Income Taxes for Individuals

Marianne M. Custodio

1
• They are natural persons with income
derived from within the territorial
jurisdiction of a taxing authority.

Individual Taxpayers 2
• Resident citizens (RC)
• Nonresident citizens (NRC)
• Resident aliens (RA)
• Nonresident aliens (NRA)
• Engaged in trade/ business (NRA-ETB)
• Not engaged in trade or business (NRA-
NETB)
Classification of
Individual Taxpayers 3
• Situs of income
• Manner of computing tax
• Treatment of certain passive incomes
• Allowable deductions
• References in the tax code

Importance of
Classification 4
• Establishes, to the satisfaction of the
Commissioner of Internal Revenue,
the fact of his physical presence
abroad with a definite intention to
reside therein.

Nonresident Citizen of the

Philippines 5
• 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.

Nonresident Citizen of the

Philippines 6
• A Filipino citizen taxpayer not
classified as nonresident citizen is
considered a resident citizen for tax
purposes.

Resident Citizen of the

Philippines 7
• An alien is a foreign-born person who
is not qualified to acquire Philippine
citienship by birth or after birth.

Alien 8
• He/she is an individual whose residence is within the
Philippines and who is not a citizen thereof.
• An alien who is actually present in the Philippines and
who is not transient or sojouner.
• An alien who lives in the Philippines with no definite
intention as to his stay.
• An alien who comes to the Philippine who comes to the
Philippines for the purpose that requires extended stay for
its accomplishment, so he makes his home temporarily in
the Philippines, regardless of his intention to return to his
residence abroad.

Resident Alien 9
• He/she is an individual whose residence is
not in the Philippines and who is not a
citizen thereof.
• An alien who comes to the Philippines for
a definite purpose, which in its nature may
be promptly accomplished.
• An alien who is mere transient or non-
resident.

Nonresident Alien 10
• An alien who stayed in the Philippines for
an aggregate period of more than 180 days
during the taxable year and/or alien who
has business income in the Philippines
• “trade or business” include performance of
the functions of the public office or
performance of personal services in the
Philippines (except performance of services
by the taxpayer as an employee)
Nonresident Alien Engaged
in Trade or Business 11
• 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

Applicable Taxes and Tax Rates 12

• It is important to properly classify individual
taxpayers because resident citizens are
taxable on their income derived from sources
within and outside 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 are
taxable based on their “gross income” while
others are taxable based on “net income”.

Classification of the Taxpayer 13

• It is important to know the source of income
for tax purposes (income derived from within
and outside the Philippines) because as
resident citizens are taxable based on their
worldwide income while others are taxable
only on their income derived from sources
within the Philippines.

Source of Income 14
 Taxpayer Tax Base Source of Taxable
Income
RC net income within & outside
NRC, RA, NRA- net income within only
ETB
NRA -NETB gross income within only

Source of Income 15
• For purposes of income taxation, there are
three types of incomes subject for income tax
as follows:

• Ordinary or regular income

• Passive income derived from Philippine
sources
• Capital gains subject to capital gains tax

Types of Income 16
• It refers to income such as compensation income
(salaries and wages), business income, income
from practice of profession, income from sale
and/or dealings of property and miscellaneous
income and passive income other than those
subject to final taxes under Section 24(B) and
capital gains tax under Sections 24(C) and (D) of
the Tax Code.
• It is subject to graduated tax table (also known as
basic or normal tax) as provided under Section
24(A).

1. Ordinary or regular income 17

 18

Graduated Tax Rate

• Passive incomes subject to final
withholding taxes are certain passive
incomes from sources within the
Philippines as enumerated under
Section 24(B) of the Tax Code.

2. Passive incomes 19
• These passive incomes are not subject
to graduated tax rate or basic but to
specific final withholding tax rate

2. Passive incomes 20
• Interest income
• Dividend income
• Royalties
• Prizes
• Other winnings

Specific Passive Incomes Derived

from Philippine Sources Subject to
Final Withholding Tax 21
22
• Capital gains from sale of shares of
stocks of a domestic corporation not
traded in the local stock exchange
[Sec. 24(C) NIRC]; and
• Capital gains from sale of real
property in the Philippines [Sec.
24(D) NIRC]

3. Incomes from sale of

capital gains tax (CGT) 23
 Capital Gains Subject to Capital Gains Tax (CGT)

(1) Capital Gains from sale of shares of stock of a domestic Citizens NRA- NRA-
corporation not traded in the local stock exchange & Resi- ETB NETB
dents

Prior to 2018
*1st P100,000 of capital gain 5% 5% 5%
*in excess of P100,000 capital gain 10% 10% 10%

Beginning Jan. 1, 2018

*Basis: Capital gain 15% 15% 15%

(2) Sale of real property located in the Philippines

TAX BASE: Selling Price of Fair Market Value, whichever is 6% 6% 6%

higher

NOTE:
The assets sold in the table above must refer to capital assets. Capital assets are assets not used
in business nor for sale in the ordinary course of trade or business.
• Unless exempt under the law, income
not subject to final withholding tax
and capital gains tax are subject to
graduated tax rate.

Note to Remember: 25
Use the following data for Cases A-E:
An individual taxpayer provided the following information for
2018:
Gross buss. income, Philippines P5,000,000
Gross buss. income, Canada 2,000,000
Gross buss. income, Singapore 1,000,000
Business expenses, Philipines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Illustration: 26
Case A:
The taxpayer is a resident citizen

Gross buss. income, Philippines P5,000,000

Gross buss. income, Canada 2,000,000
Gross buss. income, Singapore 1,000,000
Business expenses, Philipines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Determine the taxable income assuming: 27

Case A
Answer: P3,500,000

Solution:
Gross buss. income, Philippines P5,000,000
Gross buss. income, Canada 2,000,000
Gross buss. income, Singapore 1,000,000
Business expenses, Philipines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000
Taxable Income P3,500,000

28
Case B:
The taxpayer is a nonresident citizen

Gross buss. income, Philippines P5,000,000

Gross buss. income, Canada 2,000,000
Gross buss. income, Singapore 1,000,000
Business expenses, Philipines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Determine the taxable income assuming: 29

Case B
Answer: P2,000,000

Solution:
Gross buss. income, Philippines P5,000,000
Business expenses, Philipines (3,000,000)
Taxable Income P2,000,000

30
Case C:
The taxpayer is a resident alien

Gross buss. income, Philippines P5,000,000

Gross buss. income, Canada 2,000,000
Gross buss. income, Singapore 1,000,000
Business expenses, Philipines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Determine the taxable income assuming: 31

Case C
Answer: P2,000,000

Solution:
Gross buss. income, Philippines P5,000,000
Business expenses, Philipines (3,000,000)
Taxable Income P2,000,000

32
Case D:
The taxpayer is a nonresident alien engaged in trade or
business

Gross buss. income, Philippines P5,000,000

Gross buss. income, Canada 2,000,000
Gross buss. income, Singapore 1,000,000
Business expenses, Philipines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Determine the taxable income assuming: 33

Case D
Answer: P2,000,000

Solution:
Gross buss. income, Philippines P5,000,000
Business expenses, Philipines (3,000,000)
Taxable Income P2,000,000

34
Case E:
The taxpayer is a nonresident alien not engaged in trade or
business

Gross buss. income, Philippines P5,000,000

Gross buss. income, Canada 2,000,000
Gross buss. income, Singapore 1,000,000
Business expenses, Philipines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Determine the taxable income assuming: 35

Case E
Answer: P5,000,000

Solution:
Gross buss. income, Philippines P5,000,000
Taxable Income P5,000,000

Note: NRA-ETB are taxable on their “gross income”

36
Case F:
The income and expenses of a Filipino citizen for 2018 were
provided as follows:

January to June: Philippines Canada

Gross income P5,000,000 P2,000,000
Allowable deductions 2,000,000 1,000,000

July to December:
Gross income P2,000,000 P3,000,000
Allowable 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? 37
Case F
Answer: P5,000,000

Solution:
Gross buss. income, Philippines (Jan-Dec.) P7,000,000
Gross buss. income, Canada (Jan.-June) 2,000,000
Allowable deductions, Philippines (Jan.-Dec.) (3,000,000)
Allowable deductions, Canada (Jan.-Dec.) (1,000,000)
Taxable income P5,000,000

38
Case G:
Assume the same data except that the taxpayer is a
nonresident citizen who returned and reside permanently in
the country in July of the current year. His taxable income
before personal exemptions is:

January to June: Philippines Canada

Gross income P5,000,000 P2,000,000
Allowable deductions 2,000,000 1,000,000

July to December:
Gross income P2,000,000 P3,000,000
Allowable deductions 1,000,000 1,200,000
39
Case G
Answer: P5,800,000

Solution:
Gross buss. income, Philippines (Jan-Dec.) P7,000,000
Gross buss. income, Canada (Jan.-June) 3,000,000
Allowable deductions, Philippines (Jan.-Dec.) (3,000,000)
Allowable deductions, Canada (Jan.-Dec.) (1,200,000)
Taxable income P5,800,000

40
Computation of Basic Income
Tax Due

41
• Determine the income tax due assuming
the “tax compensation income” for 2018 is
P240,000.

Purely Compensation Income Earner 42

• Determine the income tax due assuming
the “tax compensation income” for 2018 is
P240,000.

Answer: P0; tax exempt

Purely Compensation Income Earner 43

• Determine the income tax due assuming
the “tax compensation income” for 2018 is
P300,000.

Purely Compensation Income Earner 44

• Determine the income tax due assuming
the “tax compensation income” for 2018 is
P300,000.

Answer: P10,000

Purely Compensation Income Earner 45

• Determine the income tax due assuming the “tax
compensation income” for 2018 is P300,000.

Solution:
Tax on
First P250,000 P0
In excess of P250,000 P10,000
(P50,000 x 20%) __________
Tax Due P10,000

Purely Compensation Income Earner 46

• Determine the income tax due assuming
the “net taxable compensation income” for
2018 is P1,850,000.

Purely Compensation Income Earner 47

• Determine the income tax due assuming
the “net taxable compensation income” for
2018 is P1,850,000.

Answer: P445,000

Purely Compensation Income Earner 48

• Determine the income tax due assuming the “net
taxable compensation income” for 2018 is P1,850,000.

Solution:
Tax on
First P800,000 P130,000
In excess of P800,000 P315,000
(P1,050,000 x 30%) __________
Tax Due P445,000

Purely Compensation Income Earner 49

• Determine the income tax due assuming
the gross sales/receipts and other non-
operating income for 2018 is P240,000.

Purely Self-Employed and/or Professionals (SEP)

whose gross sales/receipts and other non-
operating income does not exceed the VAT
threshold of P3,000,000 50
• Determine the income tax due assuming
the gross sales/receipts and other non-
operating income for 2018 is P240,000.

Answer: P0; exempt from income tax

Purely Self-Employed and/or Professionals (SEP)

whose gross sales/receipts and other non-
operating income does not exceed the VAT
threshold of P3,000,000 51
• Using the data below, determine the
income tax due for 2018:

Gross sales P2,800,000

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

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does not exceed the
VAT threshold of P3,000,000 52
• Using the data below, determine the income tax
due for 2018:

Gross sales P2,800,000

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

Answer: 67,500

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does not exceed the
VAT threshold of P3,000,000 53
• Using the data below, determine the income tax due for 2018:

Gross sales P2,800,000

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

Solution:
Tax on
First P400,000 income P30,000
In excess of P400,000 income 37,500
(150,000 x 25%) _______
Income Tax Due P67,500

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does not exceed the
VAT threshold of P3,000,000 54
• Assume the SEP in the preceding illustration
opted to avail the 8% tax under the TRAIN
Law.

Gross sales P2,800,000

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

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does not exceed the
VAT threshold of P3,000,000 55
• Assume the SEP in the preceding illustration opted
to avail the 8% tax under the TRAIN Law.

Gross sales P2,800,000

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

Answer: P204,000

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does not exceed the
VAT threshold of P3,000,000 56
• Assume the SEP in the preceding illustration opted to
avail the 8% tax under the TRAIN Law.

Gross sales P2,800,000

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

Solution:
(P2,800,000 – 250,000) x 8% = P204,000

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does not exceed the
VAT threshold of P3,000,000 57
• Determine the income tax due assuming
the following data for 2018:

Gross sales P5,000,000

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

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does EXCEED sthe VAT
threshold of P3,000,000 58
• Determine the income tax due assuming the
following data for 2018:

Gross sales P5,000,000

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

Answer: P340,000

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does EXCEED sthe VAT
threshold of P3,000,000 59
• Determine the income tax due assuming the following data for 2018:

Gross sales P5,000,000

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

Solution:
Tax on
First P800,000 income P130,000
In excess of P800,000 income 210,000
(700,000 x 30%) ________
Tax Due P340,000

Purely Self-Employed and/or Professionals (SEP) whose gross

sales/receipts and other non-operating income does EXCEED sthe VAT
threshold of P3,000,000 60