UNIT 2 – INCOME TAX ON INDIVIDUALS

INCOME TAX
- tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the
pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws

PERSON:
1. Natural Person – an individual
2. Juridical Person – Corporations, Partnerships, Joint Ventures

CLASSIFICATION OF INDIVIDUALS:
1. Citizen
A. Resident (Under Sec. 1, Art. IV of the 1987 Constitution)
- citizen of the Philippines at the time of the adoption of this Constitution
- whose fathers or mothers are citizen of the Philippines
- born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching
the age of majority
- naturalized in accordance with law

B. Non-Resident
Citizen of the Philippines:
- whose physical presence abroad is with a definite intention to reside therein
- leaves the Philippines to reside abroad as an immigrant or for employment on a permanent basis
(e.g. OCW & OFW)
- works and derives income from abroad whose employment thereat requires him to be physically present abroad “most of the
time” (at least 183 days) during the taxable year
- 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

2. Alien
A. Resident
- lives in the Philippines with no definite intention as to his stay
- 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
- has acquired residence in the Philippines and retains his status as such until he abandons the same and actually departs from the
Philippines
B. Non-Resident
- comes to the Philippines for a definite purpose which in its nature may be promptly accomplished
- may either be: ETB or NETB
- if has stayed for an aggregate of more than 180 days—NRAETB

TAXABILITY OF INDIVIDUALS
TYPE Earned within the Philippines Earned outside the Philippines
Resident Citizen Taxable Taxable
Non-Resident Citizen Taxable Non-Taxable
Resident Alien Taxable Non-Taxable
Non-Resident Aline (whether engaged
Taxable Non-Taxable
in trade or business or not)

TAXABILITY OF CORPORATIONS
TYPE Earned within the Philippines Earned outside the Philippines
Domestic Corporations Taxable Taxable
Resident Foreign Corporations Taxable Non-Taxable
Non-Resident Foreign Corporations Taxable Non-Taxable

RULES ON SITUS (whether earned within or outside the Philippines)

INCOME SITUS
1. Interest - residence of the debtor
 2. Dividends
3. Services
4. Rentals and Royalties
5. Sale of Real Property
6. Sale of Personal Property
7. Income earned partly within
and outside the Philippines
within if coming from:
A. Domestic Corporation
B. Foreign Corporation (50% of gross income
earned within PH)
- where performed
- where the property is located or the place of
use of the intangible
- where the real property is located
Purchase: where the property is sold
Produced: partly within/without

REQUISITES OF INCOME
1. There must be gain or profit.
2. The gain must be realized or received
3. The gain must not be excluded by law or treaty from taxation.

SOURCES OF INCOME FOR INDIVIDUAL TAXPAYERS

1. Compensation
- remuneration received under an employee-employer relationship
2. Business or Professional Income
- sole proprietorship business, from practice of profession, share in the income of GPP (General Professional Partnership)
3. Passive Income
- income generated without any active conduct (Interest, Royalties, Dividends, etc.)
4. Capital Gains
- from the sale of capital assets

ALLOWABLE DEDUCTIONS FOR INDIVIDUAL TAXPAYERS

1. Itemized Deductions
- expenses incurred in conducting the business or in the practice of profession provided that they meet all
the requirements for deductibility
2. Optional Standard Deduction (OSD)
- 40% of Gross Sales or Receipts
- if mixed income, 40% will not include compensation income
3. Special Allowable Itemized Deductions
A. Rooming-in and Breast-feeding Practices (RA 7600)
B. Adopt a School Program (RA 8525)

NOTE: No longer available starting January 1, 2018 (due to TRAIN Law)

4. Basic Personal Exemption
5. Additional Exemption
6. Premium Payment on Health and/or Hospitalization Insurance (PPHHI)

BASIC FORMAT OF COMPUTATIONS

1. Pure Compensation Income
Gross Taxable Compensation Income P xxx
Less: Non-Taxable Compensation Income* (xxx)
Taxable Income** xxx

Tax Due xxx

Less: Withholding Tax on Compensation (xxx)
Tax Payable (Refundable) xxx
*includes those benefits provided by the employer which are considered de minimis or otherwise exempted from income tax such as
mandatory government and other contributions
**less Basic and Personal Exemptions if prior to Jan. 1, 2018

2. Pure Business or Professional Income Availing of the Graduated Fees

 Gross Sales/Receipts from Business or Professions* P xxx
Less: Costs and Allowable Deductions (OSD or Itemized) (xxx)
Taxable Income** xxx

Tax Due xxx

Less: Withholding Tax xxx
(xxx)
Creditable Tax xxx
Tax Payable (Refundable) xxx
*shall be gross of any applicable withholding taxes—note that creditable withholding taxes are deducted from the Tax Due; not as
reductions to gross income to arrive at Taxable Income
**less Basic and Personal Exemptions if prior to Jan. 1, 2018

3. Pure Business or Professional Income Availing of the 8% Income Tax

Gross Sales/Receipts* P xxx
Other Operating Income xxx
Less: First P250,000 exempt from Income Tax (P250,000)
Taxable Sales/Receipts xxx
Tax Rate 8%
Income Tax xxx
Less: Withholding Tax xxx
(xxx)
Creditable Tax xxx
Tax Payable (Refundable) xxx
*no deduction for costs or any other items of deduction, save for sales returns, discounts and allowances.

4. Mixed Income Earners

Compensation Income – always subject to the graduated rights
Income from Business/Practice of Profession:
1. less than or equal to P3,000,000
a) 8% income tax rate without the first P250,000 exempt (already considered in the compensation income)
b) graduated rights
2. more than P3,000,000 – graduated rights