General Classification of Individual Taxpayers

 Natural persons with income derived from within the territorial jurisdiction of a taxing authority
 Citizen: Filipino citizen
i. Jus Sanguris: Born by birth with father and/or mother as Filipino citizen
ii. Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon
reaching the age of majority
iii. Acquired Philippine citizenship after birth (Naturalized) in accordance with Philippine
Laws
iv. Classifications
a. Resident Citizen (RC)
 Permanently residing in the Philippines or is temporarily staying outside
the Philippines for less than 183 days during the taxable year
 Are taxable for all income derived from sources within and without the
Philippines.
b. Non-resident Citizen (NRC)
 NIRC Sec. 22: someone who have stayed outside the Philippines for 183
days or more during the taxable year in aggregate
 Has established proof to the CIR’s satisfaction of his intention to
permanently reside abroad as an immigrant or employee
o CIR: Commissioner of Internal Revenue
 Definite intention to stay abroad
 Overseas Contract Workers
o Overseas Filipino Workers (OFW)
o Classified as nonresident citizens for tax purposes as they are
employed in foreign countries and physically present in that
foreign country
o Also covers:
a. Seafarers or seaman
b. Filipino citizens who receives compensation for services
rendered abroad as a member of the complement of a
vessel engaged exclusively for international trade
 Taxable only for income derived from sources within the Philippines
v. If a non-resident citizen arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines, that NRC is considered a nonresident citizen with
respect to income earned from sources abroad until the date of his arrival in the
Philippines
vi. Same rule shall apply to a resident citizen who leaves the Philippines anytime during the
year as an immigrant or employee for more than 182 days
vii. Citizen classified as both as resident and nonresident in one taxable year
 A citizen who is previously considered as NRC and arrives in the Philippines at
any time during the taxable year to reside permanently (RC) shall tax the income
within and without the Philippines on the date of their arrival.
 Income before arrival shall only be taxed for income within the
Philippines
o Exemption: when applying for OFW, then the 183 day period is not needed.
  Aliens
i. Foreign-born individual from countries other than the Philippines
ii. Not qualified to acquire or have not acquired Philippine citizenship by birth or even
after birth
iii. Classifications
a.Resident Alien (RA)
 Not a citizen of the Philippines but residence is within the Philippines
 Also includes individuals who have stayed in the Philippines for more
than one (1) year upon date of arrival or who is required to stay for an
extended period for the accomplishment of a purpose or project
making a temporary home in the Philippines
 A foreigner with no definite intention as to his stay
b.Non-resident Alien (NRA)
 Not a citizen and a resident in the Philippines
 Aliens who come to the Philippines for a definite purpose, which in its
nature may be promptly accomplished
 Further Classification
1) NRA engaged in trade or business (NRA EB)
o Derives business income in the Philippines and is
staying in the Philippines for an aggregated period or
more than 180 days during the taxable period but less
than a year
o Does not include passive income
2) NRA not engaged in trade or business (NRA NEB)
o Individuals who stayed in the Philippines for only 180
days or less
o Not deriving business income in the Philippines
c. NOTE
 Once the alien acquires the classification of NRA NET would not be
revoked or not change after the taxing period
1) Brought by different tax implications
 LENGTH OF STAY WOULD BE LOOKED FIRST BEFORE THE DERIVATION
OF BUSINESS INCOME IN KNOWING THE CLASSIFICATION OF THE
ALIEN
iv. Aliens, whether resident or not of the Philippines, is taxable ONLY FOR INCOME
DERIVED FROM SOURCES WITHIN THE PHILIPPINES

Taxpayer Tax Base Tax Rate Taxable Source

RC Net Income Graduated Within and Without
NRC Net Income Graduated Within Only
RA Net Income Graduated Within Only
NRA EB Net Income Graduated Within Only
NRA NEB Gross Income Final Tax of 25% Within Only

o Net Income = Sales or Revenue– Cost of goods or Cost of services

  Deduct expenses
o Graduated: Use tax table

Income tax
 All Businesses are subject to income tax.
o All gains or profit are subject to income tax.
o Gain must be realized or received.
o It is not exempted by law or treaty from income tax.

Stricitissimi Juris
 All instances must be present in order to become a non-resident from a resident and to avail the
tax exemptions of becoming a non-resident.
 Gross Income
 Income Summary
o Gross revenue
 More collection, the better
 Burden of proof lies with the taxpayers.
 HORNBOOK DOCTRINE:
o In case of doubt as to subject-matter is tax law, ruled against the government.

TAXATION IS THE RULE, EXEMPTION IS THE EXEMPTION

Graduated Income Tax

Ordinary Income
 Regular income subject to graduated tax table
 Includes:
i. Business Income/practice of profession
ii. Compensation Income
iii. Capita gains not subject to capital gain tax
iv. Other income not subject to CGT and FWT
 Separates final withholding taxes in order since the combination would entail direct double
taxation
 Rental income is included here
 Table:
TRAIN LAW – TAXABLE YEAR 2018-2022 2023 Onwards
Amount of Income Tax Tax
Not over 250,000 Exempt or No tax Exempt or No tax

20% of
Over PHP 250,000 but not over PHP 400,000 15% of excess over P250,000

excess over
P250,000
15% of
excess over
P250,000
Over
P400,000
but not over
P800,000
P30,000 +
25% in
excess of
P400,000
P22,500 +
20% in
excess of
P400,000
Over
P800,000
but not over
P2,000,000
P130,000 +
30% in
excess of
P800,000
P102,500 +
25% in
excess of
P800,000
Over
P2,000,000
but not over
P8,000,000
P490,000 +
32% in
excess of
P2,000,000
P402,500 +
30% in
excess of
P2,000,000
Over
P8,000,000
P2,410,000
+ 35% in
excess
P8,000,000
P2,202,500
+ 35% in
excess of
P8,000,000
20% of
excess over
P250,000
15% of
excess over
P250,000
Over
P400,000
but not over
P800,000
P30,000 +
25% in
excess of
P400,000
P22,500 +
20% in
excess of
P400,000
Over
P800,000
but not over
P2,000,000
P130,000 +
30% in
excess of
P800,000
P102,500 +
25% in
excess of
P800,000
Over
P2,000,000
but not over
P8,000,000
P490,000 +
32% in
excess of
P2,000,000
P402,500 +
30% in
 excess of
P2,000,000
Over
P8,000,000
P2,410,000
+ 35% in
excess
P8,000,000
P2,202,500
+ 35% in
excess of
P8,000,000
20% of excess over P250,000
Over PHP 400,000 but not over PHP 800,000 P 30,000 + 25% in excess of P 22,500 + 20% in excess of
P400,000 P400,000
Over PHP 800,000 but not over PHP 2,000,000 P 130,000 + 30% in excess of P 102,500 + 25% in excess of
P800,000 P800,000
Over PHP 2,000,000 but not over PHP 8,000,000 P 490,000 + 32% in excess of P 402,500 + 30% in excess of
P2,000,000 P2,000,000
Above PHP 8,000,000 P 2,410,000 + 35% in excess P 2,202,500 + 35% in excess of
P8,000,000 P 8,000,000

WITHHOLDING TAX
 Not tax itself, but a system
Sound Tax System / TAX LAW
 F – fiscal adequacy
  A – administrative feasibility
o Withholding tax system
o Legislature falls within the taxpayer and the withholding agent
o Remittance of tax falls within the taxpayer
o Example:
 Lessor: taypayer
 Leasee: withholding agent
 Why to hold:
o Failure to withhold = no allowable deductions
 However, in case the tax payer fails to withheld taxes,
even partially. Result in deficiency
 Pay the proper withholding tax and the allowable
deduction would be remedied.
 T - theoretical justice
o Graduated income tax
o VAT

Final Withholding Taxes

 “Constituted as full and final payment” of the income tax due
 Not creditable against any tax of the payee on income subject to regular rates of tax for the
taxable year.
 ARE NOT INCLUDED IN THE INCOME TAX RETURN
 Liability for remittance of final taxes rest with the income payor as a withholding agent
 MUST BE:
o Included in the list of NIRC
o imposed within the Philippines.
 Always check the status of the taxpayer
Passive Income Tax
 Passive income from sources within the Philippines are subject to final withholding taxes
 Not subject to graduated tax rate
 Passive income derived abroad are subject to basic income tax.
o Therefore, this is included in the income tax return of resident citizen taxpayers.
 Deposit substitute = lending from the public from more than 20 people
 Winnings: based on luck
 Prize: Based on effort
 Prizes and winnings must come from legitimate sources
o Exempt if:
 contest or tournament is perusal of science, education, culture
 Did not partake in the contest
 Did not render service used assets

Passive Income Citizens & NRA engaged NRA not engaged

Resident in business in business
Interest
Interest from any currency bank deposit 20% 20% 25%
Yield or any other monetary benefit from Deposit 20% 20% 25%
substitute

Yield or any other

20% 20% 25%

monetary benefit
from trusts funds and
similar agreements
Yield or any other monetary benefit from trusts funds and
similar agreements
Interest incomes received from a Depository bank under 15% except Exempt Exempt
eFCDS (Beginning 2018) NRC-Exempt
Interest income from long-term deposit or investment Exempt Exempt Exempt
If pre-terminated before fifth year, a final tax shall be
imposed based on remaining maturity as follows:
 More then 5 years Exempt Exempt Exempt

5% 5% 5%
 4 years to less than 5 years
 3 years to less than 4 years
 Less than 3 years

12% 12% 12%

20% 20% 20%
5% 5% 5%
12% 12% 25%
20% 20% 25%
Royalties
Royalties on books, as well as other literary works and 10% 10% 25%
musical compositions
Royalties, in general 20% 20% 25%
Prizes
Prizes exceeding PHP 10,000 20% 20% 25%
Winnings
Other winning regardless of amount 20% 20% 25%
PCSO/Lotto Winnings
 Amount is 10,000 or less Exempt Exempt 25%
 Amount is more than 10,000 20% Exempt 25%
Dividends
From domestic corporation or from a joint stock co., 10% 20% 25%
insurance, or mutual fund companies & ROHQ of
multinational companies
Net income after tax of a partnership (except a GPP) 10% 20% 25%
Share of an individual in the net income after tax of an 10% 20% 25%
association, a joint account, or a Joint Venture or
Consortium taxable as a corporation, which he is a
member or a co- venturer

Capital Gain Tax

 Included in Final withholding taxes.
i. Not included in Gross Income
 Included in the INCOME TAX RETURN
 Capital gains refer to income from the sale of capital assets
 Capital assets (capital gain/loss)
i. Assets not used or for sale in the ordinary course of business.
ii. Income from the sale of capital assets are subject to capital gain tax
iii. Property not used in trade or business
 If capital gains arise from transaction other than those described these should be treated as
ordinary income and subject to graduated income tax
i. 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.
ii. Property used in trade or business subject to depreciation
iii. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business
iv. Real property used in trade or business of the taxpayer
 Ordinary asset (ordinary gain/loss)
i. Assets used in ordinary course of business
ii. Stocks in trade = inventory, hence used in business
iii. Depreciable assets, whether personal or real.
iv. Real property held for sale
 An asset may be a income-generating assets
 Capital assets transaction BEG. JAN 1, 2018
i. Sale for shares of stock of a domestic corporation NOT listed in the local stock
exchange.
 15% tax rate on NET CAPITAL GAIN
ii. Sale of real properties held as CAPITAL ASSET located in the Philippines not used in
business
 6% tax rate based on the GROSS SELLING PRICE or current FMV, whichever is
HIGHER
 Market Value:
a) Zonal value: Provided by BIR
b) Assessed value: Provided by City or Provincial assessors
 Exemption if sale of Principle Residence:
a) Principle Residence
1. Family home of the individual taxpayer
2. Including the land on which it is situated
3. Permanent dwelling house, or if absent, where the individual
intends to return
 4. ACTUAL OCCUPANCY shall not be considered interrupted or
abandonment by temporary absence of an individual due to
travel, studies, work abroad, or such other similar
circumstances.
b) Requirements:
1. Sale of original principle residence is FULLY UTILIZED in
acquiring a new principle residence within 18 calendar months
from date of sale
2. Within 30 days from selling the residence, notify BIR on the sale
of principle residence and the purpose of sale is to buy a new
principle residence
3. Cost basis of original principle residence is carried over to the
new principle residence
4. Tax exemption can only be utilized once every 10 years
c) No full utilization of sale: gain on the unutilized assets from sale is
subject to 6% tax rate
1. Multiple the taxable amount by 6%
2. If gross sales is higher, directly multiply the unutilized portion to
6%
Unutilized Portion
Taxable Amount= x Gross selling price∨current FMV , HIGHER
Gross Sales Price

ii. If purchased by the GOVERNEMENT

 Taxpayer may choose if the capital asset is to be taxed as CGT or Ordinary Tax
 There are also capital gains not subject to CGT. These includes
i. Sales of shares of foreign corporations
ii. Sales of real property located abroad
iii. Sale of other personal assets other than shares of stock of domestic corporations such
as cars, jewelry, and the like
 No CGT shall be due if the transaction resulted to a capital loss
 Capital loss cannot be deducted to ordinary gains
 Subject to NELCO = net loss carried over
i. ONLY TO THE AMOUNT OF NET TAXABLE INCOME OF THE PRECEEDING TAX PERIOD
ii. Liquidating dividends are included here.
iii. Wagering losses are not deductible to capital gains
 Due to gains must come from legitimate sources.
iv. Holding period
 longer than 1 year, declare income at 50%
 less than 1 year, declare income at 100%
v. ONLY APPLICABLE FOR INDIVIDUAL TAXPAYERS

Citizens & NRA engaged NRA not engaged

Resident in business in business
Capital gain from sale of shares of stock of a
domestic corporation not traded in the local
stock exchange (LSE) 15% 15% 15%

Beginning January 1, 2018 Tax Base: Capital Gain

Prior to 2018
On 1st Php100,000 capital gain 5% 5% 5%
In excess of Php100,000 capital gain 10% 10% 10%
Capital gain on sale of real property located
in the Philippines
6% 6% 6%
Tax Base: Selling Price or FMV, whichever is
higher

 Sale of Share of Stock of a Domestic Corporation not traded in the LSE

i. Capital gain or loss is computed AT FAIR VALUE LESS COST
ii. The fair market value of a stock of a domestic corporation not sold through the local
exchange shall be as follows:
1) Common Stock (CS)
 Book value (BV) based on the latest available FS duly certified by an
independent CPA prior to date of sale but not earlier than the
immediately preceding taxable year.
2) Preferred Stock (PS)
 Liquidation value (LV), which is equal to the redemption price as of
balance sheet date nearest to the transaction date, including any
premium and cumulative preferred dividends in arrears.
3) Corporation has both common and preferred stocks
 BV per CS = (Total Equity – LV of PS) / Total Outstanding CS
 All values to be used is as of balance sheet date nearest to the
transaction date.
 Sale of Real Property classified as Capital Asset within the Philippines
i. Fair Market Refers to the higher of:
1) Assessed value as provided by City or Provincial assessors as reflected in the tax
declaration for real property tax purposes
2) Zonal value (ZV) as provided by the Commissioner of Internal Revenue (CIR),
which can be checked in BIR website.
ii. If the real property classified as capital asset is sold to the government, the individual
taxpayer shall have the option to be taxed at 6% CGT or basic income tax using the
graduated tax rate.
iii. If the real property sold is classified as principal residence, it may be exempt from CGT
provided the requisites for exemption are met:
1) The proceeds are fully utilized in acquiring or constructing a new principal
residence within 18 months from the date of sale. If there is no full utilization,
the unutilized portion of the gain shall be subject to CGT computed as follows:
Taxable Amount = (Unutilized Portion/ Gross Selling Price) x GSP or FMV
at time of sale, whichever is higher
2) The historical cost or adjusted basis of the real property sold shall be carried
over to the new principal residence built or acquired.
 3) The BIR shall have been duly notified by the taxpayer within 30 days from the
date of sale through a prescribed return of his intention to avail of tax
exemption.
4) The tax exemption can only be availed of once every 10 years.
iv. Principal residence is where the individual taxpayer permanently resides or
whenever absent, wherein the said individual intends to return (RR 142000) and is
considered is family home. 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.
 Other Stock Transactions
i. Sale of shares of stock of a corporation listed in the local stock exchange is not subject
to income tax
 Falls to other percentage tax
ii. The tax rate is based on gross sales price
iii. Stock transaction tax (STT) is computed as follows:
Prior to 2018 = ½ of 1% of Gross Selling Price
Beginning 2018 = 6/10 of 1% of Gross Selling Price

Self-Employed
 A sole proprietor or an independent contractor who reports income earned from self-
employment.
 A purely self-employed individual is not earning compensation income from an employee-
employer relationship.
 Income derived from self-employment is considered as income derived from trade or
business, thus classified under ordinary or regular income
Mixed Income
 are individuals earning both business/ self -employment and compensation income
 The 8% preferential tax is applicable only to income from self-employment/ practice of
profession. Compensation income of a mixed income earner is still subject to graduated tax rate.

Types of Individual Income Tax Payers

1. Compensation Income
 Pure compensation earner
 Employed individuals
 Employee-employer relationship
 Wages and salaries
2. Business or exercise of profession
 Business income earner
 Self employed
 Examples:
i. CPA
ii. Tax or legal services
iii. Dental services
 3. Mix income earner
 Compensation + business or exercise of profession

Compensation Income
 Four-fold test for Employee-employer relationship
I. Selection process
 power to hire
II. Payment of salaries or wages
III. Power of dismiss
 Retrench or termination of employee
IV. Power of control
 Types of employees
I. Managerial employees
II. Supervisory employees
III. Rank and file employees
 Types of employees as to taxability
I. Minimum wage earners
 5,000/month or 60,000/annum, whichever is higher
 EXEMPT from INCOME TAX
 Their overtime pay are exempt from INCOME TAX
II. Regular employees
 Basic formula: Gross Compensation Income
Less: Non-taxable Compensation
TAXABLE COMPENSATION
I. Gross Compensation Income
o Regular compensation
 Basic Salary/pay
 Fixed allowance
 Cost of living allowances (COLA)
 Fixed housing allowances
 Representation allowances
 Transportation allowances
 Other allowances
o Supplementary Compensation
 Additional compensation or performance-based compensation
 Overtime pay
 Hazard pay
 Night shift differential
 Holiday pay
 Commissions
 Fees including directors fees if an employee is a director
 Emoluments
 Honoraria
 Taxable retirement and separation pay
 Value of living quarters or meals
  Gains on exercise of stock options
 Profit sharing
 Taxable bonuses
o 13th pay and other benefits in excess of 90,000
II. Non-taxable Compensation
o Mandatory deductions
 Examples:
a. GSIS
b. SSS
c. PhilHealth
d. HDMF (Home development Mutual Fund)
e. Union dues
f. Pag-Ibig
 Employees share in SSS, GSIS,PhilHealth, and HDMF are excluded from
compensation income
o Exempt benefits

Rank and File Employees

Limit Private Government
Monetized Unused Vacation Leave 10 days (Daily rate x Taxable if there is Exempted – no
days) an excess limit regardless of
amount
Monetized Unused Sick Leave No limit Taxable – Exempted – no
regardless of limit regardless of
amount, 10 day amount
limit is not
applicable
Medical cash allowances 1,500 per employee Taxable if there is Taxable if there is
per semester (4 an excess an excess
months) or 375 per
month
Rice subsidy 2,000 or 1 sack or 50 Taxable if there is Taxable if there is
kg of rice per month an excess an excess
Uniform and clothing allowance 6,000 per annum Taxable if there is Taxable if there is
an excess an excess
Actual medical assistance 10,000 per annum Taxable if there is Taxable if there is
an excess an excess
Laundry allowance 300 per month Taxable if there is Taxable if there is
an excess an excess
Employee achievement award 10,000
Gifts given during Christmas and 5,000 per employee Taxable if there is Part of the “13th
MAJOR anniversary celebration - per annum an excess month pay and
CHRISTMAS & ANNIV. GIFT other benefits”,
hence not a de
minimis benefit
 Daily meal allowance for not exceeding 25%
OVERTIME WORK & NIGHT OR of the basic
GRAVEYARD SHIFT minimum wage on a
per region basis
benefits received by an employee total annual
by virtue of a collective bargaining monetary value
agreement(CBA) and productivity 10,000 per employee
incentive schemes per taxable year

Fringe Benefit
 Any goods, service, or other benefits
 Furnished or granted by employers
 May be in cash or in kind
 Other than basic compensation
 Only applicable for managerial and supervisory employees