MIDTERMS-Taxation

A. Meaning of Individual Taxpayers

Individual Taxpayers- are natural persons with income derived within the territorial jurisdiction of a taxing
authority.

B. Classification:
1. Citizen:
a. Resident Citizen (RC) - is a Filipino who stayed permanently in the Philippines or stayed
outside the Philippines for less than 183 days during the taxable year.
b. Non-Resident Citizen (NRC)- is a Filipino who stayed outside the Philippines for 183 days or
more during the taxable year and has proof to reside outside the Philippines on a permanent basis
as an immigrant or employee.
2. Alien:
a. Resident Alien (RA)-are persons who are not citizens of the Philippines but are residing within
the Philippines including foreign individuals who have stayed in the Philippines for more than 1
year from the date of arrival.
b. Non-Resident Alien (NRA)- are foreign individuals whose residences are not within the
Philippines.

Two kinds of NRA:

b1.) Non-Resident Alien engaged in trade or business (NRAETB)
-are those who have stayed within the Philippines for more than 180 days during the
taxable year and have business income in the Philippines.
b2.) Non-Resident Alien not engaged in trade or business (NRANETB)
-are foreign individuals who have stayed within the Philippines for only 180 days or less
and have no business income derived within the Philippines.
3. Special Taxpayers
-are those alien individuals or Filipino Citizens who are taxed with a 15% tax rate based on their
gross compensation income

C. Classification of Taxpayers and Situs of Income

TAXPAYER SITUS OF INCOME
I. Citizens: Within Outside
Resident Citizen Taxable Taxable
Non-Resident Citizen Taxable Non-Taxable
II. Aliens:
Resident Citizen Taxable Non-Taxable
Non-Resident Citizen Taxable Non-Taxable

III. Special Taxpayers:

Citizen Taxable Taxable
Alien Taxable Non-Taxable
D. Taxation of Married Individuals

For married individuals, the husband and wife subject to the provision of Section 51(D) hereof,
shall compute separately their individual tax based on their respective total taxable income. Provided
that 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 income.
Provided, that minimum wage earners as defined in Section 22 (HH) of this code shall be exempt
from the payment of income tax on their taxable income: Provided further, that the holiday pay received
by such minimum wage earners shall likewise be exempt from income tax.

E. Rate of Tax on Income of Purely Self- employed Individuals and/or professionals whose gross
sales or gross receipts and other non-operating income does not exceed VAT threshold (P1,919,500)

Self-employed individuals and/or professionals shall have the option to avail of an 8% tax on
their gross sales or gross receipts and other non-operating income in excess of P250,000 in lieu of the
graduated income tax rates.

F. Rate of Tax for Mixed Income Earners

Taxpayers earning both compensation income and income from business or practice of profession shall
be subject to the following taxes:

1. All income from Compensation- the rates prescribed under Tax Schedule.

2. All income from Business or Practice of Profession

a.) If total Gross Sales and/or Gross Receipts and Other Non-operating Income do not exceed
the VAT threshold – the rates prescribed under the Tax Schedule or 8% income tax based on
gross sales or gross receipts and other non-operating income in lieu of the graduated tax
rates.
b.) If total Gross Sales and/or Gross Receipts and Other Non-operating Income exceeds the VAT
threshold – the rates prescribed under the Tax Schedule shall be followed.

G. Classification of Taxes of Individual Taxpayer

1. Normal (tabular) graduated tax- applicable to income derived from compensation.

2. Passive Income Tax
3. Capital Gain Tax
H. Normal (Schedular) Tax Rate on Individual Taxpayer
(Based on the TRAIN Law effective January 1, 2018 to December 31, 2022)

Amount and Rate of Tax

Not over P250, 000 0%

Over P250,000 but not over P400,000 20% of the excess over P250,000

Over P400,000 but not over P800,000 P30,000 + 25% of excess over P400,000

Over P800,000 but not over P2,000,000 P130,000 + 30% of excess over P800,000

Over P2,000,000 but not over P8,000,000 P490,000 + 32% of excess over P2,000,000

Over P8,000,000 P2,410,000 + 35% of excess over P8,000,000

I. Sample computation of tax due and payable

1. Taxable compensation income = 343,000

Tax withheld on salaries =18,600

Tax Due: On 250, 000 = -0-

On excess (93,000 x 20%) = 18,600
Total Tax Due =18,600
Less: Tax Withheld =18,600
Tax Due and Payable = -0- .

2. Net Taxable Income =826,500

Creditable withholding tax =120,000

Tax Due: On 800,000 =130,000

On excess (26,500 x 30%) = 7,950
Total Tax Due =137,950
Less: CWT =120,000
Tax Due and Payable = 17,950

3. Taxable Income =300,000

250,000 x 0% = -0-
50,000 x 20% = 10,000
Tax Due = 10,000
J. Summary of tax base and tax rates on Individual taxpayers

Resident Non-Resident

Category of Income Citizen Alien Citizen NRAETB NRANETB

1. Compensation;
Business/Profession Tax due is based on tax table
Prizes of P10,000 or less

2. Interest on local currency;

Royalty on mining; Subject to final withholding tax of 20%
Winning/prizes over P10,000 25% of
Gross
3. Royalty on literary works and income
musical composition Subject to final withholding tax of 10% within

4. Cash/Property Dividends
(Received from local Companies) Subject to 10% FWT Subject to
20% FWT

5. Interest on foreign currency

earned within the Philippines Subject to 15% FWT Exempted

6. Capital gain on sale of real

property in the Philippines
(Note: Capital gain on sale of Subject to 6% of gross selling price or FMV whichever is higher
property abroad is considered
as ordinary income for RC
7. Capital gain on sale of shares
not traded Net capital gain is subject to 15% capital gain tax
(sold in the Philippines)

8. Other passive income earned Included

outside the Philippines by to
resident citizens are considered income Non- taxable – Income without
ordinary income subject
to tax
table
9. Sales of shares of stock in
Philippine Stock Exchange ½ of 1% of the selling price of the shares* this is a business tax

10. Interest income on long-term Over 5 years =0% Fixed 25% of

investment 4 years to less than 5 years= 5% interest
3 years to less than 4 years= 12% income
less than 3 years= 20%
K. Problem Illustration

Jenny Lou is a resident citizen living in Better Living, Paranaque City.

For taxable year 2018, he reported the following sources of income

Within Without
Rent Income 175,000 160,000
Prizes 10,000 30,000
Interest income from savings account 20,000 100,000
Interest income from foreign currency deposit 100,000 85,000
Dividend income 50,000 80,000
Bingo Winnings 40,000 70,000
Royalty Income from books 60,000 50,000
Royalty income from mining contract 180,000 90,000
Sale of land (Capital asset) (50% cost, FMV 10% higher) 500,000 600,000
Sale of land (Business Asset) (50% cost) 900,000 800,000
Sales of shares of stock not traded, 50% cost 250,000 200,000

Required: Compute all the taxes based on the foregoing information

Problem Solutions:

a.) Final taxes on passive income within:

-On interest income from savings deposit (20,000 x 20%) =4,000
-On interest from foreign currency deposit (100,000 x 15%) =15,000
-On dividend income (50,000 x 10%) =5,000
-On Bingo Winnings (40,000 x 20%) =8,000
-On Royalty from books (60,000 x 10%) =6,000
-On Royalty from mining contract (180, 000 x 20%) =36, 000

b.) Capital gain taxes from sale of capital assets within:

-On sale of land (SP-500,000; FMV-550,000 x 6%) = 33,000

-On sale of shares of stock not traded

Selling Price P250,000
Less: Cost (50%) 125,000
Capital Gain 125,000 X 15% = 18,750
c.) Tax due on income subject to normal tax:

Within Without Total

Rent Income 175,000 160, 000 335,000

Prizes 10,000 30,000 40,000
Interest income from savings account 100,000 100,000
Interest income from foreign currency deposit 85,000 85,000
Dividend income 80,000 80,000
Bingo Winnings 70,000 70,000
Royalty Income from books 50,000 50,000
Royalty income from mining contract 90,000 90,000
Gain on Sale of land (Capital Asset)
(600,000-300,000) 300,000 300,000
Gain on Sale of shares of stock not traded
(200,000-100,000) 100,000 100,000
Gain from sale of land (Business assets) 450,000 400,000 850,000

Total Gross Income 635,000 1,465,000 2,100,000

Less: Optional Standard Deduction (335,000 x 40%) 134,000
Taxable Income 1,966,000

Tax Due: on 800,000 =130,000

On excess: 1,166,000 x 30% =349,800
Tax Due and Payable =479,800

*Passive Income-expected to be earned in the future

*OSD-For operating income (earned regularly)
 L. Meaning of Tax Credit

Tax Credit - refers to the amounts allowed as deductions from the tax due in the form of creditable
withholding taxes and foreign income tax paid or accrued. For purposes of determining the tax credit on
foreign income taxes, shall mean taxes proper only, interest, surcharges or penalty are not included.

M. Taxpayers entitled to Tax Credit

1. Resident Citizens
2. Domestic corporations
3. Members of general professional partnerships (Di kasama business partnership)
4. Beneficiaries of estates and trusts

N. Two Applications of Foreign Income Taxes paid or accrued

1. Allowed as a deduction from gross income

2. Allowed as a tax credit deductible from Philippine income tax payable (tax due) subject to limitations

O. Limit of Tax Credit paid to Foreign Country

Per Sec. 34(4) of the NIRC, the rule applicable to tax credit paid to foreign country will be the lower
actual tax paid or the amount derived from computing the tax limit.

Formula:

1. For One Foreign Country –(limit#1)

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑓𝑜𝑟𝑒𝑖𝑔𝑛 𝑐𝑜𝑢𝑛𝑡𝑟𝑦

Tax credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑎𝑙𝑙 𝑠𝑜𝑢𝑟𝑐𝑒𝑠

2. For Two or More Foreign Countries –(limit#2)

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑠𝑜𝑢𝑟𝑐𝑒𝑠 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑡ℎ𝑒 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒𝑠

Tax credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑡𝑎𝑥
𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑖𝑛𝑐𝑜𝑚𝑒 𝑓𝑟𝑜𝑚 𝑎𝑙𝑙 𝑠𝑜𝑢𝑟𝑐𝑒𝑠

Note:
1. The taxable income used to compute the limit should be before personal and additional
exemptions.
2. The allowable tax credit shall be the lower amount between the tax credit limit computed under
limit #1 and that computed under limit #2
 P. Problem illustration – Foreign Tax Credit
Assuming that Jenny, a resident citizen, married with no qualified dependent reported the following data on her
net income and income taxes for the taxable year-2018

Foreign Income

Sources of income Taxable Income Taxes Paid

Philippines 480,000 -
Country Mho 192,000 45,000
Country Kho 96,000 12,000
Total 768,000 57,000

Required: Compute the income tax payable, if the foreign income taxes are claimed as a tax credit.

a.) Computation of Philippine Income Tax:

Taxable income from all sources P768,000

Tax Due: On 400,000 P 30,000

On 368,000 x 25% 92,000
Income Tax Due P122,000

b.) Allowable Tax Credit

Limit#1: Country Mho (192,000/768,000 x 122,000) =30,500

Actual amount paid =45,000
Allowed (lower) 30,500

Country Kho (96,000/768,000 x 122,000) =15,250

Actual amount paid =12,000
Allowed (lower) 12,000
Total under limit #1 42,500

Limit#2: (All Foreign Coutries)

288,000/768,000 x 122,000 =45,750
Total actual amount paid =57,000
Allowed (lower) 45,750

Tax credit allowed to be deducted from Income Tax Due = 42,500 (lower)

c.) Computation of income tax still due and payable-

Income tax due before foreign tax credit = 122,000

Less: Foreign tax credit allowed = 42,500
Income tax due and payable = 79,500