LPU MANILA

Department of Accountancy and Management Accounting

Income Tax
Lecture 3 - INCOME TAX OF INDIVIDUAL (PART 1)

- INCOME means all wealth which flows into the taxpayer other than a mere return of capital.
 Includes all forms of income specifically described as gains derived from the sale or other disposition of capital.
 The amount of money coming to a person or corporation within a specified time, whether as payment for services,
interest, or profits from investment.
 Includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an
obligation to repay and without restriction as to their disposition.
- INCOME TAX is referred to as tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a
person’s income, emoluments, profits and the like.
 A national tax
 An excise tax
 A direct tax
 A general tax
- Income taxpayers is classified into:
1. Individual
 Resident Citizen
 Non-resident Citizen
 Resident Alien
 Non-resident Alien
 Engage in Trade or Business
 Not Engage in Trade or Business
2. Corporation
 Domestic
 Foreign
3. Estate
4. Trust
- INDIVIDUAL TAXPAYERS are natural persons with income derived from within the territorial jurisdiction of a taxing
authority.
- TYPES OF INCOME OF INDIVIDUAL TAXPAYERS
1. Ordinary or Regular Income
 Compensation income
 Means all remuneration for services performed by an employee for his employer.
 There should be an existing “employee – employer relationship”.
 The name by which the remuneration for services is designated is not important, thus, all benefits
received by an employee, except those fringe benefits and non- taxable income, constitute
compensation income. (Substance over Form).
 Subject to Graduated Tax Rates
 Business income (Sole Proprietor)
 Earned by a sole proprietor or an independent contractor who reports income earned from self-
employment.
 No “employee – employer relationship” is existing.
 The individual has control over his/her work and how the work is being done and when it is done.
 Subject to:
o VAT or Percentage Tax (Business Tax)
o 8% Gross Income Tax or Graduated Tax Rate (Income Tax)
 Professional income
 Earned by professionals by practicing his/her profession.
 Income derived purely from the practice of profession, thus, no “employee – employer
relationship” is existing.
 Professional is a person formally certified by a professional body belonging to a specific
profession by virtue of having completed a required course of studies and/or practice, whose
competence can usually be measured against an established set of standards.

TAXATION ON INDIVIDUALS
Prepared by: Eureze Lhoed Tabar, CPA,MBA,CrFA
  A professional also refers to a person who engages in some art or sport for money, as means of
livelihood, rather than as a hobby.
 Subject to:
o VAT or Percentage Tax (Business Tax)
o 8% Gross Income Tax or Graduated Tax Rate (Income Tax)
2.Passive income
 Income earned without working actively
 Specific passive incomes derived from Philippine sources are:
 Interest income
o Interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements.
o Interest received from a depository bank under the expanded foreign currency deposit
system
o Interest income from long-term deposit or investment in the form of savings, common or
individual trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by BSP, that were pre-
terminated before the 5th year.
 Dividend income (actually or constructively received)
o Cash dividends
o Property dividends
 Royalties
o Royalties, in general
o Royalties from books, literary works and musical compositions
 Prizes (except prizes amounting to P10,000 or less)
 Winnings (except PCSO and lotto winnings amounting to P10,000 or less)
 Subject to Final Tax
3. Capital gains (Subject to Capital Gains Tax)
 Shares of stocks of a domestic corporation not traded in the local stock exchange.
 Capital gains from sale of real property in the Philippines.
- TYPES OF INDIVIDUAL INCOME TAXPAYERS
1. Resident Citizen
 An individual whose residence is within the Philippines and who is a citizen thereof.
 A Filipino citizen is a natural person who is/has (Philippine Constitution, Article III):
 Born with father and/or mother as Filipino citizens
 Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching
the age of majority.
 Acquired Philippine citizenship after birth in accordance with Philippine laws (Naturalization).
 A Resident Citizen is taxable on income within and without the Philippines (the taxable income is the
income less allowable deductions).
2. Non Resident Citizen
 A citizen who:
 Establishes to the satisfaction of the Commissioner the fact of his physical presence abroad, with a
definite intention to reside therein.
 Leaves the Philippines during the taxable year to reside abroad:
o As an immigrant
o For employment on a permanent basis
o For work and derives income from abroad and whose employment thereat requires him to
be physically present abroad most of the time (183 days) during the taxable year.
 A citizen of the Philippines who shall have stayed outside the country for a total of 183 days or
more by the end of the year.
 A Non Resident Citizen is taxable only on income within the Philippines (the taxable income is the income
less allowable deductions).
 A non-resident citizen who arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall be considered a non-resident citizen for the taxable year in
which he arrives in the Philippines with respect to income derived from sources abroad until the
date of his arrival in the Philippines.
3. Resident Alien
 A foreign born person who is not qualified to acquire Philippine citizenship by birth or after birth.
 Any individual whose residence is within the Philippines and who is not a citizen thereof.

TAXATION ON INDIVIDUALS
Prepared by: Eureze Lhoed Tabar, CPA,MBA,CrFA
  Aliens who are actually present in the Philippines and who are not mere transients are classified as
resident aliens.
 An alien who lives in in the Philippines with no definite intention as to his stay is also a resident
alien.
 An alien who comes to the Philippines for the purpose that requires extended stay for its
accomplishment, so he makes his home temporarily in the Philippines, is a resident, regardless of
his intention to return to his residence abroad.
 Whether the alien is transient or not is determined by his intentions with regard to the length and nature of
his stay.
 A Non-Resident Alien is taxable only on income within the Philippines (the taxable income is the income
less allowable deductions).
4. Non Resident Alien
 An individual whose residence is not within the Philippines and who is not a citizen thereof.
 Aliens who come to the Philippines for a definite purpose, which in its nature may be promptly
accomplished (transients or non-residents).
 Non- resident alien engaged in trade or business (NRAETB)
 Aliens who stayed in the Philippines for an aggregate period of more than 180 days during the
taxable year during anytime in a calendar year.
 Aliens who have business income in the Philippines.
o Trade or business includes:
 Performance of the functions of a public office
 Performance of personal services in the Philippines (except performance of
services as an employee).
 A sustained habitual activity, of which the purpose is for a livelihood or profit.
 NRAETB is taxable only on income within the Philippines (the taxable income is the income less
allowable deductions).
 Non-resident alien non engaged in trade or business (NRANETB)
 An alien who stays for only 180 days or less and not deriving any income within the Philippines.
 Subject to 25% final withholding tax based on gross income (no allowable deductions) on all
sources within the Philippines (excluding Capital Gains Tax).
- Some Legal permits of Alien Individuals Working in the Philippines
1. Provisional Working Permit – a document issued by Bureau of Immigration while waiting for pending application of
9G Visa.
2. 9G Visa – issued by Bureau of Immigration to foreign nationals who are employed in the Philippines and occupying
a technical, executive, managerial or highly confidential position in a company for at least 1 year.
3. Alien Employment Permit – issued by DOLE, authorizing a foreign national to work in the Philippines.

SUMMARY

TYPES OF INDIVIDUAL INCOME INCOME WITHIN THE INCOME OUTSIDE THE

TAX PAYER PHILIPPINES PHILIPPINES
RESIDENT CITIZEN TAXABLE TAXABLE
NON-RESIDENT CITIZEN TAXABLE NON-TAXABLE
RESIDENT ALIEN TAXABLE NON-TAXABLE
NON-RESIDENT ALIEN ETB TAXABLE NON-TAXABLE
NON-RESIDENT ALIEN NETB TAXABLE (GROSS) NON-TAXABLE

TAXATION ON INDIVIDUALS
Prepared by: Eureze Lhoed Tabar, CPA,MBA,CrFA