INDIVIDUAL INCOME TAX

I. Classes of Individual Taxpayers

1. Citizens
 Those who are citizens of the Philippines at the time of the adoption of the Constitution (on February 2,1987);
 Those whose fathers or mothers are citizens of the Philippines;
 Those born before January 17, 1973 of Filipino mothers who elect Philippine Citizenship upon reaching the age
of majority
 Those who are naturalized in accordance with law

a. Resident Citizen – is a citizen of the Philippines who has a permanent or perpetual home in the Philippines to
which he plans or intends or return whenever he is away or out of the country

b. Nonresident Citizen
1) 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
2) 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
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) A citizen who has been previously considered as nonresident 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 nonresident
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

2. Aliens
a. Resident alien – an individual whose residence is within the Philippines and who is not a citizen thereof.

b. Nonresident alien – an individual whose residence is not within the Philippines and who is not a citizen
thereof.

1) Nonresident Alien – ETB – a nonresident alien who has stayed in the Philippines for an aggregate period of
more than 180 days during any calendar year.

2) Nonresident Alien – NETB – a nonresident alien who has stayed in the Philippines for an aggregate period
of not more than 180 days during any calendar year.

Taxpayers Classification Tax Base Tax Rate

a. Resident Citizen
b. Nonresident Citizen
c. Resident alien
d. Nonresident Alien – ETB

e. Nonresident Alien – NETB

II. Kinds of Income

a. Subject to 24a
1. Compensation Income
- “Those arises from employer-employee relationship”
- Includes salaries, wages, emoluments and honoraria, commissions, taxable bonuses and fringe benefits, taxable
allowances, non-monetary compensation, director’s fees and the like, taxable pensions and retirement pay,
amounts drawn as salaries by partners of a partnership and other incomes of a similar nature unless specifically
exempted by the Tax Code.
2. Business Income
- These are incomes from business such as incomes from manufacturing and selling goods, incomes from buying
and selling goods, incomes, fees from the exercise of profession, gains from sale or exchange of assets other
than inventories, commission, rental income, and other incomes not covered by compensation income
3. Mixed Income
b. Subject to other rate
1. Passive Income
- Consist of interest from currency deposits, yields and other monetary benefits from deposit substitutes, trust
fund and similar arrangements, royalties, prizes, winnings, interest from foreign currency deposits, share in a
business partnership income, dividends in a domestic corporation, interest on long term deposits.
2. Capital Gains Tax
 - Include capital gains from sales of shares of stock and sales of real property
3. Fringe Benefit Tax
c. Excluded or exempted

Format of Computation of Taxable Income

A. Gross Compensation Income P xxx
Less: Non-taxable/Exempt Income xxx
Taxable Compensation Income P xxx
Non-Taxable/Exempt Income includes:
1. SMW, holiday pay, overtime pay, night shift differential, and hazard pay of an MWE;
2. First P90,000 of 13th Month Pay and other benefits;
3. De minimis fringe benefits;
4. Employee’s share of SSS, GSIS, PhilHealth,and Pag-ibig Contributions; and
5. Union dues.
B. Sales/Receipts, net of returns, allowances and discounts P xxx
Less: Cost of Sales/ Cost of Services xxx
Gross Income from Operations P xxx
Less: Itemized Deductions or OSD xxx
Net Income from Operations P xxx
Add: Non-operating income P xxx
Share in GPP net income xxx xxx
Taxable Net Income P xxx
C. Purely self-employed individuals or mixed earners can avail of the 8% income tax rate if the gross sales/receipts from their
business/profession plus non-operating income does not exceed the VAT threshold of P3,000,000.

The 8% tax is in lieu of (1) graduated rates and (2) the OPT under section 116 of the Tax Code.

However, this option is not available to the ff individual taxpayers:

1. VAT-registered taxpayers;
2. Taxpayers subject to OPT other than the 3% OPT under section 116;
3. Partners of General Professional Partnerships (GPP’S);
4. Individuals enjoying income tax exemption (e.g. those registered as BMBEs); and
5. Taxpayers who fail to signify their intention to avail of the 8% income tax rate in the First (1 st) Quarter Income Tax Return,
or in the First (1st) Quarter Percentage Tax Return, or in the initial quarterly return of the taxable year upon the
commencement of a new business or practice of profession.

D. Net of P250,000 if individual taxpayer is a self-employed individual earning income purely from self-employment or practice of
profession. Mixed income earners are not allowed this P250,000 deduction.

Passive Income
RC NRC RA NRA-ETB NRA-NETB
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Exercise # 1

Classify each individual taxpayer:

1. Anette B., a citizen, stayed in Japan for more than one hundred eighty days.
2. Hilary S., an alien, stayed in the Philippines for more than one year.
3. Meryll S., citizen, maintained her residence in Australia.
4. Sigourney W., departed from the Philippines to work as a physical therapist in the U.S.
5. Melanie G., a Filipino overseas contract worker, on vacation in the Philippines for one month.
6. Winora R., non-resident citizen, after two years of working as entertainer under contract in Japan, returns during the year to
reside in the Philippines.
7. Cindy C., a Filipino singer, visited Canada for three days to sing for cousin’s wedding.
8. Angelina J., a non-resident alien, finding the beauty of the Philippines, stayed therein for more than one hundred eighty days.
9. Jims., a non-resident alien, stayed in the Philippines as manager of a domestic airline for January to September.
10. Anthony H., a British, left Manila for Europe for vacation. He has a re-entry permit.

Exercise # 2

The Taxpayer is a Resident citizen, unless otherwise stated. Identify whether the following are subject to final tax or not. Place ( )
on the space provided if it is subject to final tax and state the rate, otherwise place ( ).

Final Tax? Rate

1. Interest from peso bank deposit, BDO Manila

2. Interest from US dollar bank deposit, BPI-Morayta

3. Interest from US dollar bank deposit, Bank of New York USA

4. Interest from US dollar bank deposit, Bank of New York USA

5. Interest from money market placement, BDO Philippines

6. Interest from overdue notes receivable, Philippines

7. Royalties, in general, Philippines

8. Royalty, literary work, Philippines

9. Prize, P10,000, Philippines

10. Prize, P100,000, Philippines

11. Prize, P10,000, USA

12. Prize, P20,000, USA

13. Winnings, P10,000, Philippines

14. Winnings, P50,000, Philippines

15. Winnings, P10,000, USA

16. Winnings, P50,000, USA

17. Philippines Lotto winnings

18. USA Lotto winnings

19. Interest Income received from depository bank under expanded foreign currency deposit
system
20. Interest Income from long-term deposit or investment evidenced by certificates issued by
BSP
21. Dividend from a domestic corporation

22. Dividend from a resident foreign corporation

23. Dividend from a non-resident foreign corporation

24. Share in Distributive net income of business partnership in the Philippines

25. Share in Distributive net income of general professional partnership in the Philippines
 26. Share in net income after tax of an association, a joint account, or a joint venture or
consortium
27. Interest Income under expanded foreign currency deposit system received by a Non-resident
alien engage in trade or business individual
28. Interest Income under expanded foreign currency deposit system received by a Non-resident
citizen individual
29. Dividend received by a non-resident alien not engage in business in the Philippines from a
domestic corporation
30. Dividend received by a non-resident alien engage in business in the Philippines from a
domestic corporation
31. Interest income under expanded foreign currency deposit system received by Non-resident
alien not engaged in trade or business individual

Exercise # 3

Determine the basic personal and additional exemptions of the taxpayers described. They shall be assumed resident citizens earning
purely compensation income unless otherwise indicated. Assume also that the spouse, if applicable, is employed unless otherwise
stated, lastly assume 2015 as the taxable year.

Basic Additional
1. Woody A. married Diane K. 2 years ago. Diane gave birth to their second
baby on April 15,2015.
2. George C. is single, self-supporting student. His working mother and
unemployed father lives in Pasay City. He lives in Quezon City.
Occasionally, he gives his parents money.
3. Brooke S., Single, resigned from government service to try her luck in the
US early 2011. Her employment contract as personnel officer was for 5
years. In 2015, she was earning 1,250 US dollars a month. She sends 20%
income to her parents who are based in Pangasinan. Assume an exchange
rate of P43 per dollar.
4. Marlon B. married Phoebe C. in a civil wedding in 2008 after a month of
courtship. In 2015 they took Phoebe’s niece under their care thinking that
they may not be blessed anymore with a baby. The child’s mother verbally
assented to this.
5. Jack N. was employed in 2010. He left 2 sons, aged 14 and 12 by his
previous paramour in Quezon. In early 2013, he courted his long-time
officemate Tina T. in August 2013, they got married. As of December 2015,
they still did not have a child
6. Helen H. works for a family-owned publishing business being managed by
her husband. On Jan 25, 2015 she gave birth to their 3rd child after 6 years
of marriage. Her husband waived his right to claim for exemptions
pertaining to their children.
7. In 2015, Josie B. was 3 months pregnant with her live-in partner.
Everything was planned for the wedding but even before the wedding day
came, he acquired a serious illness and died days after. Presently she is
employed as executive secretary and raising her son all by herself.
8. Julia R. married Mel G. in 2001. After years of troublesome marriage, they
had it annulled in 2015. They gave a son and daughter, now aged 9 and 5,
respectively. Presently, Julia is running her small bakeshop while Mel
practices his profession as civil engineer. The court awarded Julia custody
of their daughter, while Mel, the custody of their son.
9. Prof. Kevin B., a teacher works as part-time consultant in a government
office. His wife, a teacher like him, gave birth to their only daughter after
10 years of marriage. Since Mrs. B. is already in her fifties, they no longer
expect to have another child. They were very happy that in 2015, their
daughter, right after finishing college at 20, decided to get married. Before
the year ended, she gave birth to a baby boy. The new family lives in Prof
B’s home.
10. Atty. Christopher R., UCPB’s corporate lawyer, married to Tiffany, Full-
time housewife, has a minor son.
11. Anita P., separated from her husband since 2010m has 2 children by him.
The older one, 25 is married while the younger, 17, lives with his father.
Both refuse to file for a legal separation up to now.
12. Debra W., practicing lawyer, is married to a non-resident citizen whose
sources of income are his investments abroad. They have 3 children.
13. Dr. James S., owner of PMA computer College a sole-proprietorship, is
married whose wife operates a pawnshop, with 5 children.
14. Liz T., married, assigned in Davao City branch of a Quezon City-based
government agency, has 2 children.
15. Cheryl L., married, with 2 children.
Exercise # 4

1. A single resident citizen has (2) qualified dependent brothers. During a particular year, he earns and spends the following:

Gross Income from practice of profession P 200,000

Income from trading business 100,000
Expenses in connection with the:
Practice of profession 20,000
Trading business 20,000
Hospitalization insurance premium paid 2,000

Required:
a. Compute the deductible hospitalization insurance premium paid.
b. Compute the taxable net income
c. Compute the tax due

2. A married resident citizen has (5) children. All his children are studying in London. He has the following data on income and
expenses for the year 2016:

Salary. Philippines, net of withholding tax of P 2,000,000 P 7,000,000

Rental income, Philippines 2,000,000
Expenses in relation to rental income, Philippines 500,000
Gross business income, USA 3,000,000
Business Expenses, USA 1,500,000
Hospitalization insurance premium paid 10,000

Required:
a. Compute his taxable net income in the Philippines
b. Assuming the taxpayer is a non-resident citizen. Compute his taxable net income in the Philippines
c. Assuming the taxpayer is a resident alien. Compute his taxable net income in the Philippines
d. Assuming the taxpayer is a non-resident alien doing in the Philippines, and his country allowed P80,000 basic
personal exemption to married Filipinos not residing there, and P40,000 additional exemption for each
dependent child. Compute his taxable net income in the Philippines
e. Assuming the taxpayer is a non-resident alien not doing business in the Philippines. Compute his taxable net
income in the Philippines

3. A husband and wife, resident citizens with 1 qualified dependent child, had the following information on their income and
expenses for the year 2016:

Salary of the husband, net of P50,000 wittholding tax P 450,000

Salary of the wife, gross of P60,000 withholding tax 600,000
Professional income, husband, net of 10% withholding tax 900,000
Expenses, practice of profession 300,000
Premium payment for health insurance paid by the wife 5,000
Gross business income, wife 500,000
Business Expenses, wife 100,000
Rent income, lease of common property gross of 5% withholding tax 700,000
Expenses, leased common property 200,000

The husband waived the additional exemption in favor of his wife

Required:
a. How much was the taxable income of the husband?
b. How much was the taxable income of the wife?