INCOME TAXATION

SESENIO B SERENO III, PHD

PROFESSOR
MIDTERM COVERAGE
CLASSIFICATION OF INDIVIDUAL TAXPAYER
INDIVIDUALS EXEMPT FROM INCOME TAX
CATEGORIES OF INCOME
CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS
TAXPAYER TAX BASE TAX RATE TAXABLE SOURCE

Resident Citizen Net Income Graduated w/in & w/out the PH

Non-Resident Citizen Net Income Graduated Within only

Resident Alien Net Income Graduated Within only

Non-Resident Alien - ETB Net Income Graduated Within only

Non-Resident Alien- NETB Gross Income Final Tax (25%) Within only

Special Employees Within only

CITIZEN

✓Citizens of the Philippines at the time of adoption of the February 2, 1987

Constitution
✓Those whose fathers and mothers are citizens of the Philippines
✓ those born before January 17, 1973 of Filipino mothers who elect Philippine
citizenship
✓Those who are naturalized in accordance with law
NON-RESIDENT CITIZEN

✓Citizens of the Philippines who establishes to the satisfaction

of the Commissioner the fact of his/her physical presence
abroad with a definite intention to reside therein
✓Citizens of the Philippines who leave the PH during the
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis
NON-RESIDENT CITIZEN

✓Citizens of the Philippines who works and derives

income from abroad and whose employment
thereat requires him/her to be physically present
abroad most of the during the taxable year
NON-RESIDENT CITIZEN

✓A citizen who has been previously considered as non-resident

citizen and who arrives in the PH at any time during the taxable
year to reside permanently in the PH shall likewise be treated as
non-resident citizen per taxable year in which he/she arrives in the
PH with respect to his/her income derived from sources abroad
until the date of his/her income derived from sources abroad until
the date of his/her arrival in the PH
NON-RESIDENT CITIZEN

✓The taxpayer shall submit proof to the Commissioner to

show his/her intention of leaving the PH to reside
permanently abroad or to return to and reside in the PH,
as the case maybe
INDIVIDUALS EXEMPT FROM INCOME TAX
INDIVIDUALS EXEMPT FROM INCOME TAX
1. Non-Resident citizen
2. Overseas Contract workers, including overseas seamen
3. Barangay Micro Business Enterprise (BMBE)
4. Personal Equity and Retirement Account (PERA)
5. Philippine nationals and alien individuals employed by foreign
governments, embassies, diplomatic missions, and international
organizations situated in the Philippines
6. Minimum wage earners – on their statutory minimum wage rates.
Holiday pay, overtime pay, night shift differential pay, and hazard pay, if
any, are also exempt
7. Senior citizen??
BARANGAY MICRO BUSINESS ENTERPRISE (BMBE)

-any enterprise engaged in the production, processing or manufacturing of

products or commodities, including agro-processing, trading and services
whose assets including those arising from loans but exclusive of the land
on which the particular business entity’s office, plant, and equipment are
situated, should not be more than P 3,000,000.00 (sari-sari stores,
bakeries, handicraft shops)
PERSONAL EQUITY AND RETIREMENT ACCOUNT (PERA)

-an individual’s voluntary retirement account established from his/her PERA

contributions and/or his/her employer contributions, for the purpose of
being invested solely in an eligible PERA investment product ( ie. Unit
investment trust fund, mutual fund, annuity contract, pension plan, share of
stocks traded in a local stock exchange, exchange-traded bonds,
government securities) duly approved by the concerned regulatory
authority ( ie BSP, SEC, BIR)
CATEGORIES OF INCOME

INCOME – in its broad sense, means all wealth, which flows into
the taxpayer other than a mere return of capital. It is the return
in money from one’s business, labor, or capital invested, e.g. gains,
profits, salary and wages

The words “income from any source whatever” disclose a

legislative policy to include all income not expressly exempted
from the class of taxable income under our laws
INCOME TAX

Is a tax on yearly profits arising from property, profession, trade

or business, or is a tax on a person’s income, emoluments,
profits, and the like
CATEGORIES OF INCOME

1. Compensation income
2. Business Income
3. Mixed Income
4. Passive Income
5. Capital gains from sale of share of stocks not traded thru
Local Stock Exchange
6. Capital gains from share of real properties
7. Fringe benefits
NON-RESIDENT ALIEN ENGAGED ON TRADE OR BUSINESS

✓Aliens who have business income in the Philippines

✓Aliens who stayed in the Philippines for an
aggregate period of more than 180 days during the
taxable year
RESIDENT ALIEN
✓An individual whose residence is within the Philippines and who is not a citizen
thereof
✓He/she is one who actually present in the PH and who is not mere transient or
sojourner
✓He/she is one who lives in the PH with no definite intention as to his/ her stay
✓He/she is one who comes to the PH for the purpose that requires extended stay
for its accomplishment, so he/she makes his/her home temporarily in the PH
NON-RESIDENT ALIEN
✓An individual whose residence is not within the PH and who
is not a citizen thereof
✓He/she is one who comes to the PH for a definite purpose
which in its nature may be promptly accomplished.
✓He/she is one who is mere transient or sojourner
SPECIAL EMPLOYEES

Regional or area headquarters (RHQ) and regional operating

headquarters (ROHQs) of multi-national entities in the
Philippines that are engaged in the international trade with
affiliates and subsidiary branch offices in the Asia-Pacific Region

Offshore banking units

Petroleum contractors and sub-contractors

PASSIVE INCOME

Earned with very minimal involvement from the taxpayer

and is generally irregular in timing and amount.

Their existence can be difficult to predict while their

actual amount may be difficult to determine. Thus, the
final withholding at source is the most favored scheme
in taxing items of passive income
FINAL TAX

Tax withheld at source. The amount of income tax that is withheld

by a withholding agent is constituted as full and final payment of the
income tax due from the payee on said income.
Passive Final Tax Remit
Income

Payee Withholding BIR

agent/ payor
 PASSIVE INCOME
Is Your Relative Playing With Dota / Strike

Passive Income RC/RA/NRC NRA-ETB NRA-NETB

Interest
Yields
Royalties 20% 20%

Prizes
25%
Winnings
Dividends
Share in Net Income (Partnership, 10% 10%
Association, Joint Account, Joint Venture)
TAX ON INVESTMENTS

INTEREST
For Short Term -- 20%
Long Term -- 0%

Less than 3 years -- 20%

3years to 4 years -- 12%
4years to 5 years -- 5%
5 years and more -- 0%
FOREIGN CURRENCY DEPOSIT SYSTEM (FCDS)

INTEREST IS TAX EXEMPT

Non Resident Alien -- 0%
Non Resident Citizen -- 0%

There is an interest of 15% for:

➢ Resident Alien
➢ Resident Citizen
(TRAIN Law)
COMPENSATION

-all renumeration for services performed by an employee for his/her

employer under employee-employer relationship, unless specifically excluded
by the Code. The term used to designate the renumeration is immaterial.
Thus, salaries, wages, emoluments and honoraria, allowance, commission (e.g.
RATA, entertainment and the like), fees including director fees, if the director
is, at the same time, an employee of the employer/cooperation, taxable
bonuses and fringe benefits except those which are subject to fringe benefit
tax, taxable premiums and retirement pay, and other income of similar nature
constitute COMPENSATION INCOME
COMPENSATION

-the timing or the basis upon which the renumeration is paid is immaterial
in determining whether the renumeration constitutes compensation. Thus,
it may be paid on the basis of piece-work, or a percentage of profits, and
maybe paid hourly, daily, weekly, monthly, or annually
COMPENSATION

Compensation
Taxable
Renumeration

Benefits (exceeds 10,000)

Others

Exempt
Benefits (90,000 or less)
Not Taxable
De minimis benefits
Fringe Benefits
FORMS OF COMPENSATION

1. Compensation paid in kind 1. Fixed or variable transportation,

2. Living quarters and meals representation & other allowances
3. Facilities and privileges of 2. Vacation & sick leave allowances
3. Deductions made by the employer
relatively small values (de from compensation of employee
minimis benefits) 4. Renumeration for services as NRA
4. Tips and gratuities individual / foreign entity
5. Pensions, retirement, and 5. Compensation for services
separation pay performed outside the Philippines
INCOME TAX RATES FOR INDIVIDUALS
(EFFECTIVE JANUARY 2016)

On Taxable income of The TAX is

Not over 250,000 0%
Over 250,000 but not over P 20 % of excess over P
400,000 250,000
Over 400,000 but not over 800,000 P 30,000 + 25% of excess over 400,000
Over 800,000 but not over 2.2M 130,000 + 30% of excess over 800,000
Over 2.2M but not over 8M 490,000 + 32% of excess over 2.2 M
Over 8M 1,450,000 + 35% of excess over 8 M
TAXABLE INCOME
• Means the income from employment, less GSIS, SSS, Philhealth and Pag-ibig contributions, and
union dues of individuals (the items are called by law as exclusions from gross.) There are other
exclusions from gross income.
• Centavos?: In the gross income and the deductions for expenses and losses , there can be centavos.
In the taxable income, centavos are to be dropped . In the income tax arrived at with the
application of tax rates, fifty or more centavos will be considered as one peso, and less than 50
centavos will be disregarded. (These rules on centavos apply to all taxpayers, in their respective tax
formulas). After deducting from the income tax computed any creditable withholding income tax,
and/or quarterly income tax paid, the income tax still due or refundable will have centavos.
TAXABLE INCOME

Refers to the pertinent items of gross income specified in the Code, less
deductions, if any, authorized for such types of income by the Code or other
special laws

Individuals Earning Purely Compensation Income

Total Compensation Income -- xxx
Less: Mandatory contributions -- (xxx)
Non-taxable benefits -- (xxx)

Net Taxable Income -- xxx

DE MINIMIS BENEFITS

Are facilities or privileges furnished or offered by an

employer to his/her employees that are of relatively small
value and are offered or furnished by the employer
merely as a means of promoting goodwill, contentment
or efficiency of his/her employees
DE MINIMIS BENEFITS (CON’T)

1. Monetized unused vacation leave credits of private employees not

exceeding ten (10) days during the year.
2. Monetized value of vacation and sick leave credits paid to government
officials and employees.
3. Rice subsidy of 2,000.00 or 1 sack of 50kg per month amounting to not
more than 2,000.00
4. Daily meal allowance for overtime work and night/graveyard shift 25% of
the basic minimum wage on a per region basis.
5. Uniform and clothing allowance not exceeding 6,000 per annum
6. Laundry allowance not exceeding 300 per month
DE MINIMIS BENEFITS (CON’T)

1. Medical cash allowance to dependents of employees not exceeding

1,500 per employee per semester or 250 per month
2. Actual medical assistance, e.g medical allowance to cover medical
and healthcare needs, annual medicine/ executive check-up,
maternity assistance and routine consultations, not exceeding
10,000 per annum.
3. Gifts given during Christmas and major anniversary celebrations
not exceeding 5,000 per employee per annum
DE MINIMIS BENEFITS (CON’T)

1. Employees achievement awards eg. for length of service or safety

achievement, which must be in the form of tangible personal property
other than cash or gift certificate with an annual monetary value of
10,000 received by an employee under an established written plan which
does not discriminate in favor of highly paid employees.
2. Benefits received by an employee by virtue of CBA and productivity
incentives schemes provided that the total monetary value received
from both CBA and PI schemes combined do not exceed 10,000 per
employee per taxable year.
TAX CREDIT VS. DEDUCTIONS

Gross Income xxx Tax Due/Payable xxx

Deductions (xxx) Tax Credit (xxx)
Taxable Income xxx
Tax still due/ payable xxx
Tax Due / Payable xxx
TAX CREDIT VS. DEDUCTIONS

Gross Income xxx Tax Due/Payable xxx

Deductions (xxx) Tax Credit (xxx)
Taxable Income xxx
Tax still due/ payable xxx
Tax Due / Payable xxx
FRINGE BENEFITS

-means any goods, service, or other benefit furnished or

granted in cash or in kind other than the basic
compensation, by an employer to an employee (except rank
and file employee as defined herein) such as, but not limited
to the following:
❖ Housing
❖ Expense account
❖ Vehicle of any kind
❖ Household personnel, such as maid, driver and others
FRINGE BENEFITS (CON’T)

❖ Interest on loan at less than the market rate to the

extent of the difference between the market rate and
actual rate granted
❖ Membership fees, dues and other expenses borne by
the employer for the employee in social and athletic
clubs and similar organization
❖ Expenses for foreign travel
FRINGE BENEFITS (CON’T)

❖ Holiday and vacation expenses

❖ Education assistance to the employee or his/her
dependents
❖ Life or health insurance and other non-life insurance
premium or similar amounts in excess of what the law
allows
GUIDELINES IN DETERMINATION OF MONETARY VALUE

FRINGE BENEFIT GRANTED VALUATION

1) Money or directly paid by 1) Amount granted/ paid for
employer
2) Property (ownership is 2) FMV or zonal value of the
transferred) property (w/c ever is higher)
3) Property (ownership is
NOT transferred 3) Depreciation value of
property
ACCOUNTING OF FRINGE BENEFITS

Monetary Value xxx

Divide by: 65% Employer’s book
Grossed-Up monetary value xxx Fringe Benefit Exp xxx
Multiply by: 35%
Fringe Benefit Tax Exp xxx
Cash/other assets xxx
Fringe Benefit Tax xxx
THANK YOU