INCOME TAXES FOR INDIVIDUALS

CA5109 Income Taxation

Prepared by: Joseph Angelo B. Ogrimen

Individual Taxpayers are natural persons with income derived from WITHIN territorial jurisdiction of
a taxing authority.

SUMMARY OF CLASSIFICATIONS OF INDIVIDUAL TAXPAYER

INDIVIDUAL CLASSIFICATION RESIDENCE (lives in PH) CITIZENSHIP (citizen of PH)

Resident Citizen YES YES
Nonresident Citizen NO YES
Resident Alien* YES NO
Nonresident Alien** NO NO
*if the intention of the alien is INDEFINITE, he shall be considered as RA for taxation purposes
**can be further classified into NRA-ETB or NRA-NETB depending if they are earning income in PH

Special Cases on classifications of Individuals:

1. Overseas Filipino Workers (OFW)/Overseas Contract Workers (OCW)

o Usually classified as NONRESIDENT CITIZEN (NRC)
o OFWs returning to PH with DEFINITE INTENTION TO RESIDE HERE shall be considered
RESIDENT CITIZEN from the time of ARRIVAL IN PH
o Previously RC who leaves PH during taxable year FOR EMPLOYMENT ON A PERMANENT
BASIS/”MOST OF THE TIME” DURING THE TAXABLE YEAR shall be considered as NRC
2. Immigrants
✓ Previously RC WITH DEFINITE INTENTION to reside ABROAD shall be considered as NRC
from the time of DEPARTURE FROM PH
3. Aliens

SITUS OF INCOME

✓ Situs = “Place” of Taxation

✓ There are certain types of income that are taxable specifically on certain “situs”/place

INCOME SOURCE SITUS OF TAXATION

Interest Income Debtor’s Residence (i.e. Interest on loans
granted to foreigners are taxable here if bank is
in PH)

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 Royalties Where the intangible is employed (i.e. Books
published here are taxable in PH)
Services Where the services are rendered (i.e. services
rendered abroad are NOT TAXABLE here unless
RC)

SOURCES OF INCOME

✓ Sources refer to “where the income was earned”

TAXPAYER SOURCE OF TAXABLE INCOME TAX BASE

RC WITHIN & WITHOUT PH (worldwide)** NET Income
RA, NRC, NRA-ETB WITHIN ONLY NET Income
NRA-NETB WITHIN ONLY GROSS Income*
*NRA-NETB are NOT ALLOWED TO DEDUCT EXPENSES
**Symbiotic relationship is the reason why RCs are taxable on worldwide income. RCs often
enjoy preferential (lower) tax rates than other taxpayer classifications.

TYPES OF INCOME

• MAIN three types of income:

1. Capital Gains
2. Passive Income
3. Ordinary/Regular Income

CAPITAL GAINS – income from sale of CAPITAL ASSETS

CAPITAL ASSET VS ORDINARY ASSET

1. CAPITAL ASSET – held for PERSONAL USE or NOT HELD FOR SALE (i.e. House & Lot, Principal
Residence) – gives rise to CAPITAL GAINS which may be subject to:

a) CAPITAL GAINS TAX

❖ Sale of shares of DOMESTIC CORPORATION NOT TRADED IN PSE
➢ Subject to 15% NET CAPITAL GAIN (Selling Price – Cost) – applicable to ALL
classifications of taxpayer
➢ If TRADED THROUGH PSE, subject to STT (refer to next section)
➢ If FOREIGN CORPORATION, subject to Basic Tax

Selling Price
(Cost)
(Selling Expenses)
NET CAPITAL GAIN (LOSS)*

*The Net Capital Gain is the TAX BASE FOR 15% CGT (hence, if loss, NO CGT AT
ALL)

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 ❖ Sale of real property held as CAPITAL ASSET located in PH
➢ Subject to 6% CGT on HIGHEST of FMV, ZV, & SP – applicable to ALL
classifications of taxpayer

➢ If Capital Loss (i.e. Cost > Selling Price), there is STILL CGT because gain in sale of real
property is presumed
➢ Sale of Real Property to GOV’T/GOCC
▪ Taxpayer has OPTION to be either at 6% CGT or Basic Tax (Graduated Rates)

Sale of Principal Residence

▪ Residential Address shown in latest ITR filed by vendor shall raise CONCLUSIVE PRESUMPTION
about his true residential address
▪ REQUISITES FOR CGT EXEMPTION:
a) Proceeds must be UTILIZED WITHIN 18 calendar months from DATE OF SALE
➢ Any expenses incurred (i.e. Documentary Stamp Tax, Transfer Taxes,
Broker’s Commission) in effecting the sale shall be CONSIDERED AS PART OF
AMOUNT UTILIZED
➢ WHAT IF proceeds are NOT FULLY UTILIZED?
o Taxable Amount is the UNUTILIZED PORTION
Unutilized Portion
Taxable Amount = x CGT ORIGINALLY DUE
GROSS SELLING PRICE

b) BIR shall be notified WITHIN 30 DAYS from the date of sale

c) Can be availed only ONCE EVERY 10 YEARS
d) Historical cost/adjusted basis of real property sold shall be carried over to the new
principal residence built

TIMELINE FOR EXEMPTION FROM CGT UPON SALE OF PRINCIPAL RESIDENCE

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b) OTHER PERCENTAGE TAX (Sec. 127) – “Stock Transaction Tax (STT)”
❖ Sale of shares of DOMESTIC CORPORATION TRADED IN PSE
➢ Subject to 0.6% STT based on GROSS SELLING PRICE
➢ If Capital Loss, there is STILL CGT because tax base is the Selling Price
➢ Refer to illustration in CGT

c) BASIC TAX
❖ Sale of shares of FOREIGN CORPORATION
➢ Subject to Basic Tax (hence part of ITR ONLY IF taxpayer is RC)
❖ Sale of real properties LOCATED ABROAD
➢ Subject to Basic tax (hence part of ITR ONLY IF taxpayer is RC)
❖ Sale of Personal Assets OTHER THAN Real Property and Shares
➢ Subject to Basic Tax (if Personal Asset was SOLD IN PH)

OVERALL VIEW OF CAPITAL GAINS AND THEIR RESPECTIVE TAXES

“NOT ALL Capital Gains will be subject to Capital Gains Tax”

2. ORDINARY ASSET – held for BUSINESS USE or HELD FOR SALE (i.e. Inventories, PPE) – gives
rise to ORDINARY GAINS (subject to Basic Tax)

PASSIVE INCOME earned from sources within PH

• Another type of income is PASSIVE INCOME which is earned with MINIMAL EFFORT (kahit
natutulog ka, pwede mong ma-earn)
• “CERTAIN” Passive Income subject to Final Withholding Tax

1. INTEREST INCOME
2. DIVIDENDS
3. ROYALTIES
4. PRIZES & OTHER WINNINGS

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 NOTE: Such passive income are ONLY SUBJECT TO FWT if earned WITHIN THE PHILIPPINES.
If earned ABROAD, it is subject to BASIC TAX

• FINAL WITHHOLDING TAX – Under Final Withholding Tax System, the payee received
income NET of tax. The one liable for payment is the PAYOR, who shall remit the same to BIR.
FWT is only applicable to “certain” passive income as listed above, assuming the same are
earned WITHIN THE PHILIPPINES. (“Kung sino ang nag-withhold, siya ang mag-reremit”)

NOTE: “Certain” Passive income already subjected to FWT can NO LONGER BE SUBJECTED TO
BASIC TAX (hence NOT part of Taxable Income if already subject to FWT); if NOT SUBJECT TO
FWT, on the other hand, then such is the time where Passive Income can be subject to Basic
Tax (i.e. Interest Income from Foreign Banks)

1. INTEREST INCOME
✓ Income earned from DEBT SECURITIES/SIMILAR ARRANGEMENTS (i.e. Deposit Substitutes,
Long-Term Investments)

Interest Income from SHORT-TERM CURRENCY BANK DEPOSITS/DEPOSIT SUBSTITUTES

o “SHORT TERM” refers to a holding period of NOT MORE THAN FIVE YEARS.
o Currency Bank Deposits can be further classified into:
a) Currency Bank Deposits/Deposit Substitutes
b) Foreign Currency Deposit System

CURRENCY BANK DEPOSITS / DEPOSIT SUBSITUTES (in PHP Currency)

❖ i.e. PHP Accounts in BDO

❖ CURRENCY BANK DEPOSITS are deposits in Local Banks (i.e. BDO, BPI, etc.)
❖ DEPOSIT SUBSTITUTES are an alternative form of obtaining funds from the public OTHER THAN
deposits. It can be in the form of Government Debt Instruments such as T-Bills, T-Bonds, etc.
❖ USUALLY subject to 20% FWT (25% for NRA-NETB)

FOREIGN CURRENCY DEPOSIT SYSTEM (in currency OTHER THAN PHP)

❖ i.e. Dollar Accounts in BDO

❖ If under FCDS, there is NO LONG-TERM/SHORT-TERM DISTINCTION
❖ ONLY RESIDENTS (RA & RC) & NRA-NETB are subject to this tax (NONRESIDENTS, except
NRA-NETB, are EXEMPT FROM THIS TAX in order to BUILD UP DOLLAR RESERVES which would
be good for the economy of the country)

RESIDENTS (RC & RA) NONRESIDENTS (NRC & NRA-ETB) NRA-NETB

15%* EXEMPT 25%
*7.5% BEFORE January 1, 2018 (TRAIN Law)

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 “NOT ALL interest income is subject to FWT~”

NOTE: Interest Income from NOTES RECEIVABLE & ACCOUNTS RECEIVABLE (NON-BANK institutions)
are NOT SUBJECT TO WITHHOLDING TAX (such interest is subject to BASIC TAX)

Interest Income from LONG-TERM DEPOSITS/INVESTMENT CERTIFICATE

❖ “LONG-TERM” refers to holding period of MORE THAN FIVE YEARS

❖ MAY BE EXEMPT FROM FWT ASSUMING ALL REQUISITES ARE MET: - Sec 22(F) of Tax Code
A. Depositor is an INDIVIDUAL CITIZEN – Corporations CANNOT AVAIL OF THIS
EXEMPTION
B. The investment certificate/LT deposit should be UNDER THE NAME OF THE INDIVIDUAL
(should NOT be under name of corporation/bank)
C. Must be in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts that are evidenced by BSP
D. Investments must be ISSUED BY BANKS ONLY and not by other financial institutions
(Interest income from investments in Insurance, Mutual Funds, etc. are NOT EXEMPT)
E. Maturity Period is MORE THAN FIVE YEARS
F. NO PRE-TERMINATION/TRANSFER BEFORE THE FIFTH YEAR by original investor

5-12-20 RULE if pre-terminated before fifth year:

HOLDING PERIOD WITHHOLDING TAX RATE

Less than 3 years 20%*
3 years – less than 4 years 12%
4 years – less than 5 years 5%
*if Holding Period is LESS THAN 3 YEARS, same tax as Short-Term Deposit (20% FWT
on ALL previous years interest income

❖ Pre-termination will subject ALL interest income earned from the BEGINNING OF THE
LONG-TERM DEPOSIT to Withholding Tax (retrospective application)

SUMMARY OF PRE-TERMINATION OF LONG-TERM DEPOSITS

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 ❖ NRA-NETBs CANNOT AVAIL of this exemption!!

2. DIVIDENDS
✓ Cash/Property Dividends ACTUALLY/CONSTRUCTIVELY received from a DOMESTIC
CORPORATION, Share from net income after tax of a PARTNERSHIP (except GPP), and share in
net income of an ASSOCIATION, JOINT VENTURE
✓ Dividends are USUALLY subject to:

PAYEE (Recipient)
PAYOR
RC, NRC, RA NRA-ETB NRA-NETB
Domestic Corporation 10% 20% 25%
Foreign Corporation BASIC TAX (RC only)* EXEMPT**
*RC is taxable WITHIN & WITHOUT PH
**All other classifications of taxpayer are taxable on income earned WITHIN PH ONLY

In summary, Dividends paid by:

DOMESTIC CORPORATION are subject to FWT (rates depend on classification of taxpayer)
FOREIGN CORPORATION are subject to BASIC TAX (assuming taxpayer is RC)

3. ROYALTIES

4. PRIZES & OTHER WINNINGS

PRIZES – usually A RESULT OF EFFORT (i.e. Prize from The Voice PH)
✓ IF MORE THAN P10,000, subject to 20% FWT (except NRA-NETB – 25%)
✓ IF LESS THAN OR EQUAL TO P10,000, subject to BASIC TAX (except NRA-NETB – 25%)

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 WINNINGS – usually due to CHANCE (i.e. Winnings from PBB, Winnings from PCSO)
✓ OTHER WINNINGS, subject to 20% FWT regardless of amount (except NRA-NETB)

✓ PSCO/LOTTO WINNINGS,
o IF LESS THAN P10,000, EXEMPT
o IF MORE THAN P10,000, SUBJECT TO 20% FWT (except NRA-ETB (EXEMPT);
NRA-NETB (25%)

5. INFORMER’S REWARD

❖ SUBJECT TO 10% FINAL WITHHOLDING TAX

❖ Cash reward for may be given to any person INSTRUMENTAL IN DISCOVERY OF:
o Violations of National Internal Revenue Code (NIRC)
▪ The LOWER of 10% of revenues recovered OR P1,000,000
o Discovery and Seizure of Smuggled Goods
▪ The LOWER of 10% of FMV of smuggled goods OR P1,000,000

❖ REQUISITES FOR INFORMER REWARD:

1. Info must NOT BE IN POSSESSION OF BIR YET (hindi pa alam ng BIR)
2. Led to discovery of FRAUD
3. Enforcement results in REVENUES, SURCHARGES, AND/OR FEES BE ACTUALLY
RECOVERED (NO REVENUE COLLECTED = NO REWARD)
4. Informer MUST NOT BE:
o BIR official/employee

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 o Other public official/employee
o Relative within the 6th degree of consanguinity of the above.

REGULAR INCOME

❖ Basic tax is used as a “filler” for income NOT SUBJECTED TO CGT & FWT
❖ There are three types of Earners of Regular/Ordinary Income:
o Individuals earning PURELY Compensation Income – employer-employee relationship
▪ LIABLE FOR INCOME TAX ONLY (No Business Tax)
o Individuals that are PURELY Self-Employed and/or Professional (SEP)
▪ LIABLE FOR INCOME TAX & BUSINESS TAX
o Mixed Income Earners
▪ LIABLE FOR INCOME TAX & BUSINESS TAX

TYPE OF REGULAR INCOME EARNER

TAX
Purely Compensation Purely SEP Mixed Income Earner
Income Taxes (based on YES YES YES
NET INCOME)
Business Taxes (based on NO* YES YES
GROSS SALES/RECEIPTS &
OTHER OPERATING
INCOME)
*NO BUSINESS TAX FOR PURELY COMPENSATION INCOME EARNER because they are simply
under an employer-employee relationship – option to be taxed at 8% is NOT AVAILABLE for Purely
Compensation Income Earners

8% OPTION IN LIEU OF BUSINESS TAX AND INCOME TAX

• This option is available only for PURELY SEPs & MIXED INCOME EARNERS (this is not available
for Purely Compensation Income Earners because they are NOT liable for Business Taxes)
• The 8% option is IN LIEU of Business Taxes & Income Taxes (imbes na dalawang taxes yung
babayaran mo, isang tax nalang which is 8%)

• Requirements for Availing 8% Tax Rate

1. GROSS SALES/RECEIPTS MUST NOT EXCEED the P3,000,000 VAT threshold

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 o The taxpayer must NOT exceed P3,000,000 in Gross Sales/Receipts because once
exceeding such threshold, the taxpayer is already LIABLE FOR 12% VAT. Below the
P3,000,000 VAT threshold, the taxpayer is LIABLE FOR 3% PERCENTAGE TAX (SEC.
116, NIRC). Exceeding P3,000,000 VAT threshold means that taxpayer DOES NOT HAVE
THE OPTION TO BE TAXED AT 8%
o
2. Taxpayer must be NON-VAT REGISTERED

o If taxpayer is VAT-registered, he is ALREADY LIABLE FOR 12% VAT, REGARDLESS of his

gross sales/receipts. The option to be taxed at 8% is NOT AVAILABLE if taxpayer is
subject to VAT

3. Taxpayer does NOT ENGAGE IN VAT-EXEMPT SALES

4. Taxpayer is ONLY SUBJECT TO SEC. 116 PERCENTAGE TAX

o The option to be taxed at 8% is NOT AVAILABLE for taxpayers who are engaged in
certain businesses such as common carriers (Sec. 117 & 118), amusement – i.e. night
clubs, bars, PBA Games (Sec. 125), banking institutions (Sec. 122), etc. (refer to Other
Percentage Taxes)

5. Taxpayer signifies the option to be taxed at 8% IN FIRST QUARTER ITR (BIR Form
1701A). If NOT, the taxpayer is assumed to avail of the graduated tax rates (and as
such, still liable for BOTH business & income tax)

8% OPTION FOR PURELY SEPs

NOTES:

• IF GROSS SALES/RECEIPTS EXCEEDED P3.000,000 – NO OPTION TO BE TAXED AT 8%

• For PURELY SEPs, the first P250,000 of GROSS SALES/RECEIPTS is NOT TAXABLE because under
the 8% Option, they can NO LONGER AVAIL OF THE INCOME TAX EXEMPTION for the first
P250,000 because they would no longer pay income taxes separately.

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 • As evident in the table above, assuming the taxpayer DID NOT OPT TO BE TAXED AT 8%, his
first P250,000 is EXEMPT, while the excess over P250,000 is the taxable amount. If the
taxpayer OPTED TO BE TAXED AT 8%, HINDI NYA MA-AAVAIL yung exemption na first P250,000
kasi hindi na siya liable for income tax separately (and business taxes).
• As such, “in-integrate” na yung first P250,000 exemption sa Tax Table sa 8% OPTION for Purely
SEPs para ma-avail pa rin nila yung first P250,000 tax exemption.

8% OPTION FOR MIXED INCOME EARNERS (MIEs)

• Mixed Income Earners have TWO SOURCES OF INCOME:

a) Compensation Income – NO OPTION to be taxed at 8%
b) Business/Professional Income – OPTION to be taxed at 8% is AVAILABLE
• Regardless of their choice, MIEs are STILL LIABLE FOR INCOME TAX FOR THEIR COMPENSATION
INCOME
• The option to be taxed at 8% is ONLY AVAILABLE FOR THEIR BUSINESS INCOME.

Graphical Illustration of
Mixed Income Earners’
8% Flat Rate

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 • IMPORTANT: ALSO, hindi na “naka-integrate” yung P250,000 exemption sa 8% Flat Rate kasi
MA-AAVAIL NA YUNG FIRST P250,000 sa COMPENSATION INCOME PORTION. Unlike Purely SEPs
na HINDI NILA MA-AAVAIL YUNG FIRST P250,000 sa 8% Flat Rate kasi they do not have
compensation income, kaya “in-integrate” sa 8% yung P250,000 exemption. Pag dineduct pa
yung P250,000 sa 8% Flat Rate for MIEs, ma-dodoble yung tax exemption, which would be
unfavorable sa government.

BREACH OF VAT THRESHOLD DURING THE YEAR UNDER 8% OPTION

• Under RR-8-2018 dated January 25, 2018, assuming taxpayer opted to be taxed at 8% in his
first quarter ITR (BIR Form 1701A), and he BREACHES THE P3,000,000 VAT threshold during
the year, he will ALREADY BE LIABLE FOR INCOME TAX AND BUSINESS TAXES SEPARATELY
• INCOME TAX PORTION:
o Taxpayer shall be ALLOWED AN INCOME TAX CREDIT for all previous quarter payments
under the 8%

TOTAL INCOME TAX DUE (Graduated Rates)

(PREVIOUS QUARTER PAYMENTS UNDER 8%)
TOTAL INCOME TAX PAYABLE

• BUSINESS TAX PORTION:

o VAT shall be imposed PROSPECTIVELY
o 3% Percentage Tax will be imposed on the first P3,000,000
o 12% VAT will be imposed on the P3M EXCESS
o i.e. if the gross sales/receipts for the year is P6.5 Million:
▪ P3,000,000 x 3% Percentage Tax = P90,000
▪ P3,500,000 x 12% VAT = P420,000
▪ The total business tax due is P510,000

ILLUSTRATIVE PROBLEM (adapted from RR-8-2018) – Mixed Income Earners

Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation income in 2018 of
P1,500,000, inclusive of 13th month and other benefits in the amount of P120,000 but net of mandatory
contributions to SSS and PhilHealth. Aside from employment income, he owns a convenience store, with
gross sales of P2,400,000. His cost of sales and operating expenses are P1,000,000 and P600,000, and
with non-operating income of P100,000.

✓ His tax due for 2018 shall be computed as follows if he opted to be taxed at 8% income tax rate
on his gross sales for his income from business:

Total Compensation Income ₱ 1,500,000

Less: Non-taxable 13th month pay and other benefits (MAX) -90000
Taxable Compensation Income ₱ 1,410,000

Income Tax DUE:

1. On Compensation
On first P800,000 ₱ 130,000
On excess (P1,410,000 - P800,000) x 30% 180,000
Tax Due on Compensation Income ₱ 310,000

2. On Business Income
Gross Sales ₱ 2,400,000
Add: Non-Operating Income 100,000

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 Taxable Gross Receipts/Sales 2,500,000
Multiply:Flat Rate 8%
Tax Due on Business Income ₱ 200,000

CREDITABLE WITHHOLDING TAXES

Final Withholding Tax vs Creditable Withholding Tax

Final Withholding Tax Creditable Withholding Tax

TAX WITHHELD AT SOURCE Method of collecting INCOME TAX IN ADVANCE
NOT deductible to income tax due DEDUCTIBLE to income tax due of taxpayer
Applicable to CERTAIN PASSIVE INCOME (i.e. Applicable to CERTAIN ORDINARY INCOME (i.e.
Interest, Dividends) Compensation, Professional Fees)

In order to further understand the distinguishment between the two, it is important to distinguish
between tax deduction vs tax credit

Gross Taxable Income

(Allowable Deductions)
Net Taxable Income
Graduated Rate
Tax DUE
(Tax Credit)
Tax PAYABLE

Creditable Withholding Tax is a DEDUCTION TO THE TAX DUE of the taxpayer. Hence, in problems, if
the income is reported NET OF CWT, you need to GROSS IT UP and report the same in GROSS AMOUNT
in the taxable income portion and report the tax credit as a CREDIT TO TAX DUE SEPARATELY

Creditable Withholding Tax is USUALLY APPLIED TO PURELY COMPENSATION INCOME EARNERS for
“Substituted Filing,” wherein taxpayers would NO LONGER HAVE TO FILE TAX RETURNS because the
employer ALREADY WITHHELD HIS TAX IN ADVANCE and REMITTED THE SAME TO BIR (Tax Due = Tax
Credit, hence NO TAX PAYABLE)

MAIN DIFFERENCE: FWT on Passive Income CANNOT BE USED AS A TAX CREDIT to tax liability of an
individual. Such is NOT TRUE for CWT on Certain Income which CAN BE USED AS A TAX CREDIT to tax
liability of an individual.

However, CWT is also applicable to CERTAIN PURCHASE OF GOODS, SERVICES, AND/OR RENTALS under
RR-11-2018:

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PROFESSIONAL FEES

Individual Payee (i.e. Sole Proprietorship)

o Gross income for the current year NOT GREATER THAN P3M – 5%
o Gross income for the current year GREATER THAN P3M – 10%

Non-Individual Payee (i.e. Corporations)

o Gross income for the current year NOT GREATER THAN P720,000 – 10%
o Gross income for the current year GREATER THAN P720,000 – 15%

*CWT rate depends upon payee’s (recipient) gross income for the current year. Payees are required to
submit a Sworn Statement of Declaration of Gross Income to ALL PAYORS. Once the payees breach the
P3M (for individuals) or P720,000 (for corporations) at any time during the years, payors shall
WITHHOLD THE HIGHER RATE after the point of the breach.

RENTALS – 5% (for properties USED IN BUSINESS)

GOODS – 1%

SERVICES– 2% (CERTAIN CONTRACTORS)

Income payments to beneficiaries of estates/trusts – 15%

Income payments to partners of GPP (same rate as NON-INDIVIDUAL PAYEES & SAME THRESHOLD)

OTHER NOTES:

o It is important for the PAYEE to secure BIR Form 2307 (for CWT) so that he may claim the tax
credit in order to reduce his tax liability
o Obligation to withhold is imposed upon BUYER but the BURDEN STILL FALLS ON THE
SELLER/PAYEE. Unjustifiable refusal by the latter is ground for mandatory audit of all internal
revenue liabilities

QUARTERLY TAX RETURNS

o Purely SEPs and MIXED INCOME EARNERS (being involved in business) are required to FILE
QUARTERLY RETURNS through BIR Form 1701Q)

1st Quarter May 15

2nd Quarter August 15 (45 days after end of Quarter)
3rd Quarter November 15 (45 days after end of Quarter)
Final adjusted/annual return April 15 of succeeding year

o Purely Compensation Income Earners, unlike the two above, are required ONLY TO FILE
ANNUALLY every April 15 of the following taxable year
o Prior quarterly payments CAN BE USED AS A TAX CREDIT for succeeding quarter, until the
ANNUAL RETURN in which payment for three previous quarters can be used as TAX CREDIT for
TAX PAYABLE

INCOME TAX FOR MARRIED TAXPAYERS

o Husband and wife shall compute SEPARATELY their individual income tax based on their
respective total taxable income

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 o HOWEVER, if certain income CANNOT BE ATTRIBUTED EXCLUSIVELY TO EITHER OF THE
SPOUSES, the same shall be DIVIDED EQUALLY BETWEEN THE SPOUSES for the purpose of
determining their taxable income

ILLUSTRATIVE PROBLEM (adapted from CPA Reviewer in Taxation, Tabag)

Mr. and Mrs. Dela Cruz, both CPAs and residents of the Philippines, with 5 minor children, had the
following data for 2020 taxable year.

Salaries, Wife P1,200,000

13th month pay and other benefits 140,000
Professional Fees (net of 5% CWT) 1,710,000
Expenses – Practice of profession (15% nondeductible) 800,000
Rental Income (net of 5% CWT) 190,000
Rental Expenses 80,000
Other Income, Husband (20% non-taxable) 80,000

The taxable income of both can be computed as follows:

Husband Wife
Salaries 1,200,000
Excess of 13th month pay over tax exempt benefit (140k-90k) 50,000
Professional Fees (P1,710,000 / 95%)/2 900,000 900,000
Professional Expenses (P800,000 x 85%) / 2 -340,000 -340,000
Rental Income (P190,000 / 95%) / 2 100,000 100,000
Rental Expenses (P80,000) / 2 -40,000 -40,000
Other Income (P80,000 x 80%) 64,000 -
TAXABLE NET INCOME ₱684,000 ₱1,870,000

NOTES:
o The 13th month pay and other benefits is ONLY EXEMPT FOR THE FIRST P90,000. Any excess of
this amount is TAXABLE
o The professional fees and rental income were NET OF CWT. In determining taxable income, the
same shall be GROSSED UP because the tax credit is a DEDUCTION TO THE TAX DUE, NOT THE
TAXABLE INCOME
o As evident above, some items (i.e. Rent & Professional Income) are NOT ATTRIBUTABLE to
either of the spouses. As such, they are EQUALLY DIVIDED
o ONLY the deductible portion of professional expenses are divided between the spouses. The
same goes for the NON-TAXABLE portion of husband’s other income.
o In computing tax payable of both spouses, and applying the CWT:

Tax PAYABLE
1. Of Husband
On first P400,000 ₱ 30,000
Excess (P684,000-P400,000) x 25% 71,000
Tax DUE ₱ 101,000
CWT applicable (ALSO DIVIDED) -50,000
Tax PAYABLE of Husband ₱ 51,000
2. Of Wife
On first P800,000 ₱ 130,000
Excess (P1,870,000 - P800,000) x 30% 321,000
Tax DUE ₱ 451,000
CWT applicable (ALSO DIVIDED) -50,000
Tax PAYABLE of Wife ₱ 401,000

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 CWT on Professional Fees P90,000
CWT on Rental Income 10,000
Total CWT of BOTH spouses P100,000
Divide: Two spouses 2
Total CWT of EACH SPOUSE P50,000

MINIMUM WAGE EARNERS, SENIOR CITIZENS AND PWDs

Statutory Minimum Wage

o Rate fixed by Regional Tripartite Wage and other concerned agencies regarding the minimum
wage for each region
o SMWs differ DEPENDING ON REGION and shall be the basis of exemption from income Tax

Minimum Wage Earner

o Worker in PRIVATE SECTOR paid the SMW; OR

o Worker in PUBLIC SECTOR with compensation income of NOT MORE THAN SMW in the non-
agricultural sector where he/she is assigned
o NOT AN MWE if paid MORE THAN THE SMW
o Purely MWE
➢ EXEMPT FROM INCOME TAXES & CREDITABLE WITHHOLDING TAXES
o MWE with “additional” COMPENSATION INCOME in excess of P90,000
➢ EXEMPT ONLY on SMW and P90,000 NON-TAXABLE PORTION
➢ EXCESS of P90,000 BENEFITS is TAXABLE (provided that the same and other excess
de minimis adds up to more than P250,000 – Graduated Rates on Tax Table)
o MWE with “additional” BUSINESS INCOME
➢ EXEMPT on SMW and P90,000 NON-TAXABLE PORITON
➢ EXCESS OF P90,000 BENEFITS IS TAXABLE
➢ Business Income is TAXABLE

Senior Citizens & PWDs

o Taxed in the SAME MANNER AS INDIVIDUAL TAXPAYERS (“Pay as you file ITR”)
o However, if SC or PWD has a gross income of LESS THAN P250,000 or an MWE, they shall be
EXEMPT FROM INCOME TAXES
o However, such income tax exemption DOES NOT EXEMPT THEM FROM FINAL WITHHOLDING
TAXES & CAPITAL GAINS TAXES, etc.

FILING OF INCOME TAX RETURNS

A. Basic Tax
o For PURELY COMPENSATION: April 15 (Annually) – BIR Form 1700
o For BUSINESS INCOME EARNERS (Purely SEPs & MIEs) – BIR Form 1701Q & BIR Form
1701A

1st Quarter May 15

2nd Quarter August 15 (45 days after end of Quarter)
3rd Quarter November 15 (45 days after end of Quarter)
Final adjusted/annual return April 15 of succeeding year

B. Final Withholding Tax on Passive Income

o For FWT (BIR Form 2316) and CWT (BIR Form 2307), return shall be filed and paid
NOT LATER than the last day of the month following the close of taxable year.
(JANUARY 31) – Beginning 2018

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 C. Capital Gains Tax

o Shares of Stock
▪ Ordinary Return (BIR Form 1707) – WITHIN 30 days from sale
▪ Annual Return (BIR Form 1707A) – on or before April 15

o Real Property (BIR Form 1706)

▪ WITHIN 30 days from sale

❖ MANNER OF FILING

1. Manual Filing
2. Electronic Filing and Payment System (ePFS)
3. eBIR Forms

❖ PAYMENT – “Pay as you file”

o There is an option to PAY TAX IN TWO EQUAL ANNUAL INSTALLMENTS assuming that
tax due is MORE THAN P2,000

1st Installment: at the time of filing annual ITR

2nd Installment: ON or BEFORE OCTOBER 15

❖ PLACE OF FILING ITR

1. Authorized Agent Banks (AAB) of place where taxpayer is registered (RDO)

2. Revenue District Officer
3. Collection Agent
4. Duly Authorized City/Municipal Treasurer

❖ PERSONS REQUIRED/NOT REQUIRED TO FILE ITR

1. REQUIRED
a. Individuals engaged in business REGARDLESS OF RESULTS OF OPERATONS
b. Individuals with TWO OR MORE EMPLOYERS during taxable year
c. Individuals with two or more employers where tax was NOT WITHHELD CORECTLY
(tax due is NOT equal to tax withheld) resulting to COLLECTIBLE/REFUNDABLE
return
d. Individuals deriving other NON-BUSINESS RELATED INCOME (i.e. Capital Gains
Tax)
e. Individuals receiving PURELY COMPENSATION from a SINGLE EMPLOYER, the
income tax of which was WITHHELD CORRECTLY. However, SPOUSE IS REQUIRED
TO FILE ITR (NOT QUALIFIED for Substituted Filing if Spouse of Taxpayer is STILL
required to file ITR)
f. NRA-ETB deriving income in the PH (business/non-business related income)
2. NOT REQUIRED TO FILE ITR
a. MWEs or gross income during the year DID NOT EXCEED P250,000
b. Individuals qualified for SUBSTITUTED FILING
c. Individual whose SOLE INCOME has been subjected to final tax

❖ SUBSTITUTED FILING OF ITR – individual taxpayers may NO LONGER FILE ITR assuming
they meet ALL requirements:

a. PURELY COMPENSATION Income Earner (MUST NOT BE MIE or Purely SEP)

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 b. Tax Due = Tax Withheld (CORRECTLY WITHHELD)
c. ONLY ONE EMPLOYER during the taxable year
d. If MARRIED, spouse must ALSO BE QUALIFIED FOR SUBSTITUTED FILING

REFERENCES:

Banggawan, R. (2019) Income Taxation: Laws, Principles, and Applications. Real Excellence Publishing

Tabag, E.D. (2020) CPA Reviewer in Taxation: With Special Topics and Properly Filled BIR Forms. EDT
Book Shop

Tabag, E.D., & Garcia, E.J. (2020) Income Taxation: With Special Topics and Properly Filled BIR Forms.
EDT Book Shop

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