Income Tax on Individuals

How are individuals taxed?

Individuals are taxed on their:

1. Taxable Income- subject to graduated rates of 0-35% for resident citizens,

non resident citizens, resident aliens, and non-resident aliens engaged in
trade or business in the Philippines
2. Gross Income – subject to final tax of 25% for nonresident alien not engaged
in trade or business in the Philippines

How is the income of self-employed and or professionals taxed pursuant to

TRAIN Law?

Under NIRC, taxable income is subject to the same graduated rates. Under the
TRAIN Law, for purely self-employed and/or professionals whose gross
sales/receipts and other non-operating income do not exceed the VAT threshold of
PHP 3M, the tax shall be at the taxpayer’s option either:

1. 8% income tax on gross sales or gross receipts in excess of Php 250,000 in

lieu of the graduated income tax rate and the percentage tax
2. Income tax based on the graduated income tax rate on individuals
How is the income of mixed income tax earners be taxed?
Taxable income is subjected to the graduated rates. For mixed income tax
earners, the income tax rate should be
1. For income from compensation – graduated income tax rate for individuals
and
2. For income from business/profession
Gross sales/receipts which do not exceed the VAT threshold of Php3M – 8%
income tax on gross sales/receipts and other non-operating income or
graduated income tax rates on taxable income; at the taxpayer’s option
Gross sales/receipts and other non-operating income which exceeds the VAT
threshold of Php 3M -graduated income tax rates for individuals

Kinds of Income and Taxes

Kinds of Sources of All income Passive Capital Capital
Tax Income other B, C, Income Gains on Gains on
and D Sale of Sale of
 Share of Real
Stock Property
W/In W/Out (A) (B) (C) (D)
RC Yes Yes CIE: NIT FWT FWT FWT

SEP/SEI
with
GR/GS not
more than
3M: NIT or
8% of
GR/GS in
excess of
Php
250,000 at
the expense
of the Tax
payer

SEP/SEI
with
GR/GS of
more than
Php 3M:
NIT

MIE on CI:
NIT
MIE on
Income
with
GR/GS of
more than
3M: NIT or
8% of the
GR/GS at
the option
of the
taxpayer
 MIE with
GR/GS
exceeding 3
million:
NIT

NRC Yes No Same FWT FWT FWT

RA Yes No Same FWT FWT FWT
NRAETB Yes No Same FWT FWT FWT
NRANETB Yes No GIT/FT Git/FT FWT FWT
25% 25%
• Please see Section 24 of the Tax Code as amended by the TRAIN
LW

Kinds of Income and Taxes

Kinds of Sources of All income Passive Capital Capital
Tax Income other B, C, Income Gains on Gains on
and D Sale of Sale of
Share of Real
Stock Property
W/In W/Out (A) (B) (C) (D)
DC Yes Yes NIT FWT FWT FWT

RFC Yes No NIT FWT FWT N/A

NRFC Yes No GIT/FT Git/FT FWT N/A
Please see Section 24 of the Tax Code as amended.

Compensation Income
All remunerations for services performed by an employee for his employer
under an employer employee-employee relationship.

When are bonuses, 13th month pay and other benefits considered as
compensation income?
When the bonuses, 13th month pay and other benefits exceed the threshold
amount of Php 90,000, the rest of which shall be subject to tax

FRINGE BENEFIT
 Means any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee ( except rank and file employees)

What is fringe benefit tax?

The Fringe Benefit Tax is treated as final income tax on the employee that
shall be withheld and paid by the employer on a calendar quarterly basis.

Who pays the Fringe Benefit Tax?

The Fringe Benefit Tax is actually due from the employee but paid by the
employer for and on in behalf of the employee. The tax is additional cost to the
employer. When the employer pays the FBT in behalf of the employee, the tax
becomes an additional benefit of the employee. Thus the need to gross up the
monetary value of the fringe benefits.

NOTE: The FBT covers only taxable fringe benefits of managerial and supervisory
employees

RC/NRC/RA/NRAETB NRANETB Special Alien

Employees and
Special Filipino
Employees
Monetary value Pxx P xx P xx
divide by gross 65% 75% 85%
monetary value
factor
Grossed up P xxx Pxx P xx
monetary value 35% Php 25% Php 15%
x FBT rate
Fringe Benefit
Tax

Managerial Employees
Refer to those who are given power or prerogatives to lay down and execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge,
assign or discipline employees
Supervisory Employees are those who effectively recommend such managerial
actions if the exercise of such authority is not merely routinary or clerical in nature
but requires the use of independent judgment.

What are the taxable fringe benefit?

a. Housing
What are instances when housing privilege is subject to FBT?
1. Employer leases residential employee used by the employer
2. Employer owns a residential property and assigns the same for use by the
employee
3. Employer purchases a residential property on installment basis and allows
use by the employee
4. Employer purchases a residential property and transfers ownership to the
employer
5. Employer provides a monthly fixed amount for the employee to pay his
landlord
Housing privileges not subject to FBT

1. Housing privileges of military officials of the AFP consisting of officials of

Philippine Army, Philippine Navy and Philippine Air Force
2. Housing unit which is situated inside or adjacent ( the unit is located within a
maximum of 50 meters from the perimeter of the business premises) to the
premises of business or factory
3. Temporary housing for an employee who stays in a housing unit for three
months or less

b. Expense Account

1. This are expenses incurred by the employee, but which are paid by his
employer except when the expenditure are duly receipted for and in the name
of the employer and the expenditures do not partake in the nature of a personal
expense attributable to said employee
2. Expenses paid for the employee but reimbursed by his employer except when
the expenditures are duly receipted for and in the name of the employer and
the expenditures do not partake the nature of personal expense attributable to
said employee
3. Personal expenses of the employee paid for or reimbursement by the employer
whether the same are duly receipted for in the name of the employer
 c. Vehicles of Any kind

It may arise under any of the following

1. Employer purchases vehicle in employer’s name

2. Employer provides employee cash for vehicle purchase
3. Employer purchases car on installment and the ownership of which is placed
in the name of the employee.
4. Employer shoulders a portion of purchase price
5. Employer owns and maintains a fleet of motor vehicles for use of business
and employees
6. Employer leases and maintains a fleet of motor vehicles for the use of business
and employees
7. The use of aircraft maintains by the employer

d. Household Personnel Expenses

Which includes
1. Salaries of household help, personal driver, of the employer
2. Other similar personal expenses like payment of homeowner’s association
dues.

e. Interest on loans obtained by the employee from the employer

If the employer lends money to his employee free of interest lower than 12%
such interest foregone by the employer or the difference assumed by the employee
and the rate of 12% shall be treated as taxable fringe benefits
f. Membership fees, dues and other expenses borne by the employer for his
employee in social and athletics or other similar organizations
g. Expenses for foreign travel
Reasonable expenses of the employee paid by the employer for the
purpose of attending business meetings and convention are exempt

1. Inland travel expenses such as expenses for food, beverages and local
transportation
2. The cost of lodging in a hotel or similar establishment amounting to an
average of US $ 300 or less per day
3. The cost of economy and business airplane tickets
4. 70% of the cost of the first-class airplane ticket

h. Foreign Travel which are subject to FBT

 1. 30% of the cost of first-class airplane tickets
2. Lodging cost in a hotel or similar establishment in excess of US$300 per
day.
3. Travelling expenses paid by the employer for the travel of the family
members of the employee.

i. Cost of educational assistance to the employee or his dependents

Educational assistance to the employee or his dependents is generally taxable

except when it is incurred for the convenience or furtherance of the
employer’s business such as

1. Education/study of the employee is directly connected with employer’s

trade or business; and
2. There is a written contract that the employee shall remain employed with
the employer for a period of time mutually agreed upon by the parties
j. Insurance premium paid by the employer
Premiums on life or health insurance and other non-life insurance are subject
to FBT, except for the

1. Cost of premiums borne by the employer for the group insurance of

employees
2. Contributions of the employer for the benefits of the employee to the SSS,
GSIS and similar provisions arising from provisions of any existing law

What are the non-taxable fringe benefits?

1. Those which are authorized and exempted from income tax under the NIRC
2. Contributions of the employer for the benefit of the employee to retirement,
insurance and other benefit plans
3. Benefits given to rank and file employees, whether granted under a collective
bargaining agreement or not
4. De minimis benefits
5. If required by the nature or necessary to the trade, business or profession of
the employer
6. It is for the convenience of the employer
7. Benefits received by an employee by virtue of a CBA and productivity
incentive schemes provided that the total annual monetary value received
from both CBA and productivity incentive schemes combined does not
exceed Php 10,000 per employee per taxable year.
What are de minimis benefits?

These are facilities or privileges furnished or offered by an employer to his

employees that are relatively of small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment and
efficiency of his employees

1. Monetized value of vacation and sick leave credits paid to government

officials and employees
2. Monetized unused vacation leave credits of private employees not exceeding
10 days during the year
3. Medical cash allowance to dependents of employee not exceeding Php 1,500
or Php 250 a month
4. Rice subsidy of Php 2,000 or one sack of 50kg rice per month amounting to
not more than Php 2,000
5. Uniform and clothing allowance not exceeding P6,000 per annum
6. Actual yearly medical benefit not exceeding Php 10,000 per annum
7. Laundry allowance not exceeding 300 per month
8. Employee achievement award e.g. for length of service which must be in the
form of tangible personal property other than cash or gift certificate with an
annual monetary value of not exceeding Php 10,000.
9. Gift given during Christmas and major anniversary celebrations not exceeding
Php 5,000
10. Daily meal allowance for overtime work and night/graveyard shifts not
exceeding 25% of the basic minimum wage on a per region basis
11. Benefits received by an employee by virtue of a CBA and productivity
incentive schemes provided that the total monetary value of the two combined
do not exceed Php 10,000 per employee per taxable year.

Professional Income

Define professional income

It includes the fees derived from engaging in an endeavor requiring special
training as professional as a means of livelihood, which includes, but not limited to
the fees of CPA’s, doctors, lawyers, engineers and the like

Business Income
 It arises from habitual engagement in any commercial activity involving
regular sale of goods or services. The income from business, legal or illegal,
registered or unregistered, is taxable.

References:

Dimaampao. 2015. Basic Approach to Income Taxation.