-er.

2 ,
Income Tax for Individuals

Definition

Individual Taxpayers are natural persons with income derived from

within the territ~ri~I jurisdiction of a taxing authority. Under RA 8424,
otherwise known as the National . Internal Revenue Code (NIRC), also
known as the Tax Code, as·amended, individual taxpayers are classified as
· follows:

1. Resident.citizens (RC) Importance/Reasons for Classification:

2. Nonresident citizens (NRC)
3. Resident aliens (RA)
4. Nonresident aliens (NRA)
■ Engaged in Trade (NRAET)
■ Nonresident aliens not engaged in
Trade or Business (NRANET)
Individual taxpayers differ among
others, as to:
• Situs of income
• Manner of computing tax
• Treatment of passive incomes
• Allowable deductions
■ References in the Tax Code

.Citizens of the Philippines

Under Sec. 1, Article IV of the Philippine,Constitution, the following are

citizens of the Philippif1es:
-
1. Those who are citizens of the Philippines at the time of the adoption of
the 1987 Philippine co·nstitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before Janua·ry 17, 1973, of Filipino mothers, who elect
Philippine citizenship upon reaching the age of majority;
4. .Those who are naturalized in acGordance with law.

59
Nonresident Citizen (NRC) of the Philippines

Sec. 22(E~ of the NIRC describes a nonresident citizen as a citizen who:

1. Estabhshes, to the satisfaction of the Commissioner of Internal
~eve~ue, the ~act of his physical presence abroad with a definite
mtent1on to reside therein;

2. Leaves the Philippines during the taxable year to reside abroad

• As an immigrant; or
• For employment on a permanent basis; or
• For work and derives income from abroad and whose
employment thereat 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 (aggregate).

A non-resident citizen who arrives in the Philippines at any time during

the taxable year to reside permanently in the Philippines shall be
considered a nonresident 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 [Section 22(E)(4) NIRC].

' ILLUSTRATION 1:
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

The same rule shall apply to a resident citizen who leaves the
Philippines anytime during the for the following reasons:
• As an immigrant abroad; or
• For employment abroad on a permanent basis.

ILLUSTRATION 2: . -
Ana a resident citizen left the Philippines on July 1, 2021 to reside permanently
in U~S. together with h~r family. She shall be classified for 2021 taxab'e year as
follows:
January to June 2021 - resident citizen
From July 2021 onwards - nonresident citizen

60
 Overseas Contract Workera(OCW)/ Overseas Filipino Workers (OFW)

Revenue . Regulation 1-2011 defines OCWs as Filipino citizens

empl?yed In foreign countries, commonly referred to as OFWs, who are
physically present in a foreign country as a consequence of their
employment thereat. 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 nonresident citizens for tax purposes. To be
considered as an OCW or OFW, they must be duly registered as such with
the Philippine Overseas Employment Administration (POEA) with a valid
Overseas Employment Certificate (OEC).

Seafarers or seamen are Filipino citizens who receive

compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively for international trade. To be
considered as an OCW or OFW, they must be duly registered as such with
the Philippine Overseas Employment Administration (POEA) with a valid
Overseas Employment Certificate (OEC) with Seafarers Identification
Record Book (SIRB) or Seaman's Book issued by the Maritjme Industry
Authority (MARINA).

For income taxation purposes, OFWs are classified as nonresident

citizens. '"

Resident citizen of the Philippines

A Filipino citizen taxpayer not classified as nonresident citizen is

considered a resident citizen for tax purposes.

AJlen An alien is a foreign-born person who Is

· not qua 1·fied
, 1 to acqU1re
-
Philippine citizenship by birth or after birth.

61
 Resident aliens

Section 22( F) of the Tax Code defines resident

Whether an
atien as an individual whose residence is w ithin the aJien is a
Philippines and who is not a citizen thereof. Aliens who transient or
are actually present in the Philippines and who are not not is
mere transients or sojourners are classified as resident determined
aliens. An alien who lives in the Philippines with no by his
intentions
definite intention as to his stay is also a resident alien . with regard to
Likewise, an alien who comes to the Philippines for the the length
purpose that requires extended stay for its _and nature of
accomplishment, so he makes his home temporarily in his stay.
the Phmppines, is a resident, regardless of his intention
to return to his residence abroad.

Non-resident aliens

The term "nonresident alien' under Section 22(G) of the Tax Gode
means an individual whose residence is not in the Philippines and who is
not a citizen tt,ereof. _ They are aliens w~o come to the Philippines for a
definite purpose, which in its nature may be promptly accomplished. They
are aJien who are mere transients or non-residents, hence, classified as
nonresident alien.

Aliens who stayed in the Philippines for an aggregate period of more

than 180 days during the taxable year and/or aliens who have business
income in the Philippines are considered as nonresident aliens engaged in
trade or business (NRAET). 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). If an alien stay in the Philippines
for onJy 180 days or less, or he is not deriving business income in the
Philippines, he is considered as a nonresident alien not engaged in trade
or business.

. . A nonres'ident alien not engaged in trade or business (NRA-NETB)

t.s SUbJ~~ t~ 25% income tax based, on gross income from all sources withih
the .Ph4hpp1nes (ordinary income or passive income except for income
subJect to ~pital gains tax) as interest, cash and/or property dividends,
rents, salanes, wages, premiums, annuities, compensation , remuneration ,
e~olument5 , or other fixed or determinable annual or periodic or casual
gams, profits, and capital gains.

6'2
ILLUSTRATION 3: ,
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 in U.S. fifteen (15)
years ago. For personal reasons, he decided to return and reside
permanently in the Philippines on March 1, 2021 .
❖ Answer. From Jan. to Feb. 2021: Allan is classified as NRC.
From March 1, 2021 onwards: Allan is classified as RC.

Case 2:
G.I. Joe is an American information technology expert. He was signed by
Doon Telecom, a local telecommunication company, from January to March
of 2021 to improve its wireless services. Due to the anticipated entry of
competitors from other countries, Doon Telecom decided to extend indefinitely
the services-of G. I. Joe
❖ Answer. He is a resident alien
An alien who comes to the Philippines {or 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.

Case 3:
Greg Popovich, head coach of the San Antonio Spurs in the NBA is in the
Philippines for a month-long NBA promotional tour. He also expressed his
intention to regularly visit the Philippines.
❖ Answer. Greg Popovich is classified as NRA-NETB

Case 4:
Using the same data in Case 3, assume that Greg Popovich invested in
shares of stocks 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 as income
derived from trade or business. ·

Cases.·
Mika "The Iceman" lmmonen, a Finnish cue artist and former world billiard
champion is a resident of Finland. He won the world 9-ball cha~pionship ~n
2005 in the Philippines. He is also the owner of one of the disco pubs In
Malate since then.
❖ Answ,r. NRA-ETB.
He Is engaged In actual conduct of trade or business In the Philippines but
ls ·nonresident.

63
Applicable Taxes and Tax Rates
The applicable taxes for individuals depend on several factors such as but
not limited to:
• Classification of the taxpayer
■ Source of income
■ Type of income

Classification of the taxpayer

It is important to properly classify individual taxpayers because

resident- 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 'Philippine sources. Moreover, individual taxpayers
classified as nonresident aliens not engaged in trade or business
(NRANETB) are taxable based on their "gross income" while others are
taxable based on "net income" (Refer to Table 2-1 ).

Source of Income

It is important to know the source of income for tax purposes

(income· derived from within or without the Philippines) because as resident
citizens are taxable based on their worldwide income while others are
taxabl~ onty on their i~come derived from sources within the Philippines.

TABLE 2-1:
Taxpayer Tax Base Source of Taxable Income
RC Net Income Within & Without
NRC, RA, NRA-ETB Net Income Within only
NRA-NETS Gross Income Within onl

For income taxation purposes, as discussed in the preceding

pages, OFWs are classified as nonresident citizens. Hence income earned
by ·an OFW or OCW, as defined in RR 1-2011 that is e~rned out of the
country is exempted _from Philippine income tax. However, the earnings of
an OF"'f from a business venture or any other property in the Philippines
are subJect to income tax in the Philippines.

64
Case D: The taxpayer is a nonresident alien engaged in trade or business
❖ Answ,r: P2,000,000
Gross business income, Philippines PS, boo, 000
Business expenses, Philippines (3;000,000)
Taxable income P2,000,000
• Same solution with Case A and B. A nonresident alien engaged in trade
or business is taxable on income derived from within Philippine sources
only.

Case E: The taxpayer is a nonresident alien not engaged in trade or business

(assume further that the data pertaining to gross income is other than business
income) ··
❖ Answer: P5,000,000
W NRA-NETBs are taxable on their "gross income".

CaseF:
The income and expenses of a Filipino citizen in 2021 were provided as follows:
January to June: Philippines ,Canada
Gross income PS,000,000 P2,000,000
Allowable deductions 2,000,000 1,000,000·

July to December:
Gross income P2,000,000 P3,000,000
AllowabJe deductions 1,000,000 1,200,000

Assume the taxpayer is a resident who left the country in July of the current year
to reside permanently in Canada, how much is his taxable income?
❖ Answer: P5,000,000
Gross income, Philippines (Jan.-Dec.) Pl,000,000
Gross income, Canada (Jan.-June) 2,000,000
Allowable deductions, Philippines (Jan.-Dec.) (3,000,000)
Allowable deductions, Canada (Jan.-June) (1 ,000,000)
Taxable income P5,000,000

Case G: Assume the same data in case F except that the taxpayer is a
nonresident citizef! who returne.d and reside permanently in the country in July of
the current year. His taxable income is:
❖ Answer: P5,800,000.
Gross income, Philippines (Jan.-Dec.) Pl,000,000
Gross income, Canada (July-Dec.) 3,000,000
Deductions, Philippines (Jan.-Dec.) (3,000,000)
Deductions, Canada (July-Dec) (1,200,000)
Taxable income P5,800,000

66
TYPES OF INCOME

Fo_r income taxatiol') purposes, there are three (3) types of income subject
to income tax, as follows:
• Ordinary or regular income
• Pas~ive income derived from Philippine sources; and
• Capital gains subject to capital gains tax

Ordinary or .regular income refers to income such as

com~ensation income (salaries or wages), busines's income, income from
practice of profession, income from sale and/or dealings of property and
miscellaneous income a~d passive income other than those subject to final
taxes and capital gains tax of the Tax Code, as amended. Regular incomes
are subject to graduated tax table (also known as basic or normal tax) as
provided for under Section 24(A). of the Tax Code, as amended. The
graduated tax raJe is summarized in Table 2-2, page 68.

Passive incomes subject to Final Withholding Taxes (FWT) are

. certain passive incomes from sources within the Philippines as enumerated
under Sections 24(8) and 25(A)(2) of the Tax Code, as amended. These
passive incomes are not subject to graduated tax rate or basic tax
presented in Table 2-2 but to specific FWT rates as summarized in Table
2-3 in pages 80 to 82.

The specific pas·sive incomes derived from Philippine sources that

are subject to final withholding taxes are as follows:
1) Interest income ,
dI Unless exempt, other passive incomes- derived .from
2) · Dividen ncome Philippines but not in the list, if any, as well as passive
3) Royalties incomes derived abroad are subject to basic tax.
4) Prizes; and
5) Other winnings

Incomes from ·sale of capital assets subject to capital gains tax (CGT):
1) Capital gains from sale of shares of stocks of • The t~x . rates are
f oration not traded in the local summanzed m Table 2-4.
a d omes IC corp . d · • Capital gains not subject
stock exchange [Sec. 24(C) NIRC], an. to capital gain ta ~
2) Capital gains from sale of real property in the subject to basic ta .
Philippines (Se tion 24(0) NIRC]
.umma of INCOME and the A licable INCOME TAX

·Regular Income Graduated Rate**

Passive income, Phils. Final Withholdjng Tax (FWT)
Ca ital ains sub'. to CGT Ca ital Gains Tax CGT

67
 3) ~eterm,~ne the income tax due assuming the "net taxable compensation
mcome for the year is P1 ,850,000
❖ Answer: P445, 000
Tax on
First ?800,000 P130,000
In excess of PB00,000; (P1,050,000 x30%) 315,000
Tax Due . P445,000

SELF-EM~LOYED and PROFESSIONALS (SEP)

Self-Employed is defined under RA 10963 (TRAIN Law) as "a sole

proprietor or an independent contractor who reports income earned from
self-employment. S/he controls who he/she works for, how the work is done
and when it is done. It includes professionals whose income is derived
purely from the practice of pr9fession and not under an employer -
employee relationship". Professional is defined as a "person formally
certified by a profes~ional 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 who engages in some .art or sport for
money, as a means of livelihood, rather than as a hobby. It includes but is
not limited to professional entertainers, professional athletes, directors,
producers, insurance agents, insurance adjusters, management and
· technical consultants, bookkeeping agents, and other re~ipients of
professional, promotional and talent fees".

Income derived from self-employment .is considered income derived

- from the conduct of trade or business, hence, classified as regular or
ordinary income. As such, it is subject to the graduated tax rate as shown
in Table 2-2. Consequently, the sample computation of basic income tax
due provided in illustration #4. shall likewise apply to SEP.

However, unlike compensation income or salaries/wages where it

is only /subject to basic tax (refer to illustration #4 )_, income derive~ from the
conduct of trade or business such as that of SEP Is generally subJect to two
types of taxes, the income tax (using the graduated tax rate) and business
tax (generally either 12% Vat 1% Percentage tax under CREATE Act,
unless exempt under the law). Business taxes are discussed in a separate
tax subject and in our other textbook entitled "Transfer and Business
Taxation".

69
 Beginning 2018 or upon the effectivity of RA 10963 [Tax Reform for
Acceleration and Inclusion Law (TRAIN Law)], regular income of SEP
amounting to more than P250,000 in a ,taxable year but with a gross
sales/receipts and other non-operating income not exceeding the revised
vat threshold of P.3,000,000 'shall have the option to avail of 8% tax on
gross sales/receipts and other non-operating income in excess of P250,000
in LIEU of the graduated income tax rate and business tax under Section
116 of the Tax Code, as amended.

Self-Employed .and Professionals (SEP)

Sec. 24(A)(2)(B) of the Tax Code provides the following rules for SEP:

■ PUR.E LY SEP
The taxpayer is considered purely SEP ifs/he is not earning
income from employment. There is not income arising from
employer-employee relationship. The applicable taxes of purely
SEP are as follows:

Graduated tax rate & 1% Percentage Tax

Not more than under Sec. 116 NIRC
P3M as amended by
CREATE Act
OR
at the option of SEP
8% *** of Gross Sales/Receipts
and other non-operating income
in excess ofP250,000 IN LIEU of the graduated income
tax rate and Section 116 of the Tax Code (NIRC)

More than Graduated tax rate & 12% Value added tax
P3M unless engaged in vat
exempt sales and
transactions under Sec. 109
of the Tax Code.
· *GS/GR = Gross sales or Gross receipts ·
0 Business Tax is in addition to income tax. Business taxes are discussed in a separate tax subject,

Tax 2 (Transfer and Business Ta~ation).

****allowed only if qualified. The requirements are provided in next page.

70
 REQUIS•ITES TO _AVAIL THE 8% PREFERENTIAL TAX RATE:

. In ord~r to avail the 8% prefere-ntial tax, the SEP shall satisfy all
the following conditions: ·

1. The gross sales/receipts anq other non-operating income does

not exceed the vat threshold of P3,000,000;
2. Th~ SEP shall be non-vat registered;
3. The gross sales/receipts were not derived from vat-exempt
sa_
les and transactions;
4. The SEP is not subject to Percentage Tax other than Section
116;and ·
5. The SEP signifies his/her intention to elect the -8% income tax.

RR 8-2018 provides, unless the taxpayer signifies in the 1st

Quarter Return o~ the taxable year the intention to elect the 8%
income tax, the taxpayer shall be considered as having availed of
the graduated rates under Section 24(A) of the Tax Code, as
amended, and such election shall be irrevocable for the taxable
year.

Income taxes differ from business taxes. The latter is discussed in

volume 2 of our text book entitled "Transfer and Business Taxation". Since
these topics are discussed in a separate subject, we assume that
undergraduate students are not yet adept on topics involving business
taxes. Thus, for illustration purposes in this book, the option to. be taxed at
8% will not yet involve complicated business transactions. Additional
comprehensive illustrations on the 8% optional tax are discussed in volume
2 of our textbook, specifically under Chapter 9 entitled "Other Percentage
Taxes (OPT)".

ILLUSTRATION 6- Self-Employed and/or Professionals (SEP)

CASE A: PURELY SEP whose gross sales/receipts and other non-

operating in.come does not 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
❖ Answer: PO; exempt from income tax

71
 2) Using the data below, determine the income tax due:

Gross sales ?2,800,000

Cost of sales (1,500,000)
Operating expenses 750,000
Net income P550,000

❖ Answer: P67,500

Solution:
Tax on
First P400,000 income P30 ,000
In excess of P400,000 income 37,500
(P150,000 x 25%)
Income Tax Due /267,500
W In addition to the income tax computed above, the SEP is still subject to a
business tax. Business taxes are discussed in volume 2 of this book entitled
"Transfer and Business Taxation". For purposes of illustration, assume the
taxpayer in this particular case is subject to Percentage Tax under Sec. 116
as amended by CREATE Act (being a non-vat registered taxpayer and the
gross sales did not exceed the vat threshold of P3M) , the business tax is
computed as follows; ·
OPT = P2,800,000 x 1% = 28,000. Consequently, the total tax expense
(income and business tax) of the SEP is P95,500. This tax shall likewise apply
·in the preceding number (assumption #1) irrespective of its exemption from
income tax. The basis of a business tax is not the "incomee but gross
sales/receipts and other non-operating . income (excluding compensation
income).

3) Assume the SEP in number "2" opted to avail the .8% tax under the TRAIN
Law.

❖ Answer: (/22,800,000- 250,000) x 8% = P204,000

The 8% tax is computed based on gross sales/receipts and other non-

operating income in excess of P250,000. This is in LIEU of the Income T
using the Graduated Rate andBusiness Tax under Sec. 116 of the Tax Cod .
Comparing total taxes of items #2 and #3 above, the former using t
graduated rate + and the business tax) will result to a lower total amount f
taxes than using the preferential tax rate of 8%. However, this is not alwa
the case. If the actual cost of sales and operating expense are minimal, th
8% preferential tax will result to a lower tax. Thus, the SEP shall compare the
total taxes using the two methods and may choose the method which will result
to a lower total taxes.

72
CASE ~: ~URELY SEP whose gross sales/receipts and other non-
operatmg mcome EXCEEDs the VAT threshold of P3,000,000.

Determine the income tax due assuming the following data:

Gross sales PS,000,000
· Cost of sales (2,250,000) .
Operating expenses (1 ,250,000)
Net taxable income P1 ,500,000

❖ Answer: P340,000
Tax on
First PB00,000 income P130,000
In excess of PB00,000 income 210,000
(P700,000 x 30%)
Tax Due P340,000
W In addition to the income tax comput!:!d above, the SEP in this particular case
is still subject to a business tax. Since the gross sales/receipts and other non-
operating income exceeds the vat threshold, the applicable business tax is
12% vat computed as follows:
VAT= PS,000,000 x 12% =P600,000

W The 8% tax is not applicable if (a)the gross sales/receipts and other non-
operating income exceeds the vat threshold; or (b)the SEP is vat registered.

CASE C: Purely SEP+ GR or GS<PJM + the SEP is vat registered

Assume the same data in CASE A(2) and the SEP opted to use the 8% tax,
compute the total tax due of t~e taxpayer.

❖ Answer: P403, 500

Income Tax:
First P400,000 income P30,000
In excess of P400,000 income 37,500 /267,500
(P150,000 x 25%)

Business Tax:
12% vat= P2.BM x 12% 336,000
Total Tax Due P403,500
W The 8% tax is not applicable in this particular case.
m The following are not allowed to avail the 8% tax:
a) VAT-registered taxpayers (regardless of gross sales/receipts)
b) those liable for Percentage Taxes other than Sec. 116 under Title
VofNIRC.

73
 CASED:
Pur,ly SEP + GR or GS S P3M +ths SEP Is sub/eel to other /yJHJ of OPT

Pedro is a taxi operator. The following data were provided for taxable year:
Gross receipts ?2,800,000
Cost of direct services (1,500;000)
Operating expenses (750,000)
Net income PSS0,000

Determine the total tax due of Pedro assumin9 he opted to use the 8% tax:

❖ Answer: P151,500
Solution:
.Income Tax:
First P400,000 income . P30,000
In excess of P400,000 income . 37,500 P67,500
(P150,000 x 25%)

Business Tax: 3% CCT under Sec. 117

3% CCT= P2.BM x 3% 84,000
Total Tax·Due· P151,500

m The 8% tax is not applicable in this particular case.

W The following are not allowed to avail the 8% tax:
a) VAT-registered taxpayers
b) those liable for Percentage Taxes other than Sec.. 116 under
Title V of NIRC.

Ill Under the Tax .Code, a domestic common carrier engaged in transport o
passengers by land is subject to a "business tax· of 3 common carrie s
under Section 117 of the Tax Code. Business taxes are one of the t
discussed in a separate tax subject, Transfer and Business Taxation.

CASE E: PURELY SEP using 8% tax rate but whose gross sales/receipts
and other non-operating income EXCEEDs the VAT threshold of fll100G 000
during the year.

Pedro signified his intention to be taxed at 8% income tax rate on gross

his 1• quarter income tax retum. However, his gro s sale during the xaoffl ta
~

year exceeded the vat threshokt o1 P3M as provided Jn h quarterty' records a

· follows: .

74
 01 02 03 04/Annual
(8% tax) (8% tax) (8% tax) (Graduated)
Sales ?500,000 ?500,000 P2,000,000 P3,500,000
Cost of sales (300,000) (300,-000) (1 ,200,000) (1,200,000)
Gross Income 200,000 200,000 800,000 2,300,000
Operating expenses (120,000) . (120,000) (480,000) (720,000)
Net taxable income PB0,000 PB0,000 . ?320,000 P1,580,000

Qu~stion: How much is P.edro's annual income tax payable?

❖ Answer: P289,200

Solution:

Sales (total for the year) P6,500,000

Cost of sales (total for the year) (3,000,000)
Gross Income (total for the year) 3,500,000
Operating expenses (total for the year) (1,440,000)
Net taxable income for year P2,060,000

Income Tax due using graduated rate P509,200,H

Less: Quarterly tax payments (Q1-Q3) based
on 8% tax rate ({P3M-250,000)x8%] (220,000)
Annual Income Tax Payable P289,200

Income Tax:
First P2,000,000 P490,000
In excess of ?2,000,000 @ 32%
(P60,000 X 25%) . 19,200
Income Tax Due P-509,200**

...The cumulative gross sales and/or receipts for the entire taxable year
exceeded the P3,000,000 vat threshold. Therefore, the 8% preferential
income tax rate shall no longer be applicable. The correct income tax due
shall be computed based on the-graduated tax table. However, the 8%
-tax rate paid for the first three quarters shall be deducted to arrive at the
income tax a able for the ear.

75
SEP's GROSS SALES/RECEIPTS EXCEEDED THE VAT
THRESHOLD DURING THE YEAR

RR 8-2018 provides, that, if at any time during a given taxable year,

a taxpayer's gross sales or receipts exceeded - the VAT Threshold
(~,000 000.00), he/she shall ·automatically be subjected to the
graduated rates under Section 24(A)(2)(a) of the Tax Code, as
amended , with the following rules/guidelines:

• The taxpayer shall be allowed an income tax credit of quarterly

payments initially made unde,r the 8% income tax option.

■ Taxpayer is likewise liable for business tax(es), in addition to

income tax.

■ For this purpose, the taxpayer is required to update his

registration from non-vat to vat taxpayer, within the 30 days
from the close of the month the vat threshold was breached.

• Percentage tax under Sec. 116 shall still be imposed from the
beginning of the year until taxpayer is liable to vat. The
Percentag~ tax pursuant to Section 116 of the Tax Code, as
amended, shall be imposed on the first P3,000,000.00. The
excess of the threshold shall be subject to VAT. Thus, for this
purpose, vat shall be imposed prospectively.

• Percentage tax due on the P3,000,000.00 shall be collected

without penalty, if timely paid on the due date immediately
following the month the threshold was breached.

• MIXED INCOME EARNER/SEP

The taxpayer is considered mixed income earner if s/he is

deriving income from both from self-employment and compensation
income arising from the presence of employer-employee
relationship.

76
 The applicable taxes of a mixed income earner are as follows:

Graduated income tax rate Percentage Tax

on compensation income under Sec. 116,ofthe
and income from self- Tax Code on income
Not more than employment: derived from self-
P3M employment only.
(exclude
. compensation OR, at the option of SEP:
income) ◊ Compensation Income - Graduated rate
◊ From Self-employment:
8% *** of Gross Sales/Receipts
and other non-operating income
IN LIEU of the graduated tax rate and Section I 16

NOTE:
■ The 8% tax is applicable only to income arising from self-
employment and/or practice of profession. It is not
applicable to compensation income.
.o-
■ lf the SEP is mixed income earner, the 8% tax rate is based
on gross sales/receipts without deducting P250,000.

More than Graduated tax rate for both Value added tax
P3M types of income unless engaged in vat
(exclude exempt sales and
compensation Note: The option to be taxed at transactions under Sec.
income) 8% is not applicable. 109 of the Tax Code.

Percentage Tax under Section 116 of the Tax Code, as

amended, is .a 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. Business
taxes are discussed in another Tax subject and in our separate
textbook, 'Transfer and Business Taxation".

77
ILLUSTRATION 7
CASE A: MIXED Income Eam~r whose gross sales/receipts and other non-
operating income does not exceed the VAT threshold of P3,000,000.

Assume the following data the year:

Compensation income P900,000
Gross sales 2,800,000
Cost of sales (1,500,000)
Operating expenses (750,000)
Total taxable net income P1 ,450,000 .

1) Determine the correct income tax due.

❖ Answer: P325, 000
Tax.on
First PS00,000 income ?130,000
In excess of PB00,000 income 195,000
(P1 ,450,000- P800k x 30%)
Tax Due P325,000
III As discussed in illustration 6, CASE A(#2), in addition to the income tax
computed above, the SEP in this particular case is still subject to a business
tax (on his business income only; exclude compensation income) computed
-as.follows:
OPT = P28,000 [Same computation/explanation with illustration 6, Case
A(#2)]. This topic is extensively covered in a separate Tax subject, Transfer
and Business Taxation.

2) · Assume the SEP opted to avail the 8% tax under the TRAIN Law,
determine the income tax due.
❖ Answer: P384,000

On his compensation income:

Tax on.
First PB00,000 P130,000
In excess of P400,000 30,000 P160,000
(P100,000 X 30%)

On his business income= 224,000

**(P2.8M x 8%)
TOTAL Tax Due P384,000

◊ The 8% ta~ shall not be applied to compensation income.

◊ ..For mixed income earners, the P.250,000 deduction is not allowed
0 The P.384,000 represents two taxes, income and business taxes

78
CASE B: MIXED lnco E
t' . me arner whose gross sales/receipts and other non-
opera mg mcome EXCEEDs the VAT threshold of P3,000,000. .

Determine the income tax due assuming the following data:

Compensation income P900,000

Gross sales · 5,000,000
Cost of sales (2,250,000)
Operating expenses (1,250,000)
Total taxable net income P2,400,000

❖ Answer: P618,000
Solution:

Tax on
First P2,000,000 income P490,000
In excess of ?2,000,000 income 128,000
(P2.4M - P2M x 32%)
Tax Due P618,000

W In addition .to the income tax' computed above, the SEP in this particular
case is still subject to a business tax. Since the gross sales/receipts and
·qther non-operating income exceeds the vat threshold, the applicable
business tax is 12% vat (on his business income only) instead of Section
116 of the Tax Code.

The vat is computed as follows:

VAT= P5,000,000 x 12% = P600,000

VAT and Percentage taxes are some of the topics covered in a separate
tax subject, Transfer and Business Taxation.

The 8% tax in LIEU of the graduated tax rate and Section 11.6 is not
applicable if the gross sales/receipts and other non-operating income
exceeds the vat threshold of ?3M.

' 79
 PASSIVE INCOME subject to Final Withholding Tax (FWT

As discussed ·in page 64, the applicable tax on an income will

depend on seve·ral factors such as the type of the· income, the
classification of the taxpayer and 'source of income.

The three (3) types of income for income taxation purposes

(ordinary or regular income, passive income and capital gains) and the
applicable income tax are discussed in page 67.

Passive incomes subject to final withholding taxes are certain

·passive incomes from sources within the Philippines as enumerated under
the Tax Code (summarized in Table 2-3). These passive incomes are not
subject to graduated ·tax rate or basic tax presented in Table 2-2 but to
specific final withholding tax rates.

The five (5) passive incomes derived from Philippine sources

subject to final withholding taxes are as follows:
1) Interest income ,
2) Dividend Income Unless exempt, other passive income derived from
3) Royalties . Philippines but not in the list (if any) as well as passive
income derived abroad are subject to basic tax.
4) Prize~; and
5) Other winnings

Citizens &
(1) INTEREST Residents NRA-ETB NRA-NETB
A. Interest from any currency bank deposit 20% 20% 25%
B. Yield or any other monetary benefit from 20% 20% 25%
deposit substitutes (Refer also to page 80)
C. Yield or any other monetary benefit from 20%- 20% 25%
trust funds and similar arrangements

D. Interest incomes received from a 15 %

depositary bank under exp~mded foreign
-\,
currency deposit system NRC=Exempt Exempt Exempt

NOTE: Only residents are subject to this type of

tax. Nonresident taxpayers are exempt from ·tax
on this particular income.

80
 E. Interest income from long-term deposit or
investm_~nt (Refer to page 85 for the requisites Exempt Exempt 25%
or condIt1ons for exemption).

If pre-te~inated before fifth year 1 a final tax

shall be imposed based on remaining maturity I
as follows:
■
4 years to less than 5 years 5% 5% 25%
■
3 years to less than 4 years 12% 12% 25%
■ less than 3 years 20% 20% 25%
(2) ROYALTIES
A. Royalties, in general (other than royalties 20% 20% 25%
described in letter "B") ·
B. Royalties on books, as well as other literary 10% 10% 25%
works and musical compositions
(3) PRIZES
Prizes exceeding P10,000 20% 20% 25%

NOTE: Prizes :S P10,000 are subject to basic

tax except those received by NRAs NETB which are
subject to 25% FWT

(4) OTHER WINNINGS '

Under TRAIN Law(Beginning 2018):

OTHER wrNNINGS Regardless of amount 20% 20% 25%

PCSO Winnings:
■ Amount is :S P10,000 Exempt Exempt 25%
■ Amount is > P10,000 20% Exempt 25%

Under CREA TE Act

OTHER WINNINGS Regardless of amount 20% 20% 25%

PCSO Winnings:
■ Amount is :S P10,000 Exempt Exempt 25%
■ Amount is > P10,000 20% 20% 25%

· NOTE:
■ The exemption of NRAs ETB for PSCO
winnings amounting to more than P10,000
was repealed under the CREATE Act.

■ The FWT rates for citizens, residents and

NRAs ETB applied to Royalties, Prizes, Other
winnings and · PCSO winning are now the
same.

81
 (5) CASH and/or PROPERTY DIVIDEND
A. Cash and/or property dividends
actually/constructively received from · a 10% 20% 25%
domestic corp. or from a joint stock co.,
insurance or mutual fund companies &. ROHQ
. of multinational companies beginning Jan.2000
B. Share of an Individual In the distributable net
income affer tax of a PA~TNERSHIP (OTHER 10% 20% 25%
THAN a GPP) beginning Jan. 1, 2000.
·c. Share of an individual in the net income after
tax of an Association, a Joint Account, or a 10% 20% 25%
Joint Venture or Consortium taxable as a
corporation, which he is a member or a co-
venturer beginnina Jan. 1, 2000.

FINAL WITHHOLDING TAX

(On "Certain" income not subject to basic tax)

Passive incomes derived from Philippine sources as summarized in

Table 2-3 above are subject to final taxes instead of basic tax or graduated
tax rates. Final withholding tax is a kind of tax which is prescribed on
"certain income" (interest income; dividends, royalties, prizes and winnings)
derived from Philippine sources and is not creditable against the income tax
due of the payee on income subject to regular rates of tax for the taxable
year.

Under the final withholding tax system, payee received the income
net of the applicable tax. The amount of tax withheld by the withholding
agent (payor) is "constituted as a full and final payment" of the income tax
due from the payee on the said income. For instance, if a resident citizen
taxpayer earned P10,000 interest income from his bank deposit, the
amount to be credited to his bank account shall only be PB,000 , net of th
20% final tax on interest income from bank deposit. The applicable tax is
~ithheld by the payer (bank) and shall remit the corresponding tax to th
BIR. Consequently, the liability for payment of the tax rests primarily on the
payor as a withholding agen(. Thus, in case of his failure to withhold the ta
or in case of under withholding, the deficiency tax shall be collected from
the payor/withholding agent.

82
 The payor is required to issue final withholding tax certificate to the
payee. The payee, on the other hand, is not required anymore to file an
income ta?< return for these types of income. Likewise, these incomes will
no longer form part of the payee's "taxable income".

Passive incomes derived abroad are subject to basic income tax,

therefore, included in the income tax return of resident citizen taxpayers.

ILLUSTRATION 8:
A resident citizen taxpayer provided the following information:
Gross business income, Philippines P2,000,000
Gross business income, Canada 3,000,000
Business expenses, Philippines 1,400,000
Bu~nessexpenses,Canada 2,050,000
Interest income - BOO Philippines 100,000
Interest income - BOO in Canada 50,000
Dividend income from a domestic corporation · 125,000
·Dividend income-resident foreign corporation 75,000
Dividend income- nonresident foreign corporation 102,000
· Interest income received from a depository bank under 50,000
FCDS, Philippines
Philippine lotto winnings 10,000
Philippine Charity Sweepstakes winnings 500,000
Singapore sweepstakes winnings 200,000
Other winnings-Philippines 50,000
Prizes - Robinsons Manila 8,000
Prizes - SM Manila 20,000
Prizes - SM "Shanghai, China" 30,000

Determine the following:

(1) Taxable income .

❖ Answer: P2, 015, 000 computed as follows.

Gross business income, Philippines P2,000,000

Gross business income, Canada -3,000,000
Business expenses, Philippines (1,400,000)
Business expenses, Canada (2,050,000)
Interest income - BOO in Canada . 50,000
Dividend income - resident foreign ~orporat,on . 75,000
DiVidend income _nonresident foreign corporation 102,000
Singapore sweepstakes winnings 200,000
Prizes - Robinsons Manila 8 000
Prizes - SM "Shanghai Ch/Ill' 30,000
Taxab/8 lncom, P2,015,IJOO .

83
 NOTE:
■ Taxable Income means ordinary income ubject to graduated ~x rates under Section
24(A) of the Tax Code as summarized In Table 2-2 of this chapter.
■ Interest incomes on bank deposits from sources ''outside" of the Phlllpplne_and Dividend
Income from "foreign corporations" are subject to basic tax
• PCSO/Phlllpplne Lotto wlnnlng1:
Under TRAIN Law: Exempt If not exceeding P10,000; Subject to 20% FWT If the amount
exceeds ?10,000
• Prizes not exceeding ?10,000 from sources within the Philippines are subject to basic
tax. On the other hand, prizes more than ?10,000 from sources "within the Philippines"
are subject to 20% final tax as shown in Table 2-3.
• Prizes derived from sources outside of the Philippines is subject to basic tax (graduated
tax rate).

(2) The amount of final taxes on "passive income". ·

❖ Answer: P154,000 computed as follows:

Interest income- BOO Philippines (20%) · P20,000

Dividend income from a domestic corporation (10%) 12,500
Interest income received from FCDU deposit (15%) 7,500
PCSO Winnings (P500,000 x 20%) 100,000
Otherwinnings-Philippines (P50,000 x 20%) 10,000
Prizes - SM Manila (P20,000 x 20%) 4,000
Total final tax on passive income /1454,000

DEPOSIT SUBSTITUTES
(Tax Treatment of Interest income derived from government debt
instruments and securities)

RR 14-2012 defines ''deposit substitute" as an alternative form of

obtai·ning funds from the public other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower's own
account, for the purpose of re-lending or purchasing of receivables and
other obligations, or financing their own needs or the needs of their agent
or dealer. "Public" is ·defined as borrowing from twenty (20) or more
individual or co_rporate lenders at any one time. The mere issuance of
government debt instruments or securities is deemed as falling within the
coverage of deposit substitutes irrespective of the number of lenders at the
time of origination,.and therefore interest income derived therefrom shall be
subject to applicable final tax rate. Government debt instruments and
securities including Bureau of Treasury issuep instruments and securities
such as Treasury bonds (T-bonds.), Treasury bills (T-bills) and Treasury
notes are classified as deposit substitutes if such instruments or securities
are to be traded or exchanged in the secondary market.

84
INTEREST INCOME FROM
CERTIFICATES (E ·d
LO NG_ ~~ERM DEPOSIT OR INVESTMENT
( Based on RR 14 2v0,12enRced by cert1f1cates prescribed by BSP
- , MC 7-2015)

f d Lo~rterm deposit or Investment certificate refers to certificate of

,me epos , ~r investmen, in the form of savings common or individual trust
~unds, deposit_ substitutes, investment manag~ment accounts and other
mves~ments with a maturity period of not less than five (5) years, the form
?f which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and
issued ~y banks only to individuals (should not be under the name of a
corporation or a bank or a trust department of a bank) in denominations of
P10,000 and other denominations as prescribed by BSP ·(RR 14-2012).

Requisites/Conditions for exemption:

1) The dep'ositor or investor is an individual citizen, a resident alien or a

nonresident alien engaged in trade or business in the Philippines.
2) The long-term deposits or investment certificates should be under the
name of the individual and not ·under the name of the corporation or the
bank or the trust department/unit of the bank.
3) 'The long-term deposits or _investments must be in the form of savings,
common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates
in such form prescribed by the Bangkb Sentral ng Pilipinas (BSP).
4) The long-term deposits or investments must be issued by banks only
and not by other financial institutions.
5) The Io·ng-term deposits or investments must have a maturity period of
not less than five (5) years.
6) The long-term deposits or investments must be in denominations of Ten
thousand pesos (P10,000) and other denominations as may be
·prescribed by the BSP. . .
7) The long-term deposits or investments should not be _terminated by the
original investor before the fifth (5th) year, otherwise they shall be
subjected to final tax rates of 5%, 12% or 20% on interest income
earnings as shown in Table 2-3. .
8) Except those specifically exempted by_ law or regulat,o_ns, any other
income such as gains from trading, foreign exchange gain shall not be
covered by income tax exemption.

85
.......

ILLUSTRATION 9:
(As illuStrated under RR 14-2012 and RMC 7-2015)

Case A:
~~ instrument with a maturity period of ten (1 0) years was held by Juan _(resident
citizen) fo~ two ~2) yea~s and was transferred to Smith (resident alien), who, in
turn, held it for eight (8) years. The final withholding tax are as follows:

·Juan 20% final tax

Smith Exempt

CaseB
An instrument with a maturity period of ten (10) years was held by Juan
(nonresident citizen) for three (3) years and transferred it to Smith, a resident
alien. Smith held it for two (2) years before subsequently transferring it to Pedro
·(resident citizen) who held it until the day of maturity or for a period of five (5)
years. The final withholding tax are as follows:
Juan ' 12% final tax
Smith 20% final tax
- Pedro Exempt
Case C.
An instrument with a maturity period of ten (10) years was held by Smith
(nonresident alien engage in trade or business) for three (3) years and transferred
it to Juan, a resident citizen. Juan held it for two (2) yea.rs before subsequently
' transferring it to James (resident alien) who pre-terminated it after four (4) years.
The final withholding tax are as follows:
Smith 12% final tax
Juan 20% final tax
James 5% final tax

CaseD:
Mr. X (a resid~nt citiz_
en) appoints Bank A-Trust Department to manage his
money created through a trust agreement. Bank A-Trust Department then
invests said money in a 5-year corporate bond. -
❖ Even if Mr. X does not withdraw•his money from such trust agreement for at least
five (5) years, his interest income from the trust agreement will NOT be exempt from
the fin~I withholding tax as the underlying investment is a corporate bond, even if
such corporate· bond has a maturity period of five (5) years. The underlying
. instrument needs to comply with the requirements of Section 22(FF) of the tax code.
A bond, promissory note or any other type of debt instrument issued by a non-bank
corporation as an underlying instrument will not ~eat the requirements of Section
22(FF) as it is not issued by a bank.

87
 CaseE:
(Refer to Case "D"). If Bank A -Trust Department in its own name without
~entioning the particul~r individual for whom the investment is being made
invests the fund instead m a 10-year long-term deposit or investment certificate
the long-term deposits and inve~tments made in the name of a trust department
of a bank are not exempted from the twenty percent (20%) final withholding tax.
Only those made specifically "in trust for the name of specific and qualified
individual investors" may be exempted from income tax, provided they comply
with Section 22(FF) of the tax code. ·

CaseF:
(Refer to Case "D"). If Bank A-Trust Department in the name of Mr. X invests
the fund instead in a 10-year long-term deposit or investment certificate.as defined ·
under Section 22(FF) of the NIRC of 1997, as amended, Mr. X's interest income
eerived from the trust agreement shall be exempt from income tax provided that
Bank A-Trust Department in behalf of Mr. X will hold such deposit or investment
in continuous and uninterrupted period for at least five (5) years. The holding
period for both the individual investor in the trust agreement and the trust in the
under! in instrument must both be at least five 5 ears.

-INFORMER'S REWARD
(Informer's Reward.to Persons instrumental in the discovery of violation of
the NIRC and the discovery and seizure of smuggled goods)

Section 282 of the Tax Code provides:

(A) For Violations of the National Internal Revenue Code. - Any

person, except an internal revenue official or employee, or other public
official or employee, or his relative within the sixth degree of consanguinity,
who voluntarily gives definite and sworn information, not yet in the
possession of the Bureau of Internal Revenue, leading to the discovery of
frauds upon the internal revenue laws or violations of any of the provisions
thereof, thereby resulting in the recovery of revenues, surcharges and fees
and/or the conviction of the guilty party and/or the imposition of any of the
fine or penalty, shall be rewarded in a sum equivalent.to ten percent (10%)
of the revenues, surcharges or fees recovered and/or fine or penalty
imposed and collected or One million pesos (P1 ,000,000) per case,
whicheyer is ·Iower. The same amount of reward shall also be given to an
informer where the offender has offered to compromise the violation of law
committed by him and his_offer has been accepted by the Commissioner
and collected from the offender: Provided, That should no revenue,

88
 surcha_rges or fees be actually recovered or collected such person shall not
be entitled to a reward· p 'd d f .' . .
.· · rov1 ~ , urther, That the information mentioned
herein s~all not refer to a case already pending or previously investigated
or ex_ammed by the Commissioner or any of his deputies, agents or
exan:uners,_ or the Secretary of Finance or any of his deputies or agents:
Provided, f1~ally: That the reward provided herein shall be paid under rules
and regulations issued by the Secretary of Finance upon recommendation
of the Commissioner. '

~B) For Discovery and Seizure of Smuggled Goods. - To encourage

the pubhc to extend full cooperation in eradicating smuggling, a cash reward
equivalent to ten percent (10%) of the fair market value of the smuggled
and confiscated goods .or One million pesos (P1 ,000,000) per case,
whichever is lower, shall be given to persons instrumental in the discovery
and seizure of such smuggled goods. The cash rewards of informers shall
be subject to income tax, collected as a final withholding tax, at the rate of
ten percent (10%).

The provisions of the foregoing subsections notwithstanding, all

public officials, whether incumbent or retired, who acquired the information
in the course of the performance of their duties during their incumbency,
are prohibited from claiming informer's reward.

CAPITAL GAINS TAX

Income from sale of capital assets, specifically from sale of shares

of stocks of a closely held corporation {shares of domestic corporation not
listed in the local stock exchange) and real properties located in the
· Philippines are subject to capital gains tax (CGT) summarized as follows:

TABLE 2-4: Capital Gains Subject to Capital Gains Tax (CGT)

(1) Capital Gains from sale of s~ares of Citizens & NRA-
stock of a domestic corporation not Residents NRA-ETB NETB
traded in the local stock exchange

Beginning Jan. 1, 2018

■ Basis: Capital gain 15% . 15% 15

(2) Sale of real property located in the 6% 6% 6

Philippines.
TAX BASE: Selling Price or **FMV,
whichever is hi her

89
NOTE:
• The assets sokt in the table above must refer to capjtal assets. Capital assets are assets not used in busine
nor for sale in the Ofdinary course of trade or business. ss
• capital gains arising from sale of capital assets other than those described in Table 2-4 are subject basic/regular
tax or graduated tax rate. 1

• "The fair market value (FMV} above of real property shall refer to the higher between:
• Fair market value as provided by City or Provincial assessors (also known as assessed value or FMV

. .
for real ~rty tax declaration purposes); and
• Zonal value as provided by the Commissioner of Internal Revenue (CIR)

.
: YPE 0~ INCOME
. . - ... . . .
APPLICABLE TAX
Regular Income G~aduated Rate** Table 2-2
Passive income, Phils. Final Withholding Tax (FWT) Table 2-3
Ca ital ains sub·. to CGT Ca ital Gains Tax CGT Table 2-4

GUIDE:
W "Unless exemptunder the law, incomes not subject to final withholding tax and capital
gains tax are classified as ordinary income and are subject to graduated tax rate.
Interest income from bank deposit abroad, for instance, is not included in the list of income
subject to FWT nor CGT as illustrated in Tables 2-3 and 2-4. Thus, such income is subject to
bask tax or graduated tax rate .- ·

'
GAIN ON SALE OF ASSETS: Capital Gain vs ..Ordinary Gain

Property classification of an asset as capital or ordinary is important

because of the special tax rules on gains and losses from sales or
exchanges of capital assets which do not apply to gains and losses from
sale or exchanges of ordinary assets. For income taxation purposes,
assets are classified either as ,ordinary or capital assets. Under the tax
code, the following are ordinary assets:

1. Stock in trade of the taxpayer- or other property of a kind which

would properly be included in the· inventory of the taxpayer if on
hand at the close of taxable year.
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 trade or business.
4. Real property used in trade or business of the taxpayer

Capital assets include all other property held by the taxpayer (whether
or not connected with his trade or business) not included in the definition of
ordinary assets above.

90
 Gain on sale of ordin
. · ary assets are commonly known as ordinary or
regu Iar income Ordinary · ·
.d d f · gains are subject to the graduated tax rate as
pr~v, e or under Section 124(A) of the Tax Code. On the other hand
gain ~n sale of capital assets are classified as capital gains subject to th~
following taxes:

1. C~pital Gains Tax (CGT) - if included in the list provided in Table 2-

4 in page 89; . .

2. P_ercentag~ tax under Section 127 of the Tax Code (a business tax
discussed in a separate Tax subject) if pertaining to sale of shares
of stock _traded and listed in the local stock exchange; and

3. Basic income tax or graduated tax rate if pertaining sale of capital

assets other than those subject to CGT and Percentage tax.

Capital Gains Tax (CGT) on Sale of Shares of Stock

Beginning January 1, 2018, a fifteen percent (15%) capital gains tax

(CGT) is imposed on capital gain on sale of shares of a domestic
corporation sold directly to a buyer [Section 124(C) of the Tax Code, as
amended]. The tax imposed shall be upon the net capital gains realized
during the taxable year from the sale, barter, exchange or disposition of
shares of stock. .

Shares of stock sold or disposed of through the local stock

exchange exempt from income tax. It is not subject to capital gains tax but
to a Percentage tax of 6/10 of 1% of gross selling price as imposed under
Section 127 of the Tax Code, as amended. It is a business tax known as
Stock Transaction Tax and the basis is the gross selling price. Stock
transaction tax is discussed in a separate tax subject entitled Transfer and
Business Taxation.

FORMULA:

Selling price Pxxx

Cost- XXX
Capital gain Pxxx
Multiply: CGT rate 15%
Capital Gains Tax (CGT) Pxxx ·
---

91
Determination of Amount and Recognition of Gain or Loss:
[Sec. 7(c) of RR 6-2008].

Determination of Selling Price [Sec. 7(c.1) of RR 6-2008] .

• In det~rmining the selling price,_the following rules shall apply:

.◊ In the case of cash sale, the selling price shall be the total
consideration per deed of sale.

◊ If. the total consideration of the sale or disposition consists partly in

money and partly in kind, the selling price shall be sum of money
and the fair market value of the property received.

◊ In the case of exchange, the selling price shall be the fair market
value of the property received.

◊ ·1n case the fair market value of the shares of stock sold, bartered ,
or exchanged is greater .than the amount of money and/or fair
market value of the property received, the excess of the fair market
value of the shares of stock sold, bartered or exchanged over the
amount of money and the fair market value of the property, if any,
received as consideration shall be deemed a gift subject to the
Donor's Tax under Section 100 of the Tax Code, as amended.

Determination of Fair Market Value

(RR 6-2008 and RR 6-2013 as amended by RR 20-2020 dated Aug. 17,
2020):

In the case of shares of stock not listed and traded in the local stock
exchange, the following rules shall apply:

◊ For Common Shares of Stock, the book value based on the latest
available financial statements duly certified by an independent public
accountant prior to the date of the sale, · but not earlier than the
immediately preceding taxable year, shall be considered as the prima
facie fair market value.

◊ For Preferred Shares of Stock, the liquidation value, which is equal to

the redemption price of the preferred shares as of balance sheet date
nearest to the transaction date, including any premium and cumulative
preferred dividends in arrears, shall be considered as the fair market
value.

92
 In the case there are both common and preferred shares, the book
value per common share is computed by deducting the liquidation value
o~ ~h~ preferred shares from the total equity of the corporation and
d1v1ding the result by the number of outstanding common shares as of
balanqe sheet date nearest to the transaction date.

The rule in RR 20-2020 requires the "latest available financial statement

duly certified by an independent public accountant prior to the date of sale.ff
The phrase "prior to the date of the sale" is very important as it precludes
the BIR from using audited financial statements after the date of sale. With
the latest rule that latest audited financial statement prior to the date of sale
must be used, taxpayers can rely on a fixed amount at the time of sale
instead of having to adjust or amend CGT returns later on when the audited
financial statements become available.

ILLUSTRATION 10:

Determine the applicable amount of capital gains tax (CGT) for the following
sale of shares of stock: · ·

1) George sold 2,000 shares of a domestic corporation in the local stock

exchange at P11 0 per share. The shares were purchased 3 years ago
for P100 per share.

Answer: PO. Subject to 6/10 of 1%stock transaction tax, not CGT.

2) George sold 2,000 shares of a domestic corporation directly to a buyer

(Clifford)·at P180 per share. The shares were acquired six (6) months
ago at P105 per share.

Answer: P.22,500

Selling price (2,000 sh. x P1 BO) P360,000

Cost (2,000 sh. x P105) (210,000)
Capital gain P150,000
CGT rate (TRAIN Law) 15%
CAPITAL GAINS TAX P22,500

3) George sold 2,000 shares sold of a domestic corporation directly to a

buyer (Earl) at P100 per share. The shares were acquired two (2) years
ago at P105 per share.

Answer: PO. The transaction resulted to a loss.

93
 4) Ge~rge sold 2,000 shares of a foreign corporation directly to abuyer
(Clifford) at P180 per share. The shares were acquired six (6) months
ago at P105 per share.

Answer: PO
◊ CGT on shares of stock is-applicable only to sale of shares of domestic
corporations. Gain on sale of shares of foreign corporations sold directly to
a bu er is sub ·ect to basic tax usin the raduated tax rate .

. Capital Gains Tax (CGT) on Sale of R_eal Properties

Sal~ of a real property classified as capital asset located in the

Philippines _is subject to .six percent (6%) .capital gains tax (CGT) imposed
under Section 124(0) of the Tax Code, as amended. · The tax imposed shall
be based on the gross selling price or fair market value, whichever is higher.

FORMULA:
I

_Selling price or FMV, whichever is higher Pxxx

Multiply: CGT rate ' 6%
Capital Gains Tax (CGT) Pxxx

Fair market value of real property subject to CGT, as discussed in

page 90, shall refer to the higher between:
• Fair market value as provided by Gity or. Provincial assessors
(also known as assessed value or FMV for real property tax
declaration purposes); and
• Zonal value as provided by the Commissioner of Internal
Revenue (CIR)

Section 24(0)(1) of the Tax Code provides that sale, exchange, or

other disposition of real property subject to capital gains tax shall include
pacto de retro sal_es and other forms of conditional sales, by individuals,
including estates and trusts.

SALE OF REAL PROPERTY TO THE GOVERNMENT

If a real property classified as capital asset located in the Philippines is

sold to the government or any of its political subdivisions or agencies or to
government owned or controlled corporations (GOCCs), the individual
taxpayer shall have the option to be taxed at 6% CGT or basic income tax
using the graduated tax rate. ·

94
ILLUSTRATION 11:

Determine the applicable amount of capital gains tax of the following sale of
real properties: . .

CASE A
1) Pedro sold of a parcel of land used in his trading business. Selling price
· was P3,000,000. The property was acquired five (5) years ago at
P1 ,500,000.

2) Pedro sold a residential lot for PS,000,000. The fair market value of the
property was P6;000,000. .The property was acquired ·three (3) years
ago at P4,000,000. ·

Question 1: What is the amount of finaJ income tax f9r these real estate
transactions?
Answer. P360,000 (P6M x 6%)
❖. Capital gains tax is 6% of gross selling price or fair market value,
whichever is higher.

Transaction "1" pertains to an ordinary asset, hence not subject to capital

gains tax. The difference of P1. 5M (P3M-P1. 5M) shall be included in the
determination of gross income subject to basic income tax.

Question 2: Assume that the residential lot in transaction "2" was sold at
P3,000,000. What should be the correct amount of capital gains tax on the
transaction?

Answer: P360,000 (P6M x 6%)

Capital gains tax is 6% of the higher amount between selling price and fair
market value.

Unlike in capital gains in the case of shares of stock directly sold to a buyer,
:the capital gains tax on the s,ale of a real property classified as capital asset
situated in the Philippines ·is not dependent on the gain derived from the
· transaction. Thus, regardless of gain or loss, the transaction is still subject
to 6% capital gains tax.

CASE B (REAL PROPERTIES SITUATED ABROAD)

Leomar sold a parcel of land classified as capital asset located abroad for ·
P3,000,000. The property was acquired five (5) years ago at P1 500,000.

95
Question: What is the amount of final income tax on the transaction
described above?
Answsr.·PO
❖ The 6% capital gains tax on real properties sold are applicable only on
real properties "held as capital assets" situated in the Philippines. Any
gain on sale of property located abroad is subject to basic income tax.

CASE C (REAL PROPERTlES SOLD TO THE GOV'T or TO a GOCC

Assume that the residential lot in transaction "2" of CASE A was sold for
P3,000,000 to the Quezon City government. How much is the tax due of the
Pedro?
❖ Answer: Either 360,000 CGT based on P3M or Basic tax
◊ Section 24(0)(1) of the Tax Code provides that If a real property classmed
as capital asset located in the Philippines is sold-to the government or any
of its political subdivisions· or agencies or to government owned or
controlled corporations (GOCCs), the individual taxpayer shall have the
option to be taxed at 6% CGT or basic income tax using the graduated tax
rate.

CASE D (Shares of Stock and Real Property)

Pedro, resident citizen, realized the following gains from sale of assets:
Capital gains on sale of shares of a domestic corporation 110,000
sold directly to a buyer (Sales Price-P1, 110,000; Cost
-P1 ,000,000)
Gain on sale of shares of a domestic corporation .sold in 25 000
the local stock exchange (Sales Price-P115,000; Cost
P90,000)
Gain on sale of real property classified as capital asset in 500,000
· the Philippines (Sales Price-P2,000,000; FMV-
P3,000,000; Acquisition cost when acquired 3 years ago-
P1 ,500,000)
Gaih on sale of real property abroad (Sales Price- 300,000
P3,000,000; FMV-P2,500,000; Acquisition cost when
acquired 3 years ago-P2,700,000)

Question: How much is the total capital gains tax?

❖ Answer: P196,500
Sale of shares of a domestic corporation sold
directly to a buyer CGT = P110,000 x 15% P16,500
CG Ton sale of real property In the Philippines 1 000
= ~3Mx6%
Total capita/ gain• llx P1#.Sll(J

96
 NOTE:
◊
The sale of shares of a domestic corporation listed in the local stock
exchange is "~xempt" from income tax. However, it is subject to 6/1 0 of 1%
stock transaction tax (a business tax) under Section 127 of the Tax Code,
as amended. ·

◊
Gain o~ sale ~n a real property classified as capital asset is subject to 6%
fin~I. ~1thhold1ng tax, provided the property is located "within" the
Ph1l!pp1nes. Real properties sold abroad, regardless of classification, are
subJect to basic income tax based on income derived from sale.

SALE OF PRINCIPAL RESIDENCE

Under certain conditions, sale of real property located in the Philippines

classified as principal residence is exempt from capital gains tax.

"Principal Residence" is the family home of the individual taxpayer.

It refers to the dwelling house, including the land on which it is situated,
wherein an individual incl~ding his family resides as a permanent dwelling,
or whenever absent, wherein the said individual intend~ to return (RR 14-
2000). It should be certified by the Barangay Chairman over the place, or
the Building Administrator .if the residence is a condominium or the
individual taxpayer's address as indicated in his latest tax return.

The residential address shown in the latest income tax return filed
by the vendor/transferor immediately preceding the date of sale of said real
property shall be treated as a conclusive presumption about his true
residential address, the certification of the Barangay Chairman, or Building
· Administrator (in case of condominium unit), to the contrary
notwithstanding, in accordance with the doctrine of admission against
interest or the .principle of estoppel.

-The seller/transferor's compliance with the preliminary conditions

for exemption from the 6% capital gains tax under Sec. 3( 1) and (2) of the
Regulations will be sufficient basis for the RDO to approve and issue the
Certificate Authorizing Registration (CAR) or Tax Clearance Certificate
(TCC) of the principal residence sold, exchanged or disposed by the
aforesaid taxpayer. Said CAR or TCC shall state that the said sale,
exchange or disposition of the taxpayer's principal residence is exempt from
capital gains tax pursuant to Sec. 24 (0)(2) of the Tax Code, but subject to
compliance with the post-reporting requirements imposed under Sec. 3(3)
of the Regulations.

97
REQUISITES FOR TAX EXEMPTION

As a rule, sale of principal residence is subject to 6% capital gain tax

based on the selling price or fair market value, whichever is higher, except,
when the proceeds are fully utilized in acquiring or constructing a new
principal residence subject to the following conditions:

·1. The proceeds is fully utilized in acquiring or constructing a new principal

residence within eighteen (18) calendar months from the date of
disposition. ·

"Fully utilized" shall mean that the taxpayer has actually

commenced with the construction of his new principal residence or
has actually entered into a contract for the purchased his new
principal residence or has act within eighteen (18) calendar months
from the date of sale, exchange or disposition thereof, with the
. intention of using the entire proceeds of sale for the acquisition or
construction of his new principal residence. Any· expense paid for
by the seller in effecting the sale (i.e. documentary stamp tax,
transfer fees, broker's commission) shall be considered as part of
the amount utilized.

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 'as follows:

UmAllizedPortion X
Groll Selling Price aala,· -■:~••'llllifllr~

2. The historical cost or adjusted basis of the real property sotd or

disposed shall be carried .over to the new principal residence built or
acquired.

3. The BIR shall have been duly notified by the taxpayer within O
from the date of sale or disposition through a prescribed tum
intention 1o avail of the tax exemption .

4. The. tax exemption can only be availed of on very 10 ye .-

98
 1

It ts likewise required under RR 2-98 that the amount represenUng the 6% CGT
must be deposited under an Escrow Agr,eement between the concerned
Revenue District Officer, the Seller and the Transferee, and the Authorized agent
bank (in cash or manager's check in an interest bearing account with the
Authorized Agent Bank). Release occurs if the proceeds of.the sale has in fact
been utilized in the acquisition or construction of the Seller/Transferor's new
principal residence within 18 calendar months from date of the said safe or
disposition.

The date.of sale or disposition of a property refers to the date of notarization of

the document evidencing the transfer of said property.

ILLUSTRATION 12: SALE of PRINCIPAL RESIDENCE

Pedro, a resident citizen, sold his residential house and lor (principal residence)
I

in the Philippines with the following additional data:

Selling price P4,000,000

Fair market value 6,000,000
Zonal v·alue 5,000,000
Expenses on the-sale 125,000

Unless provided otherwise, assume that the taxpayer was able to comply all the
requirements for exemption.

a
Question 1: Assuming Pedro bought new principal residence for P4,000,000,
how much is the applicable CGT?

❖ Answer: PO

Question 2: Assuming Pedro bought a new principal residence for PB,000,000,

how much is the applicable CGT?

❖ Answer: PO

Question 3: Assuming Pedro bought a new prindpal residence for P2 000,000,

how much- is the applicable CGT?

❖ Answer: P180,000;
CGT = 214 x P6M x 6%

99
TAXABLE INCOME SUBJECT TO BASIC TAX

A. PURE COMPENSATION -INCOME EARNER:

I Gross Compensation income Pxxx

Tax Due (Graduated tax rate; Table 2-2) Pxxx

Less: Creditable withholding tax on compensation income XXX
Income Tax a able Pxxx
Under RA 10963 (TRAIN Law), NO DEDUCTION is allowed for pure compensation income
earners beginning Jan. 1, 2018.

B. PURE BUSINESS INCOME EARNER

(Under TRAIN Law; using graduate_d tax rate):

Gross sales/revenues** Pxxx

Less: Cost of Sales/Cost of direct services (XXX) l
Gross business/professional income Pxxx
Less: Opetating expenses (XXX) I

Taxable net income**- Pxxx

Income Tax Due (Graduated tax rate)** Pxxxtt

Less: Creditable Withholding Taxes
Prior year's excess credit Pxxx
Tax payments for the previous quarter(s) XXX
Tax withheld at source XXX
Foreign income tax credit (~hapter 12) XXX (xxx)
Income Tax Pa able Pxxx

C. MIXED INCOME EARNER (Business and compensation income)

(Under TRAIN Law; using graduated tax rate on business income):

Gross compensation income Pxxx

Gross sales/receipts** Pxxx
Less: Cost of Sales/ Cost of direct services (xxx)
Gross business/professional income XXX
Less: Allowable business expenses XXX XXX ,
Taxable net income Pxxx

100
 Income Tax_ Due (Graduated tax rate)** Pxxx**
Less: Creditable Withholding Taxes
Creditable withholding tax on compensation income Pxxx
Prior year's excess credit XXX
Tax payments for the previous quarter(s) XXX
Tax withheld at source XXX
Foreign income tax credit (9hapter 12) XXX (XXX)
Income Tax Payable Pxxx
m For Purely S.E.P. and/or Mixed Income Earner.
**If qualified, the individual taxpayer may choose to be taxed at a preferential tax rate
of8%.

CREDITABLE vs. FINAL TAX

FINAL WITHHOLDING TAX

Certain Incomes such as those enumerated under section 24(8) of

the Tax Code, as summarized in Table 2-3, are subject to final taxes instead
of basic tax or·graduated tax rates. ·

CREDITABLE WITHHOLDING TAX

Certain regular incomes not subject to final taxes on passive

income and capital gains tax are subject to "creditable" withholding taxes.
Creditable withholding tax (CWT) is not an internal revenue tax but a
method of collecting income tax "in advance" from the recipient of income
through the payor thereof, which is constituted by law as the withholding
agent of government. Taxes withheld on certain payments are intended to
equal or at least approximate the tax due of the payee on said income
computed using the graduated tax rate under Section 24(A) of the Tax Code
or as shown in Table 2-1. The recipient of income is sUII required to file an
income tax return, as prescribed in Sec. 51 and Sec. 52 of the NIRC, as
amended, to report the income and/or pay the difference between the tax
withheld and the tax due on the income. The term "creditable" means the
taxes withheld are deductible from tax due as shown below:

Gross Compensation income Pxxx

Gross business/professional income XXX
Less: Al.lowable business/professional expenses XXX)
Taxable net income Pxxx

101
 Income Tax Due (Graduated tax rate) · Pxxx
1..ESS:
. CREDITABLE WITHHOLDING TAXES:
· CWTx on compensation income Pxxx
CWTx withheld at source XXX
OTHER TAX CREDITs: -
Prior year's excess credit XXX
Tax payments for the previous quarter(s) XXX
Foreign income tax credit XXX
Income Tax Payable Pxxx

The most common example of creditable withholding tax for an

individual taxpayer is the tax withheld by an employer from the
compensation income of an employee. The amount of tax withheld will be
remitted by the employer to the BIR.

On the other hand, . the withholding taxes at source are amounts

withheld by the payor (other than employer) such as creditable withholding
taxes for the purchase of goods, services and rentals. The most commonly
known CWT. rates are pr~vided under RR 11-2018 as follows:

Purchase of/payment for. CWT%

Professional fees
◊ Individual payee
o If gross income for the current year :S P3M 5%
o If gross income for the current year > P3M 10%
0
◊ Non-individual payees
o If gross income for the current year :S P720k 10%
o If gross income for the current year >P720k 15%

Rentals 5%
Goods 1%
Services 2%
Income payments to beneficiaries of estates/trusts 15%

Income p·ayments to partners of GPPs ·

o If gross income for the current year $ P720k 10%
o If gross income for the current year > P720k 15%
I

Certain ifl®m8 ·a ments made b credit card com -anies 1%

The details of the creditable withholding tax rates .above are ba~ on RR 11-2018 and RR 14-2018

102
. The d~ty to withhold and remit income taxes arises only. on
instances r~qu_,red _by law _or regulation. Withholding tax return shall be filed
and_ tax, paid in w1thhol~mg agent's legal residence or principal place of
b~s1~ess, or ~here the withholding agent is a corporation, where the
principal ?ffice is_ located, except on sales of real property subject to income
tax, where the withholding tax shall be paid in the RDO where the property
is locate~. Creditable withholding taxes shall be filed and the applicable tax
paid not later than the last day of the- month following the close of the
quarter. · .

The obligation to withhold is imposed upon the buyer-payor of

income although the burden of tax is really upon the seller-income
earner/payee; hence, unjustifiable refusal of the latter to be subjected to
withholding shall be ground for the mandatory audit of all internal revenue
tax liabilities, as well as imposition of penalties pursuant to Section 275 of
the Tax Code.

Every payor required to deduct and withhold taxes shall furnish

each payee, a withholding tax statement, in triplicate, within 20 days from
the close of the quarter. The prescribed form (BIR Form No, 2307 for
creditable withholding tax and BIR Form 2306 for final withholding tax on
passive income) shall be used, showing the monthly income payments
made, the quarterly total, and the amount of taxes withheld. Provided,
however, that upon re.quest of the payee, the payor must furnish such
statement, simultaneously with the income payment.

ILLUSTRATION 13:

Case A:
A resident citizen employee·provided the following data for the taxable year:
Compensation income (gross of deductions below) P450,000
Deductions made by the employer ·
SSS premiums contributions 6,000
Philhealth contributions ~ 8,400
Pag-ibig contributions 2,400
Union dues 1,200
Income tax withheld 35,000

Question: How much is the income tax payable of the employee?

❖ Answer: P3,000

103
 Solution:
Compensation Income (gross of deductions below) 12450,000
Less: Income exempt from tax (Refer to Chapter 8)
SSS premiums contributions (6, 000)
Phi/health contributions (8,400)
Pag-lbig contributions (2,400)
Union dues 1200
Jaxable income P432 000

Tax Due:
Tax on 151 P400,000 P30,000
Excess: P32, 000 x 25% 8,000
Total tax due 38,000
Less: Tax withheld by the employer 35 000
Income tax payable PJOOO

❖ SSS/GSIS, Pag-ibig, Philhealth contributions of the employee as well as Union

dues are excluded by law in the computation of taxable income. Exclusions
from gross income are dis.cussed in Chapter 8.
❖ As a rule, taxable income shall refer to incomes subject to basic tax.
❖ It is usual that if the taxpayer is a purely compensation income earner, the
income tax payable is already zero.

Case 8:
A resident citizen taxpayer provided the following information:
Compensation income P1 ,000,000
Gross business income, Philippines P2,000,000
Gross business income, Canada 3,000,000
Business expenses, Philippines 1,400,000
Business expenses, Canada .2,050,000
Income tax withheld by the individual taxpayer's 150,000
employer on his compensation income
Income tax withheld by "certain" payors on 100,000
business income in the Philippines
.Income tax payments to the BIR for the first three 125,000
(3) quarters of the year

Required: Determine income tax payable of the taxpayer.

❖ Answer: P291,000 computed as follows:
Compensation income P1,000,000
Gross business income, Philippines P2,000,000
Gross business income, Canada 3,000,000
Business expenses, Philippines (1,400,000)
Business expenses, Canada (2,050,000)
Taxable Income P2,550,000

104
 Tax Due;
Tax on 181 J;22,000,000
?490,000
On excess over P2M
(P-550,000 X 32%)
176,000 P666,000
Less:
CWT Tax withheld by the employer 150,000
Taxes by certain payors 100,000
Income tax paid 125,000 (375,000)
Income tax a able P291,000

QUARTERLY TAX RETURNS

Income tax returns for income derived from business and/or

practice of profession are required to be filed on a quarterly and annual
basis (regardless of the results of operations) as follows:

Quarterly 1st Quarter May 15

Returns 2nd Quarter Aug. 15 (45 days after end of Quarter)
3rd Quarter Nov. 15 (45 days after end of Quarter)

Annual
Return Final ad't.isted return A ril 15 of the succeedin ear

FORMULA:
Q1 Q2 Q3 Annual 1

Gross income (cumulative amounts) Pxxx Pxxx Pxxx Pro: I

Business expenses (cumulative amounts) XXX XXX XXX XXX

Taxable net income Pxxx Pxxx Pxxx Px_xx

Basic Income Tax Due Pxxx Pxxx Pxxx Pxxx

Less: Creditable withholding taxes:
Prior year's excess credit (XXX) . (xxx) (xxx)
Quarterly withholding taxes (XXX) (XXX) (XXX)
Quarterly tax payments (xxx) (xxx)
Foreign tax credit (Chapter 12) XXX XXX XXX
Income Tax a able Pxxx Pxxx Pxxx

105
 ..

ILLUSTRATION 14:
The fol!owing cumulative balances on income and expen·ses in 2020 of Juan Dela Cruz
were given to you: . . ·
1!!_g 2nd ,O Jrd Q 04/Year
Gross Sales P1 ,200,000 P2, 100,000 P3,000,000 P3,700,000
Cost of Sales 700,000 1,200,000 1,800,000 2,200,000
Business expenses 200,000 325,000 550,000 700,000

Income taxes paid on:

Interest income 1,560 3,040 4,520 5,960
Sale of land 24,000 24,000 24,000 24,000

Dividend received tram 10,000 10,000 20,000 20,000

domestic corp.

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 sale of Land 80,000 80,000 80,000 80,000
Selling price: P400, 000
Cost: P320, ODO

Required:
Using above information, compute the following for 2020: -
1. Income tax payable, first quarter
2. Income tax payable, second quarter
3. Income tax payabJe, third quarter
4. Income tax payable, fourth quarter
5. Final tax on passive income
6. Capital gains tax

Answers:
(1)P10,000; (2)P63,750; (3)P18,750 (4)P25,000; (5)P7,960; . (6)CGT(Land)=P24,000

Solution: (#1-4; Quaf(erly income tax due):

1!!.JJ 2Jd.Q "1Q Q41Year

Gross sales ?1,200,000 ?2,100,000 P3,000,000 P-3, 700,000 .
Cost of sales (700,000) (1,200,000) (1,800 000) (2,200,000)
Business expenses 200,000 325 000 550,000 700 000
Tt)xable income ?300,000 P575,000 P650,000

106
 Income Tax Due P10,000 P73,750 P92,500 Pt47-;600 1/u, (,0
Less: Tax Paid
01 ,_ (10,000)
"(10,000) (10,000)
02 (63,750) (63,750)
03 18 750
Income Tax Pa able P10 000 P63,750 P18 750 Pi5;600 r t1 r;u(1

Solution (#5; Final taxes on passive income):

(Amounts are cumulative) Amount % Tax
Dividend received from dome~tic corp. 20,000 10 P2,000
Interest income from
BPI . 8,000 20 1,600
UCPB 1,800 20 360
Metro.Bank 20,000 20 4,000
Total final tax on passive income P7,960

INCOME TAX DUE OF MARRIED TAXPAYERS

/

-
Under RA 10963, husband and wife, shall compute separately their
individual income tax based on their respective total taxable income:
Provided, that 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 income-.
.

ILLUSTRATION 1'5: .
Spouses Kristof and Ana provided the following data for the year:
Kristof Kristof&Ana
Gross income-practice of profession P800,000
Gross compensation income P400,000
Dividend income:
from domestic corporation 5,000 5,000
from resident corporation 12,000
Interest on notes receivabie 4,000
Interest on Philippine bank deposit 2,000 3,000 6,000
Royalty income 2000
Miscelli3neous income 10,000 60,000
Capital gain on sale of shares of ABC Co.
(domestic corp.) sold directly to a buyer 80,000
Capital loss on sale of shares of DEF Co.
(domestic corp.) sold directly to a buyer (20,000)

107
 Capital gain on sale of land in Q.C.; FMV-P12M, 2,000,000
SP-P10M, Cost-P8M
Expenses, business/Profession 425,000 20,000

Determine the following:

1. Total capital gain taxes paid by the spouses

2. Total final taxes paid on passive income by the spouses
3. Taxable income of Kristof
4. Taxable income of Ana

Answers: (1)P732,000; (2)P3,600; (3)P403,000; · (4)P438,000

Capital Gain -ABC Co. (P80,000 x 15%) P12,000

Capital gain-sale of land (P12M x 6%) 720,000
Total capital gains tax P732,000

Dividend income-domestic corp. (P10,000 x 10%) P1,000

Interest on bank deposit (P11 ,000 x 20%) 2,200
Royalty income (P2,000 x 20%) 400
Total final tax on passive income P3,600

Gross income from practice of profession PB00,000

Dividend ir:tcome from resident corp. (P12,000/2) 6,000
Interest on notes receivable (P4,000/2) 2,000
Miscellaneous income (P60,000/2} 30,000
Expenses-practice of profession (425,000)
Expenses-miscellaneous income (P20,000/2) (10,000)
Taxable inct;Jme • Kristof P403,000 ·

Taxable income - Ana:

Gross compensation income P400,000

Dividend income from resident corp. (P12,000/2) 6,000
Interest on notes receivable (P4,000/2) 2,000
Miscellaneous income (P60,000/2) +P10,000 40,000
Expenses-miscellaneous income (P20,000/2) {10,000)
·, Taxable income -Ana P438,000

108

,'
-

MINIMUM WAGE EARNERS (MWE)

The term "statutory minimum wage earner (SMW)" or "minimum

wage earner (MWE)" under RA 9504
sector paid the t . . shall refer to a worker in the private
. s atutory minimum wage or to an employee in the public
sector with compensaf · ' . .
. . ion income of not more than the statutory minimum
wage in the non-agncultur~I sector where he/she is assigned.

The rate is fixed by the Regional Tripartite Wage and Productivity

Board as defined by the Bureau of Labor and Employment Statistics (BLES)
of the Department of Labor and Employment (DOLE). Regional Tripartite
Wage and '.roduct!vity Boards (RTWPB) of each region determine the
wage rates in the different regions based on established criteria and shall
be the basis of exemption from income tax.

Minimum Wage Earners are exempt from income tax on:

1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay

MWE with additional "compensation" income in excess of P90,000

· Section 32(8)(7)(E) of the Tax Code in relation to PD 851 as

amended by RA 10963 (TRAIN Law) provides that 1J'h month pay and other
benefits received by officials and employees of public and private entities
are exempt from income tax and creditable withholding tax on
compensation) provided, however, that beginning January 1, 2018, the total
exclusion shall not exceed J:290,000. Otherwise, the excess would form part
of an individual's gross income and would be subject to income tax and
applicable creditable withholding taxes (refer also to discussions in Chapter
3 in relation to 13th month pay and other benefits).

An employee who receives/earns additional "compensation" such

as commissions, . honoraria, fringe benefits, benefits in excess of the
allowable P90,000 (as amended), taxable allowances and other taxable
income other than the statutory minimum wage, overtime pay, holiday pay,
night shift differential, hazard pay shall still enjoy the privilege of being· a
minimum wage earner (Supreme Court ruling - Soriano vs. Secretary of
Finance with GR No. 184450 dated January 24, 2017). Under this case
the SC reiterated that the intent of the income tax exemption of MWEs is to

109
 free the low-income earner from the burden of tax. R.A. No. 9504. In other
words, the law exempts from income taxation the most basic compensation
an employee receives - the amount afforded to the lowest paid employees
by the mandate of law. In a way, the legislature grants to these lowest paid
employees' additional income by· no longer demanding from them a
contribution for the operations of government. This is the essence of R.A.
9504 as a social legislation. The government, by way of the tax exemption,
affords increased purchasing power to this sector of the working class.

The .Supreme Court nullified the provision of Revenue

Regulations No. 10-2008 [(i) Sections 1 and 3], insofar as they disqualify
MWEs who earn purely compensation income from the privilege of the
MWE exemption in case they receive bonuses and other compensation-
related benefits exceeding the statutory ceiling of P90,000 (as arne~ded).

MWE with additional "business" income

Minimum wage earners receiving other income such as income

from the conduct of trade, business or practice of profession, except income
subject to final tax, in· addition to compensation income are not exempted
from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, statutory minimum wage, overtime pay, holiday pay,
night shift differential, and hazard pay shall still be exempt from income tax
.and consequently to withholding tax.

TABLE 2-5: APPLICABLE TAXES OF MWEs

Taxpayer Income Tax Creditable Withholding Tax
1. Purely MWE Exempt Exempt

2. _ MWE with additional Still treated as MWE, Still treated as MWE,

"benefits" from the hence, exempt hence, exempt
employer exceeding tax-
exempt thresholds such
as the ?90,000 limit

3. MWE with additional ' Min. wage = exempt Min. wage= exempt
"business" income Bus. income = subject Bus. income = subject to
to basic tax .,)
creditable withholdin tax

110
HAZARD PA y GIVEN TO MINIMUM WAGE EARNERS

Given to those o~ working on hazardous workplaces where primary

duty pe~~rmed under circumstances in which an accident could result in
senou~ inJury or death, such as a duty performed on a high structure where
pr?te_c_tive facilities are not used, or on an open structure where adverse
c~nditions ~uch ~s darkness, lightning, fumes/gases, steady rain, or high
win~ ~eloc1ty exist, work were primarily health-related that tnay result to
radiabon/c?ntamination /communicable/inf~ctiow~. However, exposures to
hazard which a~ects the entire population in a locality as air, land, and water
borne and noise hazards are compensable under these Regulations.
I

Under RR 10-2008, the following are considered "hazardous workplaces:"

1. ~h~re the ·nature of work exposes the workers to dangerous

environmental elements, contaminants or work ·conditions including
ionizing radiation, chemicals, fire, flammable substances, noxious
components and the like; ·
2. Where the workers are · engaged in construction work, logging, -fire
fighting, mining, quarrying, blasting, stevedoring, dock work, deep-sea
fishing and mechanized farming;
3. Where the \Yorkers are engaged in the ·manufacture or handling of
explosives and other pyrotechnic products;
4. Where the workers use or are exposed to power driven or explosive
powder actuated tools;
5. Where the workers are exposed to biologic agents such as bacteria,
fungi, viruses, protozoa', nematodes, and other parasites.

Senior ·citizens (SCs.) and Persons with Disabilities (PWDs)

. Generally, Senior Citizens and PWDs are subject to income tax in

the same manner as an ordinary individl}al taxpayer. Hence, qualified
Senior Citizens and PWDs deriving returnable income during the taxable
year whether from compensation or otherwise, are required to file their
inco,'.y,e tax returns and pay the tax as they file the return. However, if the
returnable income of a Senior Gitizen/PWD is ·in the natur~ of compensation
income but he qualifies as a minimum wag~ earner und~r ~ No. 950~,. he
shall be exempt from income tax on the said con:ipensatIon I~c?me subJect
to the rules provided under RR 10-2008 applicable to mIrnmum wage
I

earners. ·

111
 . L_i~ewise, if the aggregate amount of gross income ear~ed by the
Senior C1t1zen/PWD ~uring the taxable ·year does not exceed P250,000 he
shall be exempt from income tax and shall not be required to file income tax
return. Consequently, a senior citizen/PWD can still be liable for other taxes
such as:

1• The 20% final withholding tax on interest income from any currency
bank deposit

2 • The 15% final withholding tax on interest income from a depository

bank under the expande9 foreign currency deposit system (Sec.
24(8)(1 ), Tax Code

3. Pre-termination -of long-term deposit or investment under Section

24(8)(1) of the Tax Code
Four years to less than five years 5%
Thre~ years to less than four years 12%
Less than three years 20%

4. The 10% final withholding -tax:

• On cash and/or property dividends actually or constructively
received from a domestic corporation or from a joint stock
company, insurance or mutual fund company and a regional
operating headquarters of a multinational company; or
• On the share of an individual in the distributable net income
after tax of a partnership (except a general professional
partnership) of which he is a partner; or
■ On the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium
taxable as a corporation of which he is a member or a co-
venturer (Sec. 24(8)(2), Tax Code).

5. The Capital gains tax from sales of shares of stock not traded in the
stock exchange (Sec. 24(C), Tax Code); and
6. The 6% final withholding tax on presumed capital gains from sale
of real property, classified as capital asset, except capital gains
presumed to have been realized from the sale or disposition of
principal residence (Sec. 24(0), Tax Code).
7. OTHER TAXES. A Senior Citizen/PWD shall also be subject to the
following internal revenue taxes, among others, imposed under the
- Tax Code:

112
 ·• Value Added Tax or Other Percentage Taxes. If he is self-
e!11ployed or engaged in business or practice of profession, and
his gross annual sales and/or receipts exceeds the revised vat
threshold of P-3,000,000 or such amount to which this may be
adjusted pursuant to Sec. 109(1)(V) of the Tax Code, he shall
be subject to VAT. Otherwise, he shall be subject to Percentage
· Tax under Section 116 of the Tax Code, as amended (VAT and
Other Percentage Taxes are discussed in volume2-Transfer
and Business Taxes).
• Donor's Tax on all donations made by a Senior Citizen/PWD
during any calendar year, unless exempt under a specific
provision of law (Donor's Tax is discussed in volume2-Transfer
and Business Taxes).
• Estate Tax. In the event of death, the estate of the Senior
Citizen/PWD may also be suoject to the estate tax following the
rules enunciated under Title Ill of the Tax Code and its
implementing Regulations (Estate Tax is discussed in
volume2-Transfer and Business Taxes).
• Excise Tax on certain goods (discussed in volume2-Transfer
and Business Taxes). ·
• ·o ocumentary stamp tax (discussed in volume2-Transfer and
Business Taxes).

Benefits for Senior Citizens and/or PWDs

Senior citizens and/or PWDs, as the case may be, under under the
law are entitled to the following benefits

■ 20% discount and exemption from VAT on their purchase of

specified goods and services (a more detailed discussed is
presented in volume2-Transfer and Business Taxes);
■ 5% discount on basic and prime commodities
■ P.500 monthly social pension, for indigent senior citizens;
• · Death benefit assistance;
• 5% discount on utilities; and
■ Income tax exemption for minimum wage earners or for senior
citizens/PWDs whose annual taxable income is not more than
P250,000

113
 FILING OF INCOME TAX RETURNS ITR

❖ BASIC TAX

■ FOR PURELY COMPENSATION INCOME EARNERS:

► Once a year only (unless qualified for substituted filing)
► On or before April 15 of the following year.

■ FOR BUSINESS INCOME EARNERS including income from

practice of profession: .

► The individual taxpayer ~s required to 'file a quarterly tax

return on or before the following dates (regardless of the
results of operations):
1 Quarter
st May 15
2 Quarter.
nd Aug. 15 (45 days after end of Quarter)
rd
3 Quarter Nov. 15 (45 days after end of Quarter)
Final adjusted/annual return April 15 of the succeeding year

❖ FINAL WITHHOLDING TAX ON PASSIVE INCOME

January to November 10th day of the month following the

PRIOR to 2018 month the withholding was made .
December January 15 of the succeeding year

Beginning 2018 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 was made. The power of the Secretary of
Finance to require withholding agents to pay or deposit-taxes
deducted or withheld at more frequent intervals is repealed
under RA 10963~

❖ CAPITAL GAINS TAX

a) Shares of stock _
• Ordinary Return - within 30 days after .each transaction
■ Final Consolidated Return - on or before April 15 of the
following year · ·

b) Real Property - within 30 days following eacM sale or.other

disposition

114'
Manner of Filin$J

Filing of ITR may be made through:

a) Ma·nual Filing .
b) Electronic Filing and Payment System (EFPS)
c) eBIR Forms

Payment

. . Genera~ly, the income tax payable shall be paid at the time the
r~tur~ 1s _filed (also known as "Pay as you file system"). The de~dline for
filing_ 1s discussed in the preceding page. However: RA 10963 (TRAIN Law)
provides, that, When the tax due is in ~xcess of µ2,000, the individual
taxpayer may elect to pay the tax in two equal installments as follows:

1st installment : .at the time of filing the annual ITR.

2'1d installment : on or before October 15 following the close of the
calendar year.

ILLUSTRATION 16:
Juan Dela Cruz, a practicing CPA, with four dependent children, provided the following data
for 2018 taxable year; Gross receipts, P10,000,000, direct cost and expenses, PS,000,000,
creditable withholding taxes, P1 ,250,000. His income tax payable is computed as follows:
Gross receipts P10,000,000
Direct cost and expenses (5,000,000)
Taxable net income P-5,000,000

Income Tax:
. 1st P2M P490,000
In .excess of P2M@32%
(P3M x 32%) 960,000
TotaJ income Tax Due P1,450,000
Less: Creditable withholding taxes (1,250,000)
Income Tax Payable P200,000

NOTE:
•. Juan Dela Cruz is required to file quarterly and annual.income tax returns
■ The creditable withholding taxes is deductible from income the tax due
• ~e is allowed to pay the inqome tax payable in two (2) equal annual installments
■ In addition to income tax, as a practicing professional, he is also required to pay
business tax.

115
 . Place of Filing Income Tax Return

The Income tax return shall be filed and paid with any of the
following; (1 )authorized agent •ban,ks, (2)Revenue District Officer,
(3)Collection agent; (4)Duly authorized city or municipal Treasurer in which
the taxpayer has his legal residence or principal place of busine.ss in the
Philippines or if there be no legal residence or place of business in the
Philippines, with the Office of the Commissioner of Internal Revenue.

For "Wit!J Payment" Returns

File the return in with the Authorized Agent Bank (AAS) of the place
where the taxpayer registered or"required to be registered. In places where
there are no AABs, the· return ·shall be filed directly with the Revenue
Collection Officer or duly Authorized --Treasurer of the city or municipality in
which such person has his legal residence or principal place of business in
the Philippines, or if there is none, filing of the return will be at the Office of
the Commissioner.

For "No Payment" Returns (refundable, break-even, exempt and no

operation)

File the return with the concerned Revenue District Office (RDO)
where the taxpayer is registered. However, "no payment" returns filed late
shall be accepted by the RDO but shall be filed with an AAB of Collection
Officer/Deputized Municipal Treasurer (in places where there are no AABs,
. for paymE:nt of necessary penalties.

Persons Required to file Income Tax Return

1) Individuals engaged in business and/or practice of profession

regardless of the results of operations.
2) Individuals deriving compensation from two or more employers
concurrently or successively at any time during lhe taxable year .
. 3) Employees deriving compensation income, regardless of the amount
whether from a single or several employers during the calendar year,
the income tax of which has not been withheld' correctly (i.e. tax due is
not equal to the tax withheld) resulting to collectible or refundable return.
4) Individuals deriving other non-business, non-profession-related income
in addition to compensation income not otherwise subject to final tax.

116
5) Individuals receiving purel . .
employer, although the i Y compensation . income from a single
withheld, but whose s n~ome !ax of .wh.1ch has been correctly
O
6) Non-resident alie P use 18. required to file I.ncome tax return.
deriving purely c~mengage_d 1~ trade or business in the Philippines
other non-busine pensat1on ,~come, or compensation income and
SS, non-profession-related income.

Persons not Required t 1-1

. o I e Income Tax Return (RR 8-2018)
1) ~n ind ividual earning purely compensation income wt;iose taxable
inco_m~ ~oes not exceed P250,000.
2 ) An individual ~hose income tax has been correctly withheld by his
employer, provided that such individual has only one employer for the
taxable year - the Certificate of Withholding filed by the respective
employers, duly stamped "Received" by the Bureau, shall be
tantamount to the substituted filing of income tax returns by said
employees. _
3) An individual whose sole income has been subjected to final
withholding tax.
4) Minimum wage earners

CERTIFICATE OF WITHHOLDING BY THE EMPLOYER

(BIR FORM 2316)

Under Section 2.83 of RR2-98, as amended, every employer is

required to furnish its employees (including minimum wage earners) BIR
Form 2316 on or before January 31 of the succeeding calendar year, or if
employment is terminated before the close of such calendar year, on the
day on which last payment of compensation is made. Failure to furnish BIR
1
Form 2316 shall be grounds for the mandatory audit of payor s income tax
liabilities (including withholding tax) upon verified complaint of the payee.

In addition to the requirement to furnish BIR Form 2316 to

employees, the BIR now requires that all employers submit the duplicate
copy of BIR Form 2316 to the BIR not later than February 28 following the
close of the calendar year. Failure to submit/file BIR Form 2316 on or before
February 28 following the close of the calendar year will merit a penalty of
P1 ,000 for each failure, or a maximum amount of P25,000 for all such
failures during a calendar year. In case the employer fails t? comply with
the filing or submission of BIR For~ 2316 for two consecutive yearsl the
employer shall be liable to a fine In the amount of P10,000 and suffer
imprisonment of not less than one year but not more than 10 years upon

117
conviction, in accordance with Section 255 of the Tax Code. This i n
aqdition to other penalties provided by law. In settlement, a compromise fee
of P1 ,000 for each BIR Form 2316 not filed without any maximum thre hold
shall be collected by the BIR. (Revenue Regulations No. 11 -20 13, June 6,
2013).

Substituteaflllng of Income tax returns (ITR)

Under RA 9504 and RR 10-2008, individual taxpayers may no

longer file income tax return on or before April 15 of the following taxable
year provided the taxpayer is/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 w.ithheld)
3. Only one employer during the taxable year.
4. If married, the employee's spouse also complies with all three
aforementioned conditions, or otherwise receives no income.

PREPARATION OF INCOME TAX RETURN

Juan Dela Cruz is a MIXED INCOME EARNER. He is a self-employed resident citizen a

currently the Finance man.ager of Omega Corporation. The following data were provided for the
taxable year:

Compensation income P1 800,000

Sales · 2,800,000
Cost of sales 1,125,000
Business·Expenses 650,000
Interest income from peso bank deposit 80 000
Interest income from bank deposit under FCDS 120J)()()
Gain on sale of land in the Philippines held as capital asset with cost
of P1 ,500,000 when the zonal value is P1 ,200,000 500 000
Gain on sale of land in the Philippines held as capital asset with cost
of P1 ,500,000 when the zonal value is P1 ,200,000
Creditable withholding tax on compensation income
13th month pay and other benefits
Creditable withholding tax on sale of goods

118
1· How much is his total income tax expense assuming he opted to be taxed at 8%?
a. P321 ,S00 c. P826,000
b. P?BB,500 d. P358,000
❖ Answer: C
• Basic Income Tax P-672,000**
• F!nal Tax on Peso deposit (80,000 x 20%) ia,ooo
• . Final Tax on FCDS deposit (120,000 x 15%) 18,000
• CGT on real properties (P2M x 6%} 120,000
~P =Cost + Gain =P2M vs.
ZV = P1 ,200,000
TOTAL_Income Tax Expense P826,000

Income from Self-employment:

Gro~s Sa/es P2,800,000
x" 8%
8% Tax P224,000

Compensation Income:
Compensation + excess of 1Jth month pay
less P90,000 = P1,860,000
Add:
Basic tax on compensation income:
1st PB00,000 P130,000
Excess over PB00k
= P1, 060, 000 x 30% 318,0.00 448,000
Total Basic Income Tax P672,000**

.◊ If the self-employed or practitioner is a mixed income earner,

the 8% income tax rate is based on Gross Sales and/or
receipts and other non-operating income without deducting
P250,000. .

◊ The compensation incorr,e is not subject to 8% tax rate.

2. How much is the income tax payable 'of Juan for the year?
a. P28,000 . c. P448,000
b. P196,-000 d. P672,000

❖- ·Answer: B
Income tax from Self..amploy-ment:
Gross Se/es P2,800,000
X 8%
8% Tax P224,000

Inc.om• Tax on Compensation Income: ·

Compensation + excess of 1JIii month pay
over P90,000 = P1,860,000
Add 448,000

119
Basic tax on compensation in,come:
· 1st PB00,000 P130,000
Excess over PB00k
= P1 ,060,000 x 30% 318,000
Total Income Tax Due P672,000
Less:
■ Creditable withholding tax on
compensation income ·
■ Creditable withholding tax on sale of (448,000)
goods (28,000)
Income Tax Payable Pf96,000

120
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P.AAT II - To!al TU Pa
Part! bllllra

JUAN D. DELA CRUZ

ltaM~lill!tr!Ul!fflO
lSCheck

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121
Annual l·nc,ome. Tax R.etum ·
ls { m:Judio,g IXEfl ll'COffl Ellrn ,j, Esta · Tne;ts

122
 Annual. lnco·me Tax Return
In . viduar~ (incfoding MlXEo Income Earner). 'Esb

Coritiilu,ions

rment. Amusement amt Reefs on

fits

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11 Rental'
12:Re~ and Oe,;;'i,-~
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15 Taxes,and liCErts-es

·123
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I G AND 8 FOODS PHILS 11' C. (SAMPLE ONLY) . I
I R~eraii.~ . , , , 8A ZiP COO~
•. ·I8 81 SAN NICOLAS ST. BRGY. PI NAGSAMA, SAMPALOC M!ANILA i-1110 ,a ,31
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GOODS WC15.3 2 aoo 000.00 2.800 aoollo :la 000.00

2,800,000.,00 2,800 000.00 28,000.00

G AND B FOODS PHILS INC,

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JUAN D. DELA CRUZ

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