FINANCIAL ACCOUNTING AND BUSINESS
MANAGEMENT LECTURE NOTES
The golden rule in accounting: The total amount of
debits must equal the total amount of credits in a
transaction. Meaning all entries in the ledger must be
balance.
We need to look for the reason why the entry is not
balance. In accounting we call that process as “BANK OF
RECONCILIATION”
A BANK RECONCILIATION is the process of matching the
balances in an entity’s accounting records for a cash
account to the corresponding information on a bank
statement.
A BANK RECONCILIATION statement is a summary of
banking and business activity that reconciles an entity’s
bank account with its financial records. The statement
outlines the deposits, withdrawals, and other activities
affecting a bank account for a specific period.
The purpose of bank reconciliation statement is to
carried out uncover and correct any errors in the
recording of payments made from the bank account and
amounts lodged to the bank account. It will also highlight
any transactions initiated by the bank which have not yet
been recorded in the business accounting records.
The reconciliation statement will include the balance on
the bank statement, the balance on the cash book, the
value of cheques issued but not yet presented at the
bank (un-presented cheques) and the value of deposits
which have not yet been processed/cleared by the bank.
USES OF BANK RECONCILIATION STATEMENT:
(1) The bank reconciliation statement constitutes a
comparison between the cash book and the
independent bank statement, allowing for items
in transit (including six months old out-of-date
cheques).
(2) Non agreement of the two adjusted balances
indicates an error which can be corrected or
advised to the bank, if the bank statement is
wrong.
(3) Agreement of the two adjusted balances
provides completeness of the cash book.
(4) When cash book is updated and corrected, the
organization has an amended and correct figure
for the bank balance to be shown in the trial
balance and balance sheet.
(5) The bank statement is an independent
accounting record; therefore, it will assist in
deterring fraud by providing a means of verifying
the cash book balance.
(6) A trial balance difference may have indicated an
error somewhere in the accounting system, the
same amount showing up, as a bank
reconciliation difference, indicates that any
search for an error can be restricted to the bank
accounting system.
Reasons for difference in Passbook and Cash Book
Balances:
1.
Cheques issued but not yet presented for
payment in the bank.
2.
Cheque paid into the bank for collection but not
yet credited/collected by the bank.
3.
Cheques paid into the bank for collection but
dishonored by the bank.
4.
Interest allowed by the bank.
5.
Interest and dividend collected by the bank.
6.
Direct payment through bank.
7.
Outstanding checks.
8.
Deposits in transit.
9.
Bank service charges.
10.
Check printing charges.
11.
Errors in the books.
12.
Errors by the bank.
13.
Electronic charges on the bank statement not yet
recorded in the books.
RECONCILIATION is a fundamental accounting process
that ensures the actual money spent or earned matches
the money leaving or entering an account at the end of a
fiscal period. Reconciliating the accounts is a particularly
important activity for businesses and individuals because
it is an opportunity to check for fraudulent activity and to
prevent financial statement errors. Reconciliation is
typically done at regular intervals, such as monthly or
quarterly, as part of normal accounting procedures.
The accountant typically prepares the bank
reconciliation statement using all transactions through
the previous day, as transactions may still be occurring
on the actual statement date. All deposits and
withdrawals posted to an account must be used to
prepare a reconciliation statement.
Bigger companies usually assign persons who handles
bank reconciliation and that is the accounting
department. But in a practical sense, every business who
has bank account should do bank reconciliation. It should
be done on a monthly basis.
A business who does not regularly do bank reconciliation,
is more prone to fraud, theft, and bank errors. In the long
run, it affects the operations, credibility, and goodwill.
Note: For the ease of discussion, we will use the term
“bank” to refer bank reconciling items and “book” for
book reconciling items.
ITEMS TO RECONCILE
BANK Reconciling Items – these are the items that need
to be computed in
Order to balance it with the book. These items will be
adjusted by the bank in
Its records. No book entry is needed.
HERE ARE THE ITEMS TO RECONCILE FOR BOTH BANK
AND BOOK RECORDS.
Bank Reconciling Items
1.Deposit in transit – deposits already recorded in the
company’s books but not yet recorded by the bank.
2.Outstanding checks – checks issued by the company
but not yet paid by the bank.
3.Bank errors – items erroneously recorded by the bank.
Book Reconciling Items
1.Bank debits – bank charges that the bank deducts
against the company’s account and not yet reflected in
the books.
2.Bank credits – deposits made by the bank but not yet
reflected in the books.
3.Book errors – item erroneously recorded by the
company in its books.
Bank Reconciling Items
1.Deposit in transit consists the following items:
• Deposit in transit, beginning of the month –
deposits made from the
Previous month but reflected in the current working
month or simply
The ending of last month’s DIT.
• Deposit made per books- all deposits recorded in
the book during the
Month
• Deposits shown in the bank statement – deposits
which are reflected in
The bank during the month
2.Outstanding checks consist of the following items:
• Outstanding checks, beginning of the month –
checks from last month’s
Issue only reflected in the current month or simply
the ending of last month’s OC.
• Checks issued per books – all checks issued and
recorded in the book during the current month
• Checks paid by the bank – all checks that have been
issued that are encashed in the bank during the month.
3. errors – items erroneously recorded by the bank
during the month.
Example scenario:
Jan 3. The company’s everyday sales are deposited in the
bank. December 31 deposits
Are reflected on January 3 amounting to P10,000. Adding
all the deposits recorded in
The book, it amounts to P100,000, however, in the bank
statement only P90,000 is
Reflected. Compute for the deposit in transit at the end
of January.
Answer:
Deposit in transit, beg. Of the month P 10,000
Add: Deposit made per books 100,000
Total amount that should have been recorded P 110,000
Less: Deposits shown in the bank statement 90,000
Deposits in transit, end of the month P 20,000
Analysis: P20,000 worth of deposit has not reached the
bank.
Example scenario:
Jan1. The company pays its suppliers by issuing checks.
Checks issued from December
Purchases amounting to P25,000 was reflected in
January bank statement. As per the
Records in the book, all checks issued amounting to
P230,000. However, of all checks
Issued, only P200,000 was cleared by the bank. Compute
for the outstanding checks at
The end of January.
Answer:
Outstanding checks, beg. Of the month P 25,000
Add: Checks issued per books 230,000
Total checks that should have been cleared P255,000
Less: Checks paid by the bank 200,000
Outstanding checks, end of the month P 55,000
Analysis: P55,000 of worth of checks issued to suppliers
have not yet been paid by the bank.
2. It is legislative in character- the power to tax is
pecuniary and exclusively vested to the Congress.
3.It is subject to limitations- inherent and constitutional.
Characteristics:
BOOK Reconciling Items – these are the items that need
journal entries to
ADJUST THE ACCOUNTS IN THE BOOKS
1.Tax is an enforced contribution.
2. It is proportionate in character.
3. It is levied by the law-making in character.
4. It is levied for public purpose or purposes.
5. It is generally payable in money.
6. It is levied on persons and property by the state which
has jurisdiction.
INCOME TAX is a tax on all yearly profits arising from
property, profession, trades or offices or as a tax on a
person’s income, emoluments, profits and the like.
THE TWO CLASSIFICATIONS OF INCOME TAXPAYERS
ARE:
Corporations are juridical persons which also possesses
rights and responsibilities as that of an individual person.
Their taxes are imposed on the net income of the
business.
Individuals, in a conceptual definition in taxation, are
persons who gain income from
ONE TO ALL THE FOLLOWING SOURCES:
a.Compensation Income
Income received from working as an employee in
different companies. This comes in the form of salaries
and wages, bonuses, and allowances.
b.Business Income
Income generated from the conduct of business or
profession like lawyers, doctors, and accountant.
A TAX is a compulsory financial charge, or some other
type of levy imposed on a taxpayer by a governmental
organization in order to fund government spending and
various public expenditures.
Taxation refers to the practice of a government
collecting money from its citizens to pay for public
services.
Nature of Taxation
1. It is inherent in sovereignty- it is essential to the
existence of every government.
c.Passive Income
Income generated from investments by the individual
like interest income in bank accounts, time deposits,
royalties from patents or compositions, cash prizes, lotto
winnings and dividends.
are subject to capital gains tax include properties, stocks,
pieces of jewelry, and other high-value goods.
Documentary Stamp Tax is imposed on documents,
instruments, loan agreements, and papers that are used
as evidence of acceptance, assignment, sale or transfer
of obligation, rights, or property. Documentary stamps
are usually found on deeds of sale and bank promissory
notes, among others.
Donor’s Tax is levied on a donation or gift for the
gratuitous transfer of property between two or more
persons who are both still living at the time of transfer.
Even relief goods sent for donation are charged this type
of tax.
BUSINESS TAXATION is the process of collecting taxes
from the activities of a business organization. It refers to
the taxes that businesses must pay as a normal part of
business operations. Whether you are a sole proprietor,
partner, part of a limited liability company, or a
corporation, your business is responsible for adhering to
tax regulations. any individual who has earned income is
liable to pay income tax and any individual who engages
in business is likewise liable to pay business tax.
Income tax is imposed on all compensation and income
received or earned from practice of profession, conduct
of trade in business, and from properties.
Percentage tax is a business tax imposed on businesses
not covered by Value Added Tax and where gross annual
receipts for sale of good and services do not exceed
Php750,000.
Value Added Tax or VAT is another kind of indirect tax
that is passed on to the end consumer. It is a form of
consumption tax making it the most common tax type
because all final sales are almost always charged this tax.
Withholding tax on compensation is tax deducted from
salaries of employees and it is the company’s
responsibility to remit the same to the government.
Other kinds of withholding tax are Expanded
Withholding Tax, Final Withholding Tax, and Withholding
Tax on Government Money Payments.
NATIONAL TAXES are the ones paid to the government
through the Bureau of Internal Revenue (BIR). Our
national taxation system is based on the National
Internal Revenue Code of 1997 or the Republic Act No.
8424 also known as the Tax Reform Act of 1997, as
amended.
LOCAL TAXES, on the other hand, are based on Republic
Act 7160, otherwise known as the Local Government
Code of 1991, as amended. These taxes and fees are
imposed by the local government units in every province,
city, municipality, and barangay, which are given the
power to levy such taxes by the code.
LOCAL TAXES:
NATIONAL TAXES:
Basic Real Property Tax is tax on real properties classed
as follows: agricultural, commercial, industrial,
residential, timberland, and mineral.
Capital Gains Tax is tax imposed on the proceeds from
sale, exchange, or other disposition of capital assets
located in the Philippines. Examples of sold assets that
Franchise Tax is imposed by LGUs on business franchises
at a rate not more than 50% of 1% of the gross annual
receipts of the previous taxable year.
Business of Printing and Publication Tax is collected
from any business that does printing or publication of
printed materials such as books, cards, pamphlets,
posters, or tarpaulins.
Professional Tax is collected from doctors, lawyers,
engineers, and other professionals engaged in the
exercise or practice of professions that require
government examination or acquisition of license to
practice.
Amusement Tax is tax on all forms of entertainment such
as movies, concerts, and plays. This tax is usually already
included in the ticket price.
Community Tax, more commonly called Cedula, is
required from individuals from a base fee of Php5.00 and
additional Php1.00 for every Php1,000 income.
Annual Fixed Tax for Delivery Trucks and Vans
amounting to Php500 is collected by the LGU from trucks
and vans which deliver goods such as beer, soda, and/or
cigarettes.
Barangay Tax is subjected on sari-sari stores and
retailers whose annual gross sales do not exceed
Php50,000 and is accrued on the first day of January of
each year.
Barangay Clearance is paid as a legal permission for
particular individuals, hosts, or companies to conduct an
event or start a business in a barangay.
Taxes help the government fund their projects for
economic development. It’s also the lifeblood of
outstanding government employees. Contributing your
share of the pie greatly helps in the development of the
Philippines as a whole.
The money we pay in taxes goes to many places. In
addition to paying the salaries of government workers,
tax dollars also help to support common resources, such
as police and firefighters. Tax money helps to ensure the
roads you travel on are safe and well-maintained.
Governments need to fund the services they provide to
the community, such as education, health, defense and
infrastructure such as roads. To do this they must collect
money, which is called revenue, through the tax system.
Without taxes, the government would have no money to
provide services.
Paying the right amount of tax is a social responsibility to
the country. The taxes we pay will go to the government
funds that will be used in developing and improving the
government facilities and life of Filipinos, inside and
outside our country.
If all income earners will pay the right amount of tax, the
government can collect more money to support its
objectives such as building roads, schools, better
government salaries and improve government services.
If all income earners will pay the right amount of tax, the
government can collect more money to support its
objectives such as building roads, schools, better
government salaries and improve government services.
These factors can help attracting more investors and jobs
in the Philippines. More people having jobs, means more
people having money to spend which will directly or
indirectly improve business as well.
Taxpayers in the Philippines are classified into two
types: corporate or individuals. Those who fall on the
individual taxpayer category, are those who are either
employed (or a compensation income earner, which
includes minimum wage earners) or self-employed.
Self-employed individuals are those who work on their
own account or with one or few partners. In these jobs,
the income is directly dependent upon the profits
derived from the products or services produced by the
person or individual running the business.
Compensation income earners are individuals whose
source of income is purely derived from an employeremployee relationship.
The incomes of individuals can be divided into the
following categories:
Compensation income is the income that comes from an
employer-employee relationship. Salaries, wages, and
honoraria, commissions, taxable bonuses, and fringe
benefits all fall into this category.
But there are lots of individuals who are not satisfied to
being employed or self-employed alone, so they choose
to be classified as “Mixed Income Earners”.
Mixed Income Earners are those with income from
compensation as employee of a company at the same
time having a business by providing professional services
examples are registered physicians, lawyers and
accountants.
business income may include income received from the
sale of products or services. For example, fees received
by a person from the regular practice of a profession are
business income. Rents received by a person in the real
estate business are business income.
a. If the total Gross Sales/Receipts Do Not Exceed VAT
Threshold of P3,000,000, the Individual Taxpayer May
Opt to Avail:
Business income taxes apply to corporations,
partnerships, small businesses, and people who are selfemployed.
i. 8% Income Tax on Gross Sales/Receipts and Other NonOperating Income in Lieu of the Graduated Income Tax
Rates and the Percentage Tax; Or
Updated March 2018 Page 2 2 Starting January 1, 2018,
compensation income earners, self-employed and
professional taxpayers (SEPs) whose annual taxable
incomes are P250,000 or less are exempt from the
personal income tax (PIT). The 13th month pay and other
benefits amounting to P90,000 are likewise tax-exempt.
We consider them as minimum wage earner/s
ii. Income Tax Based on Graduated Income Tax Rates
INCOME TAX RATES
SOURCES OF TAX IN THE PHILIPPINES:
I. For Individual Citizens and Resident Aliens Earning
Purely Compensation Income and Individuals Engaged in
Business and Practice of Profession
(1) Income tax, except when levied on banks and other
financial institutions;
(2) Documentary stamp tax;
(3) Taxes on estates, inheritance, gifts, legacies and
other acquisitions mortis causa, except as otherwise
provided in the Local Government Code (Code) (except
taxes levied on the transfer of real property ownership
under Section 135, and Section 151 of the Code);
(4) Customs duties, registration fees of vessels (except
license fees imposed under Section 149, and Section
151 of the Code), wharfage on wharves, tonnage dues
and all other kinds of customs fees, charges and dues
except wharfage on wharves constructed and
maintained by the local government unit concerned;
(5) Taxes, fees, charges and other impositions upon
goods carried into or out of, or passing through, the
territorial jurisdictions of local governments in the guise
of charges for wharfage, tolls for bridges or otherwise,
or other taxes in any form whatever upon such goods or
merchandise;
A. Graduated Income Tax Rates under Section 24(A)(2) of
the Tax Code of 1997, as amended by Republic Act No.
10963
A. For Purely Self-Employed Individuals and/or
Professionals Whose Gross Sales/Receipts and Other
Non-Operating Income Do Not Exceed the VAT
Threshold of P3,000,000, the tax shall be, at the
taxpayer’s option:
1. 8% Income Tax on Gross Sales or Gross Receipts in
Excess of P250,000 in Lieu of the Graduated Income Tax
Rates and the Percentage Tax; Or
2. Income Tax Based on the Graduated Income Tax Rates
B. For Individuals Earning Both Compensation Income
and Income from Business and/or Practice of
Profession, their income taxes shall be:
1. For Income from Compensation: Based on Graduated
Income Tax Rates; and
2.For Income from Business and/or Practice of
Profession:
b. If the total Gross Sales/Receipts Exceed VAT
Threshold of P3,000,000
i. Income Tax Based on Graduated Income Tax Rates
GROSS PAY is the amount of money your employees
receive before any taxes and deductions are taken out.
For example, when you tell an employee, “I’ll pay you P
50,000 a year,” it means you will pay them P50,000 in
gross wages.
NET PAY is the amount of money your employees take
home after all deductions have been taken out. This is
the money they actually get on payday.
MANDATORY PAYROLL DEDUCTIONS are the wages that
are withheld from your paycheck to meet income tax and
other required obligations. Voluntary payroll deductions
are the payments you make to retirement plan
contributions, health and life insurance premiums,
savings programs and before-tax health savings plans.
DEDUCTIONS:
Withholding Taxes
SSS or Social Security System
GSIS-Government Service Insurance System
-PHIC or Philippine Health Insurance Corporation
-HDMF or Home Development Mutual Fund
13th Month Pay (The 13thmonth pay is exempt from tax,
up to a limit of PHP 90,000)
Let us try this problem:
Please try to answer this problem:
Salary paid on monthly basis:
Breakdown of Abby’s pay slip
Salary – 30,000
SSS- 800
PHILHEALTH- 412. 50
PAG-IBIG- 100
Compute the following:
A. NET INCOME
B. TAX DUE
Employee 1 who earns P25,000 a month would be
deducted of P581.30 for SSS, P 343.75 for PhilHealth and
P 100 for PAG-IBIG.
Compute the following:
A. NET INCOME
B. TAX DUE
How did I arise with the amount of 1570.90?
I used the given data. Please see the highlighted data.
TO GET THE WITHHOLDING TAX LOOK FOR THE
REVISED WITHHOLDING TAX TABLE
In our case, we are going to use the following data:
MIXED INCOME EARNERS are those who derive income
from business or practice of profession and
compensation income.
Business income may include income received from the
sale of products or services. For example, fees received
by a person from the regular practice of a profession are
business income.
Adjusted gross income. PAY (AGI) is an individual’s
taxable income after accounting for deductions and
adjustments. Net income/PAY is also the profit a
company generates after accounting for all expenses and
taxes.
TOPIC: PRINCIPLES AND PURPOSES OF TAXATION
What are the three principles of a sound tax system?
The PRINCIPLES OF A SOUND TAX SYSTEM are fiscal
adequacy, administrative feasibility, and theoretical
justice.
FISCAL ADEQUACY means the sources of revenue must
be sufficient to meet government expenditures and
other public needs.
FISCAL ADEQUACY. The sources of tax revenue should
coincide with, and approximate the needs of,
government expenditures. The revenue should be elastic
or capable of expanding or contracting annually in
response to variations in public expenditures.
Ideally, taxes collected should be enough for the
operations of the government. Government funds
should not be lower than what is needed. However, it
should also not be more than that because, if so, the
public would be overburdened with tax
ADMINISTRATIVE FEASIBILITY means tax laws and
regulations must be capable of being effectively
enforced with the least inconvenience to the taxpayer.
ADMINISTRATIVE FEASIBILITY. Tax laws should be
capable of convenient, just and effective administration.
Each tax should be capable of uniform enforcement by
government officials, convenient as to the time, place,
and manner of payment, and not unduly burdensome
upon, or discouraging to business activity.
What are the three Inherent powers of the state?
INHERENT DEFINED:
As being inherent, it means that as long as the state
exists, this power can never be taken away.
Power of Taxation – An inherent power of the state
exercised through legislature, to impose burdens upon
subjects and objects within its jurisdiction, for the
purpose of raising revenues to carry out the legitimate
objects of the government.
Police Power – This is the power vested in the Legislature
by the Constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes and
ordinances, either with penalties or without, not
repugnant (offensive) to the Constitution, for the good
and welfare of the State and its subjects.
BASIS:
This power is based on the legal maxim “salus populi est
suprema lex” (the voice of the people is the supreme
law). Every citizen of every community, in a civilized
society must bear certain burdens imposed for the good
of all.
What are the limitations on the power of taxation?
LIMITATIONS ON THE POWER OF TAXATION
Classifications:
a.
b.
Inherent limitations
Constitutional limitations
INHERENT LIMITATIONS – these are limitations or
restrictions that spring from its very own power. While
the power of taxation is inherent in sovereignty, there
are also limitations or safeguards which spring from its
own inherent power.
1.
Limitation on public purpose – It is an essential
characteristic of the power of taxation that the
tax is imposed is for a public purpose, and not for
a private purpose. It should be for a
governmental purpose – for the public welfare
or the common good.
2. Limitation on territorial jurisdiction – The power
of taxation is limited only within the boundary or
territory of the state. The state cannot exercise
its power of taxation outside its territory. If the
subject of taxation is found abroad, then, the
state could not anymore tax that.
By way of exception to territorial jurisdiction, the
state may exercise personal jurisdiction. Even if the
subject of taxation is outside the territory, the state can
still impose its power of taxation by invoking personal
jurisdiction. Before the exemption of the non-resident
citizens, like the OFWs, we used to tax the income of nonresident citizens or the OFWs because we invoked then
personal jurisdiction.
3.
Non-delegation of the legislative power of
taxation – As a nature of the power of taxation,
it is legislative in character. That power cannot
be delegated to others.
When the State grants taxing power to another agency,
then that is a violation of the inherent limitation.
However, this non-delegation admits exceptions:
a.
Article VI, Section 28 (2) -involves the
delegation to the President to fix tariff
rates, import and export quotas,
tonnage and wharfage dues and another
duties and imposts.
b.
Article X, Section 5 – This is the power
of taxation of LGUs to create their own
sources of revenues, levy taxes, fees and
charges. The power of taxation of LGUs
is not inherent. It may be granted either
by the Constitution or by legislation. In
our structure, the grant of the taxing
power to the LGU is by Constitutional
grant.
CONSTITUTIONAL LIMITATIONS
1.
Requirement of Due Process (Article III,
Section 1)
- When the state exercises the power of
taxation, the taking of the property
should be subject to due process. There
must be a basis for the taking.
- If the state exercises its power outside
of its territory or when it taxes another
sovereign, it is also a violation of due
process.
2.
Equal Protection of the Laws (Article III,
Section 1)
3.
Uniformity and Equity in Taxation (Article VI,
Section 21)
There is no more distinction between
equality and uniformity in taxation
-
Equitability or Equity in Taxation –
based on one’s ability to pay
What is the purpose of taxation in the Philippines?
Purpose of taxation Primary purpose
• To provide funds or property with which to promote
the general welfare of its citizens and to enable it to
finance its multifarious activities.
Purpose of taxation Secondary purposes
• To strengthen anemic enterprises by giving tax
exemptions.
• To protect local industries against foreign competition
through imposition of high customs duties on imported
goods.
TOPIC: PRINCIPLES AND PURPOSES OF TAXATION
Why do you think the BIR (Bureau of Internal Revenue)
runs after the people who fail to pay their appropriate
tax obligation?
Because taxation not only pays for public goods and
services; it is also a key ingredient in the social contract
between citizens and the economy.
Holding
governments accountable encourages the effective
administration of tax revenues and, more widely, good
public financial management. It helps build the nation.
The cost of running an entire country, especially one that
is as large and populated as ours, is enormous. It is
through the taxes we pay that the government can
perform civil operations.
What is the role of the BIR in the exercise of its taxation
power?
The Bureau of Internal Revenue shall be under the
supervision and control of the Department of Finance
and its powers and duties shall comprehend the
assessment and collection of all national internal
revenue taxes, fees, and charges, and the enforcement
of all forfeitures, penalties, and fines connected
therewith, including the execution of judgments in all
cases decided in its favor by the Court of Tax Appeals and
the ordinary courts. The Bureau shall give effect to and
administer the supervisory and police powers conferred
to it by this Code or other laws.
What happens if you don’t pay taxes in the Philippines?
In one failure to pay, you would be penalized with three
penalties – a one-time surcharge of either 25% or 50% of
the basic tax, 20% annual interest, and a one-time
compromise penalty. You may not want to be wasting
your hard-earned business income on penalties.
Is tax evasion criminal offence?
The offences hold corporations and partnerships
criminally liable when they fail to prevent their
employees, agents, or others who provide services on
their behalf from criminally facilitating tax evasion. Tax
evasion is a crime and takes away from the money we
need to fund our vital public services.
What is the difference between tax avoidance and tax
evasion?
Tax evasion means concealing income or information
from tax authorities — and it’s illegal. Tax evasion
happens when a person intentionally avoids paying any
tax under the Tax Code of the Philippines. Because tax
evasion is a criminal offense, tax evaders are subject to
serious penalties and criminal charges.
Tax avoidance means legally reducing your taxable
income. Defined as the use of legal methods to modify
an individual’s financial situation to lower the amount of
income tax owed. This is generally accomplished by
claiming the permissible deductions and credits.
Examples of tax avoidance could be:
1.Setting up residence in a country with low-income tax
rates.
2.Putting assets in your wife’s name so she can pay a
lower rate of income tax.
3.Setting up a company and pay dividends rather than
income to avoid paying national insurance.