LESSON 18: INDIVIDUAL INCOME TAXATION

Target:

At the end of the lesson, you will be able to:

 Know the classification of individual taxpayer

 Understand the types of tax for individual taxpayer
 Analyze the different sources of income

EXPLORE

Fill out the graphic organizer below by writing down what you know about Individual
Income Taxation. You may choose to answer using the following guide questions. Compare
and discuss your answers with a partner.

Guide questions:

1. What do you know about personal taxes?

2. Are employees required to file for income tax return?
3. What are the classifications of income taxpayers?

EXAMINE

CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS

1. Citizen
a. Resident
b. Non-Resident
2. Alien
a. Resident
b. Non-Resident
1. Engaged in Trade or business in the Philippines
2. Not engaged in trade or business in the Philippines
3. Employed by
a. Regional or area headquarters (RHQs) and regional operating
headquarters (RHQs) of multinational entities in the Philippines that are
engaged in international trade with affiliates and subsidiary branch
offices in the Asia Pacific region.
 b. Offshore banking units.
c. Petroleum contractors and sub-contractor
Definition of Terms
1. Citizen. The following shall be considered citizens of the Philippines:
 Those who are citizens of the Philippines at the time of the adoption of the Feb 2,
1987
Constitution;
 Those whose fathers or mothers are citizens of the Philippines;
 Those born before Jan. 17, 1973, the date of adoption of the 1973 Constitutions, of
Filipino mothers, who elect Philippine citizenship upon reaching the age of majority;
and
 Those who are naturalized in accordance of the law.
2. Resident Citizen is a Filipino citizen who permanently resides in the Philippines.
3. Non-resident citizen means:
 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.
 A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
 A citizen of the Philippines who works and derives income from abroad and whose
employment threat requires him to be physically present abroad most of the time
during the taxable year. “Most of the time” is interpreted to mean presence abroad
for at least 183 day during the taxable year. (BIR Ruling 128-99, Aug 18, 1999.
 A citizen who has been previously considered as non-resident 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 non-resident 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.
 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 may be.
4. Resident Alien. Means an individual whose residence is within the Philippines and who
is not a citizen thereof. He is one who is actually present in the Philippines and who is
not a mere transient and sojourner. But residence does not mean mere physical
presence. An alien is considered a resident or a non-resident depending on his intention
with regard to the length and nature of his stay.
5. Non-resident alien. Means an individual whose residence is not within the Philippines
and who is not a citizen thereof.
6. Non-resident alien engaged in trade or business (NRA-ETB). Means that the alien is
carrying on a business in the Philippines. It connotes more than a single act or isolated
transactions. It involves some continuity of action.
The term trade, business or profession shall not include performance of services by the
taxpayer as an employee but it includes the performance of the functions of a public office. A
non-resident alien who has stayed in the Philippines for more than 180 days during any
calendar year shall be deemed doing business in the Philippines. If he stayed for 180 days,
he is considered a non-resident alien not doing business in the Philippines (NRA-
NETB).
7. OCWs or OFWs refer to Filipino citizens employed in foreign countries who are
physically present in a foreign country as a consequence of their employment thereat.
Their salaries and wages are paid by an employer abroad and are not borne by any
entity or person in the Philippines. To be considered as an OCW or OFW, they must be
duly registered as such with the Philippine Overseas Employment Administration
(POEA), with a valid Overseas Employment Certificate (OEC).
Seafarers or seamen are Filipino citizens who receive compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade. They must be duly registered as such with the POEA with a valid
OEC and Seafarers Identification Record Book (SIRB) or Seaman’s Book issued by the
Maritime Industry Authority (MARINA) (Revenue Regulations 1-2011, Feb. 24, 2011).
8. Foreign currency deposit system (FCDS) shall refer to the conduct of banking
transactions whereby any person, whether natural or juridical, may deposit foreign
currencies forming part of the Philippine international reserves, in accordance with the
 provisions of R.A 6426 entitled “An Act instituting a Foreign Currency Deposit System in
the Philippines, and For Other Purposes.”
9. Foreign Currency Deposit Unit (FCDU) shall refer to that unit of a local bank or a local
branch of a foreign bank authorized by the Bangko Sentral ng Pilipinas (BSP) to engage
in foreign currency-denominated transactions, pursuant to the provisions of R.A. 6426,
as amended. Local Bank shall refer to a thrift bank or a commercial bank organized
under the laws of the Republic of the Philippines. Local branch of a foreign bank shall
refer to a branch of a foreign bank doing business in the Philippines, pursuant to the
provisions of R.A. 337, as amended.
10. Offshore banking system shall refer to the conduct of banking transactions in foreign
currencies involving the receipt of funds principally from external and internal sources
and the utilization of such fund pursuant to Presidential Decree 1034 as implemented by
Central Bank [now Bangko Sentral ng Pilipinas (BSP)] Circular 1389, as amended.
11. Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by the BSP to transact offshore banking
business in the Philippines in accordance with the provisions of Presidential Decree
1034 as implemented by Central Bank (now BSP) Circular 1389, as amended.
12. Deposits shall mean funds in foreign currencies which are accepted and held by an
Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of
business, with the obligation to return an equivalent amount to the owner thereof, with
or without interest.

Categories of Individual Income and Tax Rates

1. Compensation income – this includes all remuneration for services performed by an

employee for his employer under an employer-employee relationship, unless
specifically excluded by the Code. Compensation income is taxed at graduated
income tax rates from 0%-35%.

If a taxpayer is receiving compensation income from two or more employers, he/she

must combine all compensation income received from all employers for a particular
calendar year.
 Table 1 shows the revised tax table from TRAIN Law.

Illustration: Rian, a resident citizen, has a gross compensation income of P310,000.

How much is her taxable income and tax due?

Taxable compensation income – P 310,000

Tax due:
P310,000-P250,000 = P60,000 x 20% = P12,000

2. Business income – this income arises from self-employment or practice of

profession. This income excludes earnings from performance of services by the
taxpayer as an employee.

Sole proprietors whose annual gross sales or receipts do not exceed 3 Million, may
choose to pay either of the following:

a. 8% of gross sales or gross receipts in excess of P250,000; or

b. The graduated income tax rate (see Table 1)

However, gross sales or receipts exceed 3 Million, income tax shall be computed
using the Table 1.

Illustration: Assume that an MSME had the following financial data for the year
2019:
 Gross receipts – P1,500,000.00
Operating expenses – P500,000.00

Sole Proprietor (Self-employed or professionals)

*The Proprietor can opt to pay an 8% of his gross annual sales or receipts, or he can
pay using the graduated rates using the table previously shown. (referring to table
1)

If he opts for the 8%, his tax shall be computed as follows:

8% Gross Income Tax

Gross receipts P1,500,000.00

Less: Exempt Income 250,000.00

Taxable Income P1,250,000.00

Tax Due:

(1,250,000 x 8%) P 100,000.00

[8% of the excess over P250,000]

If he opts for the Graduated Income tax, his tax shall be computed as follows:

Gross receipts P1,500,000.00

Less: Operating Expense 500,000.00

Taxable Income P1,000,000.00

Tax Due:

First P800,000.00 P 130,000.00

P200,000 x 30% 60,000.00

[Excess over 800,000 x 30%]

P 190,000.00

3. Passive income – income that are subject to final tax. Examples of passive income
are interest, royalties and dividends.

CHECK
A. True or False: Write T if you think the statement is true and F if it is false.

1. Non-resident alien means an individual whose residence is not within the

Philippines and who is not a citizen thereof.
2. A taxpayer whose father or mother is a Filipino citizen is likewise a Filipino citizen.
3. Passive income is subject to a separate and final tax.
4. Resident citizen is 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.
5. Resident Citizen is a Filipino citizen who permanently resides in the Philippines.
6. An overseas contract worker is taxable only on his income from sources within the
Philippines.
7. Resident alien is an individual whose residence is within the Philippines but who is
not a citizen thereof.
8. Sole proprietors whose annual gross sales or receipts do not exceed 3 Million, may
opt to pay the 8% income tax rate.
9. Compensation income includes all remuneration for services performed by an
employee for his employer under an employer-employee relationship.
10.Compensation income excludes earnings from performance of services by the
taxpayer as an employee.

B. Computation of taxable income and tax due.

1. Thyl, a resident citizen, has a gross compensation income of P230,000. How much is
her taxable income and tax due?
2. Ema, a non-resident citizen, has two employers and has a gross compensation
income of P150,000 and P290,000. How much is her taxable income and tax due?
3. Troy, a resident alien, has a gross compensation income of P550,000. How much is
his taxable income and tax due?
4. Peter, a sole proprietor, has a gross receipts of P2,900,000. How much is the taxable
income and income tax due if he opts for an 8% income tax rate?
5. Phil, a sole proprietor, has the following financial data for the year 2019. Compute
the income tax due using the graduated tax rates.

Gross receipts – P2,800,000.00

Operating expenses – P1,200,000.00
EQUIP

“Types of Income Taxpayers- Individuals”

https://www.youtube.com/watch?v=xzs_LiU6kvE

“1701 New (2018/2019)”

https://www.youtube.com/watch?v=5APLH_rNgJU

“New BIR Forms 1700, 1701A, and 1701 for Individual Taxpayers”
https://www.youtube.com/watch?v=CoDkMvjlmls

BUILD

Mary, a resident citizen who is employed in an Outsourcing Company and runs a small
restaurant as sole proprietor has the following financial data:

Gross receipts – P 1,000,000

Operating expenses – P 650,000

Gross compensation income – P 450,000

Required:

1. Compute the taxable income of Mary.

2. Compute the income tax due of Mary.