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Individual Taxpayers

Natural Persons
1. Resident Citizens
2. Non-resident Citizens
3. Resident Aliens
4. Non-resident Aliens
a. Engaged in Trade or Business
b. Not engaged in Trade or Business
Artificial Persons
1. Taxable Estate
2. Taxable Trust
Categories of Income
Compensation Income
Income from Trade, Business or practice of profession
Passive Income
Capital Gains
Compensation Income
Definition All remuneration for services performed by an
employee for his employer under an employer-employee
relationship.
The name by which the remuneration for services is
designated is immaterial. The term includes salaries,
wages,
emoluments
and
honoraria,
allowances,
commissions
(e.g.
transportation,
representation,
entertainment and the like); fees including directors fees,
if the director is, at the same time, an employee of the
corporation; taxable bonuses and fringe benefits except
those subject to FBT; taxable pensions and retirement pay;
and other income of similar nature.
Tax Base of Compensation Income
Formula:
Aggregate compensation income
xxx
Less: Health/hosp. premium, if any
xxx
Adjusted gross income
xxx
Less: Personal Exemptions
xxx
Taxable compensation income
xxx
Personal exemptions is comprised of Basic PE of P50,000
and P25,000 for each qualified dependent child (not
exceeding 4)
Health/hospitalization premium is allowed to the extent of
P2,400 if aggregate family income does not exceed
P250,000. For married individuals, the spouse who claims

additional personal exemption shall claim the premium


deduction.
Addressing Social Inequity
Minimum wage earners are exempt from income tax (RA
9054)
Exemption extends to MWEs additional compensation
income:
Holiday pay
Overtime pay
Nightshift differential pay
Hazard pay
Who is a minimum Wage Earner?
Worker in the private sector who is paid the statutory
minimum wage
Employee in public sector with compensation income
of not more than the statutory minimum wage in the
non-agricultural sector where he is assigned.
MWEs are exempt from withholding tax
MWEs in the private and public sector are exempted
from withholding tax since January 1, 2006 under RR
No. 1-26 as a form of focused support by the
Government for the low income earners. They are,
however, subject to income tax.
Under RA 9504, MWEs are exempt from income tax,
hence, exempt from withholding tax.
What is Statutory Minimum Wage?
Statutory Minimum Wage (SMW) shall refer to
the rate fixed by the Regional Tripartite Wage and
Productivity Board (RTWPB), as defined by the
Bureau of Labor and Employment Statistics (BLES) of
the Department of Labor and Employment (DOLE).
The RTWPB of each region shall determine the wage
rates in the different regions based on established
criteria and shall be the basis of exemption from
income tax for this purpose.
Rule on MWE Receiving Additional Compensation
Income
An employee who receives/earns additional
compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable
statutory
amount
of
P30,000.00,
taxable
allowances and other taxable income other than
the SMW, holiday pay, overtime pay, hazard pay
and night shift differential pay shall not enjoy the

privilege of being a MWE and, therefore, his/her


entire earnings are not exempt from income tax
and, consequently, from withholding tax.
Rule on MWE Receiving Mixed Income
MWEs receiving other income, such as income
from the conduct of trade, business, or practice of
profession, except income subject to final tax, in
addition to compensation income are not
exempted from income tax on their entire income
earned during the taxable year.
This rule,
notwithstanding, the SMW, Holiday pay, overtime
pay, night shift differential pay and hazard pay
shall still be exempt from withholding tax.
What is Hazard Pay and the Tax Rule Thereon?
Hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to
danger or strife-torn areas, disease-infested
places, or in distressed or isolated stations and
camps, which expose them to great danger of
contagion or peril to life. Any hazard pay paid to
MWEs which does not satisfy the above criteria is
deemed subject to income tax and consequently,
to withholding tax.
Personal Exemption
P50,000 for each individual taxpayer
Exemption of Estates and Trusts is P20,000 (Sec. 62)
P25,000 for each qualified dependent child, maximum of
four (4)
Taxation of Individuals Business Income
Deductions from Gross Income of Individuals
engaged in business
Itemized Deductions these are the items enumerated
under Section 34(A) to (J)
Additional Requirement of Deductibility It must be shown that
the tax required to be deducted and withheld has been paid to
BIR
Optional Standard Deduction Section 34(L)
Special Deductions income to be distributed or actually
distributed to beneficiary or heir (Section 61)

The itemized deduction

Ordinary and necessary expenses


All events test (CIR v. Isabela Cultural Corp. 2007)
1. Fixing of liability to pay

2. Availability of reasonably accurate determination of


the liability
Business connected interest
Tax arbitrage rule
Optional treatment of interest expense on capital
expenditure (Picop v. CIR, 250 SCRA 434)
Rule on cash basis individual taxpayer
Taxes All business connected taxes except:
1. Philippine income taxes
2. Foreign income taxes if to be credited
3. Estate and donors taxes
4. Special levies
Losses
Incurred in trade or business
Incurred in transaction conducted for profit
Casualty losses of property used in business reported
with the BIR within 45 days (RR 12-77 and RR 10-79)
The itemized deduction (cont)
Bad debt
Requisites for deductibility:
1. There must be a subsisting debt
2. The obligation is connected with the taxpayers
trade or business and is not between related
parties
3. There is an actual ascertainment that the debt is
worthless
4. The debt is charged-off during the taxable year. A
partial write-off is not allowed (PRC v. CA, May 8,
1996)
Depreciation It refers to the gradual diminution in the value
of an asset due to its use in trade or business resulting in
ordinary wear and tear or normal obsolescence.
Depletion It is a reasonable allowance for the exhaustion of
wasting assets like mines, oil and gas wells. When the
depletion allowance shall have equaled the invested capital,
no further allowance is permitted (Fernandez Hermanos Inc. v.
CIR, 29 SCRA 552)
Charitable contributions
Deductible in full:
1. donation to government
2. donation to foreign institutions
3. donations to accredited NGOs
Subject to limitation Shall not exceed 10% of taxable income
before contribution
Research and Development expenses

Revenue expenditure deductible in full


Capital expenditure/deferred R&D allowed as
deduction ratably distributed over a period of not less
than 60 months at the option of TP
Pension Trusts
Current pension liability ordinary expense
Any excess (i.e. past service cost) deductible over 10
years
Optional Standard Deduction (40%)
Individuals taxable on net income (except a nonresident alien)
- 40% of Gross Sales or Gross Receipts
Domestic Corporations and Resident Foreign
Corporations
- 40% of Gross Income as defined under Section 32
Other Requirements of OSD
Must be clearly signified in the ITR, otherwise TP is
considered to have availed of itemized deduction.
OSD is irrevocable
TP is not allowed to amend the return in order to
shift to an itemized deduction
How about a shift from itemized deduction to
OSD?
Individuals availing of OSD are not required to submit
F/S as attachments to the ITR.
Hybrid method of claiming deduction is not allowed.
Sale of Real Property
The property must be a capital asset (Calazans v. CIR)
The property must be located in the Philippines
Tax Base GSP or FMV whichever is higher at the rate of 6%