REGULAR INCOME TAXATION

REGULAR INCOME TAX

 Characteristics
1. General in coverage – applies to all items of income not subjected to final tax, capital gains tax,
and special tax regimes
2. Net income tax – imposed on residual profits or gains after deductions of expenses and
personal exemptions allowed by law
3. Annual income tax – reported annually on or before the 15th day of the 4rth moth following the
end of the taxable year
4. Creditable withholding tax (CWT) – most items of regular income are subjected to CWT (i.e.
advanced taxes)
5. Progressive tax – on individuals (increasing tax rates as the tax base increases)
6. Proportional tax – on corporations (flat tax rate)

 Model
Gross income Pxx
Less: Allowable deductions (xx)
Taxable income Pxx

 Gross income – consist of the following major topics:

a. Exclusions in gross income
b. Inclusions in gross income
c. Special topics – such as:
 Compensation income
 Fringe benefits and
 Dealings in properties

 Allowable deductions – subdivided into the following topics:

a. Principles of deduction
b. Regular allowable itemized deductions
c. Special allowable itemized deductions & NOLCO
d. Standard optional deductions

 Classification of income
1. Compensation income – those that arises from an employer-employee relationship
2. Business or professional income – those that arises from selling of goods or rendering of
services for a profit
3. Other income or non-operating income – those that do not qualify in the above classifications,
such as:
 Gains from dealings in properties (those that are not subjected to CGT)
 Income distribution from GPP, taxable trust or estate, or exempt joint venture
 Casual active income (net gains arising from isolated or one-time transactions)
 Passive income (those that are not subject to final tax)

 Individual taxpayer classification

1. Pure compensation income earner
Gross compensation income Pxx
Less: Non-taxable compensation (xx)
Taxable income Pxx

2. Pure business or professional income earner

 Gross income from business/profession Pxx
Add: Non-operating income xx
Total Gross income Pxx
Less: Allowable deductions (xx)
Taxable net income Pxx

3. Mixed income earner – globalized or totalled and since no expenses are deductible against
compensation income because it is already covered by the P250K personal exemption, in case
when the business or profession incurs a net loss, it is not deductible against compensation
income (i.e. compensation income is taxable in full despite a loss in business or profession)

Note:
 Net loss in business or profession may be treated as net operating loss carry-over
(NOLCO) as deduction against the net income of the next (3) years

 Corporate taxpayer – taxable income is determined:

1. In the same formula as pure business or professional income earner individuals and
2. Using the taxation counterpart of the accounting method used in the books of the corporation
(e.g. if the corporation uses the GAAP accrual or cash basis on its books, the taxable income is
computed using taxation accrual or cash basis, respectively) or
3. Using the method prescribed by the CIR if:
 no accounting method has been employed or
 if the method employed does not clearly reflect the income

Note: Service providers using accrual basis shall report their revenue, while, those that use cash
basis shall report their gross receipts.

INCOME TAX REPORTING FORMAT

Individuals Engaged in Business or Profession Corporations

Net sales/Revenues/Receipts/Fees Net sales/Revenues/Receipts/Fees

Pxx Pxx
Add: Other income from operations not subject to final tax Less: Cost of sales or services
xx (xx)
Total Sales/ Revenues/Receipts/Fees Gross income from operations
Pxx Pxx
Less: Cost of sales or services Add: Other income not subjected to final
(xx) tax xx
Gross income from business/profession Total Gross income
Pxx Pxx
Add: Non-operating income Less: Allowable deductions
xx (xx)
Total Gross income Net Income
Pxx Pxx
Less: Allowable deductions
(xx)
Net Income
Pxx

Note:
 For corporate taxpayers, income from secondary or incidental operations will be included in the
classification under “Sales/Revenues/Receipts/Fees”
  Revenue or sales is a gross concept pertaining to the total consideration received in a transaction
which includes return of capital and return on capital, while gross income is a net concept which
includes only the return on capital
 The basis for the optional standard deduction (OSD) in:
a. Individuals engaged in business or profession – is the total revenues or receipts from
operations
b. Corporations – is the total gross income from operating and non-operating income

TYPES OF REGULAR INCOME TAX

Individual Income Tax Corporate Income Tax
Taxable income/year Income tax rate
₱250k and below Nil
Above ₱250k to ₱400k 20% of the excess over ₱250k
Above ₱400k to ₱800k ₱30k + 25% of the excess over ₱400k 30% flat tax rate on net
income
Above ₱800k to ₱2M ₱130k + 30% of the excess over
₱800k
Above ₱2M to ₱8M ₱490k + 32% of the excess over
₱2M
Above ₱8M ₱2.41M + 35% of the excess over ₱8M
Note:
 Individual income tax table includes taxable estates or trusts, but excluding NRA-NETB which is
subject to 25% final tax.
 The corporation income tax rate applies to all corporations, except:
a. NRFC - subject to 30% final tax
b. FCDU interest income not subject to final tax
c. Special corporations – enjoy lower tax rates, such as:
 Private educational corporations
 Non-profit hospitals
 PEZA or TIEZA registered enterprises

d. Corporations subject to preferential tax rate (lower tax rate applied) or special regimes
e. Exempt corporations – but still required to report the results of their operations even if they do
not have taxable income, such as:
 Government agencies
 Non-profit organizations
 Cooperatives and
 Those registered with the Board of Investments (BOI) enjoying income tax holiday
 Corporations are subject to a minimum tax rate as 2% of total gross income in cases their operation
resulted into a net loss

OPTIONAL 8% INCOME TAX

 Applicable to self-employed and/or professionals (SEP), wherein, they have the option to be taxed
at 8% of sales or receipts and other non-operating income in lieu of the:
1. Progressive income tax (i.e. individual income tax table) and
2. 3% percentage business tax on sales or receipts

INCOME TAX RETURNS

BIR Form Individual Taxpayer
1700 Pure compensation income earner
1701-A Pure business or professional income earner, using
itemized, OSD or opting to the 8% optional income tax
 1701 Mixed income earner, taxable estates and trusts
Corporate Taxpayer
1702-RT Those subject to 30% RIT
1702-MX Those subject to special or a combination of tax rates or
exempt corporations with taxable income
1702-EX Those that are exempt with no tax due (i.e. no taxable
income)

 Rounding-off rules (round-off to the nearest peso)

1. centavo 0.49 and below – dropped down
2. centavo 0.50 or more – rounded up
 Quarterly Filing
1. Corporations and individuals engaged in business/profession are required to file and pay (3)
quarterly returns, aside from the annual income tax return, that will serve as tax credit
(deductions) to the annual income tax return
2. Deadline of filing quarterly income tax returns
 Individual taxpayers (BIR Form 1701-Q) – due 45 days from the end of the 1st three
quarters of the year
 Corporate taxpayers (BIR Form 1702-Q) – due 60 days from the end of the 1st three
quarters of the year

 Frequency of Reporting Income Tax Returns

Taxpayer Frequency
1. Individuals
a. pure compensation income earner Annual
b. pure business/profession income Quarterly & Annual
earner
c. mixed income earner Quarterly & Annual
2. Corporations Quarterly & Annual
Note: Pure compensation income earner may be relieved from filing annual income tax return if
they do not
have taxable income from other sources as their employer shall withhold the tax due from them.