-INCOME TAXATION Taxation of Individuals Leaming Objectives: After studying this chapter, you should be able to: 12. Identify the individual income taxpayers. : Define the individual taxpayers and the related terms used. Illustrate the different classification of individual taxpayers. State the sources of income of individual taxpayers. Recognize the categories of income and state the tax rates to be used by each type of individual taxpayer. : List the sources of passive income and state the final tax rates to be used by each type of individual taxpayer, Discuss the treatment of passive income in the computation of taxable income from compensation or business/professional income. Define the allowable deductions from gross income. Identify the kinds of personal exemptions. Discuss the guidelines on change of status. Define and compute taxable income and tax due for each type of individual taxpayer depending on income category. » Be familiar with individual taxpayers exempt from income tax. The Code directs that a tax shall be imposed on the taxable income of every individual. . Our present tax system imposes progressive rates of income taxes on citizens and resident aliens. This system equitably distributes the tax burden by recognizing the paying ability of the individual taxpayer. Likewise, the global treatment in taxing compensation and business income has been restored from the previous schedular treatment. In a schedular system, the income tax treatment varies depending on the kind of taxable income of the taxpayer. A schedular system of taxation provides for a different tax treatment of different types of income so that a separate tax return is required to be filed for each type of income and the tax Is computed on a per return or per schedule basis. 33Global treatment, on the other hand, is a system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. A global system of taxation is one where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rules on these different items of income. Under this system, the taxable income—which is the aggregate of the gross compensation income and gross business or professional income less the allowable deductions—is being subjected to a unitary but progressive, graduated rates. Unlike financial accounting, tax law does not distinguish between a person and an unincorporated business. If one person engages in several different business activities, his or her total taxable Income is determined by aggregating income and losses from the various sources. If two of more individuals-professionals form a general professional partnership, there Is no Income tax Imposed on the entity. Rather, the partners must include their respective shares of the partnership’s income, along with income from any other sources, in determining their individual taxable incomes. While all individuals are subject to tax on their respective taxable incomes, they are nat all taxed at the same rate for two reasons. First, tax rates are generally higher for higher levels of income. Second, even at the same level of income and with the same basic personal exemption of P50,000, tax dues will vary depending on an individual's claim for additional exemptions on dependents. CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS 1. Citizen a. Resident b. Non-resident 2. Alien a. Resident b. Non-resident 1. Engaged in trade or business in the Philippines _ 2. Not engaged in trade or business in the Philippines 3. Employed by @ Regional or area headquarters (RHQs) and regional operating headquarters (ROHQs) of multinational entities in the Philippines that are engaged in international trade with affiliates and subsidiary branch offices in the Asia-Pacific region. b. Offshore banking units. c. Petroleum contractors and sub-contractors, 34Definition of Terms 1. Citizen. The following shall be considered citizens of the Philippines: 2 Resident ci 3. Nom-resident ci ‘Those who are citizens of the Philippines at the time of the adoption of the Feb. 2, 1987 Constitution; ‘Those whose fathers or mothers are citizens of the Philippines; ‘Those born before Jan. 17, 1973, the date of the adoption of the 1973 Constitution, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and ‘Those who are naturalized In accordance with law. en {s a Filipino citizen who permanently resides in the Philippines. en means: A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. “Most of the time” is interpreted to mean presence abroad for at least 183 days during the taxable year (BIR Ruling 128-99, Aug. 18, 1999). A citizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in Which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. The taxpayer shall submit proof to the Commissioner to show his intention of leaving, ippines to reside permanently abroad or to return to and reside in the Philippines, as the case may be. Resident alien. Means an individual whose residence is within the Philippines and who is not a citizen thereof. He Is one who is actually present in the Phi pines and who is not a mere transient or sojourner. But residence does not mean mere physical presence. An alien is considered a resident or a non-resident depending on his intention with regard to the length and nature of his stay. Non-resident alien. Means an individual whose residence Is not within the Philippines and who is not a citizen thereof. as10. Non-resident alien engaged in trade-or business (NRA-ETB). Means that that the - alien is carrying on a business in the Philippines. It connotes more than a single act or isolated transactions. It involves some continuity of action. The term trade, business or profession shall not include performance of services by the taxpayer as an employee but it includes the performance of the functions of a public office. A non-resident.alien who has stayed in the Philippines for more than 180 days during any calendar year shall be deemed doing business in the Philippines. If he stayed for 180 days or less, he is considered a non-resident alien. not doing business in the Philippines (NRA-NETB). OCWs or OFWs refer to Fi ens employed in foreign countries who are physically present in a foreign country as 2 consequence of their employment thereat. Their salaries and wages are paid by an employer abroad and:are not borne by any entity or person in the Philippines. To be considered as an OCW or OFW, they must be duly registered as such with the Philippine Overseas Employment Administration (POEA), with a valid Overseas Employment Certificate (OEC) Seafarers or seamen are Filipino citizens who receive compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade. They must be duly registered as such with the POEA with a valid OEC and Seafarers Identification Record Book (SIRB) or Seaman’s Book issued by the Maritime Industry Authority (MARINA) (Revenue Regulations 1-2011, Feb. 24, 2011). Foreign currency deposit system (FCDS) shall refer to the conduct of banking transactions whereby any person, whether natural or juridical, may deposit foreign currencies forming part of the Philippine international reserves, in accordance with the provisions of R.A. 6426 entitled “An Act Instituting a Foreign Currency Deposit System in the Philippines, and For Other Purposes.” Foreign currency deposit unit (FCDU) shall refer to that unit of a local bank or a local branch of a foreign bank authorized by the Bangko Sentral ng Pilipinas (BSP) to ‘engage In foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426, as amended. Local bank shall refer to a thrift bank or a commercial bank organized under the laws of the Republic of the Philippines. Local branch of a foreign bank shall refer to a branch of a foreign bank doing business in the Philippines, pursuant to the provisions of R.A. 337, as amended. Offshore banking system shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds principally from external and internal sources and the utilization of such fund pursuant to Presidential Decree 1034 as implemented by Central Bank (now Bangko Sentral ng Pilipinas (BSP)) Circular 1389, as amended. 36ot 12. 13. 14. 15. 16. 17. 18. Offshore banking unit (OBU) shall mean a branch, subsidiary or affiliate of a forelgn banking corporation which is duly authorized by the BSP to transact offshore banking business in the Philippines In accordance with the provisions of Presidential Decree 1034 as implemented by Central Bank (now BSP) Circular 1389, as amended, Deposits, in connection with offshore banking, shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. Deposit substitutes shall mean an alternative from of obtaining funds from the public (the term ‘public’ means borrowing from twenty (20) or more individual or corporate lenders at any one time] other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. Mixed income earner refers to a compensation-earner who at the same time is ‘engaged In business or practice of profession. Marginal income earner refers to an individual whose business does not realize gross sales or recelpts exceeding P100,000 in any 12-month period. Self-employed individual is one who may either be a single proprietor engaged in business or in the practice of his profession. Regional’ or area headquarters (RHQs) shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Phillppines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia- Pacific Region and other foreign markets. Regional operating headquarters (ROHQs) shell mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel 37management; logistic services; research ‘and development services and product development; technical support and maintenance; data processing and communications; and business development. ‘The following definitions are used in relation to R.A. 10165, the Foster Care Act of 2012: 19. Agency refers to any child-caring or child-placing institution licensed and accredited by the Department of Social Welfare and Development (DSWD) to iniplement the Foster Care Program. 20. Child. refers to a person below eighteen (18) years of age, or one who is over eighteen (18) but is unable to fully take care of, or protect, himself or herself from abuse, neglect, cruelty, exploitation or discrimination because of a physical or mental disability or condition. 21. Child with Special Needs refers to a child with developmental or physical disability. 22. Foster Care refers to the provision of planned temporary substitute parental care to a child by a Foster Parent or a Foster Family. 23. Foster Child refers to a child placed under Foster Care. 24. Foster Family refers to a Foster Parent(s) and his/her immediate family members. 25. Foster Family Care License refers to the document issued by the DSWD authorizing the Foster Parent(s) to provide Foster Care. 26. Foster Parent refers to a person duly licensed by the DSWD to provide Foster Care. 27. Social Worker refers to a registered and licensed Social Worker of the DSWD, LGU ‘or Agency. According to Rule 5 of the Implementing Rules and Regulations of R.A. 10165, the following may be placed under Foster Care: '@. Achild who is abandoned, surrendered, neglected, dependent or orphaned; b. A child who is a victim of sexual, physical, or any other form of abuse or exploitation; ©. Achild with special needs; d. A child whose family members are temporarily or permanently unable or unwilling to provide the child with adequate cai fe. Achild awaiting adoptive placement and who would have to be prepared for family life, including a child who has already been matched for adoption but continues to receive institutional care; f. A child who needs long-term care and close fa! for domestic adoption; 8: Achild whose adoption has been disrupted; ly ties but who cannot be placed 38h. A child who is under socially difficut circumstances such as, but not limited to, a street child, a child in armed conflict or a victim of child labor or trafficking; ‘A child who committed a minor offense but has been released on recognizance, or who is in custody supervision, or whose case has been dismissed; and j. A child who is In need of special protection as assessed by @ Social Worker, an Agency, or the DSWD. Provided, that in the case of (b}, (c), (f), (h), {i) and Qj), the child must have no family willing and capable of caring and providing for him/her. Rule 6 of the IRR states, to qualify as a Foster Parent, an applicant must meet all of the following: a. Must'be of legal age; b. Must be at /east sixteen (16) years older than the Foster Child unless the applicant Isa relative of the Foster Child; c. Must have a genuine Interest, capacity and commitment in parenting the Foster Child and able to provide the Foster Child with a familial atmosphere; d, Must have a healthy and harmonious relationship with each family member living with him/her; Must be of good moral character; ‘Must be physically and mentally capable and emotionally mature; Must have sufficient resources to he able to provide for the family’s needs; and Must be willing to be trained or recelve advice for the purpose of increasing or Improving his or her knowledge, attitudes and skills in caring for a child. For an alien to qualify as a Foster Parent, he/she must (i) be legally documented, (ii) possess all the qualifications above-stated, (iii) have resided in the Philippines for at least twelve (12) continuous months at the time of the application, and (iv) undertake to maintain such residence until the termination of placement by the DSWD or expiration of the Foster Family Care License. For purposes of determining continuous residence, the alien must not have spent more than sixty (60) days of the last twelve (12)-month period prior to the filing of the application outside of the Philippines, and then only for meritorious reasons. Mlustrations: 1. A British computer expert was hired by a Philippine corporation to assist in its computer system installation for which he had to stay in the Philippines for 6 months. Is he a resident alien? ‘Answer: One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes:his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to return to his domicile (place of habitual or permanent residence) abroad when the purpose for which he came has been accomplished. 392. A British cultural performer was engaged to perform in the Philippines for two weeks after which he returned to his country. Is he a resident alien? Answer: No. One who comes to the Philippines for a definite purpose which in its nature may bg promptly accomplished isa transient. 3. An alien owns shares of stock in the Philippines. Is he considered as engaged in business or trade in the Philippines? Answer: No, mere ownership of shares of stock in the Philippines is not enough to constitute as engaging in trade or business in the Philippines. 4. An alien temporarily serves as executive manager of an airline in Manila, Is he considered engaged in trade or business in the Philippines? Answer es, because he is performing the functions of a public office, 5. A resident alien left the Philippines and abandoned his residency thereof without any intention of returning. May he still be considered a resident alien? ‘Answer: No, because he has no intention at all to return to the Philippines. 6. A resident alien left the Philippines with a re-entry permit. Is he, still a resident alien? Answer: Yes, his re-entry permit proves that he has not abandoned his residence in the Philippines. 7. A non-resident citizen went to Manila under the Balikbayan Program. Does his return to Manila interrupt his residence abroad? Answer: No, his trip to Manila did not interrupt his residence abroad. The phrase “uninterrupted period” should not be interpreted literally. His trip to Manila did not affect the continuity of his residence abroad. Ilustration. Source: BIR Ruling ITAD 340-14, Dec. 29, 2014 ‘An Individual who, at the invitation of a Philippine schoo!, visits the Philippines for a period not exceeding ‘two years solely for the purpose of teaching at such educational institution, and wha Is, or was, Immediately before that visita resident of the UK, shall be exempt from Philippine income tax on the remuneration from teaching at such school. This is provided for under Article 20 of the Pallipplnes-United Kingdom Tax Treaty. “Alustration. Sour WR Ruling 053-2010, Sept. 14, 2010 ‘An alien who holds a Special Retiree Residents Visa is considered # resident lien subject to Philippine Income tax under Section 24(A) of the Tax Code. 40ustration. Source: BiR Ruling DA-056-2005, Feb.'16, 2005, Under the Tax Cade, a non-resident individual who stays in the Philippines for an aggregate perlod of more than 180 days during any calendar yaar shall be considered a non-resident allen engaged in trade or business in the Phippines and shall be subject to income tax at 5% to 32% graduated rates. ‘The phrase “any calendar year” should be interpreted to mean that when an expatriate stays In the Philippines for more than 180 calendar days in any calendar year, he would be taxed at the graduated rate (Of S% to 32% not only in the year that he exceeds that 180-day period, but also during the other years of agement, even if his stay did not exceed 180 days, Miestration. Source: BIR Ruling 0A-290-2008, June 27, 2005 ‘An afen is a stockholder of a PEZA-ragistered enterprise. He has been involved in the company since its incorporation in 1996, has abtained a special non-immigrant visa and was required as company president to bbe in the Philippines most of the time to manage the.day-to-day operations of the company. This alien ‘quatfies as a resident alien for Philippine income: tax purposes. His dividend income shall be subject to the ‘40% final tax imposed under Section 24(8)(2) of the Tax Code to be withheld by the payor-company.. SOURCES OF INCOME Source of income is not a place but the property, activity or service that produced the income. In the case of income derived from labor, it is the place where the labor is performed; in the case of income derived from the use of capital, it is the place where the capital is employed; and in the case of profits from the sale or exchange of capital is the place where the sale or transaction occurs, important to know the source of income of an individual taxpayer—whether from within the Philippines or without—because not all individual texpayers are taxed on all their income. The following rules apply: 1. Resident without. ens are taxable on all income derived from sources within and 2. Non-resident citizens and alien individuals—resident and non-resident—are taxable only on income derived from sources within the Philippines. An overseas contract worker is taxable only on his Income from sources within. Individual Source of income Within the Phils Without the Phils, 1. Resident Citizen az 2. Non-Resident Citizen 3, Resident Allen 4, Non-Resident Alien wees a1CATEGORIES OF INCOME AND TAX RATES * 1. Compensation income. In general, the term “compensation” means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. This is discussed thoroughly in Chapter 7. If 2 taxpayer is receiving compensation income from two or more employers, he/she must combine all compensation income received from all employers for 2 particular calendar year. Taxed at the graduated rates from 5% to 32% (revised Section 24(A) per R.A. 9504) Mlustration: Kyla, single and a resident citizen, has'a gross compensation income of P180,000 in 2015. . How much is her taxable income and tax due for 2015? A resident citizen, who is single, is allowed basic personal exemption of P50,000 (per R.A. 9504), Gross Compensation Income 180,000 Less: Basic Personal Exemption 50,000 Net Taxable Compensation Income 130,000 Tax Due: (On 70,000 P 8,500 60,000 at 20% 12,000 20,500 2. Business income arises from self-employment or practice of profession. This shall not include income from performance of services by the taxpayer as an employee. Taxed at graduated rates. from 5% to 32% (revised Section 24(A) per R.A. 9504). Note that the same graduated tax schedule is used for individual taxpayers earning compensation income, business/professional income or both. Illustration: Katrina, single and a resident citizen, has a gross business income of 350,000 in 2015. Deductions retated to her business is P80,000, How much is, her taxable income and tax due for 2015? Gross Income 370,000 Less: Deductions 80,000 * Basic Personal Exemption 50,000_ _+ 130,000 Taxable Income 240,000 Tax Due: (On P:140,000, 22,500 100,000 at 25% 25,000 47,500 42‘An individual receiving a combination of compensation and business income shall first deduct the allowable basic, personal and additional exemptions from _ compensation income. The excess, if any, shall then be deducted from business income. 3. Passive income. Passive income are subject to a separate and final tax. These are taxed at fixed rates ranging from 5% to 259%. Examples of passive Income are imerests, royalties, prizes, winnings arid dividends. A table showing the passive income and the corresponding tax rates is provided in this chapter. Masstration: Helena, single and a resident citizen, has the following passive income for the year 2015: Interest from BPI Savings Deposit 75,000, Royalty from Invention 80,000 Prize in a Painting Competition 50,000 Dividends Recelved from a Domestic Corporation _—-30,000 Computation of Final Tax: Interest (P75,000 x 20%) 15,000 Royalty (P80,000 x 20%) 116,000 Prize (P50,000 x 20%) 10,000 Dividends (P30,000 x 10%) 3,000 Total 44,000. For this illustration, it is assumed that the passive income are all gross of final taxes (FT) or final withholding taxes (FWT). Final tax imposed on income or gain shall no longer be included as taxable Income subject to the graduated rates. The final tax is imposed without any deduction and is withheld at source. The amount received by passive income earner is net of the final:tax. The final tax on passive income is remitted by the payor who serves as the withholding agent? to the BIR. For example, if the prize in a painting comps 50,000, the amount to be received by the winner will only be P40,000. 4. Capital gains from sale of shares of stock, not traded through the local stock exchange. Texed at.5% and 10% final taxes on a per transaction basis. This is discussed thoroughly in another chapter. On the Net Capital Gains: Not over P100,000 5% Amount in Excess of 100,000 10% 3 any person required to deduct and withhold any tax under the provistons of Sec. 57 of the Tax Code. 43The categories of income and the tax rates applicable for each type of individual taxpayer are presented below, Passive income is discussed in another section of this chapter. Resident | Non Resident | Resident | Non-Resident Alien on Cizen Gitizen ‘Alien | Engaged | Not Engaged TON TAKABLE INCOME as defined in Sec. 31 the tax computed under the 59-32% sx-a% | FT 25% revised Sec. 24(A), except Zor NRA-NETB. ‘ON PASSIVE INCOME Za genera, interests, “oyatties, prizes and other azings. 20% Fr25% 3, cash and/or property avidends 20% Fr35% (ON CAPITAL GAIN. “Sale of shares of stock not 5% 10% ‘vaded In stock exchange E Sale of real property LL. The taxable Income referred to in the table (no. 1} may arise from compensation income, business income from self-employment and/or practice of profession. The concept of taxable income is discussed in this chapter. In computing for the tax due, the graduated individual income tax schedule shall be used (revised Section 24(A) per R.A. 9504). From hereon, any reference to Section 24(A) means the revised Section 24 (A) per R.A. 9504 for simplicity. 2. All income received by a non-resident alien not engaged in trade or business in the Philippines (NRA-NETB) except capital gains (from sales of shares of stock not traded in stock exchange and of real property) are included as gross income taxed at 25% final tax or final ‘withholding tax (FT or FWT)). All income received by a non-resident alien employed by: a. Regional or area headquarters (RHQs) and regional operating headquarters (ROHQs) of multinational companies in the Philippines, which are engaged in International trade ‘with affiliates and subsidlary branch offices inthe Asia-Pacific region and other foreign markets (see note 4), b. Offshore banking units, Petroleum contractors and sub-contractors, are Included as gross income taxed at 15% final tax. This same tax treatment shall apply to 2 Filipino employed by such firms. But such Filipinos have the option to be taxed at either 15% or under Section 24(A) subject to the schedular tax rates of 5% to 32%, 4s‘These alien individuals referred to above are employees occupying managerial, confidential or highly technical positions or the so-called “expatriate employees.” ‘The test of “managerial status” depends on whether a person possesses the authority to act in the interest of his employer and whether such authority is not merely routinary or clerical in nature, but requires the use of independént judgment. Where such recommendatory power are subject to evaluation, review and final action by the department heads and other higher executives of the company, the person having such recommendatory powers is not a managerial employee (Philippine Appliance Corporetion vs. Laguesma, 226 SCRA 730 (1993)) ‘The term “technical positions” refers to positions that are highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. The Labor Code of the Philippines prohibits employment of aliens when there are Filipinos who are competent, able and willing to perform the services for which the aliens are desired. Revenue Memorandum. Circular 41-2009, which defined the term “managerial and/or technical positions,” has created confusion on the tax treatment of Filipinos employed by RHQs or ROHQs, as it implied that Filipinos must be employed in a “managerial and technical position” to enjoy the option to be taxed at elther the 15% preferential final withholding tax rate on gross compensation income or at the regular income tax rate based on taxable compensation income, Revenue Regulations 11-2010 clarifies the term “managerial and technical positions” under Section 2.57.1(D) of RR 2-1998, as amended, and prescribes the qualifications and requirements for Filipinos employed by RHQs and ROHQs of multinational companies to have the option to be taxed at the 15% preferential income tax rate under Section 25(C) of the Tax Code. ‘The option to be taxed at the 15% preferential rate shall be available to the Filipino employee of an RHQ or ROHQIf he meets all of the following requirements: a. Position and Function Test ~ The employee must occupy a managerial position or technical position, and must actually exercise managerial or technical functions. b. Compensation Threshold Test — The employee must have received, or is due to receive under a contract of employment, 3 gross annual taxable compensation of at least 975,000. If there is a change in the compensation resulting in the employee receiving less than the threshold for the calendar year, the employee shall be subject to the regular income tax rate.’ The compensation threshold shall be adjusted every three years using the Philippine Consumer Price Index. c. Exclusivity Test ~ The employee must be exclusively working for the RHQ. or ROHQ. as a regular employee and not just a consultant or contractual personnel. Exclusivity means having Just one employer ata time. For purposes of determining the compensation threshold of P975,000, gross compensation shall include both the regular taxable compensation income and supplementary compensation income of the employee, Regular taxable compensation Includes basic salary, fixed allowances for representation, transportation and other allowances pald to an employee per payroll period. Supplementary compensation covers payments in addition to 45the regular compensation such as commission, overtime pay, taxable bonus and other taxable benefits, with or without regard to a payroll period. Gross compensation shall not include retirement or separation benefits (whether or not taxable) as well as de minimis benefits, although these shall be considered in determining the income tax due at the time of the employee's retirement or separation. At the start of the year or at the start of employment, it will be determined whether the grass annual compensation of an employee is equivalent to or above the compensation threshold. If the total compensation cannot be determined at the start of the year or employment, the option to be taxed at 15% cannot be exercised ‘To iustrate, at the start of the year, Mr. Thed, a Filipino employed by an ROHQ, receives a monthly salary and cost of living allowance in the amount of P65,000 and P5,000 respectively. His employment contract also states that he may receive a performance bonus ‘at the end of the year which amount Is not presently determinable. Since Mr. Thed’s regular ‘compensation income of P905,000 composed of P780,000 (P65,000 x 12 months) basic pay, 65,000 13th month pay and PGO,000 (P5,000 x 12 months) cost of living allowance, is below the compensation threshold of P975,000 then his employer shall, on every pay period from the start of the yéar withhold from Mr. Thed income tax at the regular rate of withholding tax on compensation. However, If at the end of the year Mr. Thed receives a performance incentive bonus of P'100,000, thus making his annual gross compensation income total 1,005,000 and he opts to be taxed at the rate of 15% of his gross income, his employer shall make the necessary adjustments to the Income tax rate. Miustration. Source: B/f Ruling 007-99, Jan. 18, 1999 !watan! International Corporation (ITC) is a corporation formed and organized under the laws of Japan registered with the Securities and Exchange Commission (SEC) as a Philippine Representative Office. ITC is authorized to gather Information, disseminate Information on the company and Its products, liaise with customers but is not authorized to generate income within the Philippines. ITC has an expatriate resident manager. Is he subject to the 15% income tax rate on his gross income? ‘The BIR ruled in the affirmative citing Section 25(C) of the Tax Code of 1997 which states: "There shall be levied, collected and pald for each taxable year upon the gross income received by every allen Individual employed by regional or area headquarters and regional operating headquarters established In the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, a tax equal to 15% of such {gross Income.” Mlustration. Source: BIR Ruling DAXITAD 155-04, Dec. 23, 2004 ‘A Dutch corporation not registerad with the Securities and Exchange Commission has been éngaged as contractor since 2000. it has been providing engineering services to support the operation and maintenance of three geothermal power companies under the General Services Agreements. One of its employees was present in the Philippines for more than 183 days, and total project revenue derived ‘through said employee was in excess of P720,000 for 2004, ‘The BIR ruled that the company will be considered to have a permanent establishment in the Philippines pursuant to the RP-Netherlands tax treaty. As such the company shall be subject to Philippine tax on income received from all sources within the Philippines and to withholding tax at 10% 0 15% on management and technical consultants.5, The BIR has issued the Revenue Regulations 47-2011 implementing the tax provisions of Republic Act 9505, Personal Equity and Retirement Account Act of 2008, which provides the legal and regulatory framework for the establishment of personal equity retirement account (PERA), This law aims to pramate the development of the capital market by tapping into the savings of its residents and overseas citizens. PERA is a voluntary retirement account for individuals which provides tax incentives—like 5% tax credit and exempt investment income of PERA assets, Details are discussed at the end of this chapter. Revenue Memorandum Circular 31-2013 prescribes the guidelines on the taxation of compensation income of Philippine nationals and alien individuals employed by foreign governments, embassies, diplomatic missions, and international organizations situated in ‘the Philippines. Details are discussed at the end of this chapter. Revenue Regulations $-2013 prescribes the tax treatment of the sale of jewelry, gold and other metallic minerals to a non-resident alien individual not engaged in trade or business within the Philippines, or to a non-resident foreign corporation. Sellers of jewelry, gold, and other metallic minerals are required to pay business tax (VAT or percentage tax), income and excise tay, if appiicable, In advance through the assigned Revenue Collection Officers of the Revenue District Office (RDO) having jurisdiction over the “place where the subject transaction occurs, regardless of whether the sellers are duly registered with the BIR: ‘Advance payment of 12% VAT on gross selling price, or percentage tax at the rate of 3% ‘on gross sales, as the case may be; . Advance payment of income tax at the rate of 5% on gross payment; c. Actual payment of 2% excise tax based on elther the actual market value of the gross output at the time of removal, in the case of those locally extracted or produced; or the value used by the Bureau of Customs (BOC) in computing tariff and duties, in the case of Importations, Actual market value shall refer to the actual consideration paid by the buyer to the seller. ‘The advance payments shall be credited against the actual business tax (VAT or percentage tax, as the case may be) and income tax due from such persons for the taxable period for which such advance payments were remitted to the BIR. Non-resident alien individuals not engaged In trade or business within the Philippines or non-resident foreign corporations shall: (2) Maintain a record of the transactions containing the date of the transaction, name of the seller, Tax Identification Number (TIN) of the seller, if available, and amount received by the seller; and (2) Require the seller to sign an order slip or any similar document as evidence of the amount received by the seller. This document shall be the basis of the Revenue Officers in recording the transaction and assessing the correct tax due. ‘Owners and operators of hotels, inns or establishments where the subject transactions are conducted are required to provide the following information to the ROO having jurisdiction over them: name of the alien individuals and/or entity; nationality; passport number; Intended number of days of staying in the hotel, inn or establishment; place, date and time of the buying event; and TIN of the non-resident alien or non-resident foreign corporation, if already registered. 48PASSIVE INCOME Passive income is subject to a separate and final tax at fixed rates ranging from 5% to 25%. They are not included in the computation of taxable income from compensation oF business/professional income, the tax due on which is computed in accordance with the graduated income tax schedule for individuals Section 24(A). (ON PASSIVE INCOME Resident Gkizen—] Non-Resident Citizen Resident Alien Non-Resident Alien Engaged in Trade or Business in the Philippines (waa-ere) waerests ‘terest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes (see Note 1 below) and 20% 20% from trust funds and similar arrangements ‘interest income from a depository 75% Exempt ‘bank under the Expanded Forelgn Non-resident citizen Currency Deposit System (FCDS) is tax exempt | interest income from long-term deposit or investment in the form of savings, common or individual trust, funds, deposit substitute, Investment management accounts {IMA) and other investments evidenced by : certificates in such form prescribed Exempt Exempt bby the 8SP with five-year term or longer (see Note 2 below). IF deposit is pre-terminated before the fifth year, the corresponding final tax shall be: 4 years to less than S years 5% 5% 3 years to less than 4 years 12% 12% Less than 3 years 20% 20% Royalties Royalties, in general 20% 20% Royalties on books, literary works and musical composition 10% 1056 49Prizes and Wi Prizes, In general Prizes amounting to P10,000 or less are subject to the graduated Income tax schedule in Sec. 24(A). 20% 20% Winnings, in general CSO and lotto winnings are tax exempt. 20% 20% Cashand/or Property Dividends actually or constructively received from a domestic corporation, joint stock company, Insurance, mutual fund companies and regional operating headquarter of a multinational company or Share of an Individual in the distributable net income after tox of a taxable partnership or ‘Share of an individual in the net Income after tax of an association, joint account or a joint venture or consortium taxable as a corporat A. ‘Tax on dividends shall apply only on income earned on or after Jan. 1, 1998. 6% - 1998 8% - 1999 10% - 2000 20% Notes: Interest Income from Government Debts and Securities: Government Debt Instruments and Securities, including Bureau of Treasury (BTr) issued instruments and securities such as Treasury bonds (T-bonds), Treasury bills (T-bills) and Treasury notes, are considered as deposit substitutes, irrespective of the number of lenders at the time of origination, if such debt instruments and securities are to be traded or exchanged on the secondary market. ‘The mere issuance of government debt instruments and securities is considered as falling within the coverage of ‘deposit substitutes’ irrespective of the number of lenders at the time of origination; therefore, interest income derived shall be subject to 20% FWT imposed on dapostt substitutes (Sec. 2, Revenue Regulations 14-2012, Nov. 7, 2012). 50{in the case of zero-coupon liistruments and securities, the FWT Is payable upon their original issuance. In the case of interest-bearing Instruments and securities, the FWT is payable upon Payment of the interest (RMC 77-2012, Nov. 22, 2012). Interest income derived from any other debt instrument not within the coverage of deposit substitutes ~ The 20% Creditable WT shall apply to each Interest payment to be made beginning on Nov. 23, 2012, irrespective of when the instruments or securities were issued, This covers interest income from current outstanding instruments, securities, or accounts as Of Nov. 23, 2012 (Sec. 7, Revenue Regulations 14-2012, Nov. 7, 2012 and RMC 77-2012, Nov. 22, 2012) Interest Income from Long-Term Deposits or Investment Securities: The depositor or investor is an individual citizen (resident or non-resident) or resident allen or non-resident alien engaged in trade or business in the Philippines and not a corporation, The long-term deposits or investments certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank. ‘The long-term deposits or investments must be Issued by banks only and not by other financial institutions. Only the Interest income from long-term deposits or investment certificates is covered by the income tax exemption. The income tax exemption does not cover any other income such as gains from trading, foreign exchange gain (RR 14-2012, Nov. 22, 2012; RMC 18-2011, Apr. 12, 2011; BIR Ruling 84-2012, Feb. 15, 2012). Interest income from long-term deposit or Investment shall he subject to 25% FWT if received by a non-resident alien not engaged In trade or business in the Philippines (NRA- NETB) On investments of individuals in long-term trust invested by a bank’s trust department in a ‘five-year corporate bond ~ Even If the Individual does not withdraw his money from the trust ‘agreement for at least five years, his interest income from the trust agreement will not be exempt from the FWT as the underlying instrument is 2 corporate bond, even If such corporate bond has @ maturity of five years. Corporate bonds or any other debt instrument issued by a non-bank corporation as underlying Instrument will not meet the requirements of Section 22(FF) of the Tax Code since it is not issued by a bank, ‘On Investments of individuals in long-term trust invested in long-term deposits placed under name of @ bank's trust department ~ if a bank’s trust department Inyests a fund in a long- term deposit or Investment certificate in its own name without mentioning the particular Individual for whom the investment is being made, this long-term deposit and Investment are not exempt from the 20% FWT. Only those made specifically in trust for the name of, specific qualified individual investors may be exempt from income tax under the Tax Code (RIAC 81-2012, Dec. 10, 2012). Income from cinematographic films and similar works ty @ non-resident alien not engaged in trade or business in the Philippines is taxed at 25% final tax. Dividend Payments to Philippine Central Depository (PCD) Nominees: If the PCD Nominee isa Filipino, the income recipient is deémed to be an individual subject to the 10% final tax Pursuant to Sec. 24(8)(2) of the Tax Code, unless it Is satisfactorily shown that the actual ‘equity investor is a domestic corporation. 51If the PCD Nominee is not a Filipino, the Income recipient is deemed to be 2 non-resident foreign corporation subject to the 30% final tax under Sec. 28(8)(1) of the Tax Code, unles: is satisfactorily shown that the actual equity Investor is a resident alien, non-resident allen whether engaged or not engaged in trade or business in the Philippines or resident foreign corporation (Revenue Memorandum Circular 73-2014, Sept. 12, 2014). Ilustration, Source: BIR Ruling DA-390-2004, July 20, 2004 Interest income derived by @ non-resident Filipino citlzen from foreign currency bank deposit in the Philippines shall be exempt from the final withholding’tax of 7.5%. But when the account is jointly in the name of the non-resident and a resident, e.g. spouse or dependent, only 50% of the Interest income shall be exempt (that pertalning to the non-resident) and 50% shall be subject to the 7.5% final withholding tax. The non-resideint citizen shall execute a written permission allowing the depository bank to inforrn the BIR of his exemption. Any of the following shall be sufficient proof of non-residency: 1. Immigration visa Issued by the country of residence; Certificate of residency issued by the Philippine Embassy or Consulate in the country of residen Certificate of the overseas worker's employment contract duly registered with the Phillppine Overseas Employment Agency (POEA) or a Seaman's Certificate (now Seaman's Book). IMlustration. Source: BIR Ruling DA (EIT-016) 492-2009, Sept. 4, 2009 Interest income from long-term Individual trust or long-term investment management arrangements with a bank is exempt from the 20% final WT. This BIR ruling is based on the following fact 8 Co., a domestic universal bank, intends to launch new products or accounts namely: B Co. Personal Retirement Account and 8 Co, Personal Pension Account. These are long-term Individual trust or long-term investment management arrangements. Under these arrangements, the client, as trustor or principal, ‘contributes funds to an account and & Co., as the trustee or Investment manager, holds and menages the fund for the future needs of the client/trustor/prineipal, particularly at retirement. The objective of the accounts is primarily to provide supplemental funds to individuals for their retirement in addition to ‘government or company retirement plans. ‘The pertinent features of thé new products or accounts are: 2. Eligible trustors/prinelpals are limited to individuals who are Filipino citizens or resident aliens; 1b. The underlying agreements are non-negotiable and nen-transferrabie and will comply with the BSP requirements for long-term trust and investment management accounts; c. There will be a five-year holding peried for the amounts contributed into the accounts; 4d. If the principal is withdrawn within the five-year holding period, interest income shall be subject to a final WT at the applicable rates depending on the holding perlod specified under Section 24 (8) (1} and 25 (A) (2) of the Tax Code, as follows: Holding period ‘Applicable tax rate Four years to ess than five years om “Three years to less than four years 12% [[Less than three years 720% fe. The funds will be Invested In long-term (more than five years) and/or short-term (Five years cr fess) investment outlets 52‘The exemption continues ragardless of the terms of the Investment or maturity of the instrument in which the longterm deposit or Investment is subsequently Invested (see (e) above). The withdrawal of the principal deposit/investment before the fifth year will subject the entire earnings to a final WT depending (on the holding period of the instrument in accordance with the above schedule. ALLOWABLE DEDUCTIONS Allowable deductions are items or amounts, which the law allows to be deducted fram gross income in order to arrive at the taxable income. Deductions from gross income from business are discussed in another chapter. 1. From compensation income a. Basic personal and/or additional exemptions; and b. Premium payments on health and/or hospitalization insurance, 2. From business income a. Ba b. Premium payments on health and/or hospitalization insurance; personal and/or additional exemptions; €. ltemized deductions under the Tax Code (Items A-I, Section 34); and d. Optional standard deduction. In place of the itemized deductions, the individual taxpayer may opt for the optional standard deduction (OSD) nat to exceed 40% {before R.A. 9504, OSD was 10% only) of his gross sales or gross receipts, as the case maybe. if the individual is on the accrual basis of accounting for his income and deductions, the OSD shall be based on the gross sales during the taxable year. On the other hand, if the individual employs the cash basis of accounting for his income and deductions, the OSD shall be based on his gross receipts during the taxable year. Note that cost of sales in case of individual seller of goods, or cost of services in the «ase of individual seller of services, are not allowed to be deducted for purposes of of the OSD. Personal Exemptions Personal exemptions are arbitrary amounts allowed as deductions fram gross income of the individual taxpayer from compensation, business (self-employment) or practice of Profession. Personal exemptions in a sense represent the personal, living or family ‘expenses of the taxpayer, 53Kinds of Personal Exemptions . 1, Basic personal exemption 2.- Additional exemption; This exemption is further allowed to the taxpayer by reason of his qualified dependent children Basic Personal Exemption 7 Republic Act 9504, which amended Republic Act 8424, otherwise known as the National Interfial Revenue Code, was signed into law on June 17, 2008. This law provides that for purposes of deterinining the tax provided in Section 24(A), there shall be allowed a basic personal exemption amounting to P50,000 for each individual taxpayer regardless of status. In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. Addi nal Exemption ‘An individual, whether single or married, shall be allowed an additional exemption of P25,000 for each dependent child not exceeding four (4) children. The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children. The total amount of additional exemptions that may be claimed by both shall not’ exceed the maximum additional exeriptions allowed for four (4) children. The husband shall be deemed the proper claimant of the additional exemption unless he waives his right in favor of his wife. But if the spouse of the employee is unemployed or is a non-resident citizen deriving income from foreign sources, the employed spouse within the Philippines shall be automatically entitled to claim the additional exemptions for children. The above basic personal and additional exemptions shall apply after the transitory period. Ad ional Exemption for Dependents per R.A. 10165, the Foster Care Act of 2012 The definition of the term “dependent” under Section 35(B) of the National Internal Revenue Code of 1997 (NIRC), has been amended to include a “Foster Child.” 54.Parent/s Brother/sor _Chiid/ren Sister/s Living with the taxpayer v Vv Depending upon the taxpayer for chief support v Not more than 21 years old Unmarried Not gainfully employed ‘Mentally or physically defective regardless of age Pena eateda HSU esi ead Living with the person giving support does not necessarily mean actual and physical dwelling together at all times and under all circumstances. Thus, the additional exemption applies even if a child or other dependent is away at schoo] or on a visit. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family irrespective of the question of support. Chief support means principal or main support (such as paying for the rent and spending for the food of the dependent}. It is more than one half (50%) of the support required by the dependent, In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the basic and additional exemptions. For each legally married employee, the amount of personal exemption allowed is 32,000, A married individual deriving Income within the Philippines whose spouse is unemployed or is a non-resident citizen deriving income from foreign sources, shall be entitled to a personal exemption of P32,000 only. Transitory Basic Personal and Ad ional Exemptions The implementing Revenue Regulations 10-2008 was made effective on July 6, 2008 so the basic personal and additional exeniptions for calendar year 2008 shall be as follows: Jan. 1 to July 6 to 2008 _duly5,2008__Dec. 31, 2008 Total Basic Personal Exemption Single 10,000 25,000 35,000 Head of the Family 12,500 25,000 37,500 Married 146,000 25,000 41,000 ‘Additional Exemption For Every Qualified Dependent Child 4,000 12,500 16,500 56Mlustration: On July 16, 2008, Mr. Marriott married his girlfriend who was already four (4) months pregnant. On Dec. 26, 2008, the wife gave birth to twins. Earnings from Jan. 1 to July 5, 2008 was P150,000 and for the remainder of the year, he earned P200,000 more. The tax due for 2008 is computed as follows: Compensation Income (Jan. 1 to July 5, 2008) (Commpensation income (July 6 to Dec. 31, 2008) ‘Total Compensation for 2008 Less Basic Personal Exemption ‘Additional Exemptions (P16,500 x 2) ‘Taxable Compensation Income ‘Tax Due: On P250,000 26,000 x 30% Total 150,000 200,000 41,000 33,000 350,000" 74,000 276,000 50,000 7,800 P57, B00, In all of the illustrations that follow, assume that the individual taxpayer is a resident itizen and is either earning compensation income or business/professional income. In each illustration, the basic personal and additional exemptions are determined. Wustrations: For Taxable Year 2015 1. Leonardo D. Is single, supporting his studies and living by himself. 2. Jennifer L., single, supports herself and parents who live with her. 3. Demi M., legally separated who gains custody of her only child, a minor, by her husband, 4, Michael 0. Is married to Catherine Z. He Is supporting the education of a younger brother, still a minor, 5. Bruce W., married, living with his wife and son who is 22 years old but mentally retarded, 6. Madonna is married with 2 minor children, Her husband walves his right to claim exemptions. For Taxable Year 2007 1. Leonardo D. is single, supporting his studies and living by himself. 2. Jennifer L., single, supports herself and parents who live with her. 3. Demi M., legally separated who gains custody of her only child, a minor, by her husband. 4, Michael D. is married to Catherine Z, He is supporting the education of a younger brother, still a minor. 37 Basic Personal 50,000 50,000 50,000 50,000 50,000 50,000 Basic Personal 20,000 25,000 25,000 32,000 Additional None None 25,000 None 25,000 50,090 Additional None None 8,000 None5. Bruce W., married, living with his wife and son ‘who is 22 years old but mentally retarded. 6. Madonna Is married with 2 minor children, Her husband waives his right to claim exemptions. 32,000 8,000 32,000 116,000, Illustrations: Assume that the taxpayer is a resident citizen earning compensation or b 2015: iness/professional income in the following illustrations. ‘The subject taxable year Is Circumstances involving change of status Basic Personal Additional Britney S., single, has a legally adopted daughter, still a minor. Her parents live with and depend on her for their chief support. Before the year 2015 ended, Britney, met a car accident and died. How much exemption shall her estate be entitled to? Her estate may still claim her basic personal exemption as head of the family*. it may also claim additional exemption for her legally adopted daughter. It isos If the taxpayer died at the close of the Russell C, thought he was to remain single forever. But ast December, he met Jodie F. and afraid to lose her, he proposed marriage to her right away. His parents are abroad such that his entire income goes to his pocket. Eventually they got married on Dec. 13, 2015. Will Russell's basic personal exemption increase or will remain the same? Before Russell got married, he was entitled to P50,000 basic personal exemption being single* with no qualified dependent. In taxable year 2015, he may claim P50,000 as basic personal exemption, _the same amount entitled to @ married* Individual. Kevin C. got married in 2015. He and his wife were blessed with a baby boy that same year. Before the year 2015 ended, the couple expected their second baby. The baby was eventually born on December 31. Is Kevin entitled to additional exemption for the second baby? Yes, he Is. Hence, his additional exemption now is _P50,000 (P25,000 x 2) from the previous year’s P25,000. Michelle P., married, whose hushand is unemployed, has 3 qualified dependent children. The youngest of the three acquired a serious illness In 2015 and dled, May Michelle still claim the additionai exemption pertaining to this child? Yes. It is as ifthe child died at the close of _the year. 50,000 25,000 50,000 None 50,000 P50,000__ 50,000, 75,000‘Alec B. has a daughter, 20, unmarried who lives with and is dependent on him for her chief support. She just passed the board exam for teachers in February 2015 and was immediately hired as pre-school teacher at Bright Future. May Alec be still entitled to the additional exemption for his daughter? Yes. It sas if the daughter got gainfully employed at the clase of the year. 50,000 25,000 “Per RA. 9504, individual taxpayers regardless of status are entitled to basic personal zemption of P50,000 each. In the old law, the Individual taxpayers were classified into three types with varying basic personal exemptions allowed, individual Taxpayers Allowed Personal Exemptions 1. Citizens 2. Resident Alien 3. Non-Resident Alien Non-resident alien engaged in trade or business in the Philippines (NRA-ETB) is allowed basic exemptions under certain conditions but is not allowed additional exemptions. His basic personal exemption shall be the lesser amount between that allowed by the income tax law of the alien’s country to Fi therein and that allowed by our Tax Code to Filipino citizens and resident aliens. On the other hand, non-resident aliens not engaged in trade or business In the Philippines (NRA-NETB) are not allowed basic and additional exemptions, 4, Estates and trusts, which are, for purposes of personal exempt single individual. lustration. Source: BIR Ruling DA-359-2004, June 25, 2004 The Tax Code entities the benefactor of a dependent senlor citizen to the basic personal exemption of a head of @ family. However, cating for such dependent senior citizen shall not entitle the benefactor to claim additional exemption allowed a married individual or head of a family with qualified dependent children, However, In the case Agrifino C. Baybay vs. the Honorable Commissioner of internal Revenue, the Court of Tex Appeals (CTA) ruled that under the Senior Citizens Law, the term “dependent” extends to senior ditizens; hence, their benefactors should be allowed to ciaim the additional exemptions for qualified dependents. The IR appealed the decision to the Court of Appeals (CA), but It was dismissed due to a technicality. Since the case did not reach the Supreme Court (SC), the decision did not have the force and effect of a law under the “doctrine of stare decisis.” Hence, the decision applies only to Agrifino Bayabay's ‘ase and only he can invoke the same for his own benefit. 59Premium Payments on Health and/or Hospitalization Insurance The following conditions must be met: 1. The insurance shall be taken by the individual taxpayer himself for his family; 2. The amount being claimed shall not exceed P2,400 a year or P200 a month per family; 3. The family has gross income of P250,000 or less for the taxable year. Total family income includes primary income and other income from sources received by all members of the nuclear family, Le. father, mother, unmarried children living together as one household, or a single parent with children. A single person living alone is considered as a nuclear family. For married taxpayers, only the spouse entitled to claim for additional exemption is allowed this deduction. Mustration: Brigitta, single mother, is a government employee who earns a monthly gross compensation income of P18,000. Effective Jan. 1, 2015, she took a hospitalization Insurance for her and her 2-year old son. She right away paid the annual premium of P2,400. However, had she opted to pay this premium monthly, an additional P50 pesos per month is charged. Is she entitled to the deduction? If so, how much? . The first condition that the Insurance shall be taken by the individual taxpayer himself for his family has been satisfied. The second condition speaks for the annual limit of 2,400 and monthly limit of P200 for each family. The actual premium paid by Brigitta for the whole year was 2,400. This qualifies her to claim the maximum P2,400. If the annual premium were lower than P2,400, the lower amount shall be allowed. Had she chosen to pay the premium monthly, the total payment would have been P3,000 (P250 x12 months). If this is the case, she can only claim P2,400—the maximum limit. ‘The third condition is likewise satisfied. The family gross income, she being the sole bread winner, is P216,000 (P18,000 x 12), far lower than the P250,000 maximum annual gross income limit. Premium payments on health and/or hospitalization insurance may be deducted from the gross business/professional income or from the gross compensation income of a resident citizen, non-resident citizen and resident alien. ‘TAXABLE INCOME AND TAX DUE Taxable income is defined as the peitinent items of gross income less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code or other special laws. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax due. Note that in the succeeding 60.illustrations, computations are sequenced and patterned after the actual BIR income tax return forms. Depending on the taxpayer involved, taxable income may refer to either one of the following: 1. “Net compensation income. The compensation income arrived at after subtracting from gross compensation income derived by resident citizens or resident aliens, basic personal and additional exemptions; and premium payments, if any, on health and hospitalization insurance under certain conditions. For resident citizen and resident alien ear 1g purely compensation income: Gross Compensation Income 200% Basic Personal Exemption 00 Add: Additional Exemptions 00% Total Exemptions 700 ‘Add: Premium Paid on Health and/or Hospitalization Insurance 00% Less: Total Exemptions and Premium Payment Net Compensation Income ‘Tax Due (Sec. 24(A)) 2. Gross compensation income. The gross compensation income derived by aliens including Filipinos employed by regional and area headquarters and regional operating headquarters of multinational companies, by offshore banking units, or by foreign petroleum service contractors and sub-contractors. For non-resident alien employed by such firms earning purely compensation income: Gross Compensation Income 20K Muttiply by tax rate 15% Tax Due 200% 3. Net income. The income arrived at after subtracting from the gross income (from business or profession including compensation income) of a citizen, resident alien, ‘and non-resident alien if the latter is engaged in trade or business in the Philippines the deductions of the taxpayer, including the basic personal and additional exemptions, if any.For citizen, resident alien and non-resident alien. engaged in trade or business In the Philippines: _a. earning purely business or professional Gross Business Income 20x Itemized Deduction or 40% OSD 200 Basic Personal Exemption 2001 Add: Additional Exemptions 200 Total Exemptions v0 Premium Paid on Health and/or Hospitalization Insurance 20x : Less: Total Allowable Deductions 200% Net Income 200K Tax Due (Sec. 24(A)) 20K b. earning both business/professional and compensation income Gross Business Income roe Gross Compensation income roo Total Gross Income v0 Itemized Deduction of 40% OSD 30K Basic Personal Exemption 70 ‘Add: Additional Exemptions rox Total Exemptions 00% Premium Paid on Health and/or Hospitalization Insurance 200 Less: Total Allowable Deductions roe Net Income 200 Tax Due (Sec. 24(A)) = 4. Entire or gross income. The entire or gross income (from business or profession, including compensation income) without any deduction with respect to non- resident aliens not engaged in trade or business in the Philippines. - For non-resident alien not engaged in trade or business in the Philippines ear business or professional income, compensation income or combination of both: Gross Income 0% Multiply by final tax rate 25% Tax Due 20x 62Notes: For married individuals, the husband and wife shall compute separately the tax due on their respective taxable income. if any income cannot be definitely attributed to or identified as, + income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable 2. The requirement for entering centavos on the income tax return has been eliminated. If the amount of centavos is 49 or less, drop down centavos (e.g. P100.49 = P100). If the amount is 50 centavos or more, round up to the next peso. 3. Creditable withholding tex withheld from income and/or tax credit is deducted from the tax due; penalties, if any shall be added to the tax due. (These are dlscussed In later chapters.) Mlustration 1: Mr. Antonio B., the taxpayer, is married, with 6 qualified dependent children. Texable year is 2015. The following data are available: Gross Compensation Income 240,000 Premium Payment on Health insurance 10,000 Compute the taxable income and tax due if Mr. Antonio 8. is a resident citizen, Gross Compensation Income 240,000 Personal Exemptions P 50,000 Add: Additional Exemptions (P25,000 x 4) 100,000 Total Exemptions 150,000 ‘Add: Premium Paid on Health and/or Hospitalization Insurance 100 Less: Total Exemptions and Premium Payment 152,400 Net Compensation Income P_ 87,600 Tax Due (Sec. 244(A)) 70,000 P 8,500 17,600 © at 20% 3,520 12,020 ‘The tax due is the same if Mr. Antonio B. were a resident alien because gross income is purely within the Philippines. If there were gross income without, the computation of the taxable income and eventually the tax due of the resident citizen would include such income. 6Mlustration 2: Compute the taxable income and tax due if Mr. Antonio B. is a non- resident alien employed by a regional operating headquarter of a multinational company. Gross Compensation Income 240,000 Multiply by tax rate. 15% Tax Due P 36,000 Illustration 3: Compute the taxable income and tax due if Mr. Antonio B. is a non- resident alien engaged in trade or business in the Philippines. The alien’s country allows full reciprocity to Filipino citizens not residing therein, Assume further that he earned purely business income and that he opted for OSD. Use the following additional data Gross Business income 600,000 Itemized Deductions 300,600, Gross Business Income 600,000 40% OSD 240,000 Basic Personal Exemption 50,000 Less: Total Allowable Deductions 290,000 Net Income 310,000 Tax Due (Sec. 24(A)): 250,000 50,000 60,000 st 30% 18,000 68,000 Note that a NRA-ET is not allowed additional exemption and premium payment on health and/or hospitalization insurance. Illustration 4: Compute the taxable income and tax due if Mr. Antonio B. is a resident alien, Assume that he earned both business and compensation income in the Philippines and he used itemized deductions. . Use figures in previous illustrations if needed. Gross Business Income 600,000 Gross Compensation Income 240,000 Total Gross Income : 840,000 Itemized Deductions 300,000 Basic Personal Exemption P 50,000 ‘Add: Additional Exemptions 100,000 Total Exemptions 150,000 Less: Total Allowable Deductions 450,000 Net Income 330,000, 64Tax Due (Sec. 24(A)): : 250,000 50,000 140,000 at 30% 42,000 Premium is not deductible because total gross income exceeded the P250,000 limit. Mustration 5: Compute the taxable income and tax due if Mr. Antonio B. is a non- resident alien not engaged in trade or business. Assume that he earned both business and compensation income. Use figures in previous illustrations if needed. Gross Compensation Income 240,000 Gross Business Income ____609,000_ Gross Income 840,000 : Multiply by tax rate 25% Tax Due 240,000, GRADUATED INCOME TAX SCHEDULE (revised Section 24(A)) Depending on the individual taxpayer involved, the tax due on compensation income and business/professional income is computed using the graduated tax schedule. iftaxable But not ofthe come is over, ‘over Tax due is Plus excess over P 10,000 5% P 10,000 30,000 P 500 10% P 10,000 30,000 70,000 2,500 15% 30,000 70,000 140,000 8,500 20% 70,000 140,000 250,000 22,500 25% 140,000 250,000 500,000, 50,000 30% 250,000 500,000 125,000 32% 500,000 DECLARATION OF-INCOME TAX FOR INDIVIDUALS Self-employed individuals are required to file a declaration of their estimated income for the current taxable year on or before April 15 of the same taxable year. Generally, self- employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him asa sole proprietor or by a general professional partnership of which he is a member. This estimated tax shall be paid in four instalments as follows: Instalment Date First April 15 Second ‘August 15, Third November 15 Fourth April 15 65.The final adjusted Income tax return is supposed to be filed and paid in time for the fourth instalment on or before April 15 of the following calendar year. In the quarterly and final returns, gross income and deductions shalll be computed on a cumulative basis. Personal exemptions shall be allowed in the final return only. Financial statements are not required submissions on the 4st, 2nd and 3rd instalments. Estimated tax means the amount which the individual declared as income tex in his final adjusted and annual income tax return for the preceding taxable year minus-the credits allowed. If, during the taxable year, the taxpayer reasonably expects to pay a bigger come tax, ‘he shall file an amended declaration during any interval of instalment payment dates. The return shall be filed with and the income tax shall be paid in the accredited .bank in the city or municipality where the principal place of business is located. Non-resident Filipino citizens, with respect, to income from without the Philippines, and non-resident allens not engaged in trade’ or business in the Philippines, are not required to render a declaration of estimated Income tax. INDIVIDUALS EXEMPT FROM INCOME TAX. A. Non-resident citizen who is: 1. Acitizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. Acitizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis, 3. A citizen of the Philippines who works and derives income from abroad and whose ‘employment thereat requires him to be physically present abroad most of the time during the taxable year. 4, Acitizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the taxable year in which he arrives in the Philippines, with respect to his income derived from sources abroad u the date of his arrival in the Philippines. B. Overseas Contract Worker, Including Overseas Seaman An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. A seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade will be treated as an overseas contract worker, 66Note that a Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine Embassy/Consulate {s not to be treated as @ non-resident citizen, hence his income is taxable. Barangay ro Business Enterprises (R.A. 9178 or BMBE Law) More than two years after the passage of the Act, the Department of Finance (DOF) issued Department Order (DO) 17-2004—the Guidelines to Implement the Registration of Barangay Micro Business Enterprises and the Availment of Tax Incentives under Republic Act 9178 or The Barangay Micro Business Enterprises (BMBEs) Act of 2002 (passed into law on Nov. 13). DO 17-2004 took effect on May 14, 2004; the BIR circularized the same through RMC 40-2004 dated May 26, 2004. BMBEs refer.to any business enterprise engaged in the production, processing or manufacturing of products or commodities, including agro-processing, trading and services, whose total assets including those arising from loans but exclusive of the land on which the particular business entity's office, plant and equipment are situated, should not be more than P3 million. Services shall exclude the practice of a licensed profession. It is believed that BMBEs like small sari-sari stores, bakeries, and handicraft shops will boost the economic development of the country, hence, BMBEs are granted incentives and benefits. One incentive is the exemption from income tax on income arising from the registered 8MBEs operations. The Act also exempts interest, commissions and discounts derived from loans by credit institutions to BMBEs from the gross receipts tax (GRT). All the BMBEs need to do is to register as a BMBE with the Office of the City or Municipal Treasurer. The certificate of authority issued to the BMBE Is valid for two years and may be renewed for the same period, Expanded Senior Citizens Act of 2010 The exemption from the payment of individual income taxes is available to senior citizens who are considered to be minimum wage eamers in accordance with Republic Act 9504, Senior citizens are also exempted from value-added tax (VAT) on certain good and services as discussed in Chapter 10. o7E, Personal Equity and Retirement Account Act of 2008 (R.A. 9505) Under R.A 9505 and Revenue Regulations 7-2011, personal equity and retirement account (PERA) shall refer to an individual's voluntary retirement account established from his PERA contributions and/or his employer contributions, for the purpose of being invested solely in an eligible PERA investment product (e.g. unit vestment trust fund, mutual fund, annuity contract, pension plan, shares of stock traded in the local stock exchange, exchange-traded bonds, government securities) duly approved by the concerned regulatory authority (ie. BSP, SEC, Office of the Insurance Commission). PERA Contributor and Contributions Contributer refers to a natural person who 1) establishes and contributes to a PERA; 2) has a ‘Tax Identification Number (TIN); and 3) has the capacity to contract. A person over 55 years of age may still open a PERA and be a qualified contributor. Qualified employer's contribution refers to the contribution made by the employer (whether a single proprietor, a partnership, or a corporation) from the private sector to the PERA established by his/its employee which, together with such employee's contribution, if any, will not exceed such employee's qualified PERA contribution. Qualified PERA contributions refer to the contributions of the contributor to his PERA, which will not exceed P100,000 per calendar year (if the contributor is a non-overseas Filipino), or P200,000 per calendar year {if the contributor is an overseas Filipino or in representation of an overseas Filipino), and according to the provisions of Section 6 of the Regulations, subject to the adjustments authorized by the Secretary of Finance, taking into consideration the present value of the contribution using the Consumer Price Index as published by the National Statistics Office, fiscal position of the Government and other pertinent factors. ‘The aggregate maximum qualified PERA contributions in one calendar year will be as follows: ‘Maxiraurn Qualified PERA Contributor _ Contribution In Pesos™ Unmarried Filipino Chizen 100,000 Married Filipina Citlzen and both spouses quallly as 100,000 for each qualified Contributor contributor ‘Married Filipino Citizen and only one spouse qualifies asa 7 100,000 Contributor Trmarried Overseas Filipino 200,000, ‘Married Overseas Filipino whose legitimate spouse Is neither 200,000 ‘an Overseas Filipino nora qualified Contributor Warried Overseas Fillpino whose legitimate spouse and 200,000, cumulative for the spouse children (not otherwise disqualified as contributors) of an ‘and children in representation of Overseas Filipine who did not directly open any PERA the Overseas Filipino | Married Overseas Flipino whose legitimate spouse Is also an 200,000 for each qualified ‘Overseas Filipino oo contributor Married Overseas Filipino whose legitimate children are not | _P200,000 for the Overseas Filipino ‘Overseas Filipinos and are not qualified Contributors. = 68“Or its equivalent in any foreign currency at the prevailing rate at the time of actual contribution. Contributions to the PERA amounting to more than P100,000 or P200,000, as the case may be, will not be accepted by the administrator under the PERA Account. However, they may be accepted by the administrator as other savings/investment account after appropriate advice given to contributor but will not be entitled to any benefit under the PERA Act. Establishment of a PERA In establishing a PERA,.a contributor should not have more than five accounts at any one time; the contribution should not exceed the maximum allowed; shall designate and maintain only one administrator for all his PERA; that each PERA shall be confined to one ‘category of investment product; and should submit proof of income earnings for the year or to be earned for the year when the PERA contribution was made. In addition, if the contributor is an overseas Filipino, he shall be required to prove his status thru a certificate of employment issued by the Philippine Overseas Employment Agency or by a certification from the Bureau of Immigration on his retention or reacquisition of citizenship under the “Citizenship Retention and Reacquisition Act of 2003.” The legitimate spouse and child will be required additional documents. ‘The PERA contributions shall be maintained with an administrator who is duly registereds with the BIR and pre-qualified with the concerned regulatory agency. PERA Contributions and Tax Credit The qualified contributor is entitled to a tax credit of 5% on the aggregate qualified PERA contributions made in a one calendar year. The entitlement is allowed to be credited only against the contributor’s income tax liability. However, if the contributor is an overseas Filipino or Is self-employed, the 5% tax credit may be claimed against an¥ national internal revenue tax liabilities. Tax credits arising from PERA contributions shall not be refundable. ‘An employer may contribute to his employee's PERA. Such contribution shall be in addition to, and not in lieu of, the employer's contribution to the Social Security System or the mandatory retirement benefits under the Labor Code. The contribution shall not form part of the employee's taxable Income; hence, exempt from withholding tax on compensation or fringe benefit. The employer's contribution and all the benefits shall belong to the employee and shall not in any way inure to the benefit of the employer. However, the employer shall not be entitled to any 5% tax cradit from its contribution to an employee’s PERA, but he may claim the amount as a deduction from his gross income subject to limit. The employee also retains the prerogative to make Investment decisions pertaining to his PERA, including the contribution made in his favor by his employer. 69Tax Treatment of PERA Investment Income Investment Income of the contributor consisting of all income earned from the investments and relnvestments of his PERA assets in the maximum amount will be exempt from the following taxes: 1. The FWT on interest from any currency bank deposit, yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, Including @ depository bank under the expanded foreign currency deposit system; 2. The capital gains tax (CGT) on the sale, exchange, retirement or maturity of bonds, debentures or other certificates of indebtedness; 3. The 10% tax on cash and/or property dividends actually or constructively received from a domestic corporation, including a mutual fund company; 4, The CGT on the sale, barter, exchange or other disposition of shares of stock in a domestic corporation; and 5. Regular income tax. Each specific Investment product must be approved by the concerned regulatory authority before its Income or distribution can be granted tax incentives and privileges. However, non-income taxes (e.g. percentage tax, VAT, stock transactions tax on the sale, barter or exchange or through Initial public offering, and DST) inherent in the investment transaction are imposable. Distributions and Early Withdrawals Qualified PERA Distribution refers to the distribution of the PERA Assets, after the contributor and/or his employer has made qualified PERA contributions and/ or qualified employer's contributions for at least 5 years (which need not be consecutively made for 5 years), and after the contributor reaches the age of fifty five (55) years, or upon the death of the contributor Irrespective of the age of the contributor and the number of yearly contributions made by the contributor at the time of his death. In the distribution of the proceeds to the contributor or to the helrs/beneficiaries upon the death of the distributor, the proceeds shall be excluded from the gross income of the recipient and shall not be subject to income taxes. Finally, the PERA asset may not be transferred, sold, or used in any other manner in contradiction with the PERA law. Furthermore, the PERA asset shall not be considered as property of the contributor for the purpose of insolvency and estate taxes. Early withdrawal of the PERA contribution without valid and just causes shall: subject the contribistion to a penalty in the amount total to the tax exemptions and privileges enjoyed under the law. The same shall be reckoned from date the benefit accrues to the contributor (e.g., on the date the tax credit has been claimed in the tax return; on the date the employer contributed to the employee's PERA, etc.). 70Revenue Memorandum Circular 34-2013, amended by Revenue Memorandum Circular 73-2013, prescribe the guidelines on the taxation of compensation income of Philippine nationals and alien individuals employed by foreign governments, embassies, diplomatic missions, and international organizations situated in.the Philippines. ‘Section 2. Tax Treatment of Compensation income ‘The tax treatment of Philippine nationals and alien Individuals on compensation income received by them from foreign governments, embassies, missions and international organizations shall be as fellows: ‘Those Employed by Foreign Embassias/Diplomatic Missions Under Articles 34 and 37 of the Vienna Convention on Diplomatic Relations, only the following Individuals shail be exempt from Philippine Income tax: 1. Diplomatic agents who are not natlonals or permanent residents of the Philippines; 2. Members of the family of the diplomatic agent forming part of his/her household who are not Philippine nationals; 3, Members of the administrative and technical staff of the mission, together with the members of their families forming part of their respective households who are not nationals or permanent residents of the Philippines; ‘Members of the service staff of the mission who are not nationals or permanent residents of the Philippines; and 5. _ Private servants of the mission who are not nationals or permanent residents of the Philippines. Those Employed by Aid Agencies of Foreign Governments 1. Japan International Cooperation Agency (JICA) ~ Under paragraphs 1 and 2, Article XI, of the ‘Agreement on Technical Cooperation batween the Government of Japan and the Government of, the Republic of the Philippines, only JICA resident representatives and his/her staff who were dispatched from Japan shall not be subject to Philippine income tax. 2. Deutsche Gessellschaft far Internationale Zusammenarbelt (612) ~ Under paragraph 2, Article 5, of ‘the Agreement between the Government of the Federal Republic of Germany and the Government of the Republic of the Philippines concerning technical co-operation, only German specalists of German construction and consulting firms shall be exempt from Philippine income ax. 3. Australian Agency for International Development {AUSAID) ~ Based on Article 33. of the Memorandum of Subsidiary Agreement between the Government of the Republic of the Philippines and the Government of Australia Relating to the Philippines-Australia Governance ity, salaries, wages and other similar remuneration pald by the Government of Australia or by ‘Australian personnel, firms, Institutions and organizations to any_person performing work under the Memorandum shall be exempt from Philippine Income tax. 4, Canadian International evelopment Agency (CIDA) — Under Article Vill of the Resolution Concurring in the General Agreement on Development Cooperation between the Government of the Republic of the Philippines and the Government of Canada, only Canadian personnel, Canadians or nen-Phillppine citizens working in the Philippines on any project established under a subsidiary agreement, who derive income from Canadian ald funds as may be provided under subsidiary agreement, shall be exempt from Philippine income tax. maAdvisory Committee on Voluntary Foreign Aid (USA) ~The agreement between the Philippines and the US covered by the Exchange of Notes between thé two countries entitles eligible agencies registered with the Advisory Committee on certain relief tems and other supplies and equipment ‘meant to carry out the operations of the sald agencles In the country. However, the exemption does not cover salaries and emoluments pald to employees of sald agencies which are situated in the Phillppines. Any exemption from Philipsine income tax must be granted under the terms of other International agreements or particular provisions of existing laws covering the same, Some of these agencies are as follows! a. Cooperative for American Relief Everywhere (CARE) — Under paragraph 3(b)(2) of the Agreement between the Government of the Philippines and Cooperative for American Everywhere, only CARE employees who are not Philippine nationals are exempt from Philippine income tax. b. Foster Parents Plan International, Inc. (FPPI or PLAN) ~ Under paragraphs 3 & 5, Article Ill, of the Memorandum of Agreement between FP?! and the Government of the Republic of the Philippines, only non-Filipino staff members of the PLAN who receive salaries and stipends in US dollars shall be exempt from Philippine income tax. The privilege shall not apply to locelly- hired Filipino nationals and resident allens working with the PLAN, [Nid Agencies and Other Organizations Exempt under Philippine Laws a. Ford Foundation, Rockefeller Foundation, Agricultural Development Council, Inc. and Asia Foundation ~ Based on Section 2 of R.A. 3538, as amended by Presidential Decree (PO) No. 1127, only non-tlipino staff members of the foragoing organizations recelving salarles and stlpends in US dollars shall be exempt from Philippine income tax. b. Internatiénal Institute of Rural Reconstruction (IIRR) - Applying Section 2 of P.D. 728 in relation to R.A. 3538, only non-Filipino staff members of the IRR receiving salaries and stipends In US dollars are exempt from Philippine income tax. Catholic Relief Services — NCWC and Tools for Freadom Foundation — Under Section 2 of R.A. 4481, An Act Exempting the Catholic Relief Services - NCWC and the Tools for Freedom Foundation from the Payment of Certain Taxes, only non-Filigino staff members of the Catholic Relief Services - NCWC and the Tools for Freedom Foundation who receive salaries and stipends in US dollars shall be exempt from Philppine income tax. Those Employed by the United Nations (UN) and its Specialized Agencies 4 UN ~ Based on provisions of the UN Privileges Convention, officials of the UN shall be exempt from Philippine Income tax,’ regardless of thelr nationality or place of residence. However, applying Sec. 17, only those officials whose names have been communicated to the Philippine government (through the Department of Forelgn Affairs) shall be covered by the tax exemption. ‘The provisions of the UN Privileges Convention apply to those officials employed by the United Nations, its (2) principal organs [the General Assembly, the Security Council, the Economic and Social Council, the Trusteeship Council, the International Court of Justice, and the Secretarlat), and (il) taose employed by its agencies, departments, offices, funds, programmes and bodies [United Nations Development Programme (UNDP), United Nations Population Fund (UNFPA), Office of the United Nations High Commissioner for Refugees (UNHCR), United Nations Children's Fund (UNICEF), World Food Programme (WEP), Office of the United Nations High Commissioner for Human Rights (OHCHR), and other agencles, departments, offices, funds, programmes and bodles as may be confirmed by the United Nations], excluding Its Specialized Agencies. 72Specialized Agencies of the UN International Labor Organization (ILO) ‘The Food and Agriculture Organization (FAO) ‘The United Nations Educational, Sclentific and Cultural Organization (UNESCO) ‘The International Civil Aviation Organtzation (ICAO) ‘The International Monetary Fund (IMF) ‘The International Bank for Reconstruction and Development (IBRD) ‘The World Health Organization (WHO) ‘The Universal Postal Union (UPU) ‘The International Telecommunication Union (ITU) J. Any other agency in relationship with the United Nations like the Interriational Fund for ‘Agricultural Development (IFAD), International Maritime Organization (IMO), United Nations Industrial Development Organization (UNIDO), World Tourism Organization (UNWTO), World Intellectual Property Organization (WIPO), Word Meteorological Organization (WMO), International Centre for Settlement of Investment Disputes (ICSIO), ' International Development Association (IDA), International Finance Corporation (IFC), and Multilateral Investment Guerantee Agency (MIGA) Fartesogs Applying Article VI, Sec. 19(b) of the Convention on the Privileges and Immunities of the Specialized Agencies of the UN (SA. Convention) In relation to Sec. 18(b) of the UN Privileges Convention, officials of the UN Specialized Agencies shall be exempt from Philippine income tax, regardless of their nationality or place of residence. However, In order that the tax immunities under the SA Convention may be properly invoked, the Philippine Government should have acceded to the terms of the Convention and indicated in the Instrument of accession the specialized agencies with respect to which it seeks to apply the Provisions of the Convention. Other Specialized Agencies not Included in the instrument of ‘accession may be nevertheless be covered by the Convention upon the submission of subsequent ‘written notification to the UN Secretary General. Based on available Information, the following Specialized Agencies are covered by proper instruments of accession or written notifications by the Philippine Government: ILO, FAO, UNESCO, ICAO, IME, IBRD, WHO, UPU, ITU and IFC. For this reason, officials of the above UN Specialized Agencies shall be exempt from Philippine income tax, regardless of their nationality or place of residence. This rule shall apply notwithstanding disparities In the Imminities provided in the constitutional Instruments of the Specialized Agencies However, under Section 28 of the SA Convention, the names of officials of the Specialized ‘Agencies enumerated above must be properly communicated to the Philippine Government {through the Department of Foreign Affairs) ‘The tax immunities and privileges of Specialized Agencies not covered by proper Instruments of ‘accession or written notification shall be taken from thelr respective constitutional instruments as ‘agreed to by the Philippine Government. Such Specialized Agencles cannot clalm tax immunities ‘and privileges beyond those provided in thelr constitutional Instruments, notwithstanding the provision of more comprehensive beneflts under the SA Convention. ey‘Those Employed by Organizations Covered by Separate international Agreements or Specific Provisions oftaw : Asian Development Bank (ADB) ~ Under Section 45(b), Article XI, of the Agreement between the ‘ADB and the Government of the Republic of the Philippines regarding the Headquarters of the ADB, only officers and staff of the ADB who are not Philippine rationals shall be exempt from Phiifppine income tax. 2. ASEAN Centre for Biodiversity (ACB) —"Under Article Vill (D}{1) and (3) of the Host Country Agreement between the Government of the Republic of the Philippines and the ACB, only non= Filipino citizens serving as staff of the ACB who receive salaries and stipends in foreign currency shall be exempt fram Philippine income tax. 3. International Rice Research Institute (IRR) ~ Under Section 4.5.3, Article VI, of the Headquarters Agreement between the Government of the Republic af the Philippines and the IRRI, only non- Filipino members of the staff of IRRI who receive salaries and stipends in US dolfars or other foreign currency are exempt from Philippine income tax. 4, Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA) ~ Under Section 1. of P.D. 177%, only non-Flipino citizens or non-resident aliens serving, as expert staff members of the SEARCA shall be exempt from Philiopine incorne tax. 5. Southeast Asian Ministers for Education Organization (SEAMEO) ~ Under paragraphs (3)(d) and (a), Article x1, of the Agreement between the Government of the Republic of the Philippines and ‘the SEAMEO Regarding the Temporary Operation of the SEAMEC Regional Centre for Educational Innovation and Technology (INNOTECH), only officers of the Regional Centre who are not Philippine nationals shall be exempt from Philippine Income tax. As a condition for the tax exemption, the names of the sald officers must be communicated to the Philippine government. 6. Southeast Asian Fisheries Development Center Aquaculture Department (SEAFDEC) ~ Under Section 3 of P.D. 292, only non-Filipino citizens who are employed as technical and scientific staff of the SEAFDEC Aquaculture Department are exempt from Philippine income tax. 7. International Organization for Migration (IOM) ~ Based on Article 4 of the Cooperation Agreement between the Government of the Republic of the Philippines and the IOM, the Director General, ‘the Deputy Director Genaral and the staff of the [OM shall be exempt from Philippine income tax, regardless of thelr nationality or place of residence, 8, _ International Seabed Authority (ISBA) ~ Under Article &(2)(c) and Article 9(2)(e) of the Protocol on ‘the Privileges and Immunities of the IS8A, officials of the ISBA, whether Philippine nationals or not, are exempt from Philippine income tax. The names of these officials must be communicated ‘to the Philippine Government through the DEA. With respect to experts and members of the ISBA. which are not considered officials thereof, only foreign nationals shall be entitled to tax exemption, 9, Partnerships In Environmental Management for the Seas of East Asia (PEMSEA) ~ Under Section 1 of Article Vi(D) of the Agreement between the Government of the Republic of the Philippines and ‘the PEMSEA establfshing PEMSEA Resource Facility Center, only aon-Filipino officials, officers and Staff of PEMSEA who receive salaries, emoluments, indemnities and pension/ provident benefits in US dollars or other foreiga currency are exempt from Philippiné income tax. 10. Press Foundation of Asta, Inc. (PFA) ~ Under Section 1 of R.A; 5459, An Act Exempting the Trustees of the Press Foundation of Asta, Inc., and its Grants from the Payment of Income, Gift, Compensating and. Resl Property Taxes, Dutlas-and ees, only non-Fillp!no and non-resident experts who are serving in the staff of PFA are exempt from Philippine income tax. 7411. International Development Law Institute (IDL!) ~ Under Section 22, Article 4, of the Agreement between the Government of the Republic of the Phillppines and the IDLI Relating to the IDLI/Asta Regional Training Office (ARTO), only non-Flllp!no citizens who are officials of the IDLI/ARTO are ‘exempt from Philippine income tax, 12, World Organization of Scout Movement (WOSM) ~ Under Paragraphs 3 and § of Article VI of the ‘Memorandum of Agreement between the Government of the Philippines and the WOSM, nan- Filipino staff members of WOSM who receive salarles and stipends In US dollars are exempt from Philippine income tex. The privilege shall not apply to locally-hired resident aliens. 13, International Center for Living Aquatic Resources Management (ICLARM) ~ Under Section 33, Article VI, of the Agreement between the Government of the Republic of the Philippines and ICLARM to establish snd office the Werldfish Center in the Philippines, only non-Filipino members Of the staff of ICLARM office in the Philippines are exempt from Philippine Income tax on thelr salaries, emoluments, indemnities and pension/provident benefits which are recelved in US dollars or other foreign currency. 14, Colombo Plan Staff College (CPSC) — Under No. 2 (c) & (2) and No. 3 of Article Vil of the Memorandum of Agreement between the Government of the Republic of the Phillppinés and the CPSC regarding the Operation of the College in the Philippines, only officers, faculty members, consultants, senlor and administrative staff of.CPSC who are nct Philippine nationals shall be exempt fram Philippine Income tax. The names of said officers and faculty members must be approved by the Department of Education and must be communicated. to the Philippine Government through the DFA. 15, Intemational Committee of the Red Cross (ICRC) ~ Paragraphs 2, 3 and 4 of Article 5 of the Headquarters Agreement between the Government of the Republic of the Philippines andthe International Committee of the Red Cross provide as follows: ICRC Delegates, who by definition ‘are Swiss nationals, and alien employees, their spouses and dependent members of their femilies shall enjoy @ status similar to that accorded to members and employees of missions of international and intergovernmental organizations and shall enjoy the privileges and immunities provided in the present Agreement, The ICRC Delegates and allen employees shall: ‘2. be Immune from the [urisiction ofthe judicial or administrative authorities af the Phillepines in respect to nets performed In the exerdse of thelr official funeto b, note obliged to give evidence as witness in matters relating to their offical fonction; & be exempt fram taxation In respect ofthe salaries and emoluments pald to them by the ICR; 0" It Is understood that these privileges and immunities shall not be enjoyed by Filipino nationals ‘working for the ICRC except for paragraphs (a) and (b) above, Thus, only Swiss nationals and alien employees, including their spouses and dependent members of their families, shall be exempt from Philippine income tax. Employees of Other Ald Agencies of International Organizations : The taxation of selaries and emoluments recelved by employees of aid agencies or international organieatlons not discussed In the Circular shall be evaluated based on the terms of existing articles of agreement, charters or host agreements, or on the provisions of existing laws granting tax exemptions or privileges to sald agencies or organizations. 75,‘Section 3. Filing of Income Tax Returns and Declaration of Compensation Income Philippine nationals and alien individuals who were not covered by tax exemption or immunities under duly recognized international agreements or local laws shall file thelr annual Income tax returns on or before the 15th day of April cach year using BIR Form 1700 or 2701, as may be applicable, declaring in the sald returns the amount of their respective Income for the preceding taxable year for services rendered or performed for, among others, foreign government embassy, diplomatic mission, agency or international organization. ‘The annual income tax return shall be flled with the RDO, Authorized Agent Bank (AAB), or other proper ‘office which has jurisciction over the employee's legal residence or principal place of business. it may also be filed with the ROO or AAB where the principal office of his/her employer Is situated. Philippine nationals and alien Individuals who are covered by tax exemptions or Immunities under duly recognized international agreements are enjoined to file thelr annual income tax returns (BIR Form 1700 or 11701, as may be applicable). Fill out the annual income tax returns in triplicate indicating the tax exemption pursuant to the specific International agreement (e.g., UN Privileges Convention, SA Convention, etc.) in Item no. 67(A) or 122(A) of BIR Form 1700 or 1701, respectively. Proceed to the Revenue District Office (RDO) where registered. File the duly accomplished annual income fax returns on or before the 15th day of April of each year covering compensation income for the preceding taxable year, together with the Certificafe of Compensation Received/Statement of Earnings for the taxable year indicating the amount of monthly Income received; and receive copy of the duly stamped and validated annual income tax returns from the concerned RDO, Section 4. Consequences of Non-Fillng and/or Non-Payment of Tax Returns by Covered individuals Fallure of the covered taxpayers to file their annual income tax retums and to pay the Income tax due thereon constitutes a violation of Sections 254 and 255 of the Tax Code. The concerned BIR office shall Issue the corresponding tax assessments, Inclusive of surcharge and penalties, and in proper cases, Initiate the pertinent criminal actions. Section 5. Confirmation of Tax Exemption/Tax Treatment International organizations maintalning offices, headquarters or operation in the Philippines and/or thelr respective employees clalming exemptions pursuant to the terms and provisions of international ‘agreements or laws granting privileges to employees of International organizations shall flle an application for confirmation of tax exemption/tax treatment with the International Tax Affairs Division (ITAD) of the Bureau of internal Revenue, 76