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PERSONAL INCOME TAX

An income tax is a tax that governments impose on financial income


generated by all entities within their jurisdiction. By law, businesses and individuals
must file an income tax return every year to determine whether they owe any taxes
or are eligible for a tax refund. Income tax is a key source of funds that the
government uses to fund its activities and serve the public.
In Philippines, the Personal Income Tax Rate is a tax collected from individuals
and is imposed on different sources of income like labour, pensions, interest and
dividends. The benchmark we use refers to the Top Marginal Tax Rate for individuals.
Revenues from the Personal Income Tax Rate are an important source of income for
the government of Philippines.
Income Tax is a tax on a person's income, emoluments, profits arising from
property, practice of profession, conduct of trade or business or on the pertinent
items of gross income specified in the Tax Code of 1997 (Tax Code), as amended,
less the deductions and/or personal and additional exemptions, if any, authorized
for such types of income, by the Tax Code, as amended, or other special laws.
Who Are Required To File Income Tax Returns?
Individuals

Resident citizens receiving income from sources within or outside the


Philippines
o employees deriving purely compensation income from 2 or more
employers, concurrently or successively at anytime during the taxable
year
o employees deriving purely compensation income regardless of the
amount, whether from a single or several employers during the
calendar year, the income tax of which has not been withheld correctly
(i.e. tax due is not equal to the tax withheld) resulting to collectible or
refundable return
o self-employed individuals receiving income from the conduct of trade
or business and/or practice of profession
o individuals deriving mixed income, i.e., compensation income and
income from the conduct of trade or business and/or practice of
profession
o individuals deriving other non-business, non-professional related
income in addition to compensation income not otherwise subject to a
final tax

individuals receiving purely compensation income from a single


employer, although the income of which has been correctly withheld,
but whose spouse is not entitled to substituted filing
o marginal income earners
Non-resident citizens receiving income from sources within the Philippines
Aliens, whether resident or not, receiving income from sources within the
Philippines
Corporation shall include partnerships, no matter how created or organized.
Domestic corporations receiving income from sources within and outside the
Philippines
Foreign corporations receiving income from sources within the Philippines
Estates and trusts engaged in trade or business
o

Table 1. Tax Rate for Individuals Earning Purely Compensation Income and
Individuals
Engaged in Business and Practice of Profession
Amount of Net Taxable
Income
But Not
Over
Over
P10,000
P10,000

P30,000

P30,000

P70,000

P70,000

P140,000

P140,000

P250,000

P250,000

P500,000

P500,000

Rate

5%
P500 + 10% of the Excess over
P10,000
P2,500 + 15% of the Excess over
P30,000
P8,500 + 20% of the Excess over
P70,000
P22,500 + 25% of the Excess over
P140,000
P50,000 + 30% of the Excess over
P250,000
P125,000 + 32% of the Excess over
P500,000 in 2000 and onward

Functions Equation
Let : i = gross income; T(i) = income tax

0.05 ( i ) i 10,000
500+ ( 0.10 ) (i10,000) 10,000<i 30,000
2,500+ ( 0.15 ) (i30,000) 30,000<i 70,000
T (i) 8,500+ ( 0.20 ) (i70,000) 70,000<i 140,000
22,500+ ( 0.25 )( i140,000 ) 140,00< i 250,000
50,000+ ( 0.30 ) ( i250,000 ) 250,000<i 500,000
125,000+ ( 0.32 )( i500,000 ) i>500,000
Table of Values
Table 2. Philippine Jobs and its Income and Tax
Service
Crew

Custome
r Service

Oil and
Gas
Engr.

Tech
Support

Logistics

Income

P8,550

P19,769

P40,878

P115,000

Tax

P427.5
0

P1,476.9
0

P4,131.7
0

P17,500

Work

Software
Architect

Chairman/
CEO

P220,000

P330,00
0

P
1,792,400

P42,500

P74,000

P538,568

*First Gen Corp.

Personal Income Tax


Income Tax
T(i)

500,000

250,000

140,000

70,000

10,000
30,000

P125,000 + 32% of the Excess over


P500,000
P50,000 + 30% of the Excess over
P250,000
P22,500 + 25% of the Excess over
P140,000
P8,500 + 20% of the Excess over
P70,000
P2,500 + 15% of the Excess over
P30,000
P500 + 10% of the Excess over
P10,000
5%

Gross Income
i

Figure 1. Graph of Personal Income Tax

Interpretation
Basing from the graph, the relationship between the Income Tax and Gross
Income is directly proportional. A Service Crew has an income of P8550 and has an
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income of P427.5 which is 5% of his salary. A Tech Support earns P115,000 and have
a tax of P17,500 which is the sum of P8,500 and the 20% of the Excess over
P70,000. A CEO (specifically the Chief Executive Officer/ Chairman of the First Gen.
Company) have an income of P 1,792,400 and have a tax of P538,568 basing on its
sum P125,000 and32% of the Excess over P500,000. As the income increases, the
value added and the percentage of the excess over a certain limit/number also
increases, thus in general, the tax also increases. And also the otherwise, as the
income decreases, the tax being charged also decreases.

VALUE ADDED TAX

A value-added tax (VAT) is a type of consumption tax that is placed on a


product whenever value is added at a stage of production and at final sale. VAT is
most often used in the European Union. The amount of VAT that the user pays is the
cost of the product, less any of the costs of materials used in the product that have
already been taxed.
For example, when a television is built by a company in Europe, the
manufacturer is charged VAT on all of the supplies it purchases to produce the
television. Once the television reaches the shelf, the consumer who purchases it
must pay the applicable VAT.
All Organization
for
Economic
Co-operation
and
Development
(OECD) countries except the United States have a value-added tax. It differs from
the sales tax in the sense that taxes are applied to the difference between the
seller-purchased price and the resale price. This is accomplished by taking full tax
on all sales, but refunding the tax difference to the sellers.
The VAT is an alternative to a sales tax and is meant to deal with a specific
problem. With a sales tax, a business selling goods is responsible for making a
subjective decision about the intent of a buyer, the business may not be fully
competent to make the decision.
If buyers intend to consume the goods themselves, then the seller must
collect a tax on the purchase price. If instead buyers intend the goods as capital
goods, to be resold at a profit after adding value to them, then the seller must not
collect the tax. Additionally, sellers have an incentive to claim that a sale is not
taxable in order to please customers; this slight conflict of interest could, and
probably would, result in an under-collection of taxes.
The refund portion of a VAT removes that incentive, and incentivizes accurate
collection. If the buyer is a businessperson, then that VAT is a temporary payment to
the state, based on the purchase price, eventually to be reimbursed by the state for
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the initial payment when the goods are resold, usually after adding value to them.
Hence collecting the tax is a way to get money back. Consumers, with no possible
refund, have no reason to inaccurately report their intended use.
A VAT is like a sales tax, but in that, ultimately only the end consumer is taxed. It
differs from the sales tax in that with the sales tax, the tax is collected and remitted
to the government only once, at the point of purchase by the end consumer. With
the VAT, on the other hand, collections of money, remittances to the government,
and credits for taxes that are already paid occur each time a business in the supply
chain purchases products.
Value Added Tax (VAT) in the Philippines is a tax that each and every
entrepreneur should be very much aware of. Firstly, it affects all of us consumers.
Secondly, it greatly affects business transactions, in a way or another, such as in
pricing where goods or services bought and sold contains VAT, maximizing profits
when input VAT is minimal, cash flow issues, and more.
Who are required to file vat returns?

Any person or entity who, in the course of his trade or business, sells, barters,
exchanges, leases goods or properties and renders services subject to VAT, if
the aggregate amount of actual gross sales or receipts exceed One Million
Nine Hundred Nineteen Thousand Five Hundred Pesos (P1,919,500.00).
A person required to register as VAT taxpayer but failed to register
Any person, whether or not made in the course of his trade or business, who
imports goods

A 12% value added tax (VAT) of the gross selling price is imposed to all
importation, sale, barter, exchange or lease of goods or properties and sale of
services.
The term 'Gross selling price' means the total amount of money or its
equivalent that the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties,
excluding the value added tax.
Functions Equation
Let : x = Original Price; y = Value Added Tax; GSP = Gross Selling Price

y=( 0.12 ) x
GSP= y + x
Table of Values
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Table 3. Philippine Grocery Products and its VAT, Original and Gross Selling Prices

Product
Original
Price(x)
VAT (y)
GSP

Chips
(40g)

Butter
(225g)

Palm Oil
(1L)

Choco
Syrup
(355mL)

Mayonnais
e
(470mL)

Milk
Supplemen
t
(400G)

P10.27

P43.75

P82.14

P91.07

P132.14

P320.54

P1.23
P11.50

P5.25
P49.00

P9.86
P92.00

P10.93
P102.00

P15.86
P148.00

P38.46
P359.00

Value Added Tax


50
40
30
Value Added Tax
20
y
10
0
0

50

100

150

200

250

300

350

Original Price
x

Figure 2. Graph of Value Added Tax

Interpretation
Basing from the graph, the relationship between Value Added Tax and the
original price is directly proportional. Notice on the first product (chips) that has a
true price of P10.27, it has a vat of P1.23 and a gross selling price of P11.50. The
Palm oil has an original price of P82.14 and a vat of P9.86 and has a gross selling
price of P92.00. And the milk has an original price of 320.54 and a vat of P38.46 and
gross selling price of P359.00. Thus as the original price increases, the value added
tax also increases. Same through the Gross Selling Price, as the original price and
vat increases, the gross selling price also increases and vice versa.

CORPORATE INCOME TAX

A corporate tax is a levy placed on the profit of a firm to raise taxes.


After operating earnings is calculated by deducting expenses including the cost of
goods sold (COGS) and depreciation from revenues, enacted tax rates are applied to
generate a legal obligation the business owes the government. Rules surrounding
corporate taxation vary greatly around the world and must be voted upon and
approved by the government to be enacted.
Net taxable income for corporate tax is generally the financial statement
income with modifications, and may be defined in great detail within each countrys
tax system. Such taxes may include income or other taxes. The tax systems of most
countries impose an income tax at the entity level on certain type(s) of entities
(company or corporation). The rate of tax varies by jurisdiction. The tax may have
an alternative base, such as assets, payroll, or income computed in an alternative
manner.
Most countries exempt certain types of corporate events or transactions from
income tax, for example events related to formation or reorganization of the
corporation, which are treated as capital costs. In addition, most systems provide
specific rules for taxation of the entity and/or its members upon winding up or
dissolution of the entity.
In systems where financing costs are allowed as reductions of the tax base
(tax deductions), rules may apply that differentiate between classes of memberprovided financing. In such systems, items characterized as interest may be
deductible, perhaps subject to limitations, while items characterized as dividends
are not. Some systems limit deductions based on simple formulas, such as a debtto-equity ratio, while other systems have more complex rules.
Some systems provide a mechanism whereby groups of related corporations
may obtain benefit from losses, credits, or other items of all members within the
group. Mechanisms include combined or consolidated returns as well as group relief
(direct benefit from items of another member).
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Many systems additionally tax shareholders of those entities on dividends or


other distributions by the corporation. A few systems provide for partial integration
of entity and member taxation. This may be accomplished by imputation systems
or franking credits. In the past, mechanisms have existed for advance payment of
member tax by corporations, with such payment offsetting entity level tax.
Many systems (particularly sub-country level systems) impose a tax on
particular corporate attributes. Such non-income taxes may be based on capital
stock issued or authorized (either by number of shares or value), total equity, net
capital, or other measures unique to corporations.
Corporations, like other entities, may be subject to withholding
tax obligations upon making certain varieties of payments to others. These
obligations are generally not the tax of the corporation, but the system may impose
penalties on the corporation or its officers or employees for failing to withhold and
pay over such taxes. A company has been defined as a juristic person having an
independent and separate existence from its shareholders. Income of the company
is computed and assessed separately in the hands of the company. In certain cases,
distributions from the company to its shareholders as dividends are taxed as income
to the shareholders.
The corporate income tax rate both for domestic and resident foreign
corporations is 30% based on net taxable income. Excluded from the income
tax are dividends received from domestic corporations; interest on Philippine
currency bank deposit and yield from trust funds. It is important to note that
foreign corporations, whether resident or nonresident, are taxable only on
income derived from sources within the Philippines.
Functions Equation
Let : x = Corporate Income; y = Corporate Income Tax

y=( 0.30 ) x
Table of Values
Table 4. Philippine Companies and its Income and Taxes
Corporation
Pilipinas Shell Petroleum
Corp.
Mercury Drug Corporation
Puregold Price Club, Inc.
Bank of the Philippine
Islands.
Holcim Philippines Inc.

Income

Tax

P1,811,490,466.67

P543,447,140

P2,423,881,400
P2,789,842,300

P727,164,420
P836,952,690

P3,544,261,666.67

P1,063,278,500

P5,309,923,133.33

P1,592,976,940
8

Manila Electric Company

P31,152,249,666.67

P9,345,674,900

*Data are based on BIR Tax Watch Ad in 2014

Corporate Tax
10,000,000,000
8,000,000,000
6,000,000,000
Tax
y

4,000,000,000
2,000,000,000
0
0

10000000000

20000000000

30000000000

40000000000

Income
x

Figure 3. Graph of Corporate Tax

Interpretation
Basing from the graph, we therefore conclude that Corporate Tax is directly
proportional with the Corporate Income. Like for example, the first corporation,
which is Pilipinas Shell Petroleum Corporation has an income in the table of values,
which is P1,811,490,466.67 has a tax of P543,447,140 when multiplied to 30%. And
Puregold Price Club, Inc. has an income of P2,789,842,300 has a tax of
P836,952,690. Manila Electric Company has an income of P31,152,249,666.67 that
has a tax of P9,345,674,900. Thus as the corporate income increases, the corporate
tax also increases. As the corporate income decreases, the corporate also
decreases.

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