TAX ON INDIVIDUALS

TAX ON INDIVIDUALS
Note that this material should be read together with the Chapter 4: Individual
Income Taxation of the Basic Approach to Income Taxation by Justice
Dimaampao.

For tax on individuals, you need to browse (not memorize) Section 22 to

Section 26 of your Tax Code as amended by the TRAIN Law.

❖ Active vs Passive Income

You need to understand the difference between an Active Income and a Passive
Income.

• Active Income - rising from the active pursuit of its business (BIR Ruling
[DA-368-06], [June 13, 2006]). Active income is subject to the regular
corporate income tax of 30% under Sections 27(A) and 28(A)(1), Tax
Code, or the graduated tax rates on individuals under Section
24(A)(2)(a), Tax Code.

• Passive Income – is an income that requires little to no effort to earn and

maintain. Example of your passive income pertains to ‘interest’,
‘royalties’ and ‘Prizes and other winnings’ [see: Section 24(B)(1)&(2),
Tax Code]. Passive income is subject to a Final Tax.

❖ Withholding Tax System

The withholding tax system, specifically that of is a means of approximating and

collecting in advance the income tax liability of a payee or income earner for
certain types of income payment. The government, by force of law, constitutes
Philippine resident payors to act as its withholding agents.

It is a system of advance collection of payee’s (the income recipient) income tax

liability.
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Illustration:
Company A, pays Atty X professional fees of Php 100,000.00. The applicable
withholding tax rate is 15%. Thus, Company A is required to remit and withhold
an amount of Php15,000.00. [100,000 x 15%]. In effect, Atty X will only receive
Php85,000.00, while the Php15,000 will be remitted by Company A to the BIR.

Kinds of Withholding Tax:

• Final Withholding Tax (“FWT”) - Under the final withholding tax

system the amount of income tax withheld by the withholding agent is
constituted as a full and final payment of the income tax due from the
payee on the said income. The liability for payment of the tax rests
primarily on the payor as a withholding agent. Thus, in case of his failure
to withhold the tax or in case of underwithholding, the deficiency tax
shall be collected from the payor/withholding agent. The payee is not
required to file an income tax return for the particular income. [Section
2.57 (A), RR No. 2-1998, as amended]

• Creditable Withholding Tax (“CWT”) - Under the creditable

withholding tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee on said
income. The income recipient is still required to file an income tax
return, as prescribed in Sec. 51 and Sec. 52 of the Tax Code, as amended,
to report the income and/or pay the difference between the tax
withheld and the tax due on the income.

Illustration:
In continuation of the example above. Assuming that Atty X had additional
income of Php250,000.00 from other sources and that his taxable income and
income tax due for the year amounts to Php150,000.00 and Php50,000.00,
respectively. In the same year, Atty X earned interest income of Php10,000 from
his savings account with BPI which was subjected to Final Tax of Php2,000.00.

Is Atty X required to file an income tax return despite the withholding

taxes made?
 TAX ON INDIVIDUALS

Yes, Atty X is still required to file his income tax return but only as to his
Professional Fee and Other income. There is no need for Atty X to reflect the
interest income as the final taxes pertains to full and final payment of income
tax as far as the interest income is concerned.

The income tax return will reflect the following:

Revenue:
Professional Fee Php100,000.00
Other Income Php250,000.00
Total Revenue Php350,000.00
Expenses (Php250,000.00)
Taxable Income Php150,000.00*

Income Tax Due Php50,000.00*

Less: CWT (Php15,000.00)
Income Tax still Due Php35,000.00

* - amount provided in the Illustration

❖ General Principles

SEC. 23, TAX CODE. General Principles of Income Taxation in the Philippines. -
Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all

income derived from sources within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from

sources within the Philippines;

(C) An individual citizen of the Philippines who is working and

deriving income from abroad as an overseas contract worker is
taxable only on income derived from sources within the
Philippines: Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for services rendered
abroad as a member of the complement of a vessel engaged
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exclusively in international trade shall be treated as an overseas

contract worker;

(D) An alien individual, whether a resident or not of the

Philippines, is taxable only on income derived from sources within
the Philippines.

To sum it up remember this golden rule for individual taxpayers:

Resident Citizen are taxable from all sources, while others are taxable only from
sources within the Philippines.

❖ Types of Individual Taxpayers

In general, there are two (2) main categories of individual taxpayers, viz:

i. Citizen
ii. Alien

Individual taxpayers are further classified into:

1. Citizens, who are divided into:

• Resident Citizens – those citizens whose residence is within the
Philippines; and
• Non-resident citizens – those citizens whose residence is not
within the Philippines.

2. Aliens, who are divided into:

• Resident aliens – those individuals whose residence is within the
Philippines and are not citizens thereof: and
• Non-resident aliens – those individuals whose residence is not
within the Philippines but temporarily in the country and are not
citizens thereof. They are:
i. Those engaged in trade or business within the Philippines
(NRA-ETB); and
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ii. Those who are not so engaged (NRA-NETB). (See Tax Code,
Sections 23-25)
It is important to know the definition of each kind of individual taxpayer
because the tax liability of each differs (as we shall see later).

Formula
It is important to note the basic formula to determine the taxable income of an
individual. Think of it as a road map where the different provision of the code
will plug into. The basic formula to determine the taxable income of an
individual is as follows:

GROSS INCOME [See Section 32(A)&(B), Tax Code]

Less: Deductions (either itemized or optional standard deduction)
TAXABLE INCOME

Note: The TRAIN law already repealed personal and additional exemptions.

For those doing business, the Formula can be further expanded as follows:

GROSS SALES
Less: Cost of Goods Sold / Cost of Sales
GROSS INCOME
Less: Allowable Deductions
TAXABLE INCOME

Summary:

Taxpayer Tax Base Source Type

Resident citizen Taxable Income Within & Without May be subject to
Non-resident Citizen Taxable Income CWT if payor is
required to withhold;
Resident Alien Taxable Income rate is based on
Within
graduated rates
Non-resident alien ETB Taxable Income under Sec. 24(A)(2)

Non-resident alien NETB Gross Income Final Tax (@25%)

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Graduated Income Tax Rates under Section 24(A)(2), Tax Code:

Resident Aliens
As a resident alien individual, is subject to income tax in the same manner as
a Filipino citizen, as provided in Section 24 in relation to Section 23 (D) of the
Tax Code (BIR Ruling No. 252-11, [July 26, 2011])

SEC. 22 (F), Tax Code: The terms “resident alien” means an individual whose
residence is within the Philippines and who is not a citizen thereof.

✓ Mere physical or body presence is enough, not intention to make the

country one’s abode. (Garrison v. CA, G.R. No. L-44501, July 19, 1990)

✓ An alien actually present in the Philippines who is not a mere transient

or sojourner is a resident of the Philippines for purposes of income tax.
Whether he is a transient or not is determined by his intentions with
regard to the length and nature of his stay.
o A mere floating intention indefinite as to time to return to another
country is not sufficient to constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his
stay, he is a resident. One who comes to the Philippines for a
definite purpose which in its nature may be promptly
accomplished is transient.
o But if his purpose is such a nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes
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his home temporarily in the Philippines, he becomes a resident,

though it may be his intention at all times to return to his domicile
abroad when the purpose for which he came has been
consummated or abandoned . (RR. 2-1940)

✓ The BIR has ruled that there is intention on the part of an alien to stay in
the Philippines indefinitely when the alien:
o Had a special resident Retiree’s Visa;
o Acquired real property and is actually present most of the time in
the Philippines; and
o Registered as a taxpayer with the BIR. (BIR Ruling No. 252-11)

Non-Resident Citizens
SEC.22 (E), Tax Code The term “nonresident” means:
(1.) A citizen of the Philippines who establishes to the satisfaction of
the Commissioner the fact of his physical presence abroad with a definite
intention to reside therein

(2.) A Citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant of for employment
on a permanent basis.
(3.) A citizen of the Philippines who works and derives income from
aboard whose employment thereat requires him to be physically present
abroad most of the time during the taxable year.
(4.) A citizen who has previously considered as nonresident citizen and
who arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until
the date of his arrival in the Philippines
(5.) The taxpayer shall submit proof to the Commissioner to show
his intention of leaving the Philippines to reside permanently abroad or
to return to and reside in the Philippines as the case maybe for the
purpose of this Section.
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✓ Who are non-resident citizens (R.R. 1-1979)

o Immigrant – one who leaves in the Philippines to reside abroad as
an immigrant for which a foreign visa has been secured.
o Permanent Employee – one who leaves the Philippines to reside
abroad for employment on a more or less permanent basis.
o Contract worker – one who leaves the Philippines on account of
contract of employment which is renewed from time to time under
such circumstance as to require him to be physically present
abroad most of the time (not less than 183 days)

✓ Non-resident citizens who are exempt from tax with respect to income
derived from sources outside the Philippines shall no longer be required
to file information returns from sources outside the Philippines
beginning 2001 (RR 5-2001)

✓ The phrase “most of the time” shall mean that the said citizen shall have
stayed abroad for at least 183 days in taxable year.
→ However, citizens who work outside of the Philippines for at least
183 days in a taxable year due to a contract of employment with a
Philippine employment (such as employees seconded to a foreign
country) are not considered non-resident citizens because they are
not considered employed abroad. They do not fall within Section
22 E (3) because their employment remains with the Philippine
employer. (BIR Ruling No. 116-12)

• The wage or income of an OFW/OCW which is earned from outside the

Philippines is exempt from income tax.
o An Overseas Contract Worker (“OCW”) is a Filipino citizen who:
▪ Holds a job outside the Philippines;
▪ Is physically present in that foreign country where the job is;
▪ Is registered with the POEA;
▪ Has a valid overseas employment certificate;
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▪ Their salaries and wages are paid by an employer abroad and

is not borne by an entity or person in the Philippines. (RR 1-
2011)

Nonresident Alien
A nonresident alien individual engaged in trade or business in the Philippines shall
be subject to an income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all sources within the
Philippines. A nonresident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than one hundred eighty (180) days
during any calendar year shall be deemed a 'nonresident alien doing business in
the Philippines [Section 25(A)(1), Tax Code]

✓ One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished is a transient or non-resident. (RR
2-1940)

✓ Loss of residence by alien

o An alien who has acquired residence in the Philippines retains his
status until he abandons the same and actually departs from the
Philippines.
o A mere intention to change his residence does not change his
status from resident alien to non-resident alien. An alien who
has acquired residence in the Philippines retains his status until he
abandons the same and actually departs from the Philippines.
o A mere intention to change his residence does not change his
status from resident alien to non-resident alien. An alien who
has acquired a residence is taxable as a resident for the remainder
of his stay in the Philippines. (Section 6, RR 2-1940)
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Specific Taxpayers
❖ Minimum Wage Earners

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, overtime pay, night shift differential pay and
hazard pay received by such minimum wage earners shall likewise be exempt
from income tax. [Section 24, Tax Code]

The term “minimum wage earner” shall refer to a worker in the private sector
paid the statutory minimum wage; or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the
non-agricultural sector where he/she is assigned [Section 22(HH), Tax Code]

The minimum wage is fixed by the Regional Tripartite Wage and Productivity
Board

❖ Senior Citizens

• Senior Citizens are

o Resident citizens of the Philippines, and who are at least 60 years
old
▪ They are not exempt from income taxes unless they are
considered minimum wage earners. (RA. 9994)
• Senior citizens are granted a 20% discount from select establishments.
o Sales of goods and services by select establishments to senior
citizens are also exempt from VAT. (RR 7-2010)
Discounts for senior citizens are now treated as tax deductions for businesses,
as per The Expanded Senior Citizens Act of 2003 (RA. 9257).
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❖ Persons with Disability

• PWDs are:
o Individuals suffering from restriction or different abilities,
o As a result of mental, physical or sensory impairment to perform
an activity in a manner or within the range considered normal for
human beings.
• PWD are granted a 20% discount from selected establishments.
o These discounts can likewise be claimed as a deduction for
businesses have been held as valid and constitutional as a proper
exercise of police power. (Drugstores Association of the Philippines
v. National Council of Disability Affairs, GR. No. 194561, September
14, 2016)

❖ Individuals Earning PURELY Compensation Income

First compensation income is all remuneration for services performed by an

employee for his employer under an employer-employee relationship.
• This includes salaries, wages, emoluments, and honoraria, allowances,
commissions, director’s fees where the director is also an employee. (RR
8-2018)
• So, as long as there’s an employer-employee relationship, remuneration
arising from it will be considered compensation income.

If an individual earns purely compensation income, then he or she will be taxed

according to his or her taxable income and tax bracket, i.e., the graduated rates.
• Taxable income is the individual’s gross compensation income less non-
taxable income/benefits like 13th-month pay and other benefits like de
minimis benefits and employee’s share in the SSS, GSIS PHIC, Pag-Ibig
contributions and union dues (RR 8-2018)
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Substituted Filing:

Individual taxpayers receiving purely compensation income, regardless of

amount, from only one employer in the Philippines for the calendar year, the
income tax of which has been withheld correctly by the said employer (tax due
equals tax withheld) shall not be required to file Annual Income Tax Return
for Individuals Earning Purely Compensation Income (BIR Form No. 1700).
[Section 2.83.4, RR 2-98]

Employees not qualified for substituted filing but are required to file the
Income Tax Return shall file the same not later than April 15 of the year
immediately following the taxable year. Provided, that employees with
previous/successive employer/s within the taxable year shall furnish their new
employer with BIR Form No. 2316 issued by the previous employer/s

❖ Self Employed and Mix Income Earners

Self-employed individuals earning income purely from self-employment or

practice of profession.

• A self-employed individual is a sole proprietor or an independent

contractor who reports income earned from self-employment.

• A professional is a person formally certified by a professional body

belonging to a specific profession. It also refers to a person who engages
ins some art or sport for money as a means of livelihood, rather than as a
hobby (like a professional boxer or a professional artist. An insurance
agent, management and technical consultant, and recipients of
professional and talent fees are also considered professionals.
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▪ So, self- employed individuals and professionals have a choice to avail of:
• The graduated rates or
• An 8% tax on gross sales/receipts and other non-operating income in
excess of P250,000 in lieu of the graduated income tax rates and the
percentage tax under Sec. 116 NIRC.

▪ Mixed income earners are taxed in this way:

• For compensation income, straight out use the graduated rates;
• For income from business or practice of profession, it will depend
whether their gross sales/receipts and other non-operating income
exceed the VAT threshold (Php3Million):
o If it exceeds the VAT threshold, then straight out use the graduated
rates for that too
o If it does not exceed the VAT threshold, then the taxpayer has a choice
to use either:
▪ the graduated rates or
▪ 8% income tax based on gross sales/receipts and other non-
operating income in lieu of the graduated rates and percentage tax
under Section 116.
▪ The total income tax liability of the mixed income earner is the
sum of the liability for compensation income and liability for the
income from business or practice of profession
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Tax on Passive Income

For passive income, TRAIN made the following changes:

o Winnings from Phil Charity Sweepstakes and Lotto are only exempt up to
P10,000; any winnings above P10,000 are taxed 20%
o Interest income under the expanded foreign currency deposit system are
now taxed 15%

Tax Rate on Certain Passive Final Tax

Income on Citizens and Residents
Aliens
1. Interest under the expanded 15% (vs exempt for nonresident
foreign currency deposit aliens engaged in trade/business
system
Non-resident citizens: exempt
2. Royalty from books, literary 10%
works, and musical
compositions
3. Royalty other than the above 20%
4. Interest on any current bank 20%
deposit, yield or other
monetary benefits from deposit
substitute, trust fund and
similar arrangement
5. Prizes exceeding P10,000 20%
6. Winnings (except Philippine 20%
Charity Sweepstakes and Lotto
winnings amounting to
P10,000 or less, which shall be
exempt)
7. Dividend from a domestic 10% (vs 20% for non-resident aliens
corporation, or from a joint engaged in trade/business)
stock company, insurance or
mutual fund company, and
regional operating
headquarters of multinational
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company or share in the

distributive net income after
tax of a partnership), joint stock
or joint venture or consortium
taxable as a corporation
• But what about dividends from
foreign corporations for
resident citizens ( not resident
aliens?) Well, the income here
enters into the computation for
Sec. 24(a) tax calendar. For
resident aliens, they are not
taxed since their income is
derived from abroad
8. Interest on long-term deposit exempt
or investment in banks (with
maturity of 5 years or more)