Santiago City, Philippines

COLLEGE OF ACCOUNTANCY & BUSINESS ADMINISTRATION

TAXATION I

INDIVIDUAL INCOME TAX

Individual Taxpayers:
- are natural persons classified as citizen or alien 2. Passive or final income tax – The final tax imposed
with income derived within the territorial jurisdiction on passive income is being withheld by the payor
of a taxing authority. who acts as the withholding agent and remits the
final tax to the BIR or an authorized collecting agent.
Factors Affecting the Computation of Income
tax of Individual 3. Capital gains tax – Capital gains are usually
subject to capital gains tax. When the capital gains
Classification of Individual Taxpayers are not subject to final tax, they shall be included as
part of the gross taxable income subject to the basic
As to Citizenship normal tax.
1. Resident Citizen (RC) is a Filipino citizen who
stayed permanently in the Philippines or stayed 1. How to Compute Net Income Tax for
outside the Philippines for less than 183 days during Individuals?
the taxable year.
Net Income Tax Formula:
2. Non-Resident Citizen (NRC) is a Filipino citizen
who stayed outside the Philippines for 183 days or Taxable Gross Income
more during the taxable year (excluding passive income and capital gains) XX
Less: Allowable Deductions (XX)
3. Resident Alien (RA) are persons who are not Net Taxable Income X
citizens of the Philippines but are residing within the Apply Tax rate %
Philippines for more than one year from the date of Net Income tax due X
arrival. Less: Tax credit, if any (X)
Tax Still due, if any X
4. Non Resident Alien (NRA) are foreign individuals
whose residences are not within the Philippines. The progressive tax rate as follows:
NIRC classifies Non Resident Alien as follows:
a. Those engaged in trade or business within What is Taxable Gross Income?
the Philippines (NRAETB) – foreign individuals who
have stayed within the Philippines for more than 180 Means all income derive from whatever source,
days during the taxable year. including but not limited to the following:
b. Those not engaged in trade or business
within the Philippines (NRANETB) - foreign A. Compensation
individuals who have stayed within the Philippines for B. Gross income from profession, trade or business
only 180 days or less during the taxable year. C. Gains from dealing property
D. Interests
5. Special Taxpayers are those alien individuals or E. Rents
Filipino citizens who are taxed with a fifteen percent F. Royalties
(15%) tax rate based on their gross compensation G. Dividends
income. H. Annuities
I. Prizes and winnings
As to Filing status J. Pensions
1. Single K. Partners share in the net income of the general
2. Married professional partnership
3. Head of the family
What are allowable deductions for Individual?
As to types of Income Earned
1. Compensation – payment of service rendered in A. with gross compensation income from employer-
the form of salaries or wages. employee relationship only
2. Income from trade or business – income
earned by the business. 1. Premium payment on health and/or
3. Income from exercise of profession - payment hospitalization insurance;
of service rendered in the form of professional fees 2. Basic and Additional Personal Exemption.
4. Passive income – income earned by the
taxpayers without any effort or labor exerted. B. with gross income from business or practice of
5. Income from gains in dealing property – profession
income recognized on the sale of property
1. Itemized deductions or Optional Standard
As to sources of income Deduction (OSD);
1. Within the Philippines; 2. Premium payment on health and/or
2. Outside the Philippine; or hospitalization insurance;
3. Partly within and partly outside the Philippines 3. Basic and Additional Personal Exemption.

Types of Income Taxes Who cannot avail of deductions from Gross

Income?
1. Schedular or basic normal tax – shall be computed
in accordance with and at the rates established in - Non-resident aliens not engaged in trade or
the following schedules: business in the Philippines.

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What is a premium payment on health and/or
hospitalization insurance?
- It is an amount of premium on health insurance
and/or hospitalization paid by an individual taxpayer
(head of the family or married), for himself and
members of his family during the taxable year.
What are the requisites for premium payments
to be deductible?
A. Insurance must have actually been taken;
B. The amount of premium deductible does not
exceed P 2,400.00 per family or P 200.00 per month
during the taxable year;
C. The said family has a gross income of not more
than P 250,000.00 for the taxable year;
D. In case of married individual, only the spouse
claiming additional exemption shall be entitled to this
deduction.
Who may avail basic and additional
exemptions?
Available only to individuals Resident Citizen, Non-
Resident Citizen and Resident Alien (whether
business or compensation income earners).
Non-Resident Alien Engage in Trade or Business
may be entitled to personal exemptions subject to
reciprocity,
a. The country of which he is a subject or citizen
has an income tax law; and
b. the income tax laws of his country allows
personal exemption to citizens of the Philippines not
residing therein, but deriving income there from and
not to exceed the amount allowed in the Philippine
Tax Code.
What are basic and additional personal
exemptions?
A. Basic Personal Exemptions:
- The Basic Personal Exemption is Php 50,000.00
exempt income of an individual whether single, head
of the family or married individuals (each married
individuals)
B. Additional Personal Exemptions:
- The additional personal exemption is Php
25,000.00 exempt income of an individual for each
of the qualified dependent children or senior citizen
not exceeding four (4) number.
- As a rule, the proper claimant of the additional
exemption in case of married individual is the
husband being the head of the family.
Qualified Dependent is:
- child or children
- legitimate, illegitimate, legally adopted
- living with the taxpayer and dependent upon
the taxpayer of chief support
- not exceeding 21 years old, unless incapable of
self support due to mental and physically defect
- Unmarried and not gainfully employed
What are rules for a change of status?
A. If the taxpayer should marry or should have
additional dependents during the taxable year, he
may claim the corresponding exemption in full for
such year.
B. if the taxpayer should die during the taxable
year, his estate may claim his corresponding as if he
died at the close of such year.
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C. if the spouse or any dependent should marry or
become twenty-one years old during the year, or
should become gainfully employed, the taxpayer
may claim the tax exemptions as if the spouse or
dependent child or as if such dependent married,
became twenty-one years old or become gainfully
employed at the close of such year.
D. For any other event and for which there are no
specific rules applicable for the abovementioned, the
status of the taxpayer at the end of the year shall
determine his exemptions. (strictly construed against
the taxpayer)
What are the itemized deductions?
A. Ordinary and Necessary Expenses
B. Interest
C. Taxes
D. Losses
E. Bad debts
F. Depreciation of property
G. Depletion of oil and gas wells and mines
H. Charitable and other contributions
I. Research and Development
J. Pension trust contributions of employees and
What is Optional Standard Deductions?
In case of individuals, OSD is a deductions
equivalent to 40% of the gross receipts in lieu of
Cost of Sales and Itemized Deductions.
2. What is Final Tax?
A. It is constituted as a full and final payment of the
income tax due from the payee on a particular type
of income subject to final withholding tax (FWT)
B. The income subjected to final income tax is no
longer subject to the net income tax; otherwise,
there would be a violation of prohibited double
taxation.
C. The liability for the payment of the tax rates rests
primarily on the payor as withholding agent
D. The payee does not require to file income tax
return for the particular income subjected to FWT.
What are Passive Incomes?
- Income derived from sources within the
Philippines such as
A. Interest under the Expanded Foreign Currency
Deposits System; - 7.5%
B. Interest, Yields, or other monetary benefits from
deposits, deposit substitutes, trust funds or similar
arrangement; - 20%
C. Royalties from intellectual creation – 10%
D. Prizes exceeding 10,000 and Winnings – 20%
E. Dividends from Domestic Corporation or share of a
partner in the distributable income of an ordinary
partnership. – 10%
3. What is a Capital Gains Tax?
- a tax imposed on sale of shares of stock of a
domestic corporation not listed and traded thru a
local stock exchange, held as capital asset and sale
of real property in the Philippines held as a capital
asset.
Computation of Capital Gains tax
Who are Minimum Wage Earners?
- both those who are working in the private and
public sector being paid the Statutory Minimum
Wages as determined by the Tipartite Minimum
Wage Board covering their basic, holiday, overtime,
night differential and hazard pay shall be exempt
from income tax and is not required to file income
tax return.
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 - Commissions and honorarium among other things
derived of Minimum Wage Earners is taxable

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