sourced from the proceeds collected by virtue of a local ordinance.

Taxation has four main purposes and effects are as follows:
1. Revenue – Taxes escalate money to spend on armies, road, schools and hospitals, and or more indirect government functions like market regulation or legal system
2. Redistribution – this refers to the transferring wealth from the wealthy sections of society to poorer sections.
3. Reprising – taxes are imposed to address externalities; for example, tobacco is taxed to discourage smoking or also called Sin Tax.
4. Representation- it implies that ruler’s tax citizens, and citizens demand accountability from their rulers as the other part of this bargain.

Personal Income tax / Income tax for individual
Citizens of the Philippines must pay taxes for all income they have obtain from different sources, which include;
– Compensation ( salary, wages)
– Income of self-employed individual / professionals
– Partner share from the profit of partnership
– Dividends such as cash and property dividends are taxed at the rate of 10%
– Prizes and other winnings income from bank deposits, trust funds, or other similar product is taxed at the rate of 20%
– Capital gains from the sale of shares of stocks not traded in stock exchange are taxed at the rate of 15% while capital gains from the sale of real property are taxed at the rate of 6%, except when such proceed would be used to construct a new property within 18th months after the sale had occurred.
– Income tax for rate for Corporations is 30%
– Value added tax (VAT) rate is 12%
– Excise taxes apply to goods manufactured or produced in the Philippines for domestic sales or consumption or any other disposition and to things imported.
– Real property tax imposed on all types of real properties including lands, buildings, improvements, and machinery.

Compensation and self-employment income:
Individual earning compensation income are taxed based only on the income tax schedule for individuals. On the other hand, self-employed individuals and professionals are taxed based on the income tax schedule for individuals, applicable percentage taxes, and value added tax (VAT). However, if their gross sales does not exceed the VAT threshold, they have the option to be tax either on the basis of the income tax schedule for individuals and the applicable percentage taxes or just with a flat tax rate of 8% on their gross sales.

Computation of Income Tax
Here is an example of computation of an Income tax;
Mr. X is a well-paid employed as a full time Professor at the Philippine Women’s University. His Monthly salary is P85, 000. Deducted 32% of his salary for tax. He is married, with 5 children namely, Juan, 30 years old but mentally retarded, Tudis, 25 years old, third, 20 years old, fourth, 18 years old and fifth is 15 years old. To solve the monthly and annual tax of Professor X we need to identify first if there is an overpayment/tax payable using the following allowable deductions:

SALARY STATEMENT OF PROFESSOR X
Deductions:
SSS 700 monthly
Phil health 200 monthly
Pag ibig 200 monthly
Union 100 monthly
Total allowance Reduction P1,200/month X 12 = P14,400/ year
Gross Income P75,000 X 12 = P900,000/ year
Tax Deduction from his employer (32% of his salary) P900,000 X.32 = P288,000
Tax Income P75,000 – P1,200 (allowance deduction) = 73,800
Annual Tax of Professor X P73,800 x 0.32 = P23,616 monthly tax X 12 = P283,392
Mr. Magnifico is gainfully employed as a National sales manager in a Pharmaceutical company. His salary is P85, 000 and the said company deducted 32% of his salary for tax. He is Single, with no dependent. Solve the monthly and annual tax of Mr. Magnifico. Identify if there is an overpayment/tax payable using the following allowable deductions:

SALARY STATEMENT OF MR. MAGNIFICO
Deductions:
SSS 700 monthly
Phil health 200 monthly
Pag ibig 200 monthly
Union 100 monthly
Gross Income P1,020,000 – P14,400 (allowance deductions) = 1,005,600
Gross Taxable Income P1,005,600 – 50,000 (personal exemptions) = P955,600
Taxable Income (Notes: using the tax table tax due is P125,000 + 32% of the excess of P500,000 P955,600 – P500,000 = P455,600 X 0.32 = P145,792 + P125,000 = P270,792
Tax due from his employer P326,400
Tax withheld per BIR 1700 P270,792.00
Computation: Overpayment of Mr. Magnifico from his employer P55,608.00 (Refundable)

WHY TAX?

The main purpose of taxation is to accumulate funds for the functioning of the government machineries. No government in the world can run its administrative office without funds and it has no such system incorporated in itself to generate profit from its functioning. The government’s ability to serve the people depends upon the taxes that are collected. Taxes are indispensable in the government operation and without it the government will be paralyzed.

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