CHAPTER 7

INTRODUCTION TO REGULAR INCOME TAXATION

Chapter Overview and Objectives:

After this chapter, readers are expected to demonstrate knowledge on the following:
1. The scope of regular income and its tax model
2. The features of the regular income tax
3. The concept of inclusion and exclusion from gross income
4. The types of gross income subject to regular tax
5. The concept of deduction and personal exemption
6. The concept of deductions compared to personal exemptions
7. Measurement of gross income from employment and business and the treatment of other income
8. The concept of operating income or revenue and the difference in tax presentation of individuals and
corporate taxpayers
9. The procedural computation of taxable income of corporations and different individual taxpayers
10. The computation of the regular tax for individuals and corporations
11. The deadline of the regular tax returns
12. Applicability of the quarterly filing and its deadlines

THE REGULAR INCOME TAX MODEL

Gross Income P xxx,xxx

Less: Allowable Deductions P xxx,xxx
Personal Exemptions P xxx,xxx
Taxable Income P xxx,xxx

CHARACTERISTICS OF THE REGULAR INCOME TAX

1. General in coverage - all items except those that are subject to FWT, CGT and Special Tax Regimes
2. A net income tax - Residual Profits or Gains
3. An annual tax - Yearly profits or gains
4. Creditable withholding tax - withheld at source by customers or clients but not a final tax

Final Withholding Tax (FWT) vs. Creditable Withholding Tax (CWT)

Similarities of FWT and CWT

1. Both cases, the income payor withholds a fraction of the income and remits the same to the
government
2. By collecting at the moment cash is available, both serve to minimize cash flow problems to the
taxpayer and collection problems to the government.

Differences between FWT and CWT

Final Withholding Tax Creditable Withholding Tax

Income tax withheld Full Only a Portion
Coverage Certain Passive Income Certain Passive Income and
Active Income
Who remits the actual tax Income Payor Income Payor for the CWT and
the taxpayer for the balance
Necessity of an annual Not required Required
consolidated return
A. ALLOWABLE DEDUCTIONS
Allowable deductions, or simply “deductions” are expenses in the conduct of business or exercise of
profession. Deductions can be claimed itemized wherein the taxpayer supports every item of deduction or
standardized through the Optional Standard Deductions wherein the deduction is simply presumed as a
percentage of gross sales, gross receipts, or gross income.

Vast topic of deductions as follows:

1. Principle of Deductions
2. Regular Allowable Deductions
3. Special Allowable Itemized Deductions & Net Operating Loss Carry-Over
4. The Standard Optional Deductions (OSD)

B. PERSONAL EXEMPTIONS
Ideally, income taxation should not apply to the basic subsistence and support of individual taxpayers
because imposing tax on these would be tantamount to killing the goose that lays the golden egg. The
amount exempted by law in lieu of the personal, living, and family expenses of an individual taxpayer is
referred to as personal exemption.

Personal Exemptions Repealed Under TRAIN Law

A. Basic Personal Exemption (BPE) - P50,000
B. Additiona Personal Exemption (APE) - P25,000 for each qualified dependent child, maximum of 4
(including a foster child and Persons with disability (PWD), if applicable)

Requisites of a Qualified Dependent Child:

1. Legitimate, illegitimate, legally adopted child
2. Dependent upon chief support from taxpayer
3. Living with the taxpayer
4. Not married
5. Not gainfully employed
6. Not more than 21 years of age (regardless of age if incapable of self support because of mental or
physical defect)

Requirements in order for a foster child to qualify as dependent:

1. Items 2, 3, 4, 5 above
2. Below 18 years of age, or one who is over 18 but is unable to fully take care or protect oneself from
abuse, neglect, cruelty, exploitation or discrimination because of a physical or mental disability or
condition
3. Only if the period of foster care is at least for a continuous period of one(1) taxable year
4. Only one foster parent can treat the foster child as a dependent for a particular taxable year. As such,
no other parent or foster parent can claim the said child as dependent for that period.

Requirements in order for a PWD to qualify as dependent:

1. Living with the taxpayer
2. Within the fourth civil degree of consanguinity or affinity to the taxpayer
3. Regardless of age
4. Not gainfully employed; and
5. Chiefly dependent upon the taxpayer

NOTE: Personal exemption allowed to NRA-ETB is the LOWER of:

A. Personal exemption allowed in the Philippines; or
B. Personal exemption allowed to Filipinos in their country
C. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE

Requisites:
1. Gross income of the family is not more than P250,000
2. Not to exceed P2,400 per annum
3. For married taxpayers, only the spouse claiming the APE is entitled

CHANGE IN STATUS (Prior to TRAIN Law)

1. If the taxpayer should have additional dependents during the taxable year, the taxpayer may claim the
corresponding additional exemption in full of such year.
2. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependents as if he died at the close of the year.
3. If the spouse or any of the dependents dies or if any of such dependents marries, becomes 21 years old
or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions
as if the spouse or any of the dependents died, married, became 21 years old or became gainfully
employed at close of such year.

Allowable Deductions vs. Personal Exemption

1. Allowable deductions pertain to costs or expenses of earning items of gross income while personal
exemptions are deductions in lieu of the personal, family and cost of living expenses of individual
taxpayers.
2. Personal exemption is applicable only to individual taxpayers. Corporations cannot claim personal
exemptions. However, both corporations and individuals can claim allowable deductions
3. Allowable deductions are generally deductible by corporations. For individual taxpayers, only
self-employed individuals or those engaged in business or exercise of a profession can claim allowable
deductions. No deduction is allowed to individuals who are purely employed while exemption is allowed to
individuals whether purely employed or self employed.
4. Allowable deductions are deductible only from gross income from business or exercise of a profession.
Personal exemption is deductible against all types of gross income subject to regular income tax.
5. Allowable deductions are considered in the determination of net income from business or profession
whereas personal exemption is considered in the computation of taxable income.

MINIMUM WAGE EARNERS (RA 10-2008)

Minimum Wage Earners (MWEs) are exempt from income tax on:
1. Minimum Wage
2. Holiday Pay
3. Overtime Pay
4. Night shift differential pay
5. Hazard Pay

DETERMINATION OF BASIC TAX OF MARRIED INDIVIDUALS

Requirements in the filing of Income Tax Return of Married Individuals:
1. Married Individuals are required by law to file a consolidated income tax return, but they shall compute
separately their individual income tax.
2. Income which cannot be definitely attributed or identified as income exclusively earned or realized by
either of the spouses, the same shall be equally divided between the spouses for purposes of determining
their taxable income.
3. If the spouses are only physically separated and there is no legal separation, they are still required by
law to file consolidated or joint returns for which they are considered as jointly and severally liable to the
tax.
TAXATION OF NRA-NETB

All income received by a NRA-NETB is subject to 25% FWT, except the following:
1. Interest from a depositary bank under the expanded foreign currency deposit system - exempt
2. Sale of real property and shares subject to CGT

TAXATION OF SPECIAL EMPLOYEES (Repealed under the TRAIN Law)

Special Alien Employee

A. Compensation Income - 15% FWT
B. Other Income - Apply the rule of NRA-NETB

Special Filipino Employee

A. Compensation Income:
1. ROHQ/RHQ = 15% FWT or basic tax at the option of the taxpayer
2. OBUs Petroleum Contractors = 15% FWT
B. Other Income - Apply the rule on RC

BASIC TAX RATE:

Prior to 2018
Over But not over Tax Plus Of excess over
0 10,000 - 5% -
10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
500,000 - 125,000 32% 500,000

From 2018 to 2022

Over But not over Tax Plus Of excess over
0 250,000 Exempt - -
250,000 400,000 - 20% 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000

Deadline For Filing of Returns

1. Final Withholding Tax
A. January to November - 10th day of the month following the month the withholding was made
B. December - January 15 of the succeeding year
2. Capital Gains Tax
A. Shares of Stock
a) Ordinary Return - 30 days after each transaction
b) Final Consolidated Return - on or before April 15 of the following year
B. Real Property - 30 days following each sale or other disposition
3. Fringe Benefit Tax - 10th day of the month following the end of the calendar quarter in which the fringe
benefits were granted to the recipient.
4. Basic Income Tax (RIT)
A. Quarterly
a) 1st Quarter - May 15 of the current year (CY)
b) 2nd Quarer - August 15 of the current year (CY)
c) 3rd Quarter - November 15 of the current year (CY)
B. Annual (Final Quarter) - April 15 of the succeeding year

TYPES OF GROSS INCOME SUBJECT TO REGULAR INCOME TAX

1. Compensation Income
2. Business or Professional Income
3. Other Income - non-business income and non-compensation income such as:
a. Gains from dealings in properties
b. Other active or passive income not subject to final tax

THE REGULAR TAX MODEL IN EXPANDED FORM

Employment Business or Profession Others Total

Gross Income XXX XXX XXX
Less:
Deductions (XXX)
Personal Exemptions (XXX)
Taxable Income XXX XXX XXX XXX

COMPENSATION INCOME
In taxation, the term “compensation income” generally comprises all remunerations under an
employer-employee relationship, such as the regular pay of employees every payroll period and other
benefits or incentives other than the basic pay which are commonly known as fringe benefit.

TAX REPORTING OF COMPENSATION INCOME

Compensation income is presented in the income tax return as follows:

Gross compensation income P xxx

Less: Non-Taxable compensation P xxx
Gross Taxable Compensation Income P xxx
Less: Personal Exemption P xxx
Net Taxable Compensation Income P xxx

Non-Taxable Compensation includes items of compensation income that are exempted by law, contracts,
or treaty from income taxation.

BUSINESS INCOME
Business Income arises from habitual engagement in any commercial activity involving regular sales of
goods or services by an individual or a corporation. The income from business, legal or illegal, registered or
unregistered, is taxable.

Sales P xxx
Less: Cost of Goods Sold (cost of sales) xxx
Gross Income P xxx
PROFESSIONAL INCOME
The gross income from exercise of a profession or business gross income from the sales of services is
measured below:

Revenues or Gross Receipts P xxx,xxx

Less: Cost of Services P xxx,xxx
Gross Income P xxx,xxx

Note: Service providers using the accrual basis shall report their revenues while those using the cash basis
shall report their gross receipts or collections.

TAX REPORTING OF BUSINESS OR PROFESSIONAL INCOME

Tax Reporting by Individual Taxpayers

Net Sales/Revenues/Receipts/Fees P xxx

Add: Other taxable income from operation not subject to FT P xxx
Total sales/revenues/receipts/fees P xxx
Less: Cost of Sales or Services P xxx
Gross Income from business/profession P xxx
Add: Non-operating income P xxx
Total Gross Income P xxx
Less: Allowable Deductions P xxx
Net Income P xxx

Sales, revenues, receipts, and fees distinguished

Revenue is a general term which pertains to the gross inflow of benefits (total return) arising from the
primary operations of the business.
Sales - sale of goods
Fees - sale of services
Receipts - cash collection

Other taxable income from operations

Other taxable income from operations includes revenues or receipts from incidental or secondary
operations aside from the primary operations:

Examples:
1. A school has tuition fees as primary revenue, but its income from bookstore, canteen or students
dormitories constitutes other operating revenues.
2. A manufacturing firm has its gross income from sale of finished goods as its primary revenue, but its
income from scrap sales constitutes other operating revenues.
3. A private hospital has patient service fees as its primary revenue, but may have room rental and sale of
medicines at its other operating revenues.
4. A dormitory has boarding fees as its primary revenue, but may have laundry fees and canteen income
as other operating revenues.

Non-operating income
Non-operating income includes all other items of gross income such as:

1. Gains from dealings in properties

Gains are net of the cost of the property sold. They are gross income items rather than revenue. Hence,
they are excluded under the “Sale/Revenues/Receipts/Fees” of individual taxpayers and are included
under “Non-Operating Income.”
2. Income distribution from a general professional partnership, taxable trust or estate, or from an
exempt joint venture
Income distributions from these entities are not revenue, but items of gross income, hence, included
as part of the non-operating income of individuals.

3. Casual Active Income

This includes active income from isolated or one time transactions such as casual carpentry income of
a person not engaged in carpentry business. Any expense on casual transactions is set off with casual
income. The net gain or income is a non-operating income.

4. Passive income not subject to final tax

This includes passive income not connected with the business of the taxpayer and is not subjected to
final tax such as interest on advances to employees and dividends from foreign corporations. Similar to
casual income, these do not arise from the regular business operations, hence, classified as non-operating
income.

Reporting by Corporate Taxpayers

Net Sales/Revenues/Receipts/Fees P xxx

Less: Cost of sales or services P xxx
Gross income from operations P xxx
Add: Other taxable income not subject to final tax P xxx
Total Gross Income P xxx
Less: Allowable Deductions P xxx
Net Income P xxx

Note: For corporate taxpayers, revenues or receipts from secondary or incidental operations will be
included under the classification “Sales/Revenues/Receipts/Fees.”

Other taxable income not subject to final tax

This category includes other items of gross income whether or not arising from the operations of the
corporation such as gains from dealings in properties, income distribution from an exempt joint venture,
and other passive income not subject to final tax.

TAXABLE INCOME OF CORPORATE TAXPAYERS

The taxable income of corporate taxpayers is simply the net income from business because corporations
cannot claim personal exemptions.

TAXABLE INCOME OF INDIVIDUAL TAXPAYERS

The computation of the taxable income of an individual taxpayer depends on whether he or she is a:
1. Pure compensation income earner
2. Pure business income earner or pure professional income earner
3. Mixed income earner

Types of Regular Income Tax

1. Individual Income Tax
2. Corporate Income Tax
Scope of the Progressive Tax
The progressive tax covers all individuals including taxable estates and trusts except those subject to final
income tax:
A. NRA-NETB - subject to 25% final tax on gross income
B. Special aliens or special employees - subject to 15% final tax on gross income from employment

Special Alien Employees

These pertain to employees who are subject to a 15% final tax on gross compensation income.

CORPORATE INCOME TAX

The corporate income tax, commonly referred to as the regular corporate income tax (RCIT), is a
proportional or flat tax rate of 30% on taxable income. The RCIT applies to any corporation other than
those:
A. Subject to final tax such as non-resident foreign corporation and FCDU interest income not subjected to
final tax
B. Special corporations or those subject to special tax regimes such a PEZA and TIEZA-registered enterprise
C. Exempt corporations on their exempt income

Special Corporations
These are corporations that are subject to a preferential (lower) rate at less than 30% regular corporate
income tax or are subject to special tax rules.

Exempt Corporations
It should be noted that exempt corporations are required to report their results of operations through BIR
Form 1702-EX even if they do not have taxable income. They are mandated to use the itemized deductions
in their income tax return. The rule is apparently intended to assist the BIR in monitoring compliance with
the creditable withholding tax by exempt corporations.

REQUIRED ATTACHMENT IN THE ANNUAL INCOME TAX RETURN

1. Certificate of Independent CPA - if gross quarterly sales, earnings, receipts or output exceed P150,000.
2. Supplemental form for taxpayers with multiple activities per tax regime
3. Account information form and financial statements(FS) showing:
A. Sales/Receipts/Fees
B. Cost of Sales/services
C. Non-operating and other taxable income
D. Itemized Deductions (if taxpayer did not avail of OSD)
E. Taxes and licenses
F. Other information prescribed to be disclosed in the FS
G. Statement of management responsibility
H. Certificate of income payments not subjected to Withholding tax(BIR Form 2304)
I. Certificate of creditable withheld at source (BIR Form 2307)
J. Duly approved Tax debit memo, if applicable
K. Proof of prior year’s excess credit, if applicable
L. Proof of foreign tax credits, if applicable
M. For amended return, proof of tax payment and the return previously filed
N. Certificate of tax treaty relief/Entitlement issued by the concerned Investment Promotion Agency