Taxation
What taxation tests
Taxation tests the NIRC as amended by TRAIN and CREATE, including income tax, VAT, percentage tax, estate and donor tax, local taxes, withholding, and remedies. The exam mixes computations with classification: is an item gross income, exempt, zero-rated, or subject to final tax?
Core rules
- Individual income tax is progressive; compensation income and business or professional income are generally taxed under the graduated schedule, with the first ₱250,000 exempt for pure compensation earners.
- VAT on sale of goods is 12% of gross selling price; on services, 12% of gross receipts. Input VAT is credited against output VAT, subject to substantiation.
- Zero-rated sales bear 0% VAT and allow input VAT credit; exempt sales are outside VAT and generally do not allow input VAT credit.
- Deductions must be ordinary, necessary, and substantiated; CREATE changed incentives and some deductions.
- Tax remedies include assessment, protest, compromise, refund, and judicial appeal within strict periods.
Worked example
A VAT-registered seller invoices goods at ₱1,120,000 inclusive of VAT. Output VAT = ₱1,120,000 × 12/112 = ₱120,000. Input VAT supported by invoices is ₱50,000. VAT payable = ₱120,000 − ₱50,000 = ₱70,000. If the buyer were a zero-rated export buyer, the sale would be zero-rated rather than exempt; the distinction matters because it affects input VAT credits.
Traps
Do not multiply VAT-inclusive amounts by 12%. Do not treat creditable withholding tax as final tax unless the law says so. Do not confuse exemption from VAT with exemption from income tax. Watch the ₱250,000 threshold, the 8% option, and deadlines.