Module 3

Income Tax on Individuals

Leomar R. Cabarles
 Contents
1. Individual taxpayers

2. Taxation regime for RC, NRC, and RA

3. Taxation regime for NRA-ETB

4. Taxation regime for NRA-NETB

5. Exempt from income tax

6. Income tax computation for Individuals

Individual Taxpayers
 Individual Taxpayers
1. Resident citizens (RC)
2. Non-resident citizens (NRC)
3. Resident aliens (RA)
4. Non-resident aliens (NRA)
a. Engaged in trade or business (ETB)
b. Not engaged in trade or business (NETB)

5. Exempt from income tax

Who are citizens of the Philippines?
1. Citizens at time of adoption of the Constitution

2. Fathers or mothers are citizens

3. Born before January 17, 1973, of Filipino

mother, who elect Philippine citizenship upon
reaching the age of majority

4. Naturalized in accordance with law

 How is citizenship lost?
1. Naturalization in a foreign country

2. Express renunciation of citizenship

3. Subscribing to an oath of allegiance to support

the Constitution or laws of a foreign country

4. Cancellation of the certificate of naturalization

5. Declared by competent authority a deserter of

the Philippine armed forces in time of war, unless
subsequently, a plenary pardon or amnesty has
been granted
 Resident Citizen
• A Filipino citizen and

– who lives permanently in the Philippines; or

– stayed outside the Philippines for less than

183 days during the taxable year.
 Nonresident citizen
1. Physical presence, with intention to reside, abroad
2. An immigrant or permanent employee abroad
3. Employee abroad (physically present abroad most of
the time [183 days] during the year)
4. A previously considered nonresident citizen who
arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines shall be
treated as a nonresident citizen for the taxable year in
which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of
his arrival in the Philippines. (Sec 22 (e), R.A. 8424)
Three types of non-resident citizen
1. Immigrants – non-resident citizen from the
time of departure from the Philippines

2. Employees of a foreign entity on a

permanent basis – same as immigrants

3. Overseas Contract Workers (OCW)

 Resident Alien
• An individual whose residence is within the
Philippines and

• who is not a citizen thereof. (Section 22(F) RA

8424)
 Who are resident aliens?
• Not a mere transient or sojourner

• If his definite purpose may be promptly

accomplished, an alien individual is a transient

• If his purpose requires an extended stay

making his home temporarily in the
Philippines, he becomes a resident
 Nonresident Alien
• An individual whose residence is not within
the Philippines and

• who is not a citizen thereof.

 Nonresident Alien
1. Engaged in trade or business
– Aggregate stay in the Philippines for a period
of more than 180 days during any calendar

2. Not Engaged in Trade or business

– Aggregate stay in the Philippines does not
exceed 180 days during any calendar year.
 Philippine Embassy/
Consulate Service Personnel

• Not treated as a non-resident citizen

• Income is taxable.
 Citizen v. Alien Individual Employees of
Foreign Embassies and
International Organizations in the Philippines

• Resident citizens
– Subject to income tax (being taxed on
worldwide income)

• Alien individual employees

– Exempt
 Taxation Regime

for

Resident Citizens (RC),

Non-resident Citizens (NRC), and
Resident Aliens (RA)
 Resident citizens (RC), non-resident citizens
(NRC), and resident aliens (RA)
Except for income subject to final withholding tax, the income tax
shall be computed using the following graduated tax rates:
 Self-Employed/Professionals

Gross sales or gross • Option to avail of an 8%

receipts and other tax on gross sales or
non-operating gross receipts and other
income does not non-operating income in
exceed P3,000,000 excess of P250,000

• in lieu of the graduated

income tax rates and the
3% percentage tax
 Mixed Income Earners

Income from Graduated income tax rates

Compensation

Income from Graduated income tax rates

Business or Practice OR
of Profession Yes
8% income tax based on gross sales or
gross receipts and other non-operating
Gross sales or gross income in lieu of the graduated income
receipts and other tax rates and the 3% percentage tax.
non-operating
income does not No
exceed P3,000,000? Graduated income tax rates
 Who cannot avail of the 8%?
1. Originally elect the 8% but the gross
sales/receipt exceed P3,000,000.
2. VAT-registered taxpayer, regardless of the
amount of gross sales/receipts.
3. Taxpayer who is subject to Other Percentage
Taxes except those subject under Section 116.
4. Partners of a General Professional Partnership
(GPP)
 Election of 8% - Mandatory
• The taxpayer must signify the intention to elect the 8%
income tax rate in the 1st Quarter Percentage and/or income
Tax Return, or on the initial quarter return of the taxable year
after the commencement of a new business/practice of
profession.

• Failure to elect – The taxpayer shall be considered as having

availed of the graduated rates.

• Such election shall be irrevocable and no amendment of

option shall be made for the said taxable year.
 Illustration 1

Elected the 8% but gross sales/receipt

exceed P3,000,000
Total Sales 6,500,000
Less. Cost of Sales 3,000,000
Gross Income 3,500,000
Less : Operating Expenses 1,440,000
Taxable Income 2,060,000

Income Tax Due

Tax Due under the graduated rates 509,200
Less: 8% income tax previously paid (Q1 to Q3) 220,000
(3,000,000.00 - P250,000.00) x 8%
Annual Income Tax Payable 289,200
 Illustration 2

Gross sales/receipt exceed P3,000,000

Gross Receipts - (Architectural and Engineering Services) 4,250,000
Less. Cost of Service 2,150,000
Gross lncome 2,100,000
Less. Operating Expenses 1,000,000
Taxable lncome 1,100,000

Tax Due:
On P800,000.00 130,000
On excess (P1,100,000.00 - 800,000) * 30% 90,000
Income Tax Due 220,000

* The gross receipts exceeded the VAT threshold of P3,000,000; subject to graduated
income tax rates; liable for business tax - VAT, in addition to income tax.
 Illustration 3

No election of the 8%
Taxable Income from Business:
Gross Sales 2,500,000
Iess. Cost of Sales 1,000,000
Gross lncome 1,500,000
Less : Operating Expenses 600,000
Net Income from Operation 900,000
Add : Non-operating Incorne 100,000
Taxable Income 1,000,000

Tax Due:
On P800,000.00 130,000
On excess (P1,000,000.00 - P800,000.00) x30% 60,000
Total Income Tax 190,000
 Illustration 4

Mixed Income Earner

Total compensation income 1,500,000
Iess. Non-taxable 13th month pay and other benefits (max) 90,000
Taxable Compensation Income 1,410,000

Tax due:
1. On ComPensation:
On 800,000.00 130,000
On excess (P1,410,000 - P800,000) x30% 183,000
Tax due on ComPensation Income 313,000

2. On Business Income:
Gross Sales 2,400,000
Add : Non-operating Income 100,000
Taxable Business Income 2,500,000
Multiplied bY income tax rate 8%
Tax Due on Business Income 200,000

Total income Tax Due (Compensation and Business) 513,000

Total compensation income 1,500,000
Less: Non-taxable 13th month pay and other benefits - max 90,000
Taxable Compensation Income 1,410,000
Add: Taxable Income from Business
Gross Sales 2,400,000
Less: Cost of Sales 1,000,000
Gross Income: 1,400,000
Less: Operating Expenses 600,000
Net Income from Operation 800,000
Add: Non-operating Income 100,000 900,000
Total Taxable Income 2,310,000

Tax Due:
On P2,000,000 490,000
On excess (2,310,000-2,000,000)*32% 99,200
Total Income Tax 589,200
Total compensation income 150,000
Iess. Non-taxable benefits 20,000
Taxable Compensation Income 130,000

Tax due:
1. On Compensation:
On 130,000 (not over 250,000) 0

2. On Business Income:
Gross Sales 2,400,000
Add : Non-operating Income 100,000
Taxable Business Income 2,500,000
Multiplied bY income tax rate 8%
Tax Due on Business Income 200,000

Total income Tax Due (Compensation and Business) 200,000

 Illustration 5

Mixed Income Earner

Total compensation income 1,200,000
Less: Non-taxable 13th month pay and other benefits - max 90,000
Taxable Compensation Income 1,110,000
Add: Taxable Income from Business
Gross Sales 3,500,000
Less: Cost of Sales 1,000,000
Gross Income: 2,500,000
Less: Operating Expenses 600,000
Net Income from Operation 1,900,000
Add: Non-operating Income 100,000 2,000,000
Total Taxable Income 3,110,000

Tax Due:
On P2,000,000 490,000
On excess (3,110,000-2,000,000)*32% 355,200
Total Income Tax Due 845,200
 Personal Equity and Retirement Account
(PERA)
• A contributor to a PERA may be entitled to

• a non-refundable tax credit equivalent to 5%

PERA contribution in one calendar year.

• The maximum allowable contribution is

PhP100,000.00 for Philippine residents and
PhP200,000.00 for overseas Filipinos.
Types of Income – Citizens and Resident Aliens

1. Compensation income
2. Business income/income from practice of
profession
3. Passive income
4. Capital gains
5. Other income
 Compensation Income

• Arising from personal services rendered under

an employer-employee relationship

• Salaries and wages, commissions, tips,

allowances, bonuses, fringe benefits of rank-
and-file employees, and other forms of
compensation

• Taxed at gross amount (no deductions allowed)

 Compensation Income: Exclusions

• Fringe benefit for other than rank and file

employees

• De minimis benefits

• Bonuses, 13th month pay and other benefits

not exceeding Php90,000

• Those specifically excluded by law

 Business Income/
Income from Practice of Profession
• Business and/or trade income

• Fees from the exercise of profession

• Gains from sale or exchange of assets

• Commissions, rental income, and other incomes

not covered by compensation income
 Passive Income

• Interest income

• Royalties

• Dividends

• Prizes – result of an effort made (e.g., prize in a contest)

• Winnings – result of a transaction where the outcome

depends upon chance (e.g., betting)
Interest Income – Within the Philippines
Royalty – Within the Philippines
Prizes and Winnings – Within the Philippines
Dividends – Within the Philippines
 Passive Income:
Sources Outside the Philippines

• If received by a resident citizen (RC)

– Graduated income tax

Capital Gains – Within the Philippines
 Capital Gains:
Sources Outside the Philippines

• If received by a resident citizen (RC)

– Graduated income tax

 Other Income

• Informer’s rewards
– Final tax of 10%
– Reward: 10% of the revenues, surcharges or fees
recovered or P1,000,000 per case whichever is lower

• Excess campaign funds in an election

– Subject to graduated income tax
 Taxation Regime

for

Non-resident Aliens Engaged in Trade

or Business (NRA-ETB)
 NRA-ETB

• Same manner as an individual citizen or a

resident alien

• Except as a Cinematographic Film Owner (and

Similar Work)
– Subject to 25% final on taxable gross income.
Passive Income
Passive Income
Capital Gains
 Taxation Regime

for

Non-resident Aliens Not Engaged in

Trade or Business (NRA-NETB)
 NRA-NETB
• In general taxed at a rate of 25%
• Except:
Exempt from Income Tax
 Exempt from Income Tax

1. Senior Citizens (in certain cases)

2. Minimum wage earners (MWEs)

3. Exemptions granted under international

agreements
 Senior Citizens
• Any resident of the Philippines who is at least 60
years old

• Required pay income tax returns, except:

1) MWE, the income is exempt
2) Not exceed P250,000

• Exemption does not extend to income subject to

final tax (i.e., interest income from deposit,
dividends) and capital gains tax
 Minimum Wage Earners (MWEs)
• A worker paid statutory minimum wage (SMW)

• Compensation-related benefits – Exempt

• Business /profession income – Subject to

graduated tax

• Passive/Capital gains – Final tax

 Current Minimum Wage
REGION MWR (PHP)
NCR 500.00 - 537.00
CAR 340.00 - 350.00
REGION I 282.00 - 340.00
REGION II 320.00 - 360.00
REGION III 304.00 - 420.00
REGION IV-A 303.00 - 400.00
REGION IV-B 294.00 - 320.00
REGION V 310.00
REGION VI 310.00 - 395.00
REGION VII 351.00 - 404.00
REGION VIII 285.00 - 315.00
REGION IX 303.00 - 316.00
REGION X 331.00 - 365.00
REGION XI 381.00 - 396.00
REGION XII 305.00 - 326.00
REGION XIII 320.00
BARMM 290.00 - 325.00
 Illustration

Minimum Wage Earner (MWE)

r.Total Compensation lncome 135,000
Less: Mandatory contributions 5,000
Non-taxable benefits 11,000 16,000
Taxable income 119,000

*Taxpayer is exempt since he is considered a minimum income earner.

Total Compensation Income 135,000
Add: OT, night shift differential,
hazard, and holiday pay 140,000
Total Income 275,000
Less: Mandatory contributions 5,000
Non-taxable benefits 11,000 16,000
Net taxable income 259,000
Tax Due EXEMPT

* Taxpayer is tax exempt as an MWE. The statutory minimum wage

as well as the holiday pay, overtime pay. night shift differential pay
and hazard pay' received by such MWE are specifically exempted
from income tax under the law.
 Exemptions Granted under
International Agreements
• Compensation income of Philippine nationals
and alien individuals

• employed by foreign
governments/embassies/diplomatic missions
and international organizations situated in the
Philippines
 Income Tax
Computation for Individuals
 Compensation Income
Gross Compensation Income XXX
Less: Exclusions
SSS/GSIS Contributions (XXX)
Pag-ibig Contributions (XXX)
Philhealth Contributions (XXX) (XXX)
Add: 13th month and other benefits XXX
Less: Exclusion *P90,000 XXX
Taxable Income XXX
Based on Graduated Income Tax Rate
Based on Preferential Tax Rate of 8%
Based on Preferential Tax Rate of 8%
 Illustration

Income Tax Computation

 Installment Income Tax Payments
• When the tax due exceeds P2,000.00,

• Two (2) equal installments may be paid

• The first installment to shall be paid at the time

the return is filed and the second installment on
or before October 15 following the close of the
calendar year
 Married Individual
• Compute separately their individual income
tax based on their respective total taxable
income.

• If any income cannot be definitely attributed

to or identified as income exclusively earned
or realized by either of the spouses, the same
shall be divided equally between the spouses.
End