SHS

Fundamentals of Accountancy,
Business and Management 2
Quarter 2 - Module 4
Fundamentals of Accountancy, Business and Management 2
Quarter 2 Module 4
StructureFirst Edition, 2020

Copyright © 2020
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, T-III

Editor: SDO La Union, Learning Resource Quality Assurance Team

Illustrator: Ernesto F. Ramos Jr., P II

Management Team:

ATTY. Donato D. Balderas, Jr.

Schools Division Superintendent

Vivian Luz S. Pagatpatan, PhD

Assistant Schools Division Superintendent

German E. Flora, PhD, CID Chief

Virgilio C. Boado, PhD, EPS in Charge of LRMS

Melba N. Paz, Ed.D, EPS in Charge of EPP/TLE/TVL

Michael Jason D. Morales, PDO II

Claire P. Toluyen, Librarian II
 Fundamentals of
Accountancy,
Business and Management 2
Quarter 2 - Module 4
 Target

The Tax Reform for Accelaration 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.

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. Proportional tax
imposes the same percentage of taxation on everyone regardless of income.
Progressive tax imposes a higher percentage rate of taxation on those with higher
incomes. 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 business.

Before going on, check how much you know about this topic.
Answer the Pre-test on the next page.

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 Jumpstart

Pre-Test. TRUE or FALSE

Directions: Read and understand each statement carefully. Write TRUE if

the statement is true or FALSE if the statement is incorrect. Write your
answer on the space provided.

______1. A Filipino citizen residing in the Philippines is 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.

Great, you finished answering the Pre-test.

Congratulations and Keep on Learning…

Discover
Enjoy Reading…

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.

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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 should be enough to be

spend 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 from 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 or uniform
enforcement, convenient as to time, place and manner of payment and not unduly
burdensome upon or discouraging to business activity.

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;

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  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

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, 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.

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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.

Explore
Just Relax! You can DO It!

Activity 1. Read! Stop! Think!

Directions: Read, understand and analyze the scenario below. Elaborate
and justify your answer. Write your answer on the space provided. Your task
will be graded base from the following rubric:

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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.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
_________________________________________________________________________________

Deepen

Activity 1. Read! Analyze!

Directions: Read, understand, and analyze the scenario below. Elaborate
and justify your answers. Write your answer on the space provided. Your
task will be graded base from 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;

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

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 Gauge

Post-Test

Directions. Read each statement carefully and encircle the letter of the
correct answer. (For the items 1-5)

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 received from an American corporation which 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.

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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 the items 6-10. Indicate whether each of the following individuals is required or
not required to file an income tax return: Write the answer on space provided.

____________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.

JOB WELL DONE…

CONGRATULATIONS!!!

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Answer Key

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References
BOOKS

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

Business and Management 2Teacher’s Guide (pp. 171-175). Quezon City,
Philippines
 Solita A. Frias (2016). Fundamentals of Accountancy, Business and
Management 2 (pp. 102-106). Quezon City, Philippines. Phoenix Publishing
House, Inc.
 Dani Rose C. Salazar (2017). Fundamentals of Accountancy, Business and
Management 2 (pp. 197-209). Manila, Philippines. Rex Book Store, Inc.

LINK
 https://www.bir.gov.ph/index.php/tax-code.html

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