-INCOME TAXATION Taxation of Individuals Leaming Objectives: After studying this chapter, you should be able to: 12. Identify the individual income taxpayers. : Define the individual taxpayers and the related terms used. Illustrate the different classification of individual taxpayers. State the sources of income of individual taxpayers. Recognize the categories of income and state the tax rates to be used by each type of individual taxpayer. : List the sources of passive income and state the final tax rates to be used by each type of individual taxpayer, Discuss the treatment of passive income in the computation of taxable income from compensation or business/professional income. Define the allowable deductions from gross income. Identify the kinds of personal exemptions. Discuss the guidelines on change of status. Define and compute taxable income and tax due for each type of individual taxpayer depending on income category. » Be familiar with individual taxpayers exempt from income tax. The Code directs that a tax shall be imposed on the taxable income of every individual. . Our present tax system imposes progressive rates of income taxes on citizens and resident aliens. This system equitably distributes the tax burden by recognizing the paying ability of the individual taxpayer. Likewise, the global treatment in taxing compensation and business income has been restored from the previous schedular treatment. In a schedular system, the income tax treatment varies depending on the kind of taxable income of the taxpayer. A schedular system of taxation provides for a different tax treatment of different types of income so that a separate tax return is required to be filed for each type of income and the tax Is computed on a per return or per schedule basis. 33Global treatment, on the other hand, is a system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. A global system of taxation is one where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rules on these different items of income. Under this system, the taxable income—which is the aggregate of the gross compensation income and gross business or professional income less the allowable deductions—is being subjected to a unitary but progressive, graduated rates. Unlike financial accounting, tax law does not distinguish between a person and an unincorporated business. If one person engages in several different business activities, his or her total taxable Income is determined by aggregating income and losses from the various sources. If two of more individuals-professionals form a general professional partnership, there Is no Income tax Imposed on the entity. Rather, the partners must include their respective shares of the partnership’s income, along with income from any other sources, in determining their individual taxable incomes. While all individuals are subject to tax on their respective taxable incomes, they are nat all taxed at the same rate for two reasons. First, tax rates are generally higher for higher levels of income. Second, even at the same level of income and with the same basic personal exemption of P50,000, tax dues will vary depending on an individual's claim for additional exemptions on dependents. 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 @ Regional or area headquarters (RHQs) and regional operating headquarters (ROHQs) 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-contractors, 34Definition of Terms 1. Citizen. The following shall be considered citizens of the Philippines: 2 Resident ci 3. Nom-resident ci ‘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 the adoption of the 1973 Constitution, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and ‘Those who are naturalized In accordance with law. en {s a Filipino citizen who permanently resides in the Philippines. en 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 thereat 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 days during the taxable year (BIR Ruling 128-99, Aug. 18, 1999). A citizen who has been previously considered as non-resident 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 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, ippines to reside permanently abroad or to return to and reside in the Philippines, as the case may be. 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 Phi pines and who is not a mere transient or 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. Non-resident alien. Means an individual whose residence Is not within the Philippines and who is not a citizen thereof. as10. Non-resident alien engaged in trade-or business (NRA-ETB). Means that 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 or less, he is considered a non-resident alien. not doing business in the Philippines (NRA-NETB). OCWs or OFWs refer to Fi ens employed in foreign countries who are physically present in a foreign country as 2 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). 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.” 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. 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. 36ot 12. 13. 14. 15. 16. 17. 18. Offshore banking unit (OBU) shall mean a branch, subsidiary or affiliate of a forelgn 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, Deposits, in connection with offshore banking, 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. Deposit substitutes shall mean an alternative from of obtaining funds from the public (the term ‘public’ means borrowing from twenty (20) or more individual or corporate lenders at any one time] other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. Mixed income earner refers to a compensation-earner who at the same time is ‘engaged In business or practice of profession. Marginal income earner refers to an individual whose business does not realize gross sales or recelpts exceeding P100,000 in any 12-month period. Self-employed individual is one who may either be a single proprietor engaged in business or in the practice of his profession. Regional’ or area headquarters (RHQs) shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Phillppines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia- Pacific Region and other foreign markets. Regional operating headquarters (ROHQs) shell mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel 37management; logistic services; research ‘and development services and product development; technical support and maintenance; data processing and communications; and business development. ‘The following definitions are used in relation to R.A. 10165, the Foster Care Act of 2012: 19. Agency refers to any child-caring or child-placing institution licensed and accredited by the Department of Social Welfare and Development (DSWD) to iniplement the Foster Care Program. 20. Child. refers to a person below eighteen (18) years of age, or one who is over eighteen (18) but is unable to fully take care of, or protect, himself or herself from abuse, neglect, cruelty, exploitation or discrimination because of a physical or mental disability or condition. 21. Child with Special Needs refers to a child with developmental or physical disability. 22. Foster Care refers to the provision of planned temporary substitute parental care to a child by a Foster Parent or a Foster Family. 23. Foster Child refers to a child placed under Foster Care. 24. Foster Family refers to a Foster Parent(s) and his/her immediate family members. 25. Foster Family Care License refers to the document issued by the DSWD authorizing the Foster Parent(s) to provide Foster Care. 26. Foster Parent refers to a person duly licensed by the DSWD to provide Foster Care. 27. Social Worker refers to a registered and licensed Social Worker of the DSWD, LGU ‘or Agency. According to Rule 5 of the Implementing Rules and Regulations of R.A. 10165, the following may be placed under Foster Care: '@. Achild who is abandoned, surrendered, neglected, dependent or orphaned; b. A child who is a victim of sexual, physical, or any other form of abuse or exploitation; ©. Achild with special needs; d. A child whose family members are temporarily or permanently unable or unwilling to provide the child with adequate cai fe. Achild awaiting adoptive placement and who would have to be prepared for family life, including a child who has already been matched for adoption but continues to receive institutional care; f. A child who needs long-term care and close fa! for domestic adoption; 8: Achild whose adoption has been disrupted; ly ties but who cannot be placed 38h. A child who is under socially difficut circumstances such as, but not limited to, a street child, a child in armed conflict or a victim of child labor or trafficking; ‘A child who committed a minor offense but has been released on recognizance, or who is in custody supervision, or whose case has been dismissed; and j. A child who is In need of special protection as assessed by @ Social Worker, an Agency, or the DSWD. Provided, that in the case of (b}, (c), (f), (h), {i) and Qj), the child must have no family willing and capable of caring and providing for him/her. Rule 6 of the IRR states, to qualify as a Foster Parent, an applicant must meet all of the following: a. Must'be of legal age; b. Must be at /east sixteen (16) years older than the Foster Child unless the applicant Isa relative of the Foster Child; c. Must have a genuine Interest, capacity and commitment in parenting the Foster Child and able to provide the Foster Child with a familial atmosphere; d, Must have a healthy and harmonious relationship with each family member living with him/her; Must be of good moral character; ‘Must be physically and mentally capable and emotionally mature; Must have sufficient resources to he able to provide for the family’s needs; and Must be willing to be trained or recelve advice for the purpose of increasing or Improving his or her knowledge, attitudes and skills in caring for a child. For an alien to qualify as a Foster Parent, he/she must (i) be legally documented, (ii) possess all the qualifications above-stated, (iii) have resided in the Philippines for at least twelve (12) continuous months at the time of the application, and (iv) undertake to maintain such residence until the termination of placement by the DSWD or expiration of the Foster Family Care License. For purposes of determining continuous residence, the alien must not have spent more than sixty (60) days of the last twelve (12)-month period prior to the filing of the application outside of the Philippines, and then only for meritorious reasons. Mlustrations: 1. A British computer expert was hired by a Philippine corporation to assist in its computer system installation for which he had to stay in the Philippines for 6 months. Is he a resident alien? ‘Answer: One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes:his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to return to his domicile (place of habitual or permanent residence) abroad when the purpose for which he came has been accomplished. 392. A British cultural performer was engaged to perform in the Philippines for two weeks after which he returned to his country. Is he a resident alien? Answer: No. One who comes to the Philippines for a definite purpose which in its nature may bg promptly accomplished isa transient. 3. An alien owns shares of stock in the Philippines. Is he considered as engaged in business or trade in the Philippines? Answer: No, mere ownership of shares of stock in the Philippines is not enough to constitute as engaging in trade or business in the Philippines. 4. An alien temporarily serves as executive manager of an airline in Manila, Is he considered engaged in trade or business in the Philippines? Answer es, because he is performing the functions of a public office, 5. A resident alien left the Philippines and abandoned his residency thereof without any intention of returning. May he still be considered a resident alien? ‘Answer: No, because he has no intention at all to return to the Philippines. 6. A resident alien left the Philippines with a re-entry permit. Is he, still a resident alien? Answer: Yes, his re-entry permit proves that he has not abandoned his residence in the Philippines. 7. A non-resident citizen went to Manila under the Balikbayan Program. Does his return to Manila interrupt his residence abroad? Answer: No, his trip to Manila did not interrupt his residence abroad. The phrase “uninterrupted period” should not be interpreted literally. His trip to Manila did not affect the continuity of his residence abroad. Ilustration. Source: BIR Ruling ITAD 340-14, Dec. 29, 2014 ‘An Individual who, at the invitation of a Philippine schoo!, visits the Philippines for a period not exceeding ‘two years solely for the purpose of teaching at such educational institution, and wha Is, or was, Immediately before that visita resident of the UK, shall be exempt from Philippine income tax on the remuneration from teaching at such school. This is provided for under Article 20 of the Pallipplnes-United Kingdom Tax Treaty. “Alustration. Sour WR Ruling 053-2010, Sept. 14, 2010 ‘An alien who holds a Special Retiree Residents Visa is considered # resident lien subject to Philippine Income tax under Section 24(A) of the Tax Code. 40ustration. Source: BiR Ruling DA-056-2005, Feb.'16, 2005, Under the Tax Cade, a non-resident individual who stays in the Philippines for an aggregate perlod of more than 180 days during any calendar yaar shall be considered a non-resident allen engaged in trade or business in the Phippines and shall be subject to income tax at 5% to 32% graduated rates. ‘The phrase “any calendar year” should be interpreted to mean that when an expatriate stays In the Philippines for more than 180 calendar days in any calendar year, he would be taxed at the graduated rate (Of S% to 32% not only in the year that he exceeds that 180-day period, but also during the other years of agement, even if his stay did not exceed 180 days, Miestration. Source: BIR Ruling 0A-290-2008, June 27, 2005 ‘An afen is a stockholder of a PEZA-ragistered enterprise. He has been involved in the company since its incorporation in 1996, has abtained a special non-immigrant visa and was required as company president to bbe in the Philippines most of the time to manage the.day-to-day operations of the company. This alien ‘quatfies as a resident alien for Philippine income: tax purposes. His dividend income shall be subject to the ‘40% final tax imposed under Section 24(8)(2) of the Tax Code to be withheld by the payor-company.. SOURCES OF INCOME Source of income is not a place but the property, activity or service that produced the income. In the case of income derived from labor, it is the place where the labor is performed; in the case of income derived from the use of capital, it is the place where the capital is employed; and in the case of profits from the sale or exchange of capital is the place where the sale or transaction occurs, important to know the source of income of an individual taxpayer—whether from within the Philippines or without—because not all individual texpayers are taxed on all their income. The following rules apply: 1. Resident without. ens are taxable on all income derived from sources within and 2. Non-resident citizens and alien individuals—resident and non-resident—are taxable only on income derived from sources within the Philippines. An overseas contract worker is taxable only on his Income from sources within. Individual Source of income Within the Phils Without the Phils, 1. Resident Citizen az 2. Non-Resident Citizen 3, Resident Allen 4, Non-Resident Alien wees a1CATEGORIES OF INCOME AND TAX RATES * 1. Compensation income. In general, the term “compensation” means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the Code. This is discussed thoroughly in Chapter 7. If 2 taxpayer is receiving compensation income from two or more employers, he/she must combine all compensation income received from all employers for 2 particular calendar year. Taxed at the graduated rates from 5% to 32% (revised Section 24(A) per R.A. 9504) Mlustration: Kyla, single and a resident citizen, has'a gross compensation income of P180,000 in 2015. . How much is her taxable income and tax due for 2015? A resident citizen, who is single, is allowed basic personal exemption of P50,000 (per R.A. 9504), Gross Compensation Income 180,000 Less: Basic Personal Exemption 50,000 Net Taxable Compensation Income 130,000 Tax Due: (On 70,000 P 8,500 60,000 at 20% 12,000 20,500 2. Business income arises from self-employment or practice of profession. This shall not include income from performance of services by the taxpayer as an employee. Taxed at graduated rates. from 5% to 32% (revised Section 24(A) per R.A. 9504). Note that the same graduated tax schedule is used for individual taxpayers earning compensation income, business/professional income or both. Illustration: Katrina, single and a resident citizen, has a gross business income of 350,000 in 2015. Deductions retated to her business is P80,000, How much is, her taxable income and tax due for 2015? Gross Income 370,000 Less: Deductions 80,000 * Basic Personal Exemption 50,000_ _+ 130,000 Taxable Income 240,000 Tax Due: (On P:140,000, 22,500 100,000 at 25% 25,000 47,500 42‘An individual receiving a combination of compensation and business income shall first deduct the allowable basic, personal and additional exemptions from _ compensation income. The excess, if any, shall then be deducted from business income. 3. Passive income. Passive income are subject to a separate and final tax. These are taxed at fixed rates ranging from 5% to 259%. Examples of passive Income are imerests, royalties, prizes, winnings arid dividends. A table showing the passive income and the corresponding tax rates is provided in this chapter. Masstration: Helena, single and a resident citizen, has the following passive income for the year 2015: Interest from BPI Savings Deposit 75,000, Royalty from Invention 80,000 Prize in a Painting Competition 50,000 Dividends Recelved from a Domestic Corporation _—-30,000 Computation of Final Tax: Interest (P75,000 x 20%) 15,000 Royalty (P80,000 x 20%) 116,000 Prize (P50,000 x 20%) 10,000 Dividends (P30,000 x 10%) 3,000 Total 44,000. For this illustration, it is assumed that the passive income are all gross of final taxes (FT) or final withholding taxes (FWT). Final tax imposed on income or gain shall no longer be included as taxable Income subject to the graduated rates. The final tax is imposed without any deduction and is withheld at source. The amount received by passive income earner is net of the final:tax. The final tax on passive income is remitted by the payor who serves as the withholding agent? to the BIR. For example, if the prize in a painting comps 50,000, the amount to be received by the winner will only be P40,000. 4. Capital gains from sale of shares of stock, not traded through the local stock exchange. Texed at.5% and 10% final taxes on a per transaction basis. This is discussed thoroughly in another chapter. On the Net Capital Gains: Not over P100,000 5% Amount in Excess of 100,000 10% 3 any person required to deduct and withhold any tax under the provistons of Sec. 57 of the Tax Code. 43The categories of income and the tax rates applicable for each type of individual taxpayer are presented below, Passive income is discussed in another section of this chapter. Resident | Non Resident | Resident | Non-Resident Alien on Cizen Gitizen ‘Alien | Engaged | Not Engaged TON TAKABLE INCOME as defined in Sec. 31 the tax computed under the 59-32% sx-a% | FT 25% revised Sec. 24(A), except Zor NRA-NETB. ‘ON PASSIVE INCOME Za genera, interests, “oyatties, prizes and other azings. 20% Fr25% 3, cash and/or property avidends 20% Fr35% (ON CAPITAL GAIN. “Sale of shares of stock not 5% 10% ‘vaded In stock exchange E Sale of real property LL. The taxable Income referred to in the table (no. 1} may arise from compensation income, business income from self-employment and/or practice of profession. The concept of taxable income is discussed in this chapter. In computing for the tax due, the graduated individual income tax schedule shall be used (revised Section 24(A) per R.A. 9504). From hereon, any reference to Section 24(A) means the revised Section 24 (A) per R.A. 9504 for simplicity. 2. All income received by a non-resident alien not engaged in trade or business in the Philippines (NRA-NETB) except capital gains (from sales of shares of stock not traded in stock exchange and of real property) are included as gross income taxed at 25% final tax or final ‘withholding tax (FT or FWT)). All income received by a non-resident alien employed by: a. Regional or area headquarters (RHQs) and regional operating headquarters (ROHQs) of multinational companies in the Philippines, which are engaged in International trade ‘with affiliates and subsidlary branch offices inthe Asia-Pacific region and other foreign markets (see note 4), b. Offshore banking units, Petroleum contractors and sub-contractors, are Included as gross income taxed at 15% final tax. This same tax treatment shall apply to 2 Filipino employed by such firms. But such Filipinos have the option to be taxed at either 15% or under Section 24(A) subject to the schedular tax rates of 5% to 32%, 4s‘These alien individuals referred to above are employees occupying managerial, confidential or highly technical positions or the so-called “expatriate employees.” ‘The test of “managerial status” depends on whether a person possesses the authority to act in the interest of his employer and whether such authority is not merely routinary or clerical in nature, but requires the use of independént judgment. Where such recommendatory power are subject to evaluation, review and final action by the department heads and other higher executives of the company, the person having such recommendatory powers is not a managerial employee (Philippine Appliance Corporetion vs. Laguesma, 226 SCRA 730 (1993)) ‘The term “technical positions” refers to positions that are highly technical in nature or where there are no Filipinos who are competent, able and willing to perform the services for which the aliens are desired. The Labor Code of the Philippines prohibits employment of aliens when there are Filipinos who are competent, able and willing to perform the services for which the aliens are desired. Revenue Memorandum. Circular 41-2009, which defined the term “managerial and/or technical positions,” has created confusion on the tax treatment of Filipinos employed by RHQs or ROHQs, as it implied that Filipinos must be employed in a “managerial and technical position” to enjoy the option to be taxed at elther the 15% preferential final withholding tax rate on gross compensation income or at the regular income tax rate based on taxable compensation income, Revenue Regulations 11-2010 clarifies the term “managerial and technical positions” under Section 2.57.1(D) of RR 2-1998, as amended, and prescribes the qualifications and requirements for Filipinos employed by RHQs and ROHQs of multinational companies to have the option to be taxed at the 15% preferential income tax rate under Section 25(C) of the Tax Code. ‘The option to be taxed at the 15% preferential rate shall be available to the Filipino employee of an RHQ or ROHQIf he meets all of the following requirements: a. Position and Function Test ~ The employee must occupy a managerial position or technical position, and must actually exercise managerial or technical functions. b. Compensation Threshold Test — The employee must have received, or is due to receive under a contract of employment, 3 gross annual taxable compensation of at least 975,000. If there is a change in the compensation resulting in the employee receiving less than the threshold for the calendar year, the employee shall be subject to the regular income tax rate.’ The compensation threshold shall be adjusted every three years using the Philippine Consumer Price Index. c. Exclusivity Test ~ The employee must be exclusively working for the RHQ. or ROHQ. as a regular employee and not just a consultant or contractual personnel. Exclusivity means having Just one employer ata time. For purposes of determining the compensation threshold of P975,000, gross compensation shall include both the regular taxable compensation income and supplementary compensation income of the employee, Regular taxable compensation Includes basic salary, fixed allowances for representation, transportation and other allowances pald to an employee per payroll period. Supplementary compensation covers payments in addition to 45the regular compensation such as commission, overtime pay, taxable bonus and other taxable benefits, with or without regard to a payroll period. Gross compensation shall not include retirement or separation benefits (whether or not taxable) as well as de minimis benefits, although these shall be considered in determining the income tax due at the time of the employee's retirement or separation. At the start of the year or at the start of employment, it will be determined whether the grass annual compensation of an employee is equivalent to or above the compensation threshold. If the total compensation cannot be determined at the start of the year or employment, the option to be taxed at 15% cannot be exercised ‘To iustrate, at the start of the year, Mr. Thed, a Filipino employed by an ROHQ, receives a monthly salary and cost of living allowance in the amount of P65,000 and P5,000 respectively. His employment contract also states that he may receive a performance bonus ‘at the end of the year which amount Is not presently determinable. Since Mr. Thed’s regular ‘compensation income of P905,000 composed of P780,000 (P65,000 x 12 months) basic pay, 65,000 13th month pay and PGO,000 (P5,000 x 12 months) cost of living allowance, is below the compensation threshold of P975,000 then his employer shall, on every pay period from the start of the yéar withhold from Mr. Thed income tax at the regular rate of withholding tax on compensation. However, If at the end of the year Mr. Thed receives a performance incentive bonus of P'100,000, thus making his annual gross compensation income total 1,005,000 and he opts to be taxed at the rate of 15% of his gross income, his employer shall make the necessary adjustments to the Income tax rate. Miustration. Source: B/f Ruling 007-99, Jan. 18, 1999 !watan! International Corporation (ITC) is a corporation formed and organized under the laws of Japan registered with the Securities and Exchange Commission (SEC) as a Philippine Representative Office. ITC is authorized to gather Information, disseminate Information on the company and Its products, liaise with customers but is not authorized to generate income within the Philippines. ITC has an expatriate resident manager. Is he subject to the 15% income tax rate on his gross income? ‘The BIR ruled in the affirmative citing Section 25(C) of the Tax Code of 1997 which states: "There shall be levied, collected and pald for each taxable year upon the gross income received by every allen Individual employed by regional or area headquarters and regional operating headquarters established In the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, a tax equal to 15% of such {gross Income.” Mlustration. Source: BIR Ruling DAXITAD 155-04, Dec. 23, 2004 ‘A Dutch corporation not registerad with the Securities and Exchange Commission has been éngaged as contractor since 2000. it has been providing engineering services to support the operation and maintenance of three geothermal power companies under the General Services Agreements. One of its employees was present in the Philippines for more than 183 days, and total project revenue derived ‘through said employee was in excess of P720,000 for 2004, ‘The BIR ruled that the company will be considered to have a permanent establishment in the Philippines pursuant to the RP-Netherlands tax treaty. As such the company shall be subject to Philippine tax on income received from all sources within the Philippines and to withholding tax at 10% 0 15% on management and technical consultants.5, The BIR has issued the Revenue Regulations 47-2011 implementing the tax provisions of Republic Act 9505, Personal Equity and Retirement Account Act of 2008, which provides the legal and regulatory framework for the establishment of personal equity retirement account (PERA), This law aims to pramate the development of the capital market by tapping into the savings of its residents and overseas citizens. PERA is a voluntary retirement account for individuals which provides tax incentives—like 5% tax credit and exempt investment income of PERA assets, Details are discussed at the end of this chapter. Revenue Memorandum Circular 31-2013 prescribes the guidelines on the taxation of compensation income of Philippine nationals and alien individuals employed by foreign governments, embassies, diplomatic missions, and international organizations situated in ‘the Philippines. Details are discussed at the end of this chapter. Revenue Regulations $-2013 prescribes the tax treatment of the sale of jewelry, gold and other metallic minerals to a non-resident alien individual not engaged in trade or business within the Philippines, or to a non-resident foreign corporation. Sellers of jewelry, gold, and other metallic minerals are required to pay business tax (VAT or percentage tax), income and excise tay, if appiicable, In advance through the assigned Revenue Collection Officers of the Revenue District Office (RDO) having jurisdiction over the “place where the subject transaction occurs, regardless of whether the sellers are duly registered with the BIR: ‘Advance payment of 12% VAT on gross selling price, or percentage tax at the rate of 3% ‘on gross sales, as the case may be; . Advance payment of income tax at the rate of 5% on gross payment; c. Actual payment of 2% excise tax based on elther the actual market value of the gross output at the time of removal, in the case of those locally extracted or produced; or the value used by the Bureau of Customs (BOC) in computing tariff and duties, in the case of Importations, Actual market value shall refer to the actual consideration paid by the buyer to the seller. ‘The advance payments shall be credited against the actual business tax (VAT or percentage tax, as the case may be) and income tax due from such persons for the taxable period for which such advance payments were remitted to the BIR. Non-resident alien individuals not engaged In trade or business within the Philippines or non-resident foreign corporations shall: (2) Maintain a record of the transactions containing the date of the transaction, name of the seller, Tax Identification Number (TIN) of the seller, if available, and amount received by the seller; and (2) Require the seller to sign an order slip or any similar document as evidence of the amount received by the seller. This document shall be the basis of the Revenue Officers in recording the transaction and assessing the correct tax due. ‘Owners and operators of hotels, inns or establishments where the subject transactions are conducted are required to provide the following information to the ROO having jurisdiction over them: name of the alien individuals and/or entity; nationality; passport number; Intended number of days of staying in the hotel, inn or establishment; place, date and time of the buying event; and TIN of the non-resident alien or non-resident foreign corporation, if already registered. 48PASSIVE INCOME Passive income is subject to a separate and final tax at fixed rates ranging from 5% to 25%. They are not included in the computation of taxable income from compensation oF business/professional income, the tax due on which is computed in accordance with the graduated income tax schedule for individuals Section 24(A). (ON PASSIVE INCOME Resident Gkizen—] Non-Resident Citizen Resident Alien Non-Resident Alien Engaged in Trade or Business in the Philippines (waa-ere) waerests ‘terest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes (see Note 1 below) and 20% 20% from trust funds and similar arrangements ‘interest income from a depository 75% Exempt ‘bank under the Expanded Forelgn Non-resident citizen Currency Deposit System (FCDS) is tax exempt | interest income from long-term deposit or investment in the form of savings, common or individual trust, funds, deposit substitute, Investment management accounts {IMA) and other investments evidenced by : certificates in such form prescribed Exempt Exempt bby the 8SP with five-year term or longer (see Note 2 below). IF deposit is pre-terminated before the fifth year, the corresponding final tax shall be: 4 years to less than S years 5% 5% 3 years to less than 4 years 12% 12% Less than 3 years 20% 20% Royalties Royalties, in general 20% 20% Royalties on books, literary works and musical composition 10% 1056 49Prizes and Wi Prizes, In general Prizes amounting to P10,000 or less are subject to the graduated Income tax schedule in Sec. 24(A). 20% 20% Winnings, in general CSO and lotto winnings are tax exempt. 20% 20% Cashand/or Property Dividends actually or constructively received from a domestic corporation, joint stock company, Insurance, mutual fund companies and regional operating headquarter of a multinational company or Share of an Individual in the distributable net income after tox of a taxable partnership or ‘Share of an individual in the net Income after tax of an association, joint account or a joint venture or consortium taxable as a corporat A. ‘Tax on dividends shall apply only on income earned on or after Jan. 1, 1998. 6% - 1998 8% - 1999 10% - 2000 20% Notes: Interest Income from Government Debts and Securities: Government Debt Instruments and Securities, including Bureau of Treasury (BTr) issued instruments and securities such as Treasury bonds (T-bonds), Treasury bills (T-bills) and Treasury notes, are considered as deposit substitutes, irrespective of the number of lenders at the time of origination, if such debt instruments and securities are to be traded or exchanged on the secondary market. ‘The mere issuance of government debt instruments and securities is considered as falling within the coverage of ‘deposit substitutes’ irrespective of the number of lenders at the time of origination; therefore, interest income derived shall be subject to 20% FWT imposed on dapostt substitutes (Sec. 2, Revenue Regulations 14-2012, Nov. 7, 2012). 50{in the case of zero-coupon liistruments and securities, the FWT Is payable upon their original issuance. In the case of interest-bearing Instruments and securities, the FWT is payable upon Payment of the interest (RMC 77-2012, Nov. 22, 2012). Interest income derived from any other debt instrument not within the coverage of deposit substitutes ~ The 20% Creditable WT shall apply to each Interest payment to be made beginning on Nov. 23, 2012, irrespective of when the instruments or securities were issued, This covers interest income from current outstanding instruments, securities, or accounts as Of Nov. 23, 2012 (Sec. 7, Revenue Regulations 14-2012, Nov. 7, 2012 and RMC 77-2012, Nov. 22, 2012) Interest Income from Long-Term Deposits or Investment Securities: The depositor or investor is an individual citizen (resident or non-resident) or resident allen or non-resident alien engaged in trade or business in the Philippines and not a corporation, The long-term deposits or investments certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department/unit of the bank. ‘The long-term deposits or investments must be Issued by banks only and not by other financial institutions. Only the Interest income from long-term deposits or investment certificates is covered by the income tax exemption. The income tax exemption does not cover any other income such as gains from trading, foreign exchange gain (RR 14-2012, Nov. 22, 2012; RMC 18-2011, Apr. 12, 2011; BIR Ruling 84-2012, Feb. 15, 2012). Interest income from long-term deposit or Investment shall he subject to 25% FWT if received by a non-resident alien not engaged In trade or business in the Philippines (NRA- NETB) On investments of individuals in long-term trust invested by a bank’s trust department in a ‘five-year corporate bond ~ Even If the Individual does not withdraw his money from the trust ‘agreement for at least five years, his interest income from the trust agreement will not be exempt from the FWT as the underlying instrument is 2 corporate bond, even If such corporate bond has @ maturity of five years. Corporate bonds or any other debt instrument issued by a non-bank corporation as underlying Instrument will not meet the requirements of Section 22(FF) of the Tax Code since it is not issued by a bank, ‘On Investments of individuals in long-term trust invested in long-term deposits placed under name of @ bank's trust department ~ if a bank’s trust department Inyests a fund in a long- term deposit or Investment certificate in its own name without mentioning the particular Individual for whom the investment is being made, this long-term deposit and Investment are not exempt from the 20% FWT. Only those made specifically in trust for the name of, specific qualified individual investors may be exempt from income tax under the Tax Code (RIAC 81-2012, Dec. 10, 2012). Income from cinematographic films and similar works ty @ non-resident alien not engaged in trade or business in the Philippines is taxed at 25% final tax. Dividend Payments to Philippine Central Depository (PCD) Nominees: If the PCD Nominee isa Filipino, the income recipient is deémed to be an individual subject to the 10% final tax Pursuant to Sec. 24(8)(2) of the Tax Code, unless it Is satisfactorily shown that the actual ‘equity investor is a domestic corporation. 51If the PCD Nominee is not a Filipino, the Income recipient is deemed to be 2 non-resident foreign corporation subject to the 30% final tax under Sec. 28(8)(1) of the Tax Code, unles: is satisfactorily shown that the actual equity Investor is a resident alien, non-resident allen whether engaged or not engaged in trade or business in the Philippines or resident foreign corporation (Revenue Memorandum Circular 73-2014, Sept. 12, 2014). Ilustration, Source: BIR Ruling DA-390-2004, July 20, 2004 Interest income derived by @ non-resident Filipino citlzen from foreign currency bank deposit in the Philippines shall be exempt from the final withholding’tax of 7.5%. But when the account is jointly in the name of the non-resident and a resident, e.g. spouse or dependent, only 50% of the Interest income shall be exempt (that pertalning to the non-resident) and 50% shall be subject to the 7.5% final withholding tax. The non-resideint citizen shall execute a written permission allowing the depository bank to inforrn the BIR of his exemption. Any of the following shall be sufficient proof of non-residency: 1. Immigration visa Issued by the country of residence; Certificate of residency issued by the Philippine Embassy or Consulate in the country of residen Certificate of the overseas worker's employment contract duly registered with the Phillppine Overseas Employment Agency (POEA) or a Seaman's Certificate (now Seaman's Book). IMlustration. Source: BIR Ruling DA (EIT-016) 492-2009, Sept. 4, 2009 Interest income from long-term Individual trust or long-term investment management arrangements with a bank is exempt from the 20% final WT. This BIR ruling is based on the following fact 8 Co., a domestic universal bank, intends to launch new products or accounts namely: B Co. Personal Retirement Account and 8 Co, Personal Pension Account. These are long-term Individual trust or long-term investment management arrangements. Under these arrangements, the client, as trustor or principal, ‘contributes funds to an account and & Co., as the trustee or Investment manager, holds and menages the fund for the future needs of the client/trustor/prineipal, particularly at retirement. The objective of the accounts is primarily to provide supplemental funds to individuals for their retirement in addition to ‘government or company retirement plans. ‘The pertinent features of thé new products or accounts are: 2. Eligible trustors/prinelpals are limited to individuals who are Filipino citizens or resident aliens; 1b. The underlying agreements are non-negotiable and nen-transferrabie and will comply with the BSP requirements for long-term trust and investment management accounts; c. There will be a five-year holding peried for the amounts contributed into the accounts; 4d. If the principal is withdrawn within the five-year holding period, interest income shall be subject to a final WT at the applicable rates depending on the holding perlod specified under Section 24 (8) (1} and 25 (A) (2) of the Tax Code, as follows: Holding period ‘Applicable tax rate Four years to ess than five years om “Three years to less than four years 12% [[Less than three years 720% fe. The funds will be Invested In long-term (more than five years) and/or short-term (Five years cr fess) investment outlets 52‘The exemption continues ragardless of the terms of the Investment or maturity of the instrument in which the longterm deposit or Investment is subsequently Invested (see (e) above). The withdrawal of the principal deposit/investment before the fifth year will subject the entire earnings to a final WT depending (on the holding period of the instrument in accordance with the above schedule. ALLOWABLE DEDUCTIONS Allowable deductions are items or amounts, which the law allows to be deducted fram gross income in order to arrive at the taxable income. Deductions from gross income from business are discussed in another chapter. 1. From compensation income a. Basic personal and/or additional exemptions; and b. Premium payments on health and/or hospitalization insurance, 2. From business income a. Ba b. Premium payments on health and/or hospitalization insurance; personal and/or additional exemptions; €. ltemized deductions under the Tax Code (Items A-I, Section 34); and d. Optional standard deduction. In place of the itemized deductions, the individual taxpayer may opt for the optional standard deduction (OSD) nat to exceed 40% {before R.A. 9504, OSD was 10% only) of his gross sales or gross receipts, as the case maybe. if the individual is on the accrual basis of accounting for his income and deductions, the OSD shall be based on the gross sales during the taxable year. On the other hand, if the individual employs the cash basis of accounting for his income and deductions, the OSD shall be based on his gross receipts during the taxable year. Note that cost of sales in case of individual seller of goods, or cost of services in the «ase of individual seller of services, are not allowed to be deducted for purposes of of the OSD. Personal Exemptions Personal exemptions are arbitrary amounts allowed as deductions fram gross income of the individual taxpayer from compensation, business (self-employment) or practice of Profession. Personal exemptions in a sense represent the personal, living or family ‘expenses of the taxpayer, 53Kinds of Personal Exemptions . 1, Basic personal exemption 2.- Additional exemption; This exemption is further allowed to the taxpayer by reason of his qualified dependent children Basic Personal Exemption 7 Republic Act 9504, which amended Republic Act 8424, otherwise known as the National Interfial Revenue Code, was signed into law on June 17, 2008. This law provides that for purposes of deterinining the tax provided in Section 24(A), there shall be allowed a basic personal exemption amounting to P50,000 for each individual taxpayer regardless of status. In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. Addi nal Exemption ‘An individual, whether single or married, shall be allowed an additional exemption of P25,000 for each dependent child not exceeding four (4) children. The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children. The total amount of additional exemptions that may be claimed by both shall not’ exceed the maximum additional exeriptions allowed for four (4) children. The husband shall be deemed the proper claimant of the additional exemption unless he waives his right in favor of his wife. But if the spouse of the employee is unemployed or is a non-resident citizen deriving income from foreign sources, the employed spouse within the Philippines shall be automatically entitled to claim the additional exemptions for children. The above basic personal and additional exemptions shall apply after the transitory period. Ad ional Exemption for Dependents per R.A. 10165, the Foster Care Act of 2012 The definition of the term “dependent” under Section 35(B) of the National Internal Revenue Code of 1997 (NIRC), has been amended to include a “Foster Child.” 54.Parent/s Brother/sor _Chiid/ren Sister/s Living with the taxpayer v Vv Depending upon the taxpayer for chief support v Not more than 21 years old Unmarried Not gainfully employed ‘Mentally or physically defective regardless of age Pena eateda HSU esi ead Living with the person giving support does not necessarily mean actual and physical dwelling together at all times and under all circumstances. Thus, the additional exemption applies even if a child or other dependent is away at schoo] or on a visit. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family irrespective of the question of support. Chief support means principal or main support (such as paying for the rent and spending for the food of the dependent}. It is more than one half (50%) of the support required by the dependent, In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the basic and additional exemptions. For each legally married employee, the amount of personal exemption allowed is 32,000, A married individual deriving Income within the Philippines whose spouse is unemployed or is a non-resident citizen deriving income from foreign sources, shall be entitled to a personal exemption of P32,000 only. Transitory Basic Personal and Ad ional Exemptions The implementing Revenue Regulations 10-2008 was made effective on July 6, 2008 so the basic personal and additional exeniptions for calendar year 2008 shall be as follows: Jan. 1 to July 6 to 2008 _duly5,2008__Dec. 31, 2008 Total Basic Personal Exemption Single 10,000 25,000 35,000 Head of the Family 12,500 25,000 37,500 Married 146,000 25,000 41,000 ‘Additional Exemption For Every Qualified Dependent Child 4,000 12,500 16,500 56Mlustration: On July 16, 2008, Mr. Marriott married his girlfriend who was already four (4) months pregnant. On Dec. 26, 2008, the wife gave birth to twins. Earnings from Jan. 1 to July 5, 2008 was P150,000 and for the remainder of the year, he earned P200,000 more. The tax due for 2008 is computed as follows: Compensation Income (Jan. 1 to July 5, 2008) (Commpensation income (July 6 to Dec. 31, 2008) ‘Total Compensation for 2008 Less Basic Personal Exemption ‘Additional Exemptions (P16,500 x 2) ‘Taxable Compensation Income ‘Tax Due: On P250,000 26,000 x 30% Total 150,000 200,000 41,000 33,000 350,000" 74,000 276,000 50,000 7,800 P57, B00, In all of the illustrations that follow, assume that the individual taxpayer is a resident itizen and is either earning compensation income or business/professional income. In each illustration, the basic personal and additional exemptions are determined. Wustrations: For Taxable Year 2015 1. Leonardo D. Is single, supporting his studies and living by himself. 2. Jennifer L., single, supports herself and parents who live with her. 3. Demi M., legally separated who gains custody of her only child, a minor, by her husband, 4, Michael 0. Is married to Catherine Z. He Is supporting the education of a younger brother, still a minor, 5. Bruce W., married, living with his wife and son who is 22 years old but mentally retarded, 6. Madonna is married with 2 minor children, Her husband walves his right to claim exemptions. For Taxable Year 2007 1. Leonardo D. is single, supporting his studies and living by himself. 2. Jennifer L., single, supports herself and parents who live with her. 3. Demi M., legally separated who gains custody of her only child, a minor, by her husband. 4, Michael D. is married to Catherine Z, He is supporting the education of a younger brother, still a minor. 37 Basic Personal 50,000 50,000 50,000 50,000 50,000 50,000 Basic Personal 20,000 25,000 25,000 32,000 Additional None None 25,000 None 25,000 50,090 Additional None None 8,000 None5. Bruce W., married, living with his wife and son ‘who is 22 years old but mentally retarded. 6. Madonna Is married with 2 minor children, Her husband waives his right to claim exemptions. 32,000 8,000 32,000 116,000, Illustrations: Assume that the taxpayer is a resident citizen earning compensation or b 2015: iness/professional income in the following illustrations. ‘The subject taxable year Is Circumstances involving change of status Basic Personal Additional Britney S., single, has a legally adopted daughter, still a minor. Her parents live with and depend on her for their chief support. Before the year 2015 ended, Britney, met a car accident and died. How much exemption shall her estate be entitled to? Her estate may still claim her basic personal exemption as head of the family*. it may also claim additional exemption for her legally adopted daughter. It isos If the taxpayer died at the close of the Russell C, thought he was to remain single forever. But ast December, he met Jodie F. and afraid to lose her, he proposed marriage to her right away. His parents are abroad such that his entire income goes to his pocket. Eventually they got married on Dec. 13, 2015. Will Russell's basic personal exemption increase or will remain the same? Before Russell got married, he was entitled to P50,000 basic personal exemption being single* with no qualified dependent. In taxable year 2015, he may claim P50,000 as basic personal exemption, _the same amount entitled to @ married* Individual. Kevin C. got married in 2015. He and his wife were blessed with a baby boy that same year. Before the year 2015 ended, the couple expected their second baby. The baby was eventually born on December 31. Is Kevin entitled to additional exemption for the second baby? Yes, he Is. Hence, his additional exemption now is _P50,000 (P25,000 x 2) from the previous year’s P25,000. Michelle P., married, whose hushand is unemployed, has 3 qualified dependent children. The youngest of the three acquired a serious illness In 2015 and dled, May Michelle still claim the additionai exemption pertaining to this child? Yes. It is as ifthe child died at the close of _the year. 50,000 25,000 50,000 None 50,000 P50,000__ 50,000, 75,000‘Alec B. has a daughter, 20, unmarried who lives with and is dependent on him for her chief support. She just passed the board exam for teachers in February 2015 and was immediately hired as pre-school teacher at Bright Future. May Alec be still entitled to the additional exemption for his daughter? Yes. It sas if the daughter got gainfully employed at the clase of the year. 50,000 25,000 “Per RA. 9504, individual taxpayers regardless of status are entitled to basic personal zemption of P50,000 each. In the old law, the Individual taxpayers were classified into three types with varying basic personal exemptions allowed, individual Taxpayers Allowed Personal Exemptions 1. Citizens 2. Resident Alien 3. Non-Resident Alien Non-resident alien engaged in trade or business in the Philippines (NRA-ETB) is allowed basic exemptions under certain conditions but is not allowed additional exemptions. His basic personal exemption shall be the lesser amount between that allowed by the income tax law of the alien’s country to Fi therein and that allowed by our Tax Code to Filipino citizens and resident aliens. On the other hand, non-resident aliens not engaged in trade or business In the Philippines (NRA-NETB) are not allowed basic and additional exemptions, 4, Estates and trusts, which are, for purposes of personal exempt single individual. lustration. Source: BIR Ruling DA-359-2004, June 25, 2004 The Tax Code entities the benefactor of a dependent senlor citizen to the basic personal exemption of a head of @ family. However, cating for such dependent senior citizen shall not entitle the benefactor to claim additional exemption allowed a married individual or head of a family with qualified dependent children, However, In the case Agrifino C. Baybay vs. the Honorable Commissioner of internal Revenue, the Court of Tex Appeals (CTA) ruled that under the Senior Citizens Law, the term “dependent” extends to senior ditizens; hence, their benefactors should be allowed to ciaim the additional exemptions for qualified dependents. The IR appealed the decision to the Court of Appeals (CA), but It was dismissed due to a technicality. Since the case did not reach the Supreme Court (SC), the decision did not have the force and effect of a law under the “doctrine of stare decisis.” Hence, the decision applies only to Agrifino Bayabay's ‘ase and only he can invoke the same for his own benefit. 59Premium Payments on Health and/or Hospitalization Insurance The following conditions must be met: 1. The insurance shall be taken by the individual taxpayer himself for his family; 2. The amount being claimed shall not exceed P2,400 a year or P200 a month per family; 3. The family has gross income of P250,000 or less for the taxable year. Total family income includes primary income and other income from sources received by all members of the nuclear family, Le. father, mother, unmarried children living together as one household, or a single parent with children. A single person living alone is considered as a nuclear family. For married taxpayers, only the spouse entitled to claim for additional exemption is allowed this deduction. Mustration: Brigitta, single mother, is a government employee who earns a monthly gross compensation income of P18,000. Effective Jan. 1, 2015, she took a hospitalization Insurance for her and her 2-year old son. She right away paid the annual premium of P2,400. However, had she opted to pay this premium monthly, an additional P50 pesos per month is charged. Is she entitled to the deduction? If so, how much? . The first condition that the Insurance shall be taken by the individual taxpayer himself for his family has been satisfied. The second condition speaks for the annual limit of 2,400 and monthly limit of P200 for each family. The actual premium paid by Brigitta for the whole year was 2,400. This qualifies her to claim the maximum P2,400. If the annual premium were lower than P2,400, the lower amount shall be allowed. Had she chosen to pay the premium monthly, the total payment would have been P3,000 (P250 x12 months). If this is the case, she can only claim P2,400—the maximum limit. ‘The third condition is likewise satisfied. The family gross income, she being the sole bread winner, is P216,000 (P18,000 x 12), far lower than the P250,000 maximum annual gross income limit. Premium payments on health and/or hospitalization insurance may be deducted from the gross business/professional income or from the gross compensation income of a resident citizen, non-resident citizen and resident alien. ‘TAXABLE INCOME AND TAX DUE Taxable income is defined as the peitinent items of gross income less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code or other special laws. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax due. Note that in the succeeding 60.illustrations, computations are sequenced and patterned after the actual BIR income tax return forms. Depending on the taxpayer involved, taxable income may refer to either one of the following: 1. “Net compensation income. The compensation income arrived at after subtracting from gross compensation income derived by resident citizens or resident aliens, basic personal and additional exemptions; and premium payments, if any, on health and hospitalization insurance under certain conditions. For resident citizen and resident alien ear 1g purely compensation income: Gross Compensation Income 200% Basic Personal Exemption 00 Add: Additional Exemptions 00% Total Exemptions 700 ‘Add: Premium Paid on Health and/or Hospitalization Insurance 00% Less: Total Exemptions and Premium Payment Net Compensation Income ‘Tax Due (Sec. 24(A)) 2. Gross compensation income. The gross compensation income derived by aliens including Filipinos employed by regional and area headquarters and regional operating headquarters of multinational companies, by offshore banking units, or by foreign petroleum service contractors and sub-contractors. For non-resident alien employed by such firms earning purely compensation income: Gross Compensation Income 20K Muttiply by tax rate 15% Tax Due 200% 3. Net income. The income arrived at after subtracting from the gross income (from business or profession including compensation income) of a citizen, resident alien, ‘and non-resident alien if the latter is engaged in trade or business in the Philippines the deductions of the taxpayer, including the basic personal and additional exemptions, if any.