INCOME TAXATION | Laws, Principles and Applications

CHAPTER 4
REGULAR INCOME TAXATION: INDIVIDUALS

INDIVIDUAL INCOME TAXATION

The Regular Income Tax for Individuals

The income tax of individuals is determined through the following tax table:

Year 2018 to Year 2022

Taxable income Tax due
P250,000 and below None (0%)
Above P250,000 to P400,000 20% of excess above P250,000
Above P400,000 to P800,000 P30,000 + 25% of excess over
P400,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over
P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over
P2,000,000
Above P8,000,000 P2,410,000 + 35% of excess over
P8,000,000

Year 2023 Onwards

Taxable income Tax due
P250,000 and below None (0%)
Above P250,000 to P400,000 15% of excess above P250,000
Above P400,000 to P800,000 P22,500 + 20% of excess over
P400,000
Above P800,000 to P2,000,000 P102,500 + 25% of excess over
P800,000
Above P2,000,000 to P8,000,000 P402,500 + 30% of excess over
P2,000,000
Above P8,000,000 P2,205,500 + 35% of excess over
P8,000,000

Repeal of the personal exemption

The TRAIN law repealed the concept of personal exemption in order to simplify
the tax system. However, it cannot be denied that individuals incur personal
expenses such as cost of living in order to survive. Theoretically, the law must
have to make provision for this in order not to kill the goose that lays the
golden egg.

In lieu of personal and cost of living expenses of individuals, the TRAIN law
provides for the P250,000 annual income exemption for every individual. This
amount is inserted in the tax table and is automatically granted for every

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INCOME TAXATION | Laws, Principles and Applications

individual subject to regular income tax. There is no more separate accounting

of personal exemptions.

TAXPAYERS SUBJECT TO PROGRESSIVE INCOME TAX

The progressive income tax for individuals covers the following:
1. Citizens
a. Resident citizen
b. Non-resident citizen
2. Aliens
a. Resident alien
b. Non-resident alien engaged in business
3. Taxable estate
4. Taxable trust

CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS

For purposes of the regular tax, individual income taxpayers are classified as:
1. Pure compensation income earner
2. Pure business or professional income earner
3. Mixed income earner

PURE COMPENSATION EARNER

The compensation income or employees, except minimum wage earners, is
subject to withholding tax on compensation. Every employer is mandatorily
required to deduct the withholding tax from the compensation income of their
employees.

Treatment of the withholding tax on compensation

1. Full Payment – if the employee has no other income and the tax is
correctly withheld
2. Tax credit – if the employee has other taxable income or if the tax is not
correctly withheld

Employees with no other income

If the employee has no other taxable income, he may avail of the substituted
filing system. Under this system, the withholding tax on compensation is
considered enough evidence of tax compliance of the employee, provided that
the employer withheld the correct tax.

Conditions of the Substituted Filing System

1. The employee received purely compensation income during the year.
2. The employee received the income from only one employer in the
Philippines during the taxable year.
3. The amount of tax due from the employee at the end of the year equals
the amount of tax withheld by the employer (i.e., correct ax is withheld).
4. The employee’s spouse also complies with all 3 conditions stated above.

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INCOME TAXATION | Laws, Principles and Applications

5. The employer files the annual information return (BIR Form No. 1604-CF).
6. The employer issues BIT Form No. 2316 to each employee.

Employees who do not meet the conditions of the substituted filing system
shall file the annual or final adjustment return not later than April 15 of the
following year and claim Form 2316 as tax credit.

Consolidated or Adjustment Return

Consolidated or adjustment return is needed when:
1. Correct tax is not withheld
2. Employee or his spouse has other income

Correct tax due not withheld by employer

The correct tax due of the employee will least likely to be withheld by the
employer in the following cases:
1. Concurrent employment
2. Successive employment during the year
3. Incurrence of error by the employer

The annual return needs to be filed to adjust the tax due to the correct amount
of tax. This is referred to as an adjustment return. The employee shall claim
Form 2316 as tax credit and pay residual tax due or claim excess withheld
amount as tax credit or tax refund.

Employees has other taxable income

Employees other income subject to regular tax may come from:
a. Casual sources
b. Engagement in business or practice of a profession
If the employee has other taxable income, the employee is mandatorily required
to file an annual income tax return to incorporate other income sources in his
return. This is referred as a consolidated income tax return.

The consolidated income tax return may either be:

1. BIR Form 1700 – if the employee is not engaged in business or profession
2. BIR Form 1701 for mixed income earners – if the employee is also engaged
in business and or profession

The withholding tax on compensation (BIR Form 2316) given by the employer
shall be claimed as tax credit.

PURE BUSINESS AND/OR PROFESSIONAL INCOME EARNER

Individual taxpayer engaged in business or practice of profession shall file
quarterly income tax returns (BIR Form 1701Q) and an annual tax return:

Quarterly Tax Returns Deadline

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INCOME TAXATION | Laws, Principles and Applications

1st Quarter ITR – 1701Q May 15 of the same calendar year

2nd Quarter ITR – 1701Q August 15 of the same calendar year
3rd Quarter ITR – 1701Q November 15 of the same calendar
year
Annual ITR – 1701A April 15, next year

The taxable income from business or profession may be computed using:

1. Itemized deductions
2. Optional standard deduction

Excess quarterly estimated tax

The excess quarterly estimated tax payments over the quarterly tax due may,
at the option of the taxpayer, be carried forward to quarters of the succeeding
taxable year or claimed through tax refund. The option must be indicated in
the annual adjustment return. Once the option to carry-over is made, it
becomes irrevocable for that period.

The option to refund

The option to refund may be in the form of cash or a tax credit certificate. If
the option to refund is selected, the excess refundable amount should not be
carried over as tax credit to the succeeding quarters of the following year.

MIXED INCOME EARNER

The compensation income of mixed income earners will be subjected to the
withholding tax on compensation by their employers. Mixed income earners
would report their business or professional income on a quarterly basis under
Form 1701Q. The compensation income shall not be reported in the quarterly
return. It shall be included only in the annual consolidated return. Mixed
income taxpayers shall use BIR Form 1701.

THE 8% INCOME TAX OPTION

The TRAIN law introduced a new tax scheme for individual taxpayers – the 8%
optional income tax. The option to be taxed at 8% must be indicated in the
first quarter income tax return or in the first quarter percentage tax return.
When made, option shall be irrevocable for the calendar year.

Nature:
1. A bundled tax – it is in lieu of:
a. Regular income tax, determined through the income tax table
b. 3% general percentage tax

2. An annual option
It is valid for as long as the taxpayer remained as a non-VAT taxpayer
during the year. It will be invalidated in favor of the regular income tax
once the taxpayer becomes a VAT taxpayer during the year.

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INCOME TAXATION | Laws, Principles and Applications

3. Paid quarterly and annually

Scope:
a. Pure business or professional income earners
b. Mixed income earners

Business Tax: A Basic Overview

Aside from income tax, individuals engaged in business or exercise of a
profession are also required to pay business tax which is either a 3%
percentage tax or a 12% value added tax (VAT).

Types of business taxpayers:

1. Exempt businesses – not subject to VAT or percentage tax
Examples:
a. Businesses selling agricultural products in original state
b. Agricultural contract growers
c. Book publishers or bookstores
2. Business specifically subject to other percentage taxes – not subject
to VAT but subject to percentage tax of various rates
Examples:
a. Common carriers by land, such as taxi, jeepney, bus and car for hire
b. Operators of cockpits, cabarets, clubs, jai-alai or horse race track
3. Vatable businesses – other businesses
Vatable businesses either pay:
a. 12% value added tax – if their annual sales exceed P3,000,000 or
when they registered as VAT taxpayers
b. 3% general percentage tax – if their annual sales do not exceed the
P3,000,000 and did not opt to voluntary register as VAT taxpayers

Normally, businesses or professional practitioners start small as non-VAT

taxpayers. As their business or practice gains traction and reach the P3M VAT
threshold, they are mandatorily required to register as VAT taxpayers.

Covered businesses:
Only vatable businesses who are below the P3M annual VAT threshold and did
not register as VAT taxpayers can opt to be taxed under the 8% income tax.

Thus, the option is not available to:

1. VAT-registered business taxpayers
2. VAT-exempt business taxpayers such as:
a. Exempt businesses
b. Businesses specifically subject to other percentage taxes
3. Individuals receiving income not subject to business tax, such as:
a. Partners receiving share in net income of a general professional
partnership
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INCOME TAXATION | Laws, Principles and Applications

b. Co-owners receiving share of income in co-owned properties

c. Venturers receiving share in net income of an exempt joint venture
d. Heirs or beneficiaries of trust receiving income distribution from
estates or trusts

Tax obligations of individual non-VAT taxpayers:

Regular tax option 8% income tax option
Regular income tax 3 quarterly 1701Qs and 3 quarterly 1701Qs and
1 annual 1701 1 annual 1701A
Percentage tax 4 quarterly 1551Q None

VAT-registered taxpayers pay VAT and regular income tax.

Tax basis:
The 8% optional income tax shall be based upon the gross sales or gross
receipt of the individual taxpayer that is subject to 3% percentage tax. Other
income subject to regular tax are added to the basis.

Pure business or professional income earner

For pure business or professional income earners, the use of the 8% income
tax would effectively deny the individual taxpayer of his P250,000 annual
income exemption, the same being embedded in the regular tax table. Due to
this, the 8% income tax shall be computed from the basis net of P250,000.

Mixed income earner

Compensation income is not subject to business tax. Hence, it cannot be
subjected to the 8% income tax. Due to this, the income tax due from
compensation shall be separately determined using the income tax table while
the 8% income tax from the business or profession shall be separately
computed. For this purpose, the classification rule must be observed.

Since the use of the income tax table in computing the tax due from
compensation effectively allowed the taxpayer claim of P250,000 annual
income exemption as embedded in the tax table, there will be no more
P250,000 deduction allowable against the basis of the 8% income tax.
Furthermore, if the amount of compensation income does not exceed
P250,0000, the unutilized deduction cannot be deducted against business
income since –the TRAIN law did not contemplate a deduction cross-over.

INTERIM TRANSITION TO THE VALUE ADDED TAX

Individuals exceeding the P3M VAT threshold during the year are mandatorily
required to change registration from non-VAT to a VAT taxpayer before the end
of the month following the month the taxpayer exceeded the P3,000,000
threshold.

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INCOME TAXATION | Laws, Principles and Applications

The taxpayer shall pay regular income tax for his income during the entire year
and pay VAT prospectively starting the month he became a VAT taxpayer. The
8% income tax payments shall be considered as tax credit against the regular
income tax due. The taxpayer shall be required to pay the 3 % percentage tax
for sales or receipts generated before becoming a VAT taxpayer.

TAXABLE ESTATES AND TRUSTS

Taxable Estates
An estate is an income taxpayer if under judicial settlement or administration.
An estate under extra-judicial settlement is not a taxpayer. The income of the
estate under extra-judicial settlement is taxable to the heirs.

Taxable Trusts
A revocable trust is not a taxpayer and is treated as a pass-through entity
whose income is taxable to the grantor-trustor.

An irrevocable trust is a separate and distinct taxable entity (BIR Ruling 003-
05, July 22, 2005). A taxable trust is treated as an individual taxpayer and is
allowed P20,000 personal exemption.

Income taxable to an estate or trust under the NIRC

1. Income accumulated in trust for the benefit of unborn or unascertained
person or persons with contingent interests and income accumulated or
held for future distribution under the terms of the will or trust.
2. Income which is to be distributed currently by the fiduciary to the
beneficiaries and income collected by a guardian of an infant which is to
be held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period of
administration or settlement of the estate
4. Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated

Taxable income of the deceased taxpayer

In the case of the death of a taxpayer, there shall be included in computing
taxable income for the taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not otherwise properly
includible in respect of such period or a prior period. (Sec. 44, NIRC)

Consolidation of two or more trusts

Multiple irrevocable trusts designated by the same grantor for the benefit of the
same beneficiary shall be consolidated for the purpose of income tax.

The consolidation of irrevocable trusts is necessary to eliminate tax savings

which the grantor may derive by deliberately splitting the corpus of the trusts
into several trusts.
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INCOME TAXATION | Laws, Principles and Applications

Employee trust funds

An employees’ trust which forms part of a pension, stock bonus, or profit
sharing plan of an employer for the benefit of some or all of his employees is
exempt from income taxes imposed under the NIRC. (Sec. 60(B), NIRC) It must
be emphasized that this exemption covers final tax, capital gains tax, and
regular income tax.

Requisite of Exemption of Employee’s trust

1. Contributions are made to the trust by the employer, employees, or both
for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with such
plan.
2. Under the trust instrument, it is impossible at any time prior to the
satisfaction of all liabilities with respect to employees under the trust, for
any part of the corpus or income to be (within the taxable year or
thereafter) used for or diverted to purposes other than for the exclusive
benefit of his employees.
3. Any amount actually distributed to any employee or distribute shall be
taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distribute.

Return of Married Taxpayers

Married individuals shall file a return for the taxable year to include the income
of both spouses, computing separately their individual income tax based on
their respective total taxable income. Where it is impracticable for the spouses
to file one return, each spouse may file a separate return of 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 for the purpose of determining their respective taxable
incomes.

Income of unmarried minors from property received from parents

The income of unmarried minors derived from property received from a living
parent shall be included in the return of the parent except when:
1. The donor’s tax has been paid on such property.
2. The transfer of such property is exempt from donor’s tax.

INDIVIDUALS WITH PERSONAL EQUITY RETIREMENT ACCOUNTS (PERA)

Individuals who contribute to a PERA account is exempt from income tax on
said contribution and are entitled to a tax credit equivalent to 5% of said
contributions.

Return of Persons under Disability

If the taxpayer is unable to make his own return, the return may be made by
his duly authorized agent or representative or by the guardian or other person
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INCOME TAXATION | Laws, Principles and Applications

charged with the care of his person or property. The principal and his
representative or guardian assuming the responsibility of making the return
shall be responsible for penalties provided for erroneous, false, or fraudulent
returns.

Signature in the return is presumed correct

The fact that an individual’s name is signed to a filed return shall be prima
facie evidence for all purposes that the return was actually signed by him.

ATTACHMENT TO THE ANNUAL INCOME TAX RETURN

For taxpayers claiming the itemized deduction, taxpayers shall fill-up an
attachment form. The attachment from shows the composition of the itemized
deductions in the annual income tax returns plus required disclosures by law
or regulations. This is mandatory and shall be filed together with the income
tax return.

WHEN AND WHER TO FILE AND PAY TAX

1. For Electronic Filing and Payment System (eFPS) taxpayers
The return shall be e-filed and the tax e-paid on or before the 15th day of
April of each year covering the income for the preceding year using the
eFPS facilities through the BIR website.
2. For Non-Electronic Filing and Payment System (non-eFPS) taxpayers
The return shall be filed and the tax paid on or before the 15th day of
April of each year covering the income for the preceding year with:
a. Any authorized agent banks (AAB) located within the jurisdiction of
the Revenue District Officer (RDO) where the taxpayer is registered
b. Revenue Collection Officer (RCO) under the jurisdiction of the RDO
where the taxpayer is registered, if there is no AAB

In case of “no payment returns,” the same shall be filed with the RDO
where the taxpayer is registered or has his legal residence or place of
business in the Philippines or with the concerned RCO under the same
RDO.

A “No payment return” pertains to tax returns without tax payable such
as those with negative or zero taxable income, those with exempt or no
operation during the period, those with tax creditable or refundable, or
those with balance payable only on the second installment.
3. For non-resident taxpayers
In case the taxpayer has no legal residence or place of business in the
Philippines, the return shall be filed with the Office of the Commissioner
or Revenue District Office No. 39, South Quezon City.

INSTALLMENT PAYMENT OF THE REGULAR INCOME TAX

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INCOME TAXATION | Laws, Principles and Applications

When the tax due is in excess of P2,000, individual taxpayers (except

corporations) may elect to pay the tax in two equal installments:
a. The first installment shall be paid at the time the return is filed.
b. The second installment is due on or before October 15 following the close
of the calendar year.

If any installment is not paid on or before the date fixed for its payment, the
whole amount of the tax unpaid becomes due and payable together with the
delinquency penalties.

WHO SHALL FILE THE INCOME TAX RETURN?

1. A resident citizen engaged in trade, business, or practice of profession
within and without the Philippines.
2. A resident alien, non-resident citizen, or non-resident alien individual
engaged in trade, business, or practice of profession within the Philippines.
3. A trustee of a trust, guardian of a minor, executor/administrator of an
estate, or any person acting in any fiduciary capacity for any person where
such trust, estate, minor, or person is engaged in trade or business.
4. An individual engaged in trade or business or in the exercise of their
profession and receiving compensation income as well.

WHO ARE NOT REQUIRED TO FILE INCOME TAX RETURN?

1. Minimum wage earners
2. An individual whose gross income does not exceed P250,000
3. An individual whose compensation income derived from one employer
does not exceed P60,000 and the income tax on which has been correctly
withheld
4. Individuals whose income has been subjected to final withholding tax
such as in the case of non-resident aliens not engaged in trade or
business
5. Pure compensation earners qualified under the substituted filing system

AMENDMENT OF INCOME TAX RETURN

The amounts indicated by the taxpayer in the income tax return are his
assertions. The same are deemed final unless amended by the taxpayer.
Within three years from the required date of filing of the return, the taxpayer
can amend the same so long as no Letter of Authority for investigation is issued
by the BIR for the examination of his tax return.

Amended returns shall not be subject to surcharges for late filing or late
payment but shall be imposed the interest penalties.

Courtesy of the author: REX B. BANGGAWAN, CPA, MBA