RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

SESSION NO./ WEEK NO.3

MODULE NO.2: INCOME TAXES FOR INDIVIDUAL (PART 1)

Notes
2.1 Individual Taxpayers Definition
2.2. Classification
2.2.1. Citizens of the Philippines
2.2.2. Nonresident Citizens of the Philippines
2.2.3. Resident Citizens of the Philippines
2.2.4. Aliens
2.2.5. Nonresident Aliens Engaged in Trade/Business
2.2.6. Nonresident Aliens not Engaged in Trade/Business
2.3. Types of Income
2.4. Ordinary or Regular Income subject to Graduated Tax Rate
2.4.1. Self-Employed & or Professional (SEP)
2.5. Passive Income subject to Final Withholding Tax
2.6. Final Withholding Tax

A taxpayer may be an individual or business entity that is obligated to pay taxes it is

the obligation of everyone to contribute as the law required. It is important that as
individual we must know how tax is applied in our country because it has big impact on
our finances. For a typical wage earner or entrepreneur, taxes are not particularly
difficult to understand because in the latest revision of the Tax Code under the TRAIN
Law the application of tax is becomes easier, so there is no reason to dread and fear
also no reason to cheat and commit illegal action but it just a matter of educating yourself
and avoid ignorance to tax laws. In this Module we will learn how tax is applied on
income and the right practices on how to compute tax.

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Cities of Mandaluyong and Pasig

Study Guide

Content

• Learning Outcomes

• Topic Presentation

• References

Learning Outcomes

1. Classify the Individual Taxpayers in the Philippines, tax base, and sources of income.
2. Discuss on the three types of income
3. Familiarize on the Graduated Tax Table and be able to compute on the tax payable of an individual
4. Discuss the Self-Employed & or Professional and the applicable taxes
5. Compute the tax payable of Self-Employed & or Professional
6. Familiarize the tax rates on each type of Passive income
7. Explain the Final Withholding tax

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Topic Presentation

2.1. INDIVIDUAL TAXPAYERS :

• Are natural persons with income derived form within the jurisdiction of taxing authority.

2.2. CLASSIFICATIONS:
• Resident Citizens
• Non-resident citizen
• Resident Alien
• Nonresident Alien Engaged in Trade/Business
• Nonresident Alien not Engaged in Trade/Business

2.2.1. Citizens of the Philippines (Sec. 1, Article III of Philippine Constitution)

a. Born with father and/or mother as Filipino Citizen
b. Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon
reaching age of majority.
c. Acquired Philippine citizenship after birth (naturalize) in accordance with Philippine Laws.

2.2.2. Nonresident Citizens of the Philippines

a. Establishes to the satisfaction of the Commissioner of Internal Revenue, to the fact of his physical
presence abroad with definite intention to reside therein;
b. Leaves the Philippines during the taxable year to reside abroad:
b.1. As an immigrant;
b.2. For employment on a permanent basis;
b.3. For work and derives income abroad and whose employment thereat requires him to be
physically abroad most of the time during the taxable year.
c. A citizen of the Philippines who shall have stayed outside the Philippines for 183 days or more by
the end of the year.

2.2.3. Resident Citizens are those who are not classified as nonresident citizen.

2.2.4. Alien are foreign-born person who is not qualified to acquire Philippine citizenship by birth or after
birth.
a. Resident Alien (Sec. 22F of the Tax Code)
a.1. An individual whose residence is within the Philippines and who is not a resident
thereof.

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Cities of Mandaluyong and Pasig

a.2. An individual who is actually present in the Philippines and who are not mere transient
or sojourners
a.3. An individual who lives in the Philippines with no definite intention as to his stay.
b. Nonresident Alien (Sec. 22G of the Tax Code)
b.1. An individual whose residence is not in the Philippines and who is not a citizen thereof.
b.2. Individual who come to the Philippines for the definite purpose, which in its nature may
be promptly accomplished.
b.3. An individual who are mere transients or nonresident

2.2.5. Nonresident Alien Engaged in Trade/Business

Aliens who stayed in the Philippines for aggregate period of more than 180 days during the taxable
year and/or aliens who have business income in the Philippines.

2.2.6. Nonresident Alien not Engaged in Trade/Business are those who are not classified as
above.

APPLICABLE TAXES AND TAX RATES depend on several factors such as but not limited to
a. Classification of taxpayers
b. Source of Income
c. Type of income

Table 2.1. Classification of Taxpayers and Source of Income

Taxpayer Tax Base Source

Resident Citizen Net Income Within and Outside
Resident Citizen Net Income Within only
Resident Alien Net Income Within only
Nonresident Alien Engaged
Net Income Within only
in Trade/Business
Nonresident Alien not Engaged
Gross Income Within only
in Trade/Business

2.3. TYPES OF INCOME

1. Ordinary or Regular Income subject to Graduated Tax Rate
a. Compensation Income (salaries or wages)
b. Business Income
c. Income from Practice of Profession
d. Income from sale or dealings of properties
e. Miscellaneous Income
f. Passive Income other than those subject to Final Taxes and Capital Gains Tax

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2. Passive Income subject to Final Withholding Tax

a. Interest Income
b. Dividend Income
c. Royalties
d. Prizes
e. Other winnings

3. Sale of Capital Assets subject to Capital Gains Tax

a. Sale of shares of stocks of a domestic corporation not traded in local stock exchange.
b. Capital gains from sale of real property in the Philippines.

2.4. ORDINARY OR REGULAR INCOME SUBJECT TO GRADUATED TAX RATE

Table 2.2.
GRADUATED TAX RATE
Income Tax
Not over 250,000 Php Exempt
250,000 Php - 400,000 Php 20% of excess over 250,000 Php

400,000 Php - 800,000 Php 30,000 Php + 25% of excess over

400,000 Php
800,000 Php - 2,000,00 Php 130,000 Php + 30% of excess over
800,000 Php
2,000,000 Php - 8,000,00 Php 149,000 Php + 32% of excess over
2,000,000 Php
Over 8,000,00 Php 2,410,000 Php + 35% of excess over
8,000,000 Php

2.4.1. SELF-EMPLOYED & OR PROFESSIONAL (SEP)

• Self-Employed is a sole proprietor or an independent contactor who reports income earned from
self-employment. He/She controls who he/she works for, how the work is done and when it is
done.
• Professional is a person formally certified by professional body belonging to a specific profession.
• Regular income of SELF-EMPLOYED &/or PROFESSIONALS (SEP) amounting to more than
250,000 Php but with a gross sales and other operation income not exceeding 3,000,000 Php
shall have the option to avail 8% tax on gross sales/receipts and other operating income in
excess of 250,000 Php.

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Cities of Mandaluyong and Pasig

Figure 2.1.

2.5. PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX

Table 2.3.
CITIZENS
NRA- NRA-
PASSIVE INCOME AND
ETB NETB
RESIDENTS
Interest
A. Interest from any currency bank deposit 20% 20% 25%

B. Yield or any monetary benefit from de posit substitute. 20% 20% 25%

C. Yield or any monetary benefit from trust funds and similar 20% Exempt Exempt
arrangements.
D. Interest incomes received from a depositary bank under expanded 15%
Exempt Exempt
foreign currency deposit system. NRC=exempt
E. Interest Income from long-term deposit or investment. Exempt Exempt 25%

If pre-terminated before fifth year, a final tax shall be

imposed based on remaining maturity as follows
5% 5% 25%
4 years to less than 5 years
12% 12% 25%
3 years to less than 4 years

Less than 3 years 20% 20% 25%

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Royalties
A. Royalties in General 20% 20% 25%
B. Royalties on books, as well as literary works and musical
10% 10% 25%
composition
Prizes
A. Not exceeding 10,000 Php Exempt Exempt 25%
B. Exceeding 10,000 Php 20% 20% 25%
Other Winning
A. Not exceeding 10,000 Php Exempt Exempt 25%
B. Exceeding 10,000 Php 20% Exempt 25%
Dividends
A. Cash and/or property dividends actually /constructively received
from domestic corp. or from joint stock co., insurance or mutual fund 10% 20% 25%
companies & ROHQ of multinational companies beginning Jan. 2000
B. Share of an individual in the distributable net income after tax of a
10% 20% 25%
PARTNERSHIP (OTHER THAN a GPP) beginning Jan.1, 2000
C. Share of an individual in the net income after tax of an Association,
a Joint Account, or a Joint Venture or Consortium taxable as a 10% 20% 25%
corporation, which is a member or a coventurer beginning Jan. 1, 2000

2.6. FINAL WITHHOLDING TAX

• A kind of tax which is prescribed in a certain income derived from Philippine sources and is not
creditable against income tax due of the payee on income subject to regular rates of tax for the
taxable year.
• Under this tax system, payee received the income net of the applicable tax. The amount of tax
withheld is by the withholding agent (payor) is "constituted as a full and final payment" of income
tax due from the payee on the said income.
• Consequently, the liability for payment of the tax rests primarily on the payor as a withholding
agent. Thus, in case of failure to withhold the tax or in case of under withholding agent, the
deficiency tax shall be collected from the payor/withholding agent.

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Cities of Mandaluyong and Pasig

Tabag, E. & Garcia, J. E. (2018). Income Taxation. Sampaloc,Manila: (n.p.)

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