Review Materials

Prepared by:
Junior Philippine Institute of
Accountants UC-Banilad Chapter
F.Y. 2019-2020
Taxation of
Individuals
Classification of Individual Taxpayers

1. Resident Citizen
- an individual whose residence is within the
Philippines and who is a citizen;
2. Non-resident Citizen
- is a citizen who:
a. establishes to the satisfaction of the
Commissioner the fact of his physical presence
abroad, with a definite intention to reside therein;

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 b. leaves the Philippines during the taxable year
to reside abroad, either as an immigrant or for
employment on a permanent basis;
c. Works and derives income from abroad
and whose employment thereat requires him to be
physically present abroad most of the time (not
less than 183 days) during the taxable year;
d. previously considered as non-resident
citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently
in the Philippines shall be considered non-resident
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for the taxable year in which he arrives in the
Philippines with respect to his income derived from
sources abroad until date of his arrival.
3. Resident Alien
- any individual whose residence is within the
Philippines and who is not a citizen thereof.
4. Non-resident Alien
- an individual whose residence is not within
the Philippines and who is not a citizen thereof. A
non-resident alien is classified into:
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 a. Engaged in trade or business in the
Philippines (ETB)- shall come to the Philippines
and stay for an aggregate period of more than 180
days during any calendar year; or
b. Not engaged in trade or business in the
Philippines (NETB)- shall come to the Philippines
and stay for an aggregate period of 180 days or less
during any calendar year; or

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General Principles of Income Taxation
of Individuals

Individual Income
Income without
taxpayer within
1. Resident Citizen Taxable Taxable
2. Resident Alien Taxable Not Taxable
3. Non-resident
Taxable Not Taxable
Citizen
4. Non-resident
Taxable Not Taxable
Alien (ETB)
5. Non-resident
Taxable Not Taxable
Alien (NETB)

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Overseas Contract Workers
- Filipino citizens employed in foreign
countries, commonly referred to as OFWs, who
are physically present in foreign country as a
consequence of their employment thereat.
- taxable only on income from sources within
the Philippines.
- if has earnings from business activities or
properties within the Philippines, subject to
regular income tax.
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 - exempt for 15% final tax on interest
income from a depositary bank under expanded
foreign currency deposit system upon presentation
of proof of non-residency (e.g. OEC or Seaman’s
Book)
Seafarers or Seaman
- Filipino citizen who receive compensation
for services rendered abroad as member of the
complement of a vessel engaged exclusively in
international trade.

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 - if an account is in the name of the OFW or a
Filipino seaman and an individual who is living in
the Philippines, 50% of the interest income such
bank deposit will be treated as exempt while the
other 50% shall be subject to a final withholding
tax of 15% .

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 Kinds of Income of Individual
Taxpayers

1. Compensation income
- all remuneration for services performed by an
employee for his employer under a employer-
employee relationship, unless specifically excluded
by the Code.
2. Business income
- earned by sole proprietor or an
independent contractor who reports income
earned from self-employment.

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3. Professional income
- earned by professionals whose income is
derived purely from the practice of profession
and not under an employer-employee relationship.
4. Passive income
- income earned without working actively;
- they are subject to different withholding
tax rates and shall not included in gross income
of the taxpayer.

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 Income Tax Rates
Effective Jan. 1, 2018 – Dec. 31, 2022

Of excess
Over Not Over Tax Plus
over

P 250,000 0%
P 250,000 400,000 20% - P 250,000
400,000 800,000 P30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000

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Effective Jan. 1, 2023 and onwards

Of excess
Over Not Over Tax Plus
over

P 250,000 0%
P 250,000 400,000 15% - P 250,000
400,000 800,000 P22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000

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For married individuals, the husband and wife
shall compute separately their income tax based on
their respective total taxable incomes.

Provided, if 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 purposes of determining their
respective taxable income.

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 Passive Income

Resident or
Passive income NRA ETB
Citizen
Interest from any currency bank
20% 20%
deposit
Yield or any other monetary
benefit from deposit substitutes
20% 20%
and from trust funds and similar
arrangements
Royalties 20% 20%
Royalties on books and other
literary works and musical 10% 10%
compositions

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 Prizes (except prizes amounting
to P10,000 or less which shall 20% 20%
be subject to regular tax)
Winnings 20% 20%
Philippine Charity Sweepstakes
winnings and Lotto winnings in Not
Not Taxable
the Philippines amounting to Taxable
P10,000 or less
Philippine Charity Sweepstakes
winnings and Lotto winnings in
Not
the Philippines amounting to Taxable
Taxable
more than P10,000

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 Interest income received from a
depositary bank under the
Expanded Foreign Currency 15% Exempt
Deposit system (OFW/OCW-
exempt)
Cash and/ or property dividends
actually or constructively received
from any of the following:
a. Domestic corporation
b. Joint stock company 10% 20%
c. Insurance or mutual fund
d. Regional operating
headquarters of multinational
companies

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 e. On the share of an individual
partner in the distributable net
income after tax of a partnership
(except a general professional
partnership), or
f. On the share of an individual in
the net income after tax of an
association, a joint account or
consortium of which he is a
member or a co-venturer.

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 Income within on interest in long-
term deposit or investment in
Exempt Exempt
banks with a maturity of 5 years or
more
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 which was pre-terminated by the holder
before the 5th year at the rates herein prescribed:

Holding Period Rate

4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%

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Tax on non-resident aliens not engaged in trade or
business (NRA NETB)
- normally, subject to final withholding tax of
twenty-five percent (25%) from all sources within
the Philippines only.
1. 25% final withholding tax on gross amount
a. interest
b. cash and/or property dividends
c. rents
d. salaries, wages
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 e. premiums
f. annuities
g. compensation, renumerations, emoluments
h. capital gains, or
i. other fixed or determinable annual or periodic
or casual gains, profits and income.
2. 6% on capital gains presumed to have been realized
from the sale, exchange or other disposition of real
property located in the Philippines, classified as
capital assets
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 The tax base shall be whichever is higher
between:
a. gross selling price, and
b. higher between fair market value as
determined by the CIR (Commissioner of Internal
Revenue) and fair market value as determined by
the Provincial or City Assessor
3. In case of dispositions of real property as
capital assets to government or any political
subdivisions or agencies or to GOCCs, the tax to be
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imposed shall be determined in either of the following,
at the option of taxpayer:
a. accordance with graduated rates, or
b. 6% final tax based on gross selling price
or FMV, whichever is higher.
4. 15% final tax hereby imposed upon the net capital
gains realized during the taxable year from sale,
barter, exchange, or other dispositions of shares of
stock in a domestic corporation.

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Allowable Deductions from Income of
Individual Taxpayers

1. Compensation income and passive income

- no deductions allowed.
2. Business/ professional income
- either itemized deductions or OSD
(optional standard deduction).

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 Optional Standard Deduction

- an individual taxpayer (except non-resident

alien) may elect a standard deduction in an amount
not exceeding forty percent (40%) of its gross
sales or receipts.
- on the accrual basis of accounting for
income and deductions, the OSD shall be based on the
gross sales during the taxable year.
- employs cash basis of accounting for income
and deductions, the OSD shall be based on the gross
receipts during the taxable year.

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Individuals earning income from self-employment or
practice of profession
- whose gross sales/receipts and other non-
operating income does not exceed P3,000,000
shall have the option to avail of:
1. Graduated rates; or
2. 8% tax on gross sales or receipts and other non-
operating income excess of P250,000 in lieu of the
graduated income tax rates and the percentage tax (3%
non-VAT).
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The 8% income tax on gross sales or receipts
- it is in lieu of the graduated rates of tax
and the percentage tax of 3% Non-VAT.
However, if the annual gross sales/ receipts do not
exceed the threshold P3,000,000, the taxpayer
cannot avail of the 8% tax if:
1. His business and/ or profession is VAT registered;
or
2. Liable to Other Percentage Tax which is not 3%
Non-VAT; or
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3. He is a partner of a general professional
partnership (GPP) by virtue of their distributive
share from GPP which is already net of cast and
expenses.

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Taxpayer is a mixed income earner
- the taxpayer is a compensation income and
at the same time self-employed, the compensation
income shall be subject to the graduated rates of
tax while the self-employment income maybe
subject to either 8% income tax or the graduated
rates.

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 End of Topic
Please see complementary test bank for
practice problems and theories.

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 Dear, you.
Always be in pursuit for
the one you have not yet
become. Keep going!
Love,
Your UCB-JPIA family

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Reference:
▪ Ampongan, O. E. (2018). Income Taxation (with practice set) 15th
ed. Iriga City.
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