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INDIVIDUAL TAXPAYERS are natural persons with

income derived from within the territorial jurisdiction of

TAXATION OF
taxing authority. They are classified as:
1. Resident Citizens (RC)

INDIVIDUALS 2. Nonresident Citizens (NRC)

3. Resident Aliens (RA)
4. Nonresident Aliens (NRA)
● Engaged in trade/business (NRA-ETB)
● Non-resident alien not engaged in trade or business (NRA-NETB
Importance of classification:

CITIZENS OF THE PHILIPPINES (Art. IV,

Sec. 1 of the 1987 Constitution)
They differ as to: 1. Those who are citizens of the Philippines at the time of the adoption of the
Constitution
● Situs of income
2. Born with father and/or mother as Filipino citizens
● Manner of computing tax
3. Born before Jan. 17,1973 of Filipino mother who elects Philippine citizenship
● Treatment of certain passive incomes upon reaching the age of maturity
● Allowable deductions 4. Acquired Philippine citizenship after birth (naturalized) in accordance with
● References in the tax choice Philippine Laws

NON-RESIDENT CITIZEN OF THE A non-resident citizen who arrives in the Philippines at any time during the

PHILIPPINES (Sec. 22(E) of the Tax Code)
1. Establishes to the satisfaction of the Commissioner of Internal Revenue, the fact
of his physical presence abroad with a definite intention to reside therein
2. Leaves the Philippines during the taxable year to reside abroad:
● As an immigrant
● For employment on a permanent basis
● For work and derives income that requires him to be physically abroad
most of the time during the taxable year
3. A citizen of the Philippines who shall have stayed outside the Philippines for one
hundred eighty-three days (183) or more by the end of the year.
taxable year to reside permanently in the Philippines shall be considered a non-
resident citizen for the taxable year in which he arrives in the Philippines with
respect to income derived from sources abroad until the date of his arrival in the
Philippines.
ILLUSTRATION:
Pedro, an OFW, returned in the Philippines for good on May 2021. He shall
be classified for 2021 taxable year as follows:
January to April 2021 – nonresident citizen
From May 2021 onwards – resident citizen

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The same rule shall apply to a resident citizen who leaves the Philippines
anytime during the yea for the following reasons:
• As an immigrant abroad or
• For employment abroad on a permanent basis
ILLUSTRATION:
Ana, a resident citizen, left for the Philippines on July 1, 2021 to reside
permanently in US together with her family. She shall be classified for 2021 taxable
year as follows:
January to June 2021 – resident citizen
From July 2021 onwards – nonresident citizen
RESIDENT ALIEN (Sec. 22(F) of the Tax
Code)
• An individual whose residence is within the Philippines 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.
• An alien who lives in the Philippines with no definite intention as to his stay is also
a resident alien.
• An alien who comes to the Philippines for the purpose that requires extended stay
for its accomplishment, so he makes his home temporarily in the Philippines, is a
resident, regardless of his intention to return to his residence abroad.
• Non-resident alien engaged in trade or business (NRA-ETB) – an alien who
stayed in the Philippines for an aggregate period of more than 180 days during
the taxable year and/or alien who has business income in the Philippines
Under Section 22(S) of the Tax Code, “trade or business” include
performance of the functions of a public office or performance of personal services
in the Philippines (except performance of services by the taxpayer as an employee).
• Non-resident alien not engaged in trade or business (NRA-NETB) – an alien
who stayed in the Philippines for only 180 days or less, or he is not deriving
business income in the Philippines
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OVERSEAS CONTRACT WORKER
(OCW)/OVERSEAS FILIPINO WORKER (OFW)
• Revenue regulation 1-2011 defines OCWs as Filipino citizens employed in foreign
countries commonly referred to as OFWs, who are physically present in a foreign
country as a consequence of their employment. Their salaries and wages are paid
by an employer abroad and are not borne by entities or persons in the Philippines.
Hence, OFWs are classified as non-residents citizens for tax purposes.
• A seaman who is a citizen of the Philippines and who receives compensation for
services rendered abroad as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as an overseas contract worker.
NON-RESIDENT ALIEN (Sec. 22(G) of the
Tax Code)
• An individual whose residence is not within the Philippines and who is not a
citizen thereof.
• Aliens who come to the Philippines for a definite purpose, which in tis
nature may be promptly accomplished.
• Alien who are mere transients or non-residents
ILLUSTRATION: Determine the correct classification of
the taxpayer from the independent cases provided below:
Case 1: Allan is a natural born Filipino citizen. His family migrated to the U.S. fifteen years
ago. For personal reasons, he decided to return and reside permanently in the Philippines on
March 1, 2018.
Answer: From Jan.-Feb. 2018: Allan is classified as NRC
From March 1, 2018 onwards: Allan is classified as RC
Case 2: G.I. Joe is an American information technology expert. He was signed by Noypi
Telecom (a local telecommunication company) from January to March 2018 to improve its
internet services. Due to the anticipated entry of competitors from other countries, Noypi
decided to extend indefinitely the services of G.I.Joe.
Answer: He is a resident alien. An alien who comes to the Philippines for the purpose
that requires extended stay for its accomplishment, so he makes his home temporarily in the
Philippines, is a resident, regardless of his intention to return to his residence abroad.
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ILLUSTRATION: Determine the correct classification of ILLUSTRATION: Determine the correct classification of
the taxpayer from the independent cases provided below: the taxpayer from the independent cases provided below:
Case 3: Greg Popovich, head coach of San Antonio Spurs in the NBA is in the Case 5: Mika “The Iceman” Immonen, a Finnish cue artist and former world billiard
Philippines for a month-long NBA promotional tour. He also expressed his intention champion is a resident of Finland. He won the world 9-ball championships in 2005 in
to regularly visit the Philippines. the Philippines. He is also the owner of one of the disco pubs in Malate since then.
Answer: Greg Popovich is classified as NRA-NETB. Answer: NRA-ETB. He is engaged in actual trade and business in the
Philippines but is non-resident.
Case 4: Using the same data in Case 3, assume that Greg Popovich invested in
shares of stock of various domestic corporations during his recent stay in the
Philippines.
Answer: Greg Popovich is NRA-NETB. Passive income such as dividend income
is not considered income derived from trade and business.

APPLICABLE TAXES AND TAX RATES CLASSIFICATION OF TAXPAYER

The applicable taxes for individuals depend on several factors such as but not It is important to properly classify the individual taxpayers because resident
limited to: citizens are taxable on their income derived from sources within and without the
Philippines while other taxpayers are taxable only on their income derived from the
❖ Classification of taxpayer Philippine sources. Moreover, individual taxpayers classified as non-resident aliens
❖ Source of income not engaged in trade and business (NRA-NETB) are taxable based on the gross
income while others are taxable based on their net income.
❖ Type of income

SOURCES OF INCOME ILLUSTRATION:

It is important to know the source of income for tax purposes (income Use the following data for Cases A-E
derived from within and without the Philippines) because as resident citizens are
taxable based on their worldwide income while others are taxable only on their An individual taxpayer provided the following information for 2018:
income derived from sources within the Philippines. Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

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Determine the taxable income assuming: TYPES OF INCOME

• Case A: The taxpayer is a resident citizen.
• Case B: The taxpayer is a non-resident citizen.
• Case C: The taxpayer is an alien.
• Case D: The taxpayer is a non-resident alien engaged in trade or business.
• Ordinary or regular income (GRADUATED RATE) – refers to income such as
compensation income, business income, and income from practice of profession
Passive income (FINAL WITHHOLDING TAX) – subject to final withholding taxes are
•
certain passive incomes from sources within the Philippines such as:
⮚ Interest income
⮚ Dividend Income

• Case E: The taxpayer is a non-resident alien not engaged in trade or business. ⮚ Royalties
⮚ Prizes
⮚ Other winnings
• Capital gains subject to gains tax (CAPITAL GAIN TAX)
⮚ Capital gains from sale of shares of stocks of a domestic corporation
⮚ Capital gains from sale of real property in the Philippines

ILLUSTRATION: Computation of basic income tax

GRADUATED TAX RATE due.
Purely Compensation Income Earner
1. Determine the income tax due assuming the taxable compensation income for
2018 is ₱240,000.
2. Determine the income tax due assuming the taxable compensation income for
2018 is ₱300,000.
3. Determine the income tax due assuming the net taxable compensation income
for 2018 is ₱1,850,000.

COMPUTATION OF WITHHOLDING TAX SELF EMPLOYED AND/OR

(PURELY COMPENSATION) PROFESSIONALS (SEP)
Self Employed – is defined as a sole proprietor or an independent contractor who
reports income earned from self-employment. He or she controls who he/she works
for. It includes professionals whose income is derived purely from the practice of
profession and not under an employer-employee relationship”.
Professional - is a “person formally certified by a professional body belonging to a
specific profession by virtue of having completed a required course of studies and/or
practice, whose competence can usually be measured against an established set of
standards. It also refers to a person engaged in some art or sport of money.

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SELF EMPLOYED AND/OR RULES OF SELF EMPLOYED AND/OR

PROFESSIONALS (SEP) PROFESSIONALS (SEP)
Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for Purely SEP with gross sales/receipts
Acceleration and Inclusion Law (TRAIN LAW) , regular income of Self- Employed
and Professionals (SEP) amounting to more than P250,000 in a taxable year but • ₱3M and Below
with a gross sales/receipts and other non-operating income not exceeding the Regular Income Tax + Business Tax (1% percentage tax) OR 8% tax on Gross
revised vat threshold of P3,000,000 shall have the option to avail of 8% tax on gross Sales/ Receipts and other non-operating income in excess of 250,000 in LIEU of the
sales/receipts and other operating income in excess of P250,000 IN LIEU of the graduated tax rate and SECTION 116
graduated income tax rate and business tax (Sec. 116).
• Above ₱3M - regular income tax + 12% VAT unless engaged in vat exempt sales
Percentage tax under Section 116 of the Tax Code, as amended, is a and trasactions
business tax, not an income tax. It is computed at 1% of gross sales/receipts and
other operating income beginning July 1, 2020 up to June 30,2023 based on CREATE
Law.

ILLUSTRATION: ILLUSTRATION:
CASE A: Purely SEP whos gross sales/receipts and other non-operating income CASE B: Purely SEP whos gross sales/receipts and other non-operating income
does not exceed the VAT threshold of P3,000,000. exceed the VAT threshold of P3,000,000.
1. Determine the income tax due assuming the gross sales/receipts and other non-
operating income was P240,000.
2. Using the data below, determine the income tax due: Determine the income tax due assuming the following data:

Gross sales P2,800,000 Gross sales P5,000,000

Cost of sales 1,500,000 Cost of sales 2,250,000

Operating expenses 750,000 Operating expenses 1,250,000

1. Assuming the SEP in number 2 opted to avail the 8% tax under the TRAIN Law.

RULES OF SELF EMPLOYED AND/OR

ILLUSTRATION:
PROFESSIONALS (SEP)
Mixed Income Earner
CASE A: Mixed income earner whose gross sales/receipts and other non-
➔ Compensation - regular income tax operating income does not exceed the VAT threshold of P3,000,000.
➔ Business/Professional Income Assume the following data for the year:
• ₱3M and below: Regular income tax + Business Tax (1% percentage tax) OR 8% Compensation income P900,000
tax on Gross sales and other non-operating income in LIEU of the graduated tax
Gross sales
rate and Sec. 116 2,800,000
• ₱3M and above: Regular income tax + 12% VAT unless engaged in vat exempt
sales and trasactions Cost of sales 1,500,000
Operating expenses 750,000
1. Determine the correct income tax due
2. Assume the SEP opted to avail the 8% tax under the TRAIN Law, determine the
income tax due.

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REQUISITES TO AVAIL THE 8%

ILLUSTRATION:
PREFERENTIAL TAX RATE
In order to avail the 8% preferential tax, the SEP shall satisfy all the following
CASE B: Mixed income earner whose gross sales/receipts and other non- conditions:
operating income exceed the VAT threshold of P3,000,000.
• The gross sales/receipts and other non-operating income does not exceed the vat
Determine the income tax due assuming the following data: threshold of P3,000,000
Compensation income P900,000 • The SEP shall be non-vat registered
Gross sales • The gross sales/receipts were not derived from vat-exempt sales and transactions
5,000,000 • The SEP is not subject to Percentage Tax other than Section 116
Cost of sales 2,250,000 • The SEP signifies his/her intention to elect 8% income tax
Operating expenses 1,250,000

FINAL WITHHOLDING TAX

• a kind of tax, which is prescribed on “certain income” derived from the Philippine
sources.
PASSIVE INCOME
is an income earned from allowing others to use one’s right, or game of
chance or investment, which the taxpayers merely waits for the income to come in.
The law subjects passive income to final tax. Once subjected to a final tax, it is no
longer included in the taxable income subject to normal (tabular) tax. Deductions
and exemptions do not apply to items subject to final tax. Passive income is
classified as follows:
a. Interest, prizes, royalties, etc.,
b. Cash or property dividends

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GAIN ON SALE OF ASSETS (Ordinary

CAPITAL GAINS TAX
Gain)
Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind
2. Property used in trade or business subject to depreciation
3. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of business
4. Real property used in trade of the taxpayer

NOTE: Gain on sale of ordinary assets are commonly known as ordinary or regular
income, subject to graduated tax rate.

• The term “statutory minimum wage earner (SMW)” or “minimum wage earner APPLICABLE TAXES OF MWEs
(MWE)” under RA 9504 shall refer to a worker in the private sector paid the
statutory minimum wage. The rate is fixed by the Regional Tripartite Wage and
Productivity Board as defined by the Bureau of Labor and Employment Statistics. Taxpayer Income Tax
MWE are exempt from income tax on:
1. Minimum wage 1. Purely MWE Exempt
2. Holiday pay
2. MWE with additional “benefits” Still treated as MWE, hence, exempt
3. Overtime pay from the employer exceeding tax-
4. Night shift differential exempt thresholds such as the
5. Hazard pay P90,000 limit
3. MWE with additional “business” Minimum wage – exempt
income Business income – subject to basic
tax

FILING OF INCOME TAX RETURNS FILING OF INCOME TAX RETURNS

BASIC TAX FINAL WITHHOLDING TAX ON PASSIVE INCOME
➔ For Purely Compensation Income Earners • Prior to 2018:
On or before April 15 of the succeeding year January to November – 10th day of the month following the month the
withholding was made
➔ For Business Income Earners
December – January 15 of the succeeding year
The individual taxpayer is required to file a quarterly tax return ( May 15, Aug
15, Nov 15, and April 15) • 2018 – not later than the last day of the month following the close of the taxable
quarter during which the withholding was made.

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FILING OF INCOME TAX RETURNS MANNER OF FILING AND PAYMENT

CAPITAL GAINS TAX a. Manual Filing
a. Share of Stock b. Electronic Filing and Payment System (EFPS)
Ordinary Return – 30 days after each transaction c. eBIR Forms
Final Consolidated Return – on or before April 15 of the following year
b. Real Property – 30 days following each sale or other disposition Payment – PAY AS YOU FILE
1st installment: at the time of filing the annual ITR
2nd installment: on or before October 15 following the close of the calendar year

PERSONS REQUIRED TO FILE INCOME

PLACE OF FILING INCOME TAX RETURN
TAX RETURN
1. Authorized Agent Banks 1. Individuals engaged in business and/or practice of profession
2. Revenue District Officer 2. Individuals deriving compensation from two or more employers concurrently at
any time during the taxable year
3. Collection Agent
3. Employees deriving compensation income, the income tax of which has not been
4. Duly Authorized City or Municipal Treasurer withheld correctly
4. Individuals deriving other non-business, non-professional-related income in
addition to compensation income not otherwise subject to final tax
5. Individuals receiving purely compensation income from a single employer
6. Non-resident alien engaged in trade or business in the Philippines deriving purely
compensation income

PERSONS NOT REQUIRED TO FILE SUBSTITUTED FILING OF INCOME TAX

INCOME TAX RETURN
1. An individual earning purely compensation income whose taxable income does
not exceed 250,000.
2. An individual whose income tax has been correctly withheld by his employer
3. An individual whose sole income has been subjected to final withholding tax
4. Minimum wage earners, the Certificate of Withholding filed by the respective
employers, duly stamped “Received” by the Bureau
RETURNS (ITR)
Under RA 9504 and RR 10-2008, individual taxpayers may no longer file
income tax return provided he has (all the requirements must be satisfied):
1. Receiving purely compensation income, regardless of amount
2. The amount of income tax withheld by the employer is correct (Tax due = Tax
withheld)
3. Only one employer during taxable year
4. If married, the employee’s spouse also complies with all the three
aforementioned conditions, or otherwise receives no income.

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