UNIT III – INCOME TAX

Lesson 1 – Individual Taxpayers

INTRODUCTION TO INCOME TAX

Income Tax – is one levied on the income from property or occupation. It is a direct tax upon the thing called
income.

Purpose of Income tax

Imposition of the income tax is intended:
1) To raise revenue to defray the expenses of the government
2) To mitigate the evils against the inequalities of wealth by progressive scheme of taxation which places
the burden on those best able to pay.

Characteristics of Philippine Income Tax

1. A national tax – imposed and collected by the National Government throughout the country.
2. A general tax – levied without a specific or predetermined purpose, thus the revenue from income tax may
be appropriated for general public purposes.

3. An excise tax - imposed on the right or privilege of a person to received or earn income.
4. A direct tax – payable by the person upon whom it is directly imposed by law. It cannot be shifted or
passed to others.
5. A progressive tax – based upon one’s ability to pay.
6. The income tax system is a comprehensive system – it adopts the citizen principle, the residence principle
and the source principle.

7. Semi-global or semi-schedular system –

Global tax system – some types of taxable income are grouped together without distinction and after deducting
expenses and allowable deductions and exemptions therfrom, are then subjected to graduated (progressive ) tax.

Schedular tax system – some types of taxable income like passive income and capital gains which are not
subject to such graduated rates. Such income are classified into different categories and are accorded different tax
treatments. Each category of income has its own schedule of tax rates.

Meaning of Income
 Income means all wealth which flows into the taxpayer other than a mere return of capital. Income is gain
derived from labor or capital or both labor and capital.
 Includes gain derived from the sale or other disposition of capital assets.

Income distinguished from capital:

 Capital is a fund, income is a flow
 Capital is wealth, income is the fruit of wealth
 Capital is the tree, income are fruits.

Theory of Separability or Severance Test of Income –

 Under this doctrine, in ordewr that income may exist, it is necessary that there be separation from capital of
something of exchangeable value.
 Concept of income requires a realization of gain.
Examples: 1. Stock dividends do not result in taxable income
2. Increase in value of property is not income.
 Amount received as a return of capital is not an income
Requisites for taxability of Income:
1. Thee must be a gain or profit whether in cash or its equivalent.
2. The gain must be realized or received
3. The gain must be excluded by law or international treaty from taxation.

Classification of Income According to source

For income tax purposes, source – refers to the activity or property or labor that give rise or produced the
income classified as follows:
1. Income from sources within the Philippines
2. Income from sources without the Philippines
3. Income from sources partly within and partly without the Philippines.

How to determine Income within and without

Income Test Source of Income
1) Interest Residence of the debtor
2) Income from services Place of performance
3) Rent Location of property
4) Royalty Place of use of intangible
5) Gain on sale of property Location of property
6) Gain on sale of personal property
purchased in one country & sold in Place of sale
another
7) Dividend
From domestic corporation Income within
From foreign corporation a) Income within – if 50% or more of the
gross income of the foreign corp. for
the preceding 3 years prior to the
declaration of dividend was derived
from sources within the Phil.

Phil. Gross Income x Dividend = Income within

Total Gross Income

b) Income without – if less than 50% of the gross

income of the foreign corp. for the
preceding 3 years prior to the declaration of
dividend was derived from sources within the
Phil.
8) Sale of domestic shares Income within
9) Sales of foreign shares Income without
10) Income from transportation and other
services rendered partly within and Partly within and partly without
partly without the Philippines
11) Income from sale of personal property
produced in whole or in part by the Partly within and partly without
taxpayer within the Phil. and sold
without the Phil.
12) Income from sale of personal property
produced in whole or in part by the Partly within and partly without
taxpayer without the Phil. and sold
within the Phil.

Situs of Income:
 the place of taxation of the income or the country which has jurisdiction to impose the tax. For income tax
purposes, income may be taxes in one or more or all of the following places or countries:
1) The place where the taxpayer is a citizen
2) The place where the taxpayer is a resident, or
3) The place where the income is earned or derived.
Income Tax System of the Philippines

The income tax system of the Philippines may be characterized under the two general categories, namely:

1. Gross income taxation - final tax is imposed on the gross amount of specified types of income, such as
interest income, roylaty, prizes, dividends and capital gains. This is also known as schedular system of
taxation.

2. Net income taxation - gross income not subject to final tax less allowable deductions equals taxable net
income and subjected to graduated (progressive ) tax rates. This is also known as global system of
taxation.

INCOME TAXPAYERS

CLASSIFICATION OF TAXPAYERS

1. INDIVIDUALS
a) Citizens of the Philippines:
b) Aliens or foreigners

2. ESTATES AND TRUSTS

3. CORPORATIONS
a) Domestic corporations
b) Foreign corporations
1. Resident foreign corporations
2. Non-resident foreign corporations

4. GENERAL PROFESSIONAL PARTNERSHIPS

DEFINITION OF TERMS

1. Citizen. Under the constitution, the following shall be considered citizens of the Philippines:

 those who are citizens of the Philippines at the time of the adoption of the February 2, 1987
Constitution.;
 those whose fathers or mothers are citizens of the Phil;
 those born before January 17, 1973, the date of the adoption of the 1973 Consitution , of Filipino
mothers, who elects Philippine citizenship upon reaching the age of majority; and
 those who are naturalized in accordance with law.

2. Resident citizen (RC)– is a Filipino citizen who permanently resides in the Phil.

3. Non-resident citizen means ( NRC):

 a citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite to reside therein.

 a citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad,
1. as an immigrant
2. for employment on a permanent basis
3. for work and derives income from abroad and whose employment thereat requires him to
be physically present abroad most of the time during the taxable year.

 A citizen of the Philippine who shall have stayed outside the Philippines for 183 days or more by
the end of the year (aggregate).
  a citizen who has been previously considered as non-resident citizen and who arrives in the Phil.
at any time during the taxable year to reside permanently in the Phil. He shall be considered a non-
resident citizen for the taxable year in which he arrives in the Phil. 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 hi intention of leaving the Philippines
to reside permanently abroad or return to and reside in the Philippines, as the case may be.

4. Resident alien (RA) –

 an individual whose residence is within the Phil. and who is not a citizen thereof. He is one who is
actually present in the Philippines and who is not a mere transient or sojourner. But residence
does not mean physical presence.
 An alien who comes to the Philippines for a definite purpose which in its very nature would
require an extended stay, and to that end, makes his home temporarily in the Phil. is a resident
alien.

5. Non-resident alien (NRA)– an individual whose residence is not within the Philippines and who is not a
citizen thereof.

 An alien is considered resident or non-resident depending on his intention with regard to the length
and nature of his stay. Thus:
a) an alien who comes to the Phil. for a definite purpose which in its very nature may be promptly
accomplished is a transient or non-resident alien.

b) An alien who lives in the Phil. with no definite intention as to his stay is a resident. A mere
floating intention indefinite as to time of return to his country is not sufficient to constitute him as a
transient
c) An alien who has acquired residence in the Phil. retains his status as such until he abandons the
same and actually departs from the Phil. The mere intention to change his residence does not
change his status as such as a resident alien to that of non-resident alien. Thus, an alien who has
acquired residence is taxable as a resident for the remainder of his stay in the Phil.

6. Non-resident alien engaged in trade or business (NRA-ETB)– means that the alien is carrying on a
business in the Philippines. It involves some continuity of action. The term trade, business or profession
shall not include performance of services as an employee but it includes the performance of the functions
of a public office. A non resident alien who shall come to the Phil. and stay therein for an aggregate period
of more than 180 days (so the period need not be continuous) during the calendar year shall be deemed
doing business in the Philippines. The only criterion is the length of stay.

7. Non-resident not engaged in trade or business in the Philippines (NRA-NETB)–A non-resident alien to
comes to the Philippines and stay therein for 180 days or less during the taxable year shall be considered
not doing business in the Phil.

8. Overseas Contract Workers (OCW)/Overseas Filipino Workers (OFW) are classified as non-resident
citizens.

9. 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. No. 6426 entitled “An Act Instituting a
Foreign Currency Deposit System in the Philippines and For Other Purposes.’

10. Foreign Currency Deposit Unit (FCD) shall refer to the 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. No. 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.

11. Offshore banking system – 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
Pres. Decree No. 1034 as implemented by Central Bank (now BSP) Circular No. 1389, as amended.

12. Offshore banking unit (OBU) – a branch, subsidiary or affiliate of a foreign banking corporation which is
duly authorized by the BSP to transact offshore banking business in the Phil. in accordance with the
provisions of P.D.1034 as implemented by Central Bank (now BSP) Circular No. 1389, as amended.

13. Deposits – 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.

14. Marginal income earners – (RR No. 11-2000) shall refer to individuals not otherwise deriving
compensation as an employee under an employer- employee relationship but who are self-employed and
deriving gross receipts not exceeding P 100,000 during any 12-month calendar period.

15. Domestic Corporations – are those created or organized under and by virtue of Philippine laws.

16. Foreign corporations – those organized in accordance with laws of their respective countries.

17. Resident foreign corporations - those engage in trade or business within the Philippines.

18. Non-resident foreign corporations – those not engaged in trade or business within the Philippines.

19. General Professional Partnership – formed by persons for the sole purpose of exercising their common
profession, no part of the net income of which is derived from engaging in any trade or business.

20. Estate – refers to all properties, rights and obligations of a person which are not extinguished by his death
and also those which have accrued thereto since the opening of the succession.

21. Trust – is an agreement created by will or an agreement under which title to property is passed to another
for conservation or investment with the income therefrom and ultimately the corpus or principal to be
distributed in accordance with the directives of the creator as expressed in the governing instrument.

22. Creditable withholding tax – is a method of collecting the income tax in advance from the receipt of income
thru the payor, which is constituted by law as withholding agent of the government. The taxes withheld or
deducted by the payor and remitted to BIR are deductible from the tax due of the recipient of the income.
(e.g. withholding taxes on compensation, on rent income, etc,)

23. Final withholding tax – the amount of tax withheld by the payor, which is constituted as a full and final
payment of the income tax due from the payee or recipient of income. This pertains to final taxes on
passive income. The income subject to final tax are no longer included in the taxable income subject to
basic tax rate.
 Individual Taxpayers
Sources of Taxable Income

Taxpayer Taxable income

1. Resident citizen (RC) Within and without the Philippines
2. NRC, RA, NRA-ETB, NRA-NETB Within the Philippines only

Types of Taxable Income

1. Ordinary Income
a. Compensation income
b. Professional income
c. Business income

2. Passive Income - earned without any active action on the part of the taxpayer. Examples: dividends,
interest income, prizes.

3. Capital Gains - arise from the sale of capital asset.

1. Compensation income -
a. Gross compensation income means all remuneration for services performed by an employee for his
employer, whether paid in cash or in kind, unless specifically excluded under the Tax Code (e.g. salaries,
wages, emoluments, honoraria, bonuses, allowances, director’s fees).

b. In the absence of an employer-employee relationship’ compensation for personal services shall be

considered as gross professional fee (e.g. audit fee received by CPA from his client, lawyer’s fee).

c. If a taxpayer is receiving compensation income from two or more employers, he/she must combine all
compensation income received from all employers for a particular calendar year.

d. Non-taxable or exempt compensation

1) Benefits excluded and /or exempted under NIRC and special laws
a) Remuneration received as incidents of employment
1. Exempt retirement benefits under RA 7641 including exempt retirement gratuities to
government officials and employees.
2. Exempt termination benefits
3. Benefits received from United Veterans Administration
4. Social security, retirement gratuities, pensions and similar benefits from foreign government
agencies and other institutions, private or public.
5. Benefits from SSS under the AAA Act of 1954 as amended.
6. Benefits received from GSIS under GSIS Act of 1937, as amended.

b) Employee mandatory contributions to GSIS, SSS, Philhealth, HDMF and union dues .
c) Certain benefits of minimum wage earners
1. Basic minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential pay
5. Hazard pay
* to be exempt from the regular income tax, a minimum wage earner must not have other
items of taxable income aside from those employee benefits.

d) De minimis benefits
1. Meaning of de minimis benefits - facilities or privileges:
a) furnished or offered by an employer to his employees that are or relatively small value;
b) are offered or furnished by the employer merely as a means of promoting the health,
goodwill, contentment, or efficiency of his employees.
 2. Examples of de minimis benefits:
a) Monetized unused vacation leave credits of private employees not exceeding 10 days
during the year.
b) Monetized unused vacation and sick leave credits paid to government officials and
employees .
c) Medical cash allowance to dependents or employees not exceeding P1,500 per semester
or P 250 per month ( P 3,000/year) per employee;
d) Rice subsidy not exceeding 2,000 or one sack of 50-kg rice per month amounting to not
more than P2,000.
e) Uniforms and clothing allowance not exceeding P 6,000 per annum.
f) Actual medical benefits not exceeding P 10,000 per annum ex. Medical allowance to
cover medical and healthcare needs, annual medical/executive check up, maternity
assistance and routine consultation).
g) Laundry allowance at P 300 per month.
h) Employee achievement awards (e.g. for length of serivice or safety achievement, which
must in the form of a tangible personal property other than cash or gift certificate with and
annual monetary value not exceeding P10,000 received by the employe under the
established written plan which does not discriminate in favor of highly paid employees);
i) Gifts given during Christmas and major anniversary celebration not exceeding five
thousand pesos (P5,000) per employee per annum;
j) Daily meal allowance for overtime work and night or graveyard shift not exceeding twenty
five percent (25%) of the basic minimum wage.
k) Benefits received by an employee by virtue of collective bargaining agreement (CBA) and
productivity inventive schemes provided that the total annual monetary value received from
both CBA and productivity incentive schemes combine do not exceed P 10,000 per
employee per taxable year.

e. Taxable de minimis –
1) Excess de minimis over limits
2) other benefits of relatively small value that are not included in the list of the minimis benefits.

f. 13th month pay and other benefits no exceeding P 90,000.

2. Benefits exempt under treaty or international agreements

Employee benefits of non-Filipino nationals and/or non-permanent residents of the Philippines from
foreign governments, embassies or diplomatic missions and international organization in the Philippines
are exempt from income tax

Filipino employees of foreign governments, international missions and organizations are taxable as a
rule, except only to employees of the following organizations: (these organizations have exemption
provisions that extend even to their Filipino employees)
a) United Nations (UN)
b) Special Agencies of the United States
c) Australian Agency for Internationsl Development (AUSAID)
d) Food and Agriculture Organization (FAO)
e) World Health Organization (WHO)
f) United Nationas Development Programme (UNDP)
g) International Organization for Migration (IOM)
h) International Seabed Authority (ISA)

* Tax exemption of Filipino employees is not automatic. Filipinos shall file an application for
confirmation with the BIR’s
International Tax Affairs Division (ITAD). The confirmation shall serve as a proof of tax exemption.

3. Benefits required by trade, business or conduct of profession of the employer.

 benefits or allowances furnished by the employer to the employees to enable them to
appropriately and effectively execute their duties as required by the employment ( necessity of the
employer rule) – exempt from tax.
 4. Benefits for the convenience or advantage of the employer.
 benefits or allowance which are intended to improve or maintain the interest of the employer’s
business or to ensure its smooth operations ( convenience of the employer rule) – tax exempt.

e. Classification of Gross compensation income:

1. regular compensation - basic salary and fixed allowances, ex. COLA and other allowances paid to
an employee.
2. Supplemental compensation - performance-based pays to employees with or without regard to the
payroll period.
3. 13th month pay and other benefits

f. to compute for Gross Taxable Compensation income:

Gross Compensation income xxx

Less: Non-taxable compensation income xxx
Gross taxable compensation income xxx

2. Business Income – arises from self-employment or practice of profession.

3. Passive Income - income are subject to a separate and final tax. Income or gain subject to final tax shall
no longer be included as taxable income subject to graduated rates. The final tax is imposed without
any deduction and is withheld at source. The amount received is net of the final tax and the tax is remitted by
the payor who serves as the withholding agent to the BIR.

Types of Income Taxes:

1. Basic Income Tax on regular and ordinary income

2. Final Withholding Tax on Passive income derived from Philippines sources.
3. Capital Gain Tax on sale of shares of stocks of unlisted domestic corporations.
4. Capital Gain Tax on Sales of Real Properties located in the Philippines.

1. Basic Income Tax on regular and ordinary income

Individual Income Tax rates:

Sec. 5, R.A. 10963 TRAIN LAW (Amendment of Sec. 24, NIRC) Income Tax rates for Individual Citizen
and Resident Alien Taxpayer of the Philippines

A. For compensation Income earners: (Graduated rates)

a. Effective January 1, 2018:

Over But not over The tax shall be Plus Of excess over
- P 250,000 exempt - -
P 250,000 400,000 20% P 250,000
400,000 800,000 P 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 b. Effective
8,000,000 -- 2,410,000 35% 8,000,000 January 1,
2023:
Over But not over The tax shall be Plus Of excess over
- P 250,000 exempt - -
P 250,000 400,000 15% P 250,000
 400,000 800,000 P 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 -- 2,202,500 35% 8,000,000

B. For Self Employed/Professional

1. If gross sales/receipts is P 3M and below, the taxpayer may elect:

a. regular income tax (graduated tax rate); or
b. 8% tax on Gross Sales/Receipts and other operating income in excess of P 250,000

2. If gross sales/receipts is above 3M, the tax shall be at regular income tax or graduated tax rates.

2. FINAL WITHHOLDING TAX ON PASSIVE INCOME:

1. It is constituted as full payment of the income tax liability – no longer included in the income tax return of
the individual taxpayer subject to basic income tax.
2. It cannot be deducted or credited against the basic income tax due.
3. The liability for the payment of the tax is primarily on the payor as the withholding agent.
4. Passive income derived from the Philippines subject to FWT:

Final Tax Rates on Certain Passive Income From Philippine Sources.

Citizens
and NRA- NRA-
residents ETB NETB
INTERESTS
1. Interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and 20% 20% 25%
from trust funds and similar arrangements.
15%
2. Interest income from a depository bank under the NRC - Exempt exempt
expanded foreign currency deposit system. (FCDS) exempt
3. Interest income from long-term deposit or investment in
the form of saving, common or individual trust funds,
deposit substitute, investment management accounts exempt Exempt 25%
and other investments evidenced by certificates in such
form prescribed by BSP with five-year term or longer.
If pre-terminated before the fifth year, the
corresponding final tax shall be:
a. 5 years or more Exempt Exempt 25%
b. 4 years to less than 5 years 5% 5% 25%
c. 3 years to less than 4 years 12% 12%
d. Less than 3 years 20% 20% 25%

ROYALTIES
1. Royalties, in general 20% 20% 25%
2. Royalties on books, as well as other literary works and
musical composition 10% 10% 25%

PRIZES
1. Prizes, in general 20% 20% 25%
2. Prizes amounting to P 10,000 or less Basic Basic 25%
Tax Tax
RC, NRC, NRA- NRA-
RA ETB NETB
WINNINGS
1. Winnings , in general 20% 20% 25%
 2. Philippine Charity Sweepstakes and Lotto winnings
a. Not more than P 10,000 Exempt Exempt 25%
b. more than P 10,000 20% Exempt 25%

Cash and Property Dividends

1. Dividends actually or constructively received from:
a. Domestic corporation 10% 20% 25%
b. Joint stock company
c. Insurance or mutual companies
d. Regional operating headquarters of multinational
company
2. Share in the distributable net income of a partnership
( except GPP) 10% 20% 25%
3. Share of an individual in the net income after tax of an
association, a Joint account, or a joint venture or 10% 20% 25%
consortium taxable as a corporation, which he is a
member or a co-venturer beginning January 1, 2000

3. CAPITAL GAIN TAX (CGT) AND STOCK TRANSACTION TAX (STT) ON SALE OF SHARES OF STOCK:

Tax Rate
a. NOT thru a local stock exchange. Capital Gain 15% of net capital gain

b. Through a local stock exchange Stock transaction 6/10 of 1% of GSP

Note: 1. Under RA 6-2013, the value of the share of stock at the time of sales shall be the fair market value.
In determining the value the of shares , the Adjusted Net Assets Method shall be used – all the
assets and liabilities are adjusted to market values.
2. All individual taxpayers are subject to CGT on shares of stock of domestic corporation,
3. Sales of shares of domestic
thru a local stock exchange is subject to business tax (STT)
4. Sale of shares of stock of a foreign corporation is subject to basic income tax.
5. The CGT and SST are applicable only to stockholders or investors.
6. Sales by dealers in securities directly or thru a local stock exchange is subject to basic income tax.
7. Issuance of shares by issuing corporation is subject to DST and STT on initial Public Offering under
Section 127(B) of the Tax Code.

4. CAPITAL GAIN TAX ON SALE OF REAL PROPERTY

a. Requisites:
1. The real property must be a capital asset.
2. It must be located in the Philippines.

b. Tax base:
Highest - Gross selling price or current fair market value or zonal value

c. Tax rate: 6%

d. Options of the Seller in case of Sale to Government or any political subdivision or agencies or GOCCs;
1. Pay the 6% CGT, or
2. Pay basic income tax

e. Exemption on sale of principal residence:

Requisites for exemption:
1. The property sold must be the principal residence of the seller.
 2. The proceeds is fully utilized in acquiring or constructing a new principal residence within 18 calendar
months from the date of sale or disposition.
3. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the
new principal residence built or acquired.
4. The Commissioner shall have been duly notified by the taxpayer within 30 days from the date of sale or
disposition through a prescribed return of his intention to avail of the tax exemption.
5. The tax exemption can only be availed of once every 10 years.

f. Partial exemption
 If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to
have been realized from the sale or disposition shall be subject to capital gains tax.

Taxable portion:
Unutilized portion Gross selling price
----------------------- x or current fair market value,
Gross selling price or Zonal value – the highest amount

Taxation of NRA-NETB:

 Nonresident Alien Not Engaged in Trade or Business Within the Philippines

All income received within the Philippines including passive income derived from sources within the
Phil. Except capital gains from sales of shares of stocks not traded in stock exchange and of real
property are included as gross income within the Philippines taxed at 25% final tax.

COMPUTATION OF TAXABLE INCOME AND TAX DUE

A. PURELY COMPENSATION INCOME EARNER
1. Taxable compensation Income is subject to graduated tax rate
2. 13th month pay and other benefits received by public officials and employees of public and private entities
not exceeding P 90,000 are exempt from income tax and creditable withholding tax on compensation.
Amount in excess of P 90,000 shall be included in the individuals gross income and would be subject to
income tax and applicable creditable withholding taxes.

Illustration 1:
Mrs Cruz , a resident citizen had the following data for a taxable year 2021:
Gross salary from PRC Corp. , net of SSS, Philhealth, Pag-ibig contributions 235,000
13th month pay and other benefits 65,000

How much is the tax due? ______exempt____

Taxable income 235,000

Taxable due exempt

Illustration 2:
Mr. Reyes , a resident citizen had the following data for a taxable year 2021:
Gross salary from PRC Corp. , net of SSS, Philhealth, Pag-ibig contributions P 385,000
13th month pay and other benefits 85,000

How much is the tax due? ______27,000____________________

Solution:
Taxable income 385,000
 Tax on:
on the first 250,000 exempt
In excess over 250,000 (385,000 – 250,000) 135,000 x 20% 27,000
Tax due 27,000

Illustration 3:
Mr. Perez , a resident citizen had the following data for a taxable year 2021:
Compensation income, net of SSS, Philhealth, Pag-ibig contributions, P 624,000
13th month pay and other benefits 153,000

How much is the tax due? _________101,750______

Solution:
Taxable compensation income 624,000
13th month & other benefits in excess of P 90,000 (153,000 – 90,000) 63,000
Taxable income 687,000
B. Tax on: Purely Self-
on the first 400,000 30,000
In excess over 400,000 (687,000 – 400,000= 287,000 x 25%) 71,750 Employed/Profess
iona Tax due 101,750 l:
1. If gross sales/receipts is P 3M and below, the taxpayer may elect:
a. regular income tax (graduated tax rate); or
b. 8% tax on Gross Sales/Receipts and other operating income in excess of P 250,000 in lieu of the
graduated tax rates and Sec. 116 – 3% percentage tax., provided that the SEP is non-VAT registered,
not engaged in VAT exempt sales/transactions and not subject to other OPT other that Sec. 116.

3. If gross sales/receipts is above 3M, the tax shall be at regular income tax or graduated tax rates.

Note:
1. The option to be taxed at 8% is available only to taxpayers who are a) NON-VAT registered and (b)
liable for 3% percentage tax under Sec. 115 of the NIRC.
2. VAT registered taxpayers and those liable for other percentage tax under Title V of the NIRC (except
for Sec. 116) are to be taxed at regular tax or graduated tax rates.
3. Unless the taxpayer signified in the 1st Quarterly Return of the taxable year the intention to elect the
8% income tax, the taxpayer shall be considered as having availed of the graduated tax rates and
such election is irrevocable .
4. If the taxpayer opted the 8% tax in 1st quarterly return and at any time during the year the taxpayer’s
gross sales /receipts exceeded 3M (VAT threshold) , the taxpayer shall automatically be subjected to
graduated rates, with the following rules/guidelines:
a. The taxpayer shall be allowed an income tax credit of quarterly payments initially made under
the 8% income tax option.
b. Taxpayer will be liable to business taxes. A percentage tax on the first 3M and the excess shall
be subject to VAT.
c. Percentage tax on the P 3M shall be collected without penalty, if timely paid on the due date
immediately following the month the threshold was breached.

Sec. 116 –3% percentage tax on person exempt from Value added tax (business tax) - Not a VAT registered
person and whose gross sales or receipts do not exceed 3M.

Illustration 4:
Mr. Buena is in business had the following data for a taxable year 2021:
Gross Sales 2,900,000
Cost of sales 1,500,000
Business expenses (deductible) 550,000
 Determine the tax due, in each of the following cases:

a) If Mr. Buena signified in his 1st Quarterly ITR his intention to be taxed at 8% income tax rate, how much is
the tax due? P 204,000 ( 2,800,000 – 250,000 = 2, 550,000 x 8% = 204,000)

b) if Mr. Buena elected graduated rates, using itemized deduction, the tax due is __175,000_
Solution:
Gross sales 2,900,000
Less Cost of Sales 1,500,000
Gross Profit 1,400,000
Less: Business expenses 550,000
Taxable income 850,000
Tax on:
First 800,000 130,000
In excess of 800,000 ( 50,000 x 30%) 45,000
Tax due 175,000

c) if the taxpayer elected graduated rates, using Optional Standard Deduction the tax due is _ 412,000_
Solution:
Gross sales 2,900,000
Less Optional Standard deduction (40% x 2,900,000) 1,160,000
Taxable income 1,740,000
Tax on:
First 800,000 130,000
In excess of 800,000 ( 1,740,000 – 800,000 = 940,000 x 30%) 282,000
Tax due 412,000

Illustration 5:
Mr. Reyes, married resident citizen has three qualified dependent children. During the year 2021, he
earns and spends the following:
Gross Sales from business 3,400,000
Cost of sales 2,400,000
Business expenses (deductible) 500,000

Compute the tax due if:

a) if Mr. Reyes opted the 8% income tax rate: Mr. Reyes cannot avail the 8% income tax rate because his
gross sales is more than 3M.

b) if the taxpayer elected itemized deduction, the tax due is :______55,000

Solution:
Gross sales 3,400,000
Less Cost of Sales 2,400,000
Gross Profit 1,000,000
Less: Business expenses 500,000
Taxable income 500,000
Tax on:
First 400,000 30,000
In excess of 400,000 ( 100,000 x 25%) 25,000
Tax due 55,000
c) if the taxpayer
elected Optional Standard Deduction the tax due is ______________________
Solution:
 Gross sales 3,400 ,000
Less Optional Standard deduction (40% x 3,400,000) 1,360,000
Taxable income 2,040,000
Tax on:
:
First 2,000,000 490,000
In excess of 2,000,000 ( 40,000 x 32%) 12,800
Tax due 502,800

Illustration 6 Quarterly payments (source: Income Taxation by Enrico D. Tabag & Earl Jimson R. Garcia)

The following cumulative balances on income and expenses in 2021 of Mr. Juan were given to you:
1Qtr 2ndQtr 3rd Qtr 4Qtr/Year
Gross Sales 1,200,000 2,100,000 3,000,000 4,200,000
Cost of sales 700,000 1,200,000 1,800,000 2,200,000
Business expenses 200,000 325,000 550,000 800,000

Income tax paid on:

Interest income 1,500 3,040 4,520 5,960
Sales of land 24,000 24,000 24,000 24,000

Dividend from domestic corporation 10,000 10,000 20,000 20,000

Interest income from:

BPI 2,000 4,000 6,000 8,000
UCPB 800 1,200 1,600 1,800
Metro Bank 5,000 10,000 15,000 20,000
Capital gain on sale of land
Selling Price, 400,000, Cost: P 320,000 80,000 80,000 80,000 80,000

REQUIRED: Compute the following for 2021:

1. Income tax payable for the first to fourth quarter
2. Final tax on passive income
3. Capital gain tax

Solution:
1Qtr 2ndQtr 3rd Qtr 4Qtr/Year
Gross Sales 1,200,000 2,100,000 3,000,000 4,200,000
Cost of sales (700,000) (1,200,000) (1,800,000) (2,200,000)
Business expenses (200,000) (325,000) (550,000) (800,000)
Taxable income 300,000 575,000 650,000 1,200,000

Income tax due 10,000 73,750 92,500 250,000

Tax paid
1st Quarter - (10,000) (10,000) (10,000)
2nd quarter (63,750) (63,750)
3rd quarter __________ __________ _______ (18,750)
Income tax payable 10,000 63,750 18,750 157,500

2. Final tax on passive income: c) capital gain tax on sale of land

Dividend 20,000 x 10% 2,000 Selling Price 400,000
Interest income Multiply by rate _6%
BPI = 8,000 x 20% 1,600 Capital gain tax 24,000
UCPB = 1,800 x 20% 360
Metro Bank = 20,000 x 20% 4,000
Total final tax 7,960
Illusutration 7:
Using the same data in illustration 6, except that Mr. Juan signified in his 1 st Quarterly ITR his intention to be
taxed at 8% income tax rate,

Q1: how much is the tax payable for the first to fourth quarter?

1Qtr 2ndQtr 3rd Qtr

Gross Sales 1,200,000 2,100,000 3,000,000
Less: tax exempt 250,000 250,000 250,000
Taxable income 950,000 1,850,000 2,750,000

Income tax due 76,000 148,000 220,000

Tax paid
1st Quarter - (76,000) (76,000)
2nd quarter (148,000)
3rd quarter __________ __________ _______
Income tax payable 76,000 72,000 72,000

Income tax payable for the 4th quarter/Year 2020:

4Qtr/Year
Gross Sales 4,200,000
Cost of sales (2,200,000)
Business expenses (800,000)
Taxable income 1,200,000

Income tax due 250,000

Tax paid
1st Quarter (76,000)
2nd quarter (72,000)
3rd quarter (72,000)
Income tax payable 30,000

Q2: The total business tax payable due for the year is ____234,000__

3% OPT ( 3,000 ,000 x 3%) 90,000

12% VAT on excess over 3M
(4,200,000 – 3,000,000) 1,200,000 x 12% 144,000
Total business taxes 234,000

C. MIXED INCOME EARNER

1. On Compensation - subject to graduated rates
2. On Business /Professional Income
a. If gross sales/receipts is P 3M and below, the taxpayer may elect:
1. regular income tax (graduated tax rate); or
2. 8% tax on Gross Sales/Receipts and other operating income in excess of P 250,000 in lieu of
the graduated tax rates and Sec. 116 – 3% percentage tax., provided that the SEP is non-
VAT registered, not engaged in VAT exempt sales/transactions and not subject to other OPT
other that Sec. 116.

b. If gross sales/receipts is above 3M, the tax shall be at regular income tax or graduated tax rates.
 Illustration 8:
Mr. Ben , the an employee of Great Corporation, earned compensation income of P 310,000. This amount is
inclusive of his 13th month pay and other benefits of P 70,000 but net of the mandatory contribution for SSS,
Philhealth and Pag-ibig.

Aside from his employment, he also owns a grocery store . In 2021, the store had gross sales of P 2,700,000,
cost of sales of P 1,500,000 and operating expenses of P 400,000. It had also non-operating income of
P 100,000

Compute the tax due for 2021 if he avails of the 8% income tax rate option on his gross sales plus non-
operating income from his cafeteria. .

Solution:
a) On Compensation income:
Solution:
Gross compensation income 310,000
Less: 13th month pay & other benefits 70,000
Taxable income 240,000
: Tax due exempt
b) on Business income:
Gross sales 2,700,000
Add: non-operating income 100,000
Taxable income 2,800,000
:
Tax due (8%) 224,000
Total 224,000

Illustration 9:
Mr. Corpuz, an employee of Dream Company , earned compensation income of P 550,000. This amount is
inclusive of his 13th pay and other benefits of P 105,000 but net of the mandatory contribution for SSS,
Philhealth and Pag-ibig.

Aside from his employment, he also owns a store In 2021, the store had gross sales of P 2,700,000, cost of
sales of P1.200,000 and operating expenses of P 550,000. It also had non operating income of P 200,000.

Compute the tax due for 2021 if he failed to signify in his 1 st Quarterly ITR his intention to be taxed at 8%
income tax rate:

On compensation income:
Gross compensation income 550,000
Less: 13th month pay & other benefits 90.0000
Taxable compensation income 460,000
On business income:
Gross sales 2,700,000
Less: cost of sales 1,200,000
Gross profit 1,500,000
Less: business expenses 550,000
Net profit 950,000
Add: non-operating income 200,000
Taxable business income 1,150,000
Total taxable income 1,610,000
Tax on:
First 800,000 130,000
In excess of 800,000 ( 810,000 x 30%) 243,000
Tax due 373,000
Illustration 10:
Mr. Samonte , an employee of ASTRA Company , earned compensation income of P 750,000. This amount is
inclusive of his 13th month pay and other benefits of P 150,000 but net of the mandatory contribution for SSS,
Philhealth and Pag-ibig.

Aside from his employment, he also owns a water station. In 2021, the water station had gross sales of
P 3,600,000, cost of sales of P 2,100,000 and operating expenses of P 600,000.

Compute the income tax due for 2021 .

Solution:
On compensation income:
Gross compensation income 750,000
Less: 13th month pay & other benefits 90.0000
Taxable compensation income 660,000
On business income:
Gross sales 3,600,000
Less: cost of sales 2,100,000
Gross profit 1,500,000
Less: business expenses 600,000
Taxable business income 900,000
Total taxable income 1,560,000
Tax on:
First 800,000 130,000
In excess of 800,000 ( 760,000 x 30%) 228,000
Tax due 358,000

Illustration 11: (adapted: Income Taxation by Enrico D. Tabag & Earl Jimson R. Garcia)
A resident citizen taxpayer provided the following information for taxable year 2020:
 Gross business income, Philippines 2,100,000
Gross business income, USA 2,500,000 Q1.
The Business expenses – Philippines 1,100,000
Business expenses – USA 1,300,000
Interest income – BDO Philippines ( 20%) 50,000
Interest income – BDO USA 75,000
Interest income from notes receivable 10,000
Interest income foreign currency deposit system – BDO Phil. (15%) 45,000
Dividend from domestic corporation (10%) 60,000
Dividend from nonresident foreign corporation 80,000
PCSO winnings (20%) 50,000
Philippine lotto winnings (exempt) 10,000
USA lotto winnings 100,000
Raffle draw prize ( basic tax) 9,000
Other winnings – Philippines ( 20%) 10,000
Raffle draw prize – SM Manila (20%) 40,000
Raffle draw winnings – USA 35,000
Royalty income – literary works (10%) 100,000
Royalty income Philippines (20%) 200,000
Royalty income – USA 300,000
Gains on sale of domestic shares direct to buyer ( 15% x 100,000) 100,000
Gains on sale of foreign shares direct to buyer 50,000
Gains on sale of real estate classified as capital asset, Phil (6^ x 1,200,000)
Selling Price, P 1,200,000; Zonal value P 1,000,000, cost P 800,000 400,000
Gain on sale of real estate classified as current assets located in USA
Selling Price, P 2,000,000; cost P 1,500,000 500,000
taxable income is ___________________________
Gross business income, Philippines 2,100,000
Gross business income, USA 2,500,000
Business expenses – Philippines (1,100,000)
Business expenses – USA (1,300,000)
Interest income – BDO USA 75,000
Interest income from notes receivable 10,000
Dividend from nonresident foreign corporation 80,000
USA lotto winnings 100,000
Raffle draw prize 9,000
Raffle draw winnings – USA 35,000
Royalty income – USA 300,000
Gains on sale of foreign shares direct to buyer 50,000
Gain on sale of real estate classified as current assets located in USA
Selling Price, P 2,000,000; cost P 1,500,000 500,000
Taxable income 3,359,000

Q2: Final tax on passive income: _________________

Solution:
Interest income – BDO Philippines ( 20% x 50,000) 10,000
Interest income foreign currency deposit system – BDO Phil. (15%) 6,750
Dividend from domestic corporation (10%) 6,000
PCSO winnings (20%) 10,000
Other winnings – Philippines ( 20%) 2,000
Raffle draw prize – SM Manila (20%) 8,000
Royalty income – literary works (10%) 10,000
Royalty income Philippines (20%) 40,000
Total final tax on passive income 92,750
Q3: the Capital gain tax is ___________________________
Gains on sale of domestic shares direct to buyer ( 15% x 100,000) 15,000
Gains on sale of real estate classified as capital asset, Phil (6^ x 1,200,000)
Selling Price, P 1,200,000; Zonal value P 1,000,000, cost P 800,000 72,000
Total Capital gain tax 87,000
Illustration 12: for Questions 4 – 6: Assume the same data in illustration 10; except that the taxpayer is a
resident alien,

Q4. The taxable income is ___________________________

Gross business income, Philippines 2,100,000
Business expenses – Philippines (1,100,000)
Interest income from notes receivable 10,000
Raffle draw prize 9,000
Taxable income 1,019,000

Q5: The Final tax on passive income: _________________

Solution:
Interest income – BDO Philippines ( 20% x 50,000) 10,000
Interest income foreign currency deposit system – BDO Phil. (15%) 6,750
Dividend from domestic corporation (10%) 6,000
PCSO winnings (20%) 10,000
Other winnings – Philippines ( 20%) 2,000
Raffle draw prize – SM Manila (20%) 8,000
Royalty income – literary works (10%) 10,000
Royalty income Philippines (20%) 40,000
Total final tax on passive income 92,750
Q6: the Capital gain tax is ___________________________

Solution:
Gains on sale of domestic shares direct to buyer ( 15% x 100,000) 15,000
Gains on sale of real estate classified as capital asset, Phil (6% x 1,200,000)
Selling Price, P 1,200,000; Zonal value P 1,000,000, cost P 800,000 72,000
Total Capital gain tax 87,000

Q7: Assuming the taxpayer is a nonresident citizen, the total final tax on passive income is :
Solution:
Interest income – BDO Philippines ( 20% x 50,000) 10,000
Dividend from domestic corporation (10%) 6,000
PCSO winnings (20%) 10,000
Other winnings – Philippines ( 20%) 2,000
Raffle draw prize – SM Manila (20%) 8,000
Royalty income – literary works (10%) 10,000
Royalty income Philippines (20%) 40,000
Total final tax on passive income 86,000

D. MINIMUM WAGE EARNERS

1. Statutory Minimum Wage (SMW) earner – is a worker in a private sector paid in the statutory minimum wage
or an employee of a public sector with compensation income of not more than the statutory minimum wage
in the non-agricultural sector where he/she is assigned . MWEs are exempt on income tax on:
a. Minimum wage
b. Holiday pay
c. Overtime pay
d. Night shift differential
e. Hazard pay

2. Applicable taxes for MWEs

 a. Purely MWE - exempt
b. MWE with additional compensation income exceeding the tax-exempt threshold of P 90,000 - still
considered MWE –exempt

c. MWE with additional business income:

1. compensation income as MWE - exempt
2. Business income - subject to basic income tax

Illustration 13:
Armand a rank and file employees received the following during the month ( the statutory minimum age is
P 10,000/month):

Salary, gross P 10,000

Overtime pay 5,000
Holiday pay 1,000
Night shift differential 2,000
Hazard pay 3,000
Total P 21,000

The taxable due and payable byof Armand is __exempt __________

E. INCOME TAX OF MARRIED INDIVIDUALS

1. 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 to or identified as income exclusively earned or realized by
either of the spouses, shall be divided between the spouses for purposes of determining their taxable
income.
3. If the spouse 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 considered as jointly and severally liable to the tax.
4. If impractical to file one return: each spouse will file a separate return but the return so filed will be
consolidated by BIR for the process of verification for the year.

Illustration 14: (adapted)

Spouses Tino and Fina provided the following data for taxable year 2020:
Tino Fina Tino & Fina
Gross income – practice of profession 1,800,000
Gross compensation income 504,000
Miscellaneous income 15,000
Interest on notes receivable 14,000
Rental income (gross of 5%CWT) 150,000
Expenses – business/profession 1,025,000
Expenses vs rent income 40,000

REQUIRED: Determine the taxable income of Tino and Fina.

Solution:
Tino Fina
Gross income – practice of profession 1,800,000
Gross compensation income (net of SS, Philhelath & Pagibig) 504,000
 Miscellaneous income 10,000
Interest on notes receivable (14,000/2) 7,000 7,000
Rental income (gross of 5%CWT) (150,00/2) 75,000 75,000
Expenses – business/profession (1,025,000)
Expenses vs rent income (40,000/2) (20,000) (20,000)
Taxable Income 837,000 576,000

F. INCOME TAX OF SENIOR CITIZENS AND PWDS

1. SCs and PWDs deriving returnable income are required to file their income tax returns and pay the tax as
they file the return
2. SCs and PWDs as MWE – exempt from income tax on compensation income.
3. SCs and PWDs can still be liable for other taxes, such as: FWT on passive income from Philippine sources
and CGT on sale of shares of stock and from sale of real property classified as capital asset.

SALIENT FEATURES OF GRADUATED RATES AND 8% INCOME TAX RATE:

Graduated rates 8% income tax rate
1. Applicability In general, applicable to all May be availed by qualified individual
individual taxpayers taxpayers
2. Basis of income tax Net income Gross Sales/receipts and other non-
operating income
3. allowed deduction Itemized or OSD P 250,000 ( for purely SEP)
4. Business tax VAT or OPT None, in lieu of basic income tax and
OPT under Sec. 116
5. Financial  under itemized – required Not required
Statements audited FS if gross income is
more than 3M
 under OSD – not required
FILING OF INCOME TAX RETURNS (ITR)

 Basic Tax
1. For purely compensation income earner – on or before April 15 of the succeeding year
2. For Business Income Earner – to file a quarterly tax return (regardless of the results of operations) as
follows:
First Quarter May 15
Second Quarter Aug. 15 ( 45 days after the end of Quarter)
Third Quarter Nov. 15 ( 45 days after the end of Quarter)
Final adjusted/annual return April 15 of the succeeding year

 Final Withholding Tax on Passive Income

For Final and Creditable Withholding Taxes , the return shall be filed and paid not later than the last day
of the month following the close of the taxable quarter during which the withholding tax was made.

 Capital Gains Tax

1. Shares of stock
 Ordinary return - 30 days after each transaction
 Final consolidated return - on or before April 15 of the following year.

2. Real property - 30 days following each sale or other disposition.

MANNER OF FILING
1. Manual Filing
2. Electronic Filing and Payment System (EFPS)
3. eBIR Forms
PAYMENT
The income tax payable shall be paid at the time the returned is filed ( Pay as you File system), but when the
tax due is in excess of P 2,000, the individual taxpayer may elect to pay the tax on installment as follows:
1st installment - at the time of filing the annual ITR
2nd installment - on or before October 15 following the close of the calendar year.

Place of Filing
The ITR shall be filed and paid with any of the following:
1) Authorized agent bank (AAB)
2) Revenue District Officer
3) Collection Agent
4) Duly authorized city or municipal treasurer

- which the taxpayer has his legal residence or principal place of business in the Phil. or if there is no legal
residence of place of business in the Philippines, with the Office of the Commissioner of Internal Revenue.

For “with payment “ returns

File the return with AAB of the place where the taxpayer registered or required to be registered. In place where
there is no ABBs, the return shall be filed directly with the Revenue Collection Officer or duly authorized
treasurer of city or municipality in which such as person has his legal residence or principal place of business
in the Philippines, or if there is none, filing of return will be at the Office of the Commissioner.

For “No Payment Returns” ( refundable, exempt, break-even or no operation)

File the return with the concerned RDO where the taxpayer is registered. No Payment returns filed late shall
be accepted by RDO but shall be filed with AAB or Collection Officer/Deputized Municipal Treasurer ( in places
where there are no AABs) for payment of necessary penalties.

PERSONS REQUIRED TO FILE INCOME TAX RETURNS

1. Individuals engaged in business and/or practice of profession regardless of the results of operations.
2. Individuals deriving compensation income from two or more employers concurrently or successively at
any time during the year.
3. Employees deriving compensation income, regardless of the amount from a single or several employer(s)
during the calendar year, the income of which has not been withheld correctly resulting to collectible or
refundable return.
4. Individuals other non-business income, non-profession related income in addition to compensation
income not otherwise subject to final tax.
5. Individual receiving purely compensation income from a single employer, although the income tax of
which has been correctly withheld but whose spouse is required to file ITR.
6. Non-resident alien engaged in trade or business in the Philippines deriving purely compensation income
and other non-business, non-profession-related income.

PERSONS NOT REQUIRED TO FILE ITR (RR 8-2018)

1. An individual earning purely compensation income whose taxable income does not exceed P 250,000.
 The CWT-BIR Form 2316- filed by the respective employers duly stamped “Received” by the BIR shall
be tantamount to the substituted filing of income tax returns by such employees.

2. An individual whose income tax has been correctly withheld by the employer, provided that such individual
has only one employer for the taxable year.
 The CWT-BIR Form 2316- filed by the respective employers duly stamped “Received” by the BIR shall
be tantamount to the substituted filing of income tax returns by such employees.

3. An individual whose sole income has been subjected to final withholding tax.
 4. Minimum wage earners , the CWT-BIR Form 2316- filed by the respective employers duly stamped
“Received” by the BIR shall be tantamount to the substituted filing of income tax returns by such employees.

Substituted Filing of ITRs

Under RA 9504 and RR 10-2008, Individual taxpayers may no longer file ITR on or before April 15, provided the
following requirements are present:
1. The employee received purely compensation income (regardless of the amount) during the taxable year
2. One employer only during the taxable year
3. The amount of tax due from the employee at the end of the year equals the tax withheld by the employer
4. If married, the employees spouse also complies with all three aforementioned conditions or otherwise
received no income
5. The employer files the annual information return (BIR Form No. 1604-CF), the employer issues BIR Form
No. 2316 to employees
6. The CWT-BIR Form 2316- filed by the respective employers duly stamped “Received” by the BIR shall be
tantamount to the substituted filing of income tax returns by such employees.

CERTIFICATE OF WITHHOLDING BY EMPLOYER (BIR Form 2316)

Every employer is required to furnish its employees BIR Form 2316 on or before January 31 of the succeeding
year. Failure to furnish BIR Form 2316 shall be grounds for mandatory audit of payor’s income tax liabilities upon
verified complaint of the payee. The BIR requires that all employees submit the duplicate copy of BIR Form 2316
on or before February 28 following the close of calendar year will merit a penalty of P 1,000 for each failure or a
maximum amount of P 25,000 for all such failures during a calendar year. Failure to file or submit BIR 2316 for
two consecutive years, the employer shall be liable to a fine in the amount of P 10,000 and suffer imprisonment of
not less than one year but not more than 10 years upon conviction. In settlement, a compromise fee of P 1,000 for
each BIR 2316 not filed without any maximum threshold shall be collected by BIR.

UNIT III – INCOME TAX

Lesson 1 – Individual Taxpayers
Assignment 1: Theory

I - For income tax purposes, in which of the following will you classify an individual taxpayer given below ?
A - Resident citizen D - Non-resident alien ETB
B - Non-resident citizen E - Non-resident alien - NETB
C. - Resident alien

__1. A resident citizen who, departs from the Philippines on Januay 3, 2020 to work abroad.
__2. A non-resident citizen who arrived on January 5, 2020 to reside in the Philippine.
__3. An alien who shall have stayed in the Philippines for 165 days.
__4. An alien who shall have stayed in the Philippines for more than one year.
__5. A citizen who stayed outside the Philippines for one hundred eighty two days.
__6. T. Smith, a management consultant was hired by a Philippine corporation to assists in its organization and
operation for which he had to stay in the Philippines for an indefinite period. His coming to the Philippines
was for a definite purpose, which in its nature would require an extended stay and to that end makes his
home temporarily in the Philippines. He intends to leave the Philippines as soon as his job is finished.
__7. David , an American singer, was engaged to sing for one week at the Mall of Asia after which she returned
to U.S.A.
__8. A Filipino who resides in New York, Cubao
__9. A Filipino who stayed abroad for an aggregate period of 183 days.
__10. A foreign individual who stayed in the Philippines for an aggregate period of 183 days during the taxable
year
__11. Mr. Tan, a Filipino businessman, went on business trip abroad and stayed there most of the time during the
taxable year.
__12. Kyla, a Filipino singer, held a series of concert, in various concert around the world during the taxable year.
She stayed abroad most of the time during the year.
__13. Denver, an Australian national arrived in the Philippines on February 1, 2020 to visit his girlfriend . He
planned to stay in the country until January 31, 2021. He derived income during his stay here in the
Philippines.
__ 14. Anna, a native of Virac, Catanduanes, working as an overseas contract worker in Dubai.

__ 15. Rodrigo Morales, Spanish citizen, and a resident of Spain, spent 2 weeks vacation trip in Boracay.

II – Multiple Choice

___ 1. A citizen of the Philippines who works and derives income from abroad is a resident citizen if he stayed
outside the Philippines:
a) for less than 180 days c) for more than 180 days
b) for 183 days or more d) for less than 183 days

___ 2. A citizen of a foreign country is considered a non-resident alien engaged in business in the Philippines if he
stayed inside the Philippines:
a) for 183 days or more c) for less than 183 days
b) for more than 180 days d) for less than 180 days

___3. An individual whose residence is within the Philippines but who is not a Filipino citizen.
a) resident citizen b) NRA-ETB c) resident alien d) NRA-NETB

___4. David Smith , an American actor, came to the Philippines to do a film under contract with Universal
Production, a local film producer. He arrived in the Philippines on August 1, 2018, completed the film and
then left on May 31, 2019 What is the tax status of the actor for income tax purposes in 2019?
a) Resident alien c) Nonresident alien engaged in trade or business
b) Nonresident citizens d) Nonresident alien not engaged in trade or business
___5. HONEY, nonresident citizen, arrived in the Philippines on July 1, 2020 to reside here permanently after
working as nurse in the United States of America for many years. Which of the following statements is
correct with respect with Honey’s classification for income tax purposes?

a) She shall be classified as nonresident citizen for the year 2020 with respect to her income derived from
resources abroad from January 1, 2020 until the date of her arrival in the Philippines.
b) She shall be classified as nonresident citizen for the whole year of 2020.
c) She shall be classified as resident citizen for the whole year of 2020.
d) She shall be classified as neither resident nor nonresident for the year 2020.

___6. An alien who shall have stayed in the Philippines for 175 days.
a) resident citizen b) NRA-ETB c) resident alien d) NRA-NETB

___7. An alien who shall have stayed in the Philippines for more than one year.
a) resident citizen b) NRA-ETB c) resident alien d) NRA-NETB

___8. A citizen who stayed outside the Philippines for one hundred eighty two days.
a)resident citizen b) NRA-ETB c) resident alien d) NRA-NETB

___9. An individual whose residence is within the Philippines and a Filipino citizen.
a) resident citizen b) NRA-ETB c) resident alien d) NRA-NETB

___10. A Filipino who stayed abroad for 186 days.

a) resident citizen b) NRC c) resident alien d) NRA-ETB

___11. A foreign individual who stayed in the Philippines for an aggregate period of 183 days during the taxable
year
a) resident citizen b) NRA-ETB c) resident alien d) NRA-NETB

___12. A citizen of the Philippines who works abroad and whose employment requires him to be physically present
 abroad most of the time during the taxable year is:

a) taxable on income within and without the Philippines c) exempt from income tax
b) taxable on income from without the Phils. d) taxable on income from within the Phils.

___13. A resident citizen is taxable on all income derived from sources:

a) within the Phil. only c) partly within and partly without

b) without the Phil.only d) within &without the Phil.

___ 14. A non-resident citizen is taxable on all income derived from sources:

a) within the Phil. only c) partly within and partly without

b) without the Phil.only d) within &without the Phil.

___15..The taxable income of this individual taxpayer includes income from all sources regardless of location.
a) resident citizen b) NRA-ETB c) Non-resident citizens d) NRA-NETB

III. Modified True or False: Instruction: Write “T” if the statement is correct, and if the statement is incorrect,
underline the word or group of words that makes the statement incorrect.
.
____ 1. CPAs and physicians are both professionals because they passed the licensure examination given by
PRC.
____ 2. Compensation income, overtime pay, and night differential pay are examples of income earned by a
person under employee-employer relationship.

____3. Entrepreneurs, businessman, sidewalk vendors and factory owners are examples of individuals engaged
in business.
____4. Nurses who maintain their own nursing homes and a CPA practitioner are professionals engaged in the
practice of professions.

____5. A controller, a bank manager, and the president of a company are employees receiving income subject to
income tax.

____6. A businessman, factory owner and taxi operator, are examples of individuals engaged in business in the
Philippines.

____7. A medical practitioner who owns and operates a medical clinic, and a lawyer employed in his own law firm
are examples of individuals engaged in the practice of profession.

____8. CPAs employed in a government agency, lawyers employed in law firms, physicians employed in a
private hospitals are persons under employee-employer relationship and persons engaged in the
practice of professions.

____ 9. A factory owner, A CPA practitioner and a franchisee of Mr. Siomai are examples of persons engaged in
business in the Philippines.

____ 10. Professionals engaged in the practice of their professions and entrepreneurs are considered
businessmen or persons who are engaged in business.

____11. Passive income are included in the computation of taxable income from compensation or
business/professional income.

____12. A resident taxpayer naturalized in accordance with Philippine laws is a resident alien.
____13 Winnings are subject to a final tax of 20%, except when the amount is P 10,000 or below.
____14 Interest income of a foreign currency deposit of a nonresident Filipino is subject to a final tax of 15%.
____15. An income which is subject to final tax is excluded from the computation of income subject to Section 24
(A).
____16. Individual taxpayers are natural persons with income derived within the territorial jurisdiction of a
taxing authority.

____17. The intention with regard to the length and nature of stay of alien determines whether he is a
resident or non-resident.

____18. A seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of vessel engage in international trade shall
be treated as an overseas contract worker.

____19. The provision in the Tax Code as amended, allows 8%income tax rate on gross sales/receipts and other
non-operating income in excess of P 250,000 is available purely self-employed/professional and
compensation income earners.

____20. The MWE is exempt from income tax on his basic statutory minimum wage only.

End

UNIT III – INCOME TAX

Lesson 1 – Individual Taxpayers

Assignment 2: (Source: Income taxation by Tabag, E. and Garcia, EJ.)

Determine whether the income described below is subject to final withholding tax on passive income,
basic tax or exempt from income tax. Write the following in the tax type column:
FWTx - if subject to final withholding tax on passive income, indicate the correct tax rate
BTx - if the income described is subject to basic income tax
CGTx – if the income described is subject to capital gain tax, indicate the correct tax rate
Exempt - if the income described is exempt from income tax

Unless provided otherwise, assume the taxpayer is a resident citizen.

Tax Type Tax Rate

1. Interest from peso bank deposit, BDO, Virac
2. Interest from US dollar bank deposit, BDO, Virac
3. Interest income from notes received from customer
4. interest from money market placements, Philippines
5. interest from US dollar deposit, PNB, Hongkong
6. interest from foreign currency deposit in Singapore by NRC
7. interest from US dollar bank deposit , BDO Virac by NRC
8. interest from US dollar bank deposit , BDO Virac by NRA-ETB
9. Compensation income, Philippines
10. Business income, Philippines
11. Business income, Australia
12. Business income, Hongkong by resident alien
13. Gain on sale of personal car for personal use
14. Royalties, in general
15. Royalties books published in Manila
16. Prizes amounting to P 50,000, Philippines
17. Prize amounting to P 10,000, Philippines
18. Prize amounting to P 20,000, USA
19. Other winnings amounting to P 10,000, Philippines
20. Other winnings amounting to P 40,000, Philippines
21. Gain on sale of delivery truck
22. Other winnings amounting to P 10,000, USA
23. PCSO lotto winnings, P 10,000
24. PCSO lotto winnings, P 200,000
25. PCSO lotto winnings of P 30,000 by NRA-NETB

Tax Type Tax Rate

26. Lotto winnings in USA
27. Interest income from long-term bank deposit by resident alien
28. Interest income from long-term bank deposit by NRA-NETB
29. Interest income from gov’t issued bonds with maturity of 10 yrs.
30.interest income issued by PLDT with maturity of 10 yers.
31. Dividend income from domestic corporation
32. Dividend income from resident foreign corporation
33. Dividend income from nonresident foreign corporation
34. Dividend income from domestic corporation by NRA-NETB
35.Gain on sale of shares of stock of a domestic corp. direct to
buyer
36. Interest income from long-term bank deposit by NRA-ETB
37. Gain on sale real properties used in business
38. Gain on sale of real properties classified as capital located in
Singapore
 39. Gain on sale of real properties classified as capital assets, Phil.
40. Compensation income, Hongkong by OFW

UNIT III – INCOME TAX

Lesson 1 – Individual Taxpayers
Assignment 3 – Practice. Use Yellow pad for supporting computations.

For items 1 – 10: Determine the income tax due and payable: (source: income taxation by Tabag, E. & Garcisa, EJ.)

1. Dante is a resident citizen, earning purely compensation income. Determine the tax due and payable for taxable
Year 2020 if the gross compensation income, net of SSS, Philhealth an Pagibig contributions is:
a) P 245,000
b) P 755, 350
c) P 2,650,455

2. Jack is resident citizen earning purely business income for taxable year 2020:
Gross sales 2,800,000
Cost of Sales 1,200,000
Operating expenses 650,000
Creditable withholding taxes 80,000

3. Use the same data in # 2: except that Jack opted to be taxed using 8% tax rate.

4. Using the same data in # 2: except that Jack is a VAT registered taxpayer:

5. Brien is resident citizen earning purely business income for taxable year 2020:
Gross sales 2,800,000
Cost of Sales 1,200,000
Operating Expenses 650,000
Rental income ( net of 5% CWT) 380,000
Expenses – rental property 150,000
Other creditable withholding taxes 80,000

6. Using the same data no. 5: Can Brien choose to be taxed at 8%? If yes, how much is the tax still due and
payable for the year?

7. Teddy is a practicing professional with the following data for the taxable year 2020:
Gross receipts 4,000,000
Cost of direct services 1,800,000
Other operating expenses 825,000

8. Using the same data no. 6: Can Teddy choose to be taxed at 8%? If yes, how much is the tax still due and
payable for the year?

9. Renee is resident citizen, earning compensation and business income for the taxable year 2020:
Compensation income 1,400,000
Gross sales 2,800,000
Cost of Sales 1,200,000
Operating Expenses 650,000
Withholding tax on compensation income 310,000
Other Creditable withholding taxes 80,000

10. Using the same data no. 9: Can Brien choose to be taxed at 8%? If yes, how much is the tax still due and
payable for the year?
For items 11 and 12:
Tory Reyes is single, employed in DRY Corporation and is also a part-time real estate agent for a real estate
broker. In addition to the compensation (net of SSS, Philhealth and Pag ibig contributions ) of P 480,000 she
received from her employer, she likewise received P 75,000 as commission from her real estate dealings for
the year 2019.

11. How much is the income tax due, if she is under the graduated income tax regime? _____________

12. How much is the income tax due, if she is under the 8% income tax regime? __________________

13. Dan married to Mary had the following during the taxable year 2019:
Gross Income:
From the practice of profession P 700,000
Rental income of their conjugal property 300,000
Allowable deductions:
For the practice of profession 520,000
For the property rented to tenants 140,000

If Dan opted the graduated tax rate, the taxable income is:
a) P 340,000 b) P 260,000 c) P 180,000 d) P 170,000

14. Freddie, a resident citizen, married, with two dependent children, received the following income:
Business income, Philippines P 1,000,000
Business income, Singapore 500,000
Interest on peso deposit, BDO 50,000
Interest on US$ deposit, BDO ($1,000 x P 54) 54,000
Interest bank deposit in Singapore 120,000
Dividend from domestic corporation 250,000
Prize (TV) won in a local lottery 20,000
PCSO/lotto winnings 150,000
Dividend from foreign corporation 50,000

The total final tax is _________________________

15. Refer to no. 14, except that Freddie is a non-resident citizen, the total final tax is ____________

16. Christian, a resident citizen provided the following data for the taxable year 2019:

Gross receipts from profession (gross of P 62,000 CWT) 2,450,000

Cost of direct services 850,000
Other operating expenses 300,000
Royalty from books 60,000
Interest income from savings deposit, BPI 15,000
Interest income from customer’s notes receivable 6,000
Gain on sale direct to the buyer of shares of stock of a domestic corporation 50,000
Gain on sale of direct to the buyer of shares of stock of a foreign corporation 60,000
Loss on sale of land in the Philippines held as capital asset with cost of P 400,000, 50,000
zonal value P 200,000

The income payable still due and of Christian __________________________

17. refer to # 16 the total final tax and capital gain tax on shares of stock and real properties ____________
18. Philip, married left the Philippines on July 1, 2019 to go and work in Canada for 5 years. The following data
were provided as of December 31, 2019:

Gross Business Income Business Expenses

Philippines Abroad Philippines Abroad
January 1 to June 30. 2019 P 500,000 600,000 P 350,000 P 475,000
July 1 to December 31, 800,000 500,000 650,000 345.000
2019

His taxable income is: __________________________

A taxpayer had the following data for the taxable year 2019: (Exchange rate $1 = P 50)
Philippines Abroad
Gross receipts from profession 2,400,000 $50,000
Salaries earned 250,000 --
Cost of direct services & other operating expenses 1,150,000 20,000

19. If the taxpayer is a resident citizen, the taxable income is _____________________

20. If the taxpayer is a resident alien, the taxable income is _______________________

21. If the taxpayer is a non-resident alien not engaged in trade or business, disregarding the professional data,
total income tax that should be withheld from his income is ____________________.

22. Antonio, single, is a minimum wage earner of TGD Corporation In addition to the minimum wage of P 150,000
for the year 2019, also received the following:
Overtime pay 25,000
Night shift differential 20,000
Hazard pay 24,000
13th month pay & other benefits 60,000

The income subject to tax is _________________________

23. On December 15, 2019, Ryan sold the following shares of stock of a domestic corporations which he bought
for investment purposes:
Listed and traded Not listed and traded
Selling price P 250,000 P 143,680
Selling expenses 12,000 3,680
Cost 118,000 80,000

The capital gain tax is ___________________

24, Refer to No. 23: assume that Ryan is a dealer in securities, the capital gain tax is ___________________

25. Refer No. 23, assume that the shares sold are shares issued by foreign corporation, the capital gain tax
_________________

26. On August 15, 2019, M. Perez sold a 600 square meter residential land for P 1,000,000. The land was
acquired in 2013 for P 500,000. On the date of sale, the fair market value shown in the real property declaration
is P 500,000 and the assessed value amounted to P 200,000. The Zonal value is P 1,500 per square meter.
 The capital gain tax is: ________________________

27. Martin, a resident citizen, owns apartment units with a monthly rental of P 8,000 per unit. On December 20,
he
sold the property Carl, a resident alien taxpayer. The sale shall be subject to:

a) 6% capital gain tax

b) Regular/basic income tax
c) 6% capital gain tax or basic income tax at the option of Martin
d) 6% capital gain tax or basic income tax at the option of Carl

28. Teddy sold a residential house and lot, his principal residence, for P 4,000,000. Its current fair market value is
P 4,500,000 while the Zonal value of P 3,500,000. Teddy used ¾ of the proceeds to buy a new principal
residence within 18 months after the sale. Teddy properly informed the BIR about the sale. The sale shall be:

a) Exempt from capital gain tax

b) Subject to P 270,000 capital gain tax
c) Subject to P 67,500 capital gain tax
d) Not given (specify)

29. Mr. David owns a videoke bar with gross receipts of P 2,800,000 for the taxable year 2019. His cost of direct
expenses and operating expenses are P 1,200,000 and P 800,000, respectively and with non- operating
income of P 100,000.

Which of the following statement is correct?

a) Mr. David has no option to avail the 8% income tax rate.

b) Mr. David’s income tax shall be computed using the graduated tax rate.
c) Aside from the income tax computed using the graduated rate, Mr. David is still liable for business tax
the Amusement tax under Sec. 125 of the Tax Code as amended.
d) All of the above

30.Refer to No, 29: Mr. David’s income tax due for the year shall be: ________________

31. A married resident citizen has five qualified dependent children. The following information pertain to his
income and expenses in the year 2020:
Salary, net of P 20,000 withholding tax, SSS, Philhealth & Pagibig
contributions, P 22,525 380,000
Rent expense – apartment house 36,000
Health insurance premiums 5,000
Tuition fee of children 50,000

The tax due is _______________________

32. Resident Filipino taxpayer, married, with two qualified dependents. Data for the year 2020:
Gross Salary from ABC Company P 540,000
13th month pay and other benefits 95,000
SSS, Philhealth, Paig-ibig contributions 25,430
Interest from peso bank deposit, PNB - Manila 10,000

The tax due is _______________________

Mr. Richard David, a citizen of the Philippines married to Mrs. Dee David , had the following data for 2020:
Mr. Mrs. Mr. & Mrs.
Gross income from business P 1 440,000
Gross income from profession P1,400,000
Rent income from land and building , gross of 5%
Withholding tax P 96,000
Dividend from domestic corporation 20,000
Interest on notes receivable 4,000 2,000
Interest on Philippine currency bank deposit 6,000 14,000 16,000
Capital gain on sale directly to buyer at P 560,000
Of shares of domestic corporation 160,000
Capital gain on sale directly to buyer at P 4,000,000
of land in the Philippines 600,000
Expenses, business/profession 700,000 640,000
Expenses vs rent income 20,000

33. The capital gain taxes paid and final tax paid on passive income within the year:

34. The income tax still due and payable by Mr. and Mrs. Go:

In 2019, Brian signified his intention to be taxed at 8% income tax rate on gross sales in his 1 st quarter income tax
return and had the following data:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Sales P 800,000 P1,000,000 1,100,000 2,500,000
Cost of Sales 480,000 600,000 650,000 1,300,000
Gross income 320,000 400,000 450,000 1,200,000
Operating expenses 180,000 220,000 250,000 590,000
Net taxable income 140,000 180,000 200,000 610,000

35. The income tax payable for the 1st quarter is ___________________
36. The income tax payable for the 2nd quarter is ____________________
37. The income tax payable for the 3rd quarter is ____________________
38. The income tax payable for the year 2019 is: _____________________
39. The total business tax payable due for the year is ______________________

40. John Smith, alien employed by Global Petroleum, a Petroleum Service Contractor, received a
compensation income of P 3,500,000 in 2020 inclusive of P 450,000 13 th month pay and other benefits.

John Smith’s income tax due for the year is _________ ___________
End