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Individual Income Taxation and Dealings in Property

Types of Individual Income Taxes and Taxpayers

1. Regular income taxes are taxes derived from ordinary income (income from compensation, business, or
profession), passive income derived abroad by a resident citizen, and other income/gains reflected in the
income tax return of the taxpayer.

2. Final Taxes on Passive Income

- A final tax is imposed upon the gross passive income of citizen and resident aliens.
- An income is considered passive if there is no active participation on the part of the taxpayer. The
examples of passive income are: (1) yield from deposit substitutes and trust fund; (2) interest income;
(3) royalty income; (4) dividend income; and (5) prizes and winnings.

3. Capital Gains Taxes are taxes derived from capital gain or profits in selling specific capital assets.
- Ordinary assets are assets that are connected or used in business operations.
- Capital asset is the residual definition of assets. It is usually a type of asset that is not connected to a
business or profit undertakings of the taxpayer. The following are considered as capital assets (Valencia
& Roxas, 2016):
o Stock and securities held by taxpayers other than a dealer in securities
o Real and personal properties not used in trade or business (e.g., residential house, jewelry, etc.)
o Investment property

Regular Income Taxation

Under Section 2 of the Revenue Regulation No. 8-2018, these are the following terminologies used in the
regulation:
• Compensation Income – These are all remuneration for services performed by an employee for his
employer under employee-employer relationship, unless specifically excluded by the Code. These include:
salaries, wages, emoluments and honoraria, allowances, commissions (e.g., transportation, representation,
entertainment and the like); fees including director’s fees, if the director is, at the same time, an employee
of the employer/corporation; taxable bonuses and fringe benefits, except those which are subject to the
fringe benefit tax under Sec. 33 of the Code and allowable “de minimis*” benefits (e.g., rice subsidy, uniform
and clothing allowance, and laundry allowance, etc.); taxable pensions and retirement pay; and other
income of similar nature.
• Gross Receipts – These refer to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental, or royalty, including the amount charged for materials supplied with the
services, and deposits and advance payments actually or constructively received during the taxable period
for the services performed or to be performed for another person, except returnable security deposits for
these regulations. In the case of a value-added tax (VAT) taxpayer, this shall include the VAT component.
• Gross Sales – These refer to the total sales transactions net of VAT, if applicable, reported during the
period, without any other deductions. However, gross sales subject to the 8% income tax rate option shall
be net of the following deductions:
o Sales return and allowances for which a proper credit or refund was made during the month or quarter
to the buyer for sales previously recorded as taxable sales
o Discounts determined and granted at the time of sale, which is expressly indicated in the invoice, the
amount thereof forming part of the gross sales duly recorded in the books of accounts
• Taxable Income - As defined under Section 2 of the Revenue Regulation No. 8-2018, this refers to the
pertinent items of gross income specified in the Code less deductions, if any, authorized for such types of
income by the Code or other special laws.
Gross Income XXX
Less: Deductions (XXX)
Taxable Income XXX
Progressive Tax Rates %
Tax Due XXX
Less: Tax Credit (in case a tax credit is given) XXX

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Tax still due (in case a tax credit is given) XXX

The income tax on these earnings is computed based on the following progressive tax rates:

Annual Income Bracket Tax Rate Tax Rate

(in PHP) (2018-2022) (2023 onwards)
Over But not over Basic Amount Additional Rate Basic Amount Additional Rate
0 250,000 - - -
250,000 400,000 - 20% - 15%
400,000 800,000 30,000 25% 22,500 20%
800,000 2,000,000 130,000 30% 102,500 25%
2,000,000 8,000,000 490,000 32% 402,500 30%
8,000,000 - 2,410,000 35% 2,202,500 35%
Table 1. Graduated Tax Rate on Personal Income Tax
Source: Revenue Regulation No. 8-2018, Implementing the Income Tax Provisions of Republic Act No. 10963, Otherwise known as the
“Tax Reform for Acceleration and Inclusion (TRAIN) Act.”

Minimum Wage Earner

Under the Revenue Regulation No. 8-2018, Minimum Wage Earner (MWE) refers to a worker in the private
sector who is paid with a statutory minimum wage (SMW) rates, or to an employee in the public sector with
compensation income of not more than the statutory minimum wage rates in the non-agricultural sector where
the worker/ employee is assigned. Such statutory minimum wage rates are exempted from income tax. Likewise,
the exemption covers the holiday pay, overtime pay, night shift differential pay, and hazard pay earned by an
MWE.

Illustrative Problem. Mr. JKL, a minimum wage earner, works for YLEAD Inc. He is not engaged in business nor
has any other source of income other than his employment. For 2018, Mr. JKL earned a total compensation
income of P135,000.

a. The taxpayer contributed to SSS, PhilHealth, and Pag-IBIG amounting to P5,000 and has received the 13th
month pay of P11,000. His income tax liability will be computed as follows:

Total Compensation Income P 135,000

Less: Mandatory Contributions P 5,000
Non-taxable Benefits 11,000 16,000
Taxable Income P 119,000

*The taxpayer is exempt since he is considered a minimum income earner.

b. The following year, Mr. JKL earned, aside from his basic wage, the additional pay of P140,000 which
consists of an overtime pay of P80,000, night shift differential of P30,000, hazard pay of P15,000, and
holiday pay of P15,000. He has the same benefits and contributions as above.

Total Compensation Income P 135,000

Less: Overtime, night differential,
Hazard, and holiday pay 140,000
Total Income P 275,000
Less: Mandatory contributions P 5,000
Non-taxable benefits 11,000 16,000
Net Taxable Income P 259,000
Tax Due EXEMPT

*The taxpayer is tax exempt as an MWE. The statutory minimum wage as well as the holiday pay, overtime
pay, night differential pay, and hazard pay received by such MWE are specifically exempted from income
tax due under the law.

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Taxation on Compensation Income

Purely Compensation Earner
The taxable income for compensation earners under Section 3 (B) of the Revenue Regulations No. 8-2018 is
the gross compensation income less non-taxable benefits such as but not limited to the 13th month pay and
other benefits (subject to limitation, under Section 6 (G) of the regulation), de minimis benefits, and employee’s
share in the SSS, GSIS, PhilHealth, Pag-IBIG contributions, and union dues.

Under Section 3 (B) of the Revenue Regulations No.8-2018, individuals earning purely compensation income
shall be taxed based on the graduated income tax rates as shown in Table 1.

Husband and wife shall compute their individual income tax rate separately based on their respective taxable
income. If any income cannot be attributed or identified as income exclusively earned or realized by either of
the spouses, the same shall be divided equally between the spouses to determine their respective taxable
income.

Illustrative Problem 1. Mr. JKS, a financial comptroller of ABC Company, earned annual compensation of
P1,500,000 in 2018, inclusive of the 13th month and other benefits amounting to P120,000 but net of mandatory
contributions to SSS and PhilHealth.

His tax due for 2018 shall be computed as follows:

Total Compensation Income P 1,500,000
Less: Non-taxable 13th month pay and other benefits (max) 90,000
Taxable Compensation Income P 1,410,000
Tax due:
On P 800,000 P 130,000
On excess (P1,410,000-P800,000) x 30% 183,000
Tax Due on Compensation Income P 313,000

*The maximum non-taxable benefit is P90,000. Further discussion and elaboration of this concept are
prearranged in the succeeding topics.

Individuals Earning Income both from Compensation and from Self-employment (Business or Practice
of Profession)

For mixed income earners, the following income tax rates are applicable:
1. The compensation income shall be subject to the tax rates prescribed under Section 24 (A)(2)(a) of the Tax
Code, as amended.
2. The income from business or practice of profession shall be subject to the following:
a. If the gross sales/ receipts and other non-operating income do not exceed the value-added Tax (VAT)
threshold, the individual has the option to be taxed at:
i. Graduated income tax rates prescribed under Section 24 (A)(2)(a) of the Tax Code, as amended;
or
ii. Eight percent (8%) income tax rate based on gross sales/receipts and other non-operating income
in lieu of the graduated income tax rates and percentage tax under Section 116 of the Tax Code,
as amended.
b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the individual
shall be subject to the graduated income tax rates prescribed under Section 24 (A)(2)(a) of the Tax
Code, as amended.
Illustrative Problem 2. Mr. JKS, an accountant of ABC Company, earned annual compensation income of
P1,500,000 in 2018, inclusive of the 13th month and other benefits in the amount of P120,000 but net of
mandatory contributions to SSS and PhilHealth. Aside from the employment income, he owns a convenience
store with gross sales of P2,400,000. His cost of sales and operating expenses are P1,000,000 and P600,000,
respectively, and with non-operating income of P100,000.

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a. His tax due for 2018 shall be computed as follows if he opted to be taxed at 8% income tax rate on his
gross sales for his income from business:

Total Compensation Income P 1,500,000

Less: Non-taxable 13th month pay and other benefits (max) 90,000
Taxable Compensation Income P 1,410,000

Tax Due:
On Compensation:
On P 800,000 P 130,000
On excess (P1,410,000-P800,000) x 30% 183,000
Tax due on Compensation Income P 313,000
On Business Income:
Gross Sales P 2,400,000
Add: Non-operating Income 100,000
Taxable Business Income 2,500,000
Multiply by income tax rate 8%
Tax Due to Business Income P 200,000

Total Income Tax Due (Compensation and Business) P 513,000

- The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the
same is in lieu of the income tax under the graduated income tax rates and the percentage tax
under Section 116 of the Tax Code, as amended.
- The amount of P250,000 allowed as a deduction under the law for taxpayers earning solely from
self-employment/ practice of the profession is not applicable for a mixed-income earner under the
8% income tax rate option.
- The P250,000 mentioned above is already incorporated in the first tier of the graduated income tax
rates applicable to compensation income.

b. His tax due for 2018 shall be computed as follows if he did not opt for the 8% income tax based on
gross sales/receipts and other non-operating income:

Total Compensation Income P 1,500,000

Less: Non-taxable 13th month pay and other benefits (max) 90,000
Taxable Compensation Income P 1,410,000
Add: Taxable Income from Business-
Gross Sales P 2,400,000
Less: Cost of Sales 1,000,000
Gross Income P 1,400,000
Less: Operating Expenses 600,000
Net Income from Operation P 800,000
Add: Non-operating Income 100,000 900,000
Total Taxable Income P 2,310,000

Tax Due:
On P 2,000,000 P 490,000
On excess ( P 2,310,000-2,000,000) x 32% 99,200
Total Income Tax P 589,200

*The taxable income from both compensation and business shall be combined for the purpose of
computing the income tax due if the taxpayer chose to be subject under the graduated income tax rates.

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De Minimis and Other Benefits

According to Revenue Regulations No. 11-2018 (RR 11-2018), the following shall be considered as “de minimis”
benefits not subject to income tax as well as withholding tax on compensation income of both managerial, and
rank and file employees:

Benefits Limit of Exemption

Monetized unused vacation leave credits of private employees 10 days
Monetized value of vacation and sick leave credits paid to government
No limit
officials and employees
Medical cash allowance to dependents of employees P1,500/sem; P250/month
P 2,000 or one sack of 50kg. rice/month
Rice subsidy
amounting to not more than P2,000
Uniform and clothing allowance P 6,000/ year
Actual medical assistance (e.g., medical allowance to cover medical
P10,000/ year
and healthcare needs, etc.)
Laundry allowance 300/month
Employees achievement award (e.g., for the length of service or safety
achievement, which must be in the form of tangible personal property P10,000/year
other than cash or gift certificate)
Gifts made during Christmas and major anniversaries P5,000/year
25% of the basic minimum wage on a per
Daily meal allowance for overtime work and night/graveyard shift
region basis
Benefits received under collective bargaining agreement and
P10,000
productivity incentive schemes

As per RR 11-2018, the following income payments are exempted from the requirement of withholding tax on
compensation but may be subject to income tax depending on the nature/source(s) of income earned by the
individual recipient.

1. Thirteenth Month Pay and Other Benefits

a. Thirteenth month pay equivalent to the mandatory one (1) month basic salary of officers and employees
of the government, including government-owned or controlled corporations, and/or private offices
received after the twelfth-month pay; and
b. Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind,
and other benefits of similar nature actually received by officials and employees of both government
and private offices, including the Additional Compensation Allowance (ACA) granted and paid to all
officials and employees of the National Government Agencies (NGAs) including State Universities and
Colleges (SUCs), Government-Owned and or Controlled Corporations (GOCCs), Government Financial
Institutions (GFIs) and Local Government Units (LGUs).
- The above-stated exclusions under (a) and (b) shall cover benefits paid or accrued during the year,
provided that the total amount shall not exceed P90,000.

2. GSIS, SSS, Medicare, and Other Contributions – These are GSIS, SSS, Medicare and Pag-IBIG
contributions, and union dues of individual employees.

3. Compensation income of Minimum Wage Earners (MWEs) who work in the private sector and being
paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where he/she is
assigned, as well as the compensation of employees in the public sector who are paid not more than the
SMW applicable to non-agricultural sector, as fixed by RTWPB/NWPC, applicable to the place where he/she
is assigned (BIR, Revenue Regulations No. 11-2018, 2018).

Dealings in Property
Dealings with property refer to the sale or exchange of ordinary or capital assets. Under Section 2 of the
Revenue Regulations No. 7-2003, ordinary assets and capital assets were defined as:

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 Capital Assets shall refer to all real properties held by the taxpayer, whether connected with his trade or
business or not, and which are not included among the real properties considered as under Sec 39 (A)(1)
of the Code.
 Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets
under Sec. 39 (A)(1) of the Code, namely:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year;
b. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business;
c. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is
subject to the allowance for depreciation provided for under Sec. 34 (F) of the Code; or
d. Real property used in trade or business of the taxpayer.
- Real properties acquired by banks through foreclosure sales are considered as their ordinary
assets.
Note: There is a different process in taxing the gain/profit of these assets. The concept will be discussed
lengthily in the successive topics.
Taxation of Business Income/Income from the Practice of the Profession
Individuals Earning Income Purely from Self-Employment or Practice
According to Section 3 of the said regulation, individual earning income purely from self-employment and/or
practice of profession whose gross sales/receipts and other non-operating income does not exceed the value-
added tax (VAT) threshold as provided under Section 109 (BB) of the Tax Code as amended, shall have the
option to avail of:
1. The graduated rates under Section 24 (a)(2)(a) of the Tax Code, as amended; or
2. An 8% on gross sales or receipts and other non-operating income more than P250,000.00 in lieu of the
graduated income tax rates under Section 24(A) and the percentage tax under Section 116 all under the
Tax Code, as amended.
To simplify the concept, please see the illustration below:
Revised graduated
Non-VAT registered taxpayers VAT-Registered Income Tax Rates plus
who initially opted to avail the
12% VAT
8% tax but has exceeded the YES
threshold during the year shall
be subject to 3% percentage tax NO
on the first 3 million without YES
penalty if payment was made on Gross Sales/Receipt exceeded the
the following month when the P3,000,000 VAT threshold
threshold was breached. Excess
over 3 million shall be subject to
VAT
NO

Taxpayers subject to other

Option to be taxed at 8%
should be signified in the
first quarter percentage tax
and/or ITR.
8% tax on gross
sales/receipts (in
excess of P250,000)
Revised graduated percentage tax (OPT) and
OR Income Tax Rates partners of GPP by virtue of
their distributive share in the
plus 3% percentage
GPP shall have no option to
tax
avail the 8% tax.

Figure 1. Income Tax Rates for Self-Employed Individuals Earning Income Purely from Self-Employment or Practice of Profession
Source: Tax Reform for Acceleration and Inclusion (TRAIN) Manual, 2018. p. 24
Important Notes:
 The taxpayer should signify the intention to elect the 8% income tax rate in the 1st Quarter Percentage
and/or Income Tax Return, on the initial quarter return of the taxable year after the commencement
of a new business/ practice of the profession. Failure to do so, the taxpayer shall be considered availed of
the graduated rates.
 Even the taxpayer initially selected the 8% income tax rate but exceeded the VAT threshold of P 3,000,000
during the taxable year, the taxpayer shall automatically be subject to the graduated rates.

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Illustration 1. Taxpayer signifies her intention to be taxed at 8% income tax rate

Ms. ABC operates a convenience store while she offers bookkeeping services to her clients. In 2018, her gross
sales amounted to P800,000, in addition to her receipts from bookkeeping services of P300,000. She already
signified her intention to be taxed at 8% income tax rate in her 1st quarter return.

Her income tax liability for the year will be computed as follows:
Gross Sales-Convenience Store P 800,000
Gross Receipts- Bookkeeping 300,000
Total Sales/ Receipts P 1,100,000
Less: Amount Allowed as a deduction 250,000
Taxable Income P 850,000
Tax Due:
8% of P850,0000 P 68,000

Illustration 2. Taxpayer failed to signify her intention to be taxed at 8% income tax rate
Ms. ABC above failed to signify her intention to be taxed at 8% income tax rate on gross sales in her initial
Quarterly Income Tax Return, and she incurred the cost of sales and operating expenses amounting to
P600,000 and P200,000, respectively. The income tax shall be computed as follows:

Gross Sales/Receipts P 1,100,000

Less: Cost of Sales 600,000
Gross Income P 500,000
Less: Operating Expenses 200,000
Taxable Income P 300,000
Tax Due:
On excess (P300,000-P250,000) x 20% P 10,000

Illustration 3. Taxpayer signified his interest, but gross sales/ receipts exceeded the VAT threshold during the
taxable year
Mr. BCD signified his intention to be taxed at 8% income tax rate on gross sales in his 1st Quarter Income Tax
Return. He has no other source of income. His total sales for the first three (3) quarters amounted to P3,000,000
with 4th quarter sales of P3,500,000.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

(8% Rate) (8% Rate) (8% Rate)
Total Sales P 500,000 P 500,000 P 2,000,000 P 3,500,000
Less: Cost of Sales 300,000 300,000 1,200,000 1,200,000
Gross Income P 200,000 P 200,000 P 800,000 P 2,300,000
Less: Operating Expenses 120,000 120,000 480,000 720,000
Taxable Income P 80,000 P 80,000 P 320,000 P 1,580,000

Tax due shall be computed as follows:

Total Sales P 6,500,000
Less: Cost of Sales 3,000,000
Gross Income P 3,500,000
Less: Operating Expenses 1,440,000
Taxable Income P 2,060,000
Income Tax Due:
Tax Due under graduated rates P 509,200
Less: 8 % income tax previously paid (Q1 to Q3)
(P 3,000,000 -P250,000) x 8% 220,000
Annual Income Tax Payable P 289,200

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Illustration 4. Gross receipts exceeded the VAT threshold

Mr. DEF is a prominent independent contractor who offers architectural and engineering services. Since his
career flourished, his total gross receipts amounted to P4,250,000 for taxable year 2018. His recorded cost of
service and operating expenses were P2,150,000 and P1,000,000, respectively.

His income tax liability will be computed as follows:

Gross Receipts (Architectural and Engineering Services) P 4,250,000

Less: Cost of Service 2,150,000
Gross Income P 2,100,000
Less: Operating Expenses 1,000,000
Taxable Income P 1,100,000
Tax Due:
On P800,000 P 130,000
On excess (P1,100,000-P800,000) x 30% 90,000
Income Tax Due 220,000

References:
Bureau of Internal Revenue. (2018). Guide to Philippines tax law research. Retrieved from Bureau of Internal
Revenue: https://www.bir.gov.ph
Bureau of Internal Revenue. (2018). Index for income tax. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-information/income-tax.html
Bureau of Internal Revenue. (2018, January 31). Revenue Regulations No. 11-2018. Amending Certain
Provisions of Revenue Regulations No. 2-98, as Amended, to Implement Further Amendments
Introduced by Republic Act No. 10963, Otherwise Known as the “Tax Reform for Acceleration and
Inclusion (TRAIN)” Law, Relative to Withholding of Incom. Quezon City, Philippines: Rebublic of the
Philippines.
Bureau of Internal Revenue . (2018). Tax reform for acceleration and inclusion (TRAIN). Retrieved from Bureau
of Internal Revenue: https://www.bir.gov.ph/index.php/train.html
De Leon, H. S. & De Leon, H. M. (2016). The law on income taxation. Quezon City: REX Printing Company,
Inc.
Department of Finance. (2018, August 31). Tax 101. Retrieved from Department of FInance:
http://www.dof.gov.ph
De Vera, J. L. (2018). Quicknotes in taxation. Manila: GIC Enterprises & Co.,Inc.
Hoffman, W. H. & Smith, J. E. (2014). Individual income taxes. Mason: Cengage Learning.
SyCip Gorres Velayo & Co. (2018). TRAIN seminar. Makati City: SGV & Co.
Tabag, E. D. (2018). CPA reviewer in taxation. Manila: Professional Review and Training Center.
Valencia, E. G. & Roxas, G. F. (2016). Income taxation. Baguio City: Valencia Educational Supply.

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