INDIVIDUAL

TAXATION

Part I

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 MODULE 2

LEARNING OBJECTIVES:

After studying this module, the learners should be able to:

1. Determine as to what classification a taxpayer belongs

2. Determine the income that will be included in the computation of taxable
income.
3. Compute the taxable income

Classification of individual
taxpayers
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The National Internal Revenue Code provides different formulas in

computing income tax due. There is no one tax computation formula that is
applicable to all kinds of taxpayers. Bearing this in mind, it helps to
determine the nationality and/or residence of the taxpayer for proper
computation of income tax due.
For tax purposes, individual taxpayers are classified as follows:
 Resident citizen
 Non-resident citizen
 Resident aliens
 Non-resident aliens engaged in trade or business in Philippines
 Non-resident aliens not engaged in trade or business in Philippines

Resident Citizen (RC)

-------------------------

The 1987 Philippine Constitution considers the following as Filipino

citizens, to wit:

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  Those who are citizens of the Philippines at the time of the
adoption of this Constitution;

 Those whose fathers or mothers are citizens of the

Philippines;

 Those born before January 17, 1973, of Filipino mothers,

who elect Philippine citizenship upon reaching the age of
majority; and

 Those who are naturalized in accordance with law.1

Non-Resident Citizen (NRC)

---------------------------------

A Filipino citizen can be considered as non-resident citizen in any of

the following situations:

1. He establishes to the satisfaction of the Commissioner the fact of his

physical presence abroad with a definite intention to reside therein.

2. He leaves the Philippines during the taxable year to reside abroad,

either as an immigrant or for employment on a permanent basis.

3. He works and derives income from abroad and whose employment

thereat requires him to be physically present abroad most of the
time during the taxable year.

Most of the time means being outside Philippines for not less than
183 days in a particular taxable year. 2

4. He has been previously considered as nonresident citizen and arrives

in the Philippines at any time during the taxable year to reside
permanently in the Philippines. He shall 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. 3

1
Art. IV, Sec. 1 of 1987 Philippine Constitution
2
Section 2 (c), Revenue Regulations No. 01-79
3
Section 22 (E) of R.A. 8424 [Tax Reform Act of 1997]

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Resident alien (RA)
----------------------

All foreign individuals are considered alien if they do not possess any
of the qualifications enumerated in Art. IV, Sec. 1 of 1987 Philippine
Constitution.
“The term “resident alien” means an individual whose residence is within the
Philippines and who is not a citizen thereof.” 4

Non-resident alien (NRA)

------------------------------

Non-resident alien means an individual whose residence is not

within the Philippines and who is not a citizen thereof. 5

A non-resident alien may either be engaged in trade or business

(ETB), or not engaged in trade or business (NETB).

“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.

4
Sec. 22 (F) of R.A. 8424 [Tax Reform Act of 1997]
5
Sec. 22 (G) of R.A. 8424 [Tax Reform Act of 1997]

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Computing the taxable income
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After determining as to what classification, a particular taxpayer

belongs, the next thing to consider is what income will be included in the
computation. Use the table below (Table 1) as your guide.

Taxpayer Taxable income

Resident citizens Within6 and Without7

Non-resident citizens Within

Resident aliens Within

Non-resident aliens engaged in

trade or business Within

Non-resident aliens not engaged in Within

trade or business

Example:
Mr. Pakyaw, earned the following income in the taxable year 2019:
Gross business income, United States Php4,300,000
Gross business income, Philippines 8,200,000
Business expenses, United States 1,600,000
Business expenses, Philippines 3,400,000

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“Within” means income earned inside Philippine jurisdiction
7
“Without” means income earned outside Philippine jurisdiction

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Situation A: If Mr. Pakyaw is a resident citizen (RC), his taxable income is:

Gross business income, United States Php4,300,000

Gross business income, Philippines 8,200,000
Total gross income Php12,500,000

Less: Expenses
Business expenses, United States (1,600,000)
Business expenses, Philippines (3,400,000)
Total Business expenses 5,000,000
Taxable income Php 7,500,000

Situation B: If Mr. Pakyaw is non-resident citizen (NRC), his taxable income

is:

Gross business income, Philippines Php8,200,000

Less: Expenses
Business expenses, Philippines (3,400,000)
Taxable income Php4,800,000

Situation C: If Mr. Pakyaw is resident alien (RA), his taxable income is:

Gross business income, Philippines Php8,200,000

Less: Expenses
Business expenses, Philippines (3,400,000)
Taxable income Php4,800,000

Situation D: If Mr. Pakyaw is non-resident alien engaged in trade or

business (NRA-ETB), his taxable income is:

Gross business income, Philippines Php8,200,000

Less: Expenses
Business expenses, Philippines (3,400,000)
Taxable income Php4,800,000

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Situation E: If Mr. Pakyaw is non-resident alien not engaged in trade or
business (NRA-NETB), his taxable income is:

Gross business income, Philippines Php8,200,000

Note:
If the taxpayer is a non-resident alien not engaged in trade or
business (NRA-ETB), his gross income, within, will be considered as his
taxable income.

END OF MODULE 2