INCOME TAXATION

PRELIM
Taxation Of Individuals
Learning objectives
Identify the individual taxpayers.
Define the individual taxpayers and the related terms
used.
Illustrate the different classification of individual
taxpayers.
State the source of income of individual taxpayers.
Recognized the categories of income and state the tax
rate to be used by each type of individual taxpayers.
Learning objectives
List the sources of passive income and state the final
tax rates to be used by each type of individual
taxpayers.
Discuss the treatment of passive income in the
computation of taxable income from compensation or
business/professional income.
Define the allowable deduction from gross income.
Be familiar with individual taxpayers exempt from
income tax.
DEFINITION OF TERMS
Definition of Terms
 Compensation income – in general, means all
remuneration for services performed by an employee
for his employer under an employer-employee
relationship.

 Compensation income earner – individual whose

source of income is purely derived from an
employer-employee relationship
Definition of Terms
Employee – an individual performing services under an
employer-employee relationship. The term covers all
employees including officers and employees, whether
elected or appointed, of the Government of the
Philippines or any political subdivision thereof or any
agency or instrumentality.

Employer – any person for whom an individual performs

or performed any service, of whatever nature, under an
employer-employee relationship.
Definition of Terms
Employer-employee relationship –exist when a person
for whom services were performed has the right to control
and direct an individual who perform the services, not only
as to the result of the work to be accomplished but also as
to details, methods and means by which it is accomplished.

Fringe Benefits – means any good, service or other benefit

furnished or granted in cash or in kind other than the basic
compensation, by an employer to an individual employee
except rank and file employee.
Definition of Terms
Minimum wage earner – refer to worker in the private
sector who is paid with a statutory minimum wage rate,
or to an employee in the public sector with compensation
income not more than the statutory minimum wage rate
in the non-agricultural sector where the
worker/employee is assigned.

Rank and File Employee – refers to an employee

holding neither managerial nor supervisory position as
defined under existing provision of the Labor Code of the
Philippines, as amended.
Definition of Terms
Non-resident alien engaged in trade and business
(NRAETB)- refers to a non-resident alien who shall come
to the Philippines and stay for an aggregate period of
more than one hundred eighty (180) days during any
calendar year.

Non-resident alien not engaged in trade and

business (NRANETB)- refers to anon-resident alien who
shall come to the Philippines and stay for an aggregate
period of one hundred eighty (180) days or less during the
calendar year.
Definition of Terms
Rank and File Employee – refers to an employee
holding neither managerial nor supervisory position
as defined under existing provision of the Labor Code
of the Philippines, as amended.
Definition of Terms
Regional or area headquarter (RHQs)- shall mean
a branch established in the Philippines by
multinational companies and which headquarters do
not earn or derive income from the Philippines and
which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries, or
branch in the Asia Pacific Region and other foreign
markets.
Definition of Terms
Regional operating headquarters (ROHQs) – shall
mean a branch established in the Philippines by
multinational companies which are engaged in any of
the following service: general administration and
planning; business planning and coordination;
sourcing and procurement of raw materials and
components; corporate finance advisory services;
marketing control and sales promotion; training and
personnel management; logistic services; research and
development; service and product development etc.
Definition of Terms
Taxable year - means the calendar year, or the fiscal year
ending during such calendar year, upon the basis of which
the net income is computed.

Fiscal year - means an accounting period of twelve (12)

months ending on the last day of any month other than
December.

Calendar year - means an accounting period of twelve (12)

months starting on first day of January ending on the last
day of December.
Classification
1. Resident Citizen (RC)
2. Non-resident Citizen (NRC)

3. Resident Alien (RA)

4. Non-resident Alien
a. Engaged in trade or business (NRAETB)
b. Not engaged in trade or business (NRANETB)
Classification
c) Employed by:
Regional or area headquarters (RHQs) and regional
operating headquarters (RQHQs) of multinational
entities in the Philippines that are engaged in
international trade with affiliates and subsidiary branch
offices in the Asia-Pacific region.
Offshore banking unit
Petroleum contractors and sub-contractors
Resident and Non-resident citizens
Resident citizen - is a Filipino citizen who permanently
resides in the Philippines or stayed outside the
Philippines for less than 183 days during the taxable year.

Non-resident citizen means:

 Citizen who establishes the fact of his physical presence
abroad with definite intention to reside therein.

 Citizen who leaves the Philippines during the year to reside

abroad as immigrant or employment on a permanent basis.
Non-resident Citizen
Citizen who works and derives income from abroad and
whose employment thereat require him to be physically
present abroad most of the time (more than 183 days).

Citizen who arrives in the Philippines during the taxable

year to resides permanently, however for his/her income
from abroad will be treated as a non-taxable citizen.

Taxpayer shall submit proof to BIR to show his intention

to leave and to reside permanently abroad or to return
and reside in Philippines as the case maybe.
Resident alien
Individuals whose residence is within the Philippines and
who is not a citizen thereof.

One who is actually present in the Philippines and who is not

a mere transient or sojourner.

Residence does not mean mere physical presence.

An alien is considered a resident or non-resident depending

on his intention with regards to the length and nature of his
stay.
Non-resident alien
Means an individual whose residence is not within the
Philippines and who is not a citizen thereof.

NRA- Engaged in Trade or Business (NRA-ETB) means

that the alien is carrying on a business in the
Philippines. It connotes more than a single act or
isolated transaction. It involves some continuity of
action. If he/she stayed for 180 days or more.

NRA-NETB if he/she stayed for 180 days or less.

SOURCE OF TAX LAW
Procedure in Determining Tax Due
1. Identify the taxpaying party or entity to which the tax
computation formula applies.
2. Determine the taxpayers gross income.
3. Determine the expenses and certain other items that can be
deducted in computing the taxable income.
4. Apply the appropriate tax rate to the taxpayer taxable income to
find the tax due.
5. Apply any tax credits/payment from the taxpayer’s tax due in
finding the tax payable.
6. Increase the tax penalties and interest to obtain the total amount
payable.
 TAXABLE INCOME
INCOME
Type of Taxpayer Within Without

1. Resident Citizen Include Include

2. Non-resident Citizen Include Exclude
3. Resident Alien Include Exclude
4. Non-resident Alien Include Exclude
Tax rate for Individuals
Citizen (both resident and non-resident) and
resident alien – shall be subject to income tax rate as
per Section 24(A)(2)(a) of Tax Code, as amended.

A nonresident alien individual engaged in trade or

business in the Philippines - shall be subject to an
income tax in the same manner as an individual citizen
and a resident alien individual, on taxable income
received from all sources within the Philippines as per
Section 24(A)(2)(a) of Tax code as amended.
Tax rate for Individuals
Non-resident alien not engaged in trade or
business in the Philippines – shall be levied,
collected and paid for each taxable year upon the
entire income received from all sources within the
Philippines such as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other
fixed or determinable annual or periodic or casual
gains, profits, and income, and capital gains, a tax
equal to twenty-five percent (25%) of such income.
Tax Rate for Individuals
All concerned employees of the regional or area headquarters
and regional operating headquarters of multinational
companies, offshore banking units and petroleum service
contractor and subcontractor - shall be subject to the regular
income tax rate under Section24(A)(2)(a) of the Tax Code, as
amended.

However, existing RHQs/ROHQs, OBUs or petroleum service

contractors and subcontractors presently availing of the preferential
tax rates (15%) for qualified employees shall continue to be entitled
to avail of the preferential tax rate for present and future qualified
employees.

INCOME TAXATION FOR INDIVIDUAL
PURELY COMPENSATION PURELY FROM SELF-EMPLOYMENT/
INCOME PRACTICE OF PROFESSION
(RENUMERATIONS) (BUSINESS INCOME)
1. Graduated rate as per Section 24 (A) 2(a) 1. Graduated rate as per Section 24 (A) 2(a)
of the TaxCode of the TaxCode
OR
Exemption includes: 2. Eight (8%) tax on gross sales or other
First Two Hundred Fifty Thousands (250K) non-operating income in excess of Two
13th month pay and bonuses (up to 90K) Hundred Fifty Thousand (P250K).
De minimis benefits Provided that the gross sales does not
Employees share in SSS,GSIS,PHIC,PAG IBIG exceed the P 3 million threshold.
Percentage tax is likewise waived or
MinimumWage Earner (MWE) exempt.
(NOT ALLOWED FOR VAT REGISTERED)
MIXED COMPENSATION/
SELF - EMPLOYMENT/
PRACTICE OF PROFESSION
1. Graduated rate as per Section 24 (A) 2(a)
of the Tax Code for compensation income,
AND
2. The income from business shall be
subject to the following:
a. If the gross income does not
exceed three million (3M)
a1. Graduated rate as per Section 24 (A) 2(a) of
the TaxCode for compemsation income
OR
a2. Eight (8%) percent income tax rate based on
gross sales/gross receipt and other non-operating
income in lieu of graduated income tax rates
and percentage tax rate.
(250K SD is allowed one time only)
PURELY COMPENSATION INCOME
In general, the tax due on the individual’s taxable
income shall be computed on the following schedules
as provided under Section 24(A)(2)(a) of the Tax Code,
as amended (Graduated Rate).

Individuals earning purely compensation income shall

be taxed on the income tax rates prescribed under
subsection (A) of Tax Code, as amended.
INCOME TAX RATES

A. Effective January 1, 2018 until December31,2022

RANGE OF TAXABLE
INCOME Tax due = a + (b * c)
    BASIC AMOUNT ADDITIONAL OF EXCESS OVER
OVER NOT OVER a b c
- - - -
250,000
-
250,000 400,000 20% 250,000

400,000 800,000 30,000 25% 400,000

800,000 2,000,000 130,000 30% 800,000

2,000,000 8,000,000 490,000 32% 2,000,000

-
8,000,000 2,410,000 35% 8,000,000
B. Effective January 1, 2023 and onwards

RANGE OF TAXABLE

INCOME Tax due = a + (b * c)

    BASIC AMOUNT ADDITIONAL OF EXCESS OVER

OVER NOT OVER a b c

- 250,000 - - -

250,000 400,000 - 15% 250,000

400,000 800,000 22,000 20% 400,000

800,000 2,000,000 102,000 25% 800,000

2,000,000 8,000,000 402,500 30% 2,000,000

8,000,000 - 2,202,500 35% 8,000,000

Pro-forma - Computation
Gross Compensation XXX

Less: Mandatory Deductions XXX

Non-taxable income XXX XXX

Taxable Income XXX

Tax Due

Taxable income vs. Graduated Rate Tax Table

Pro-forma for Non-resident Alien

Gross Compensation XXX

Multiply by 25%

Tax Due XXX

GROSS COMPENSATION INCOME
Means all remuneration for services performed by an
employee for his employer under an employer-employee
relationship, unless specifically excluded by the Code.
The term use to designate the remuneration is
immaterial.

Thus, salaries, wages, emoluments and the like; fees

including director fees, if the director is at the same time
an employee of the employer/corporation; taxable
bonuses and fringe benefits except those which are
subject to the fringe benefits, taxable pensions and
retirement pay; and other income of a similar nature
constitute compensation income.
MANDATORY CONTRIBUTIONS
Employee’s share in the SSS, GSIS, PHIC, EEC,
Pag-ibig contributions and union dues.

It does not include deductions for withholding income

tax, loan payment, IOU or any personal loans or
obligation of the employee.

As a rule, actual amount is deductible in full.

NON-TAXABLE BENEFITS
Income such as but not limited to the 13th month pay and
other benefits

Minimum wage earners shall be exempt from the payment

of income taxed based on their statutory minimum wage
rates. The holiday pay, overtime pay, night shift differential
pay and hazard pay received by such earner shall likewise
be exempt.

As a rule, actual amount or P90,000 whichever is lower is

the amount deductible.
Working Couple
Husband and wife shall compute their individual
income tax separately based on their respective taxable
income;

 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 taxable income.
Illustration
Mr. CSO, a minimum wage earner, works for G.O.D., Inc.
He is not engaged in business nor has any other source
of income other than his employment. For 2018, Mr.
CSO earned a total compensation income of P
135,000.00.

a. The taxpayer contributed to the SSS, Philhealth, and

HDMF amounting to P5,000.00 and has received
13th month pay of P11,000.00.

His income tax liability will be computed as follows:

Solution
Gross compensation P135,000
Less: Mandatory contribution 5,000
Non-taxable benefits 11,000 16,000
Taxable income 119,000

Taxpayer is exempted because his taxable income is less

than 250K and he is a minimum wage earner
Illustration
Mr. Cruz a resident citizen is a call center supervisor in Makati
has the following financial information:

His total compensation for 2019 is P 420,000 including a 13th

month pay of P35,000 and a bonus of P70,000.
Other income of P 150,000 from Singapore.

His contribution to SSS, Philhealth and HDMF is P18,000 for

the year.

His income tax liability will be computed as follows:

Solution
Basic compensation 420,000
Add: Income from Singapore 150,000
Less: Mandatory contribution 18,000
Non-taxable benefits 90,000 108,000
Taxable income 462,000

Tax due = On 400K 30,000

On excess (462,000-400,000)*25%= 15,500
45,500
Illustration
Mr. Dumale a non-resident citizen working for a company in
Manila and in Malaysia has the following income:

His salary in the Philippine for 2019 is P 300,000.

His total annual deductions for SSS, Philhealth and HDMF is
P8,000.
In addition during the year, he received a 13th month pay of
P25,000 and bonus of P25,000.
Income from Malaysia amounted to P100,000 only.

His income tax liability will be computed as follows:

Solution
Annual salary 300,000
Add: 13th month pay 25,000
Bonus 25,000 50,000
Total compensation 350,000

Less: Mandatory contributions 8,000

Non-taxable benefits 50,000 58,000
Taxable income 292,000
Tax due On P250K - 0
On excess (P292,000 - P250,000)x 20% = 8,400
8,400
Problem Exercise
GROSS COMPENSATION – PHILIPPINES 750,000
INCOME FROM SINGAPORE 250,000
a) Gross compensation includes 13th month pay of P50,000 and P 45,000
bonus during the year.
b) Annual mandatory deduction from his salary amounted to P 24,000 only.
Compute the taxable income and tax due assuming the taxpayer is a:
1. Resident Citizen
2. Non resident Citizen
3. Resident Alien
4. Non-resident Alien - Engaged in Trade or Business
5. Non-resident Alien - Not Engaged in Trade or Business
6. Employee of regional or area headquarters of multi-national company/
offshore banking units/petroleum service contractor/sub-contractor
Installment Payment of Tax Due
When the tax due is in excess of Two Thousand Pesos
(P2,000), the individual may elect to pay in two equal
installments, in which case, the first installment shall be
paid at the time the annual income tax return is filed and
the second installment paid on or before October 15
following the close of the calendar year.

If any payment is not paid on or before due date, the whole
amount of the unpaid tax becomes due and payable,
together with delinquency penalties to be reckoned on the
original date when the tax is required to be paid.
Individual not required to file ITR
Individual earning purely compensation income not
exceeding Two Hundred Fifty Thousand Pesos
(P250,000)
Individual whose income tax has been correctly
withheld by his employer, provided he only have one
employer for the taxable year.
Individual whose sole income has been subjected to
final withholding tax.
A minimum wage earner.
PASSIVE INCOME
Passive income are subject to a separate and final tax.

 Interest from any currency bank deposit and yield or

any other monetary benefit from deposits substitute
and from trust funds and similar arrangements – 20%

 Interest income received by an individual taxpayer

(except a non-resident individual) from a depository
bank under the expanded foreign currency deposit
system – 15%
PASSIVE INCOME
Proceeds of pre-terminated long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitute, investment
management account and other investments
evidenced by certificates in such form as prescribed by
the Bangko Sentral ng Pilipinas – final tax shall be
base on remaining maturity of the investment;
4 years but less than 5 years - 5%
3 years but less than 4 years - 12%
Less than 3 years - 20%
PASSIVE INCOME
Royalties (except royalties on books and other literary
works and musical composition) – 20%

Royalties on books and other literary works and

musical composition – 10%

Prizes (except prizes amounting to P10,000 or less) –

20%
PASSIVE INCOME
Winnings (except Philippine Charity Sweepstakes and
Lotto winnings amounting to P10,000 or less) – 20%

Cash and Property Dividends – 10%

Capital gains from sale of shares of stocks not traded in

the stock Exchange – 15%

Capital gains from sale of Real property located in the

Philippines - 6%
Definition of Terms
Foreign currency deposit system (FCDS)- shall
refer to the conduct of baking transactions
whereby any person, whether natural or juridical,
may deposit foreign currencies forming part of the
Philippine international reserves, in accordance
with the provision of R.A. 6426 entitled “An Act
Instituting a Foreign Currency Deposit System in
the Philippines, and For Other Purposes”.
Definition of Terms
Foreign currency deposit unit (FCDU)- shall refer to
that unit of local bank or a local branch of a foreign
bank authorized by the Bangko Sentral ng Pilipinas
(BSP) to engaged in foreign currency-denominated
transactions, pursuant to the provision of R.A.6426, as
amended. Local bank shall refer to a thrift bank or a
commercial bank organized under the laws of the
Republic of the Philippines. Local branch of a foreign
bank shall refer to a branch of a foreign bank doing
business is the Philippines, pursuant to the provision of
R.A.337, as amended.
Definition of Terms
Offshore banking system – shall refer to
the conduct of banking transactions in
foreign currencies involving the receipt of
funds principally from external and internal
sources and the utilization of such fund
pursuant to Presidential Decree 1034 as
implemented by Bangko Sentral ng Pilipinas
(BSP) Circular 1389, as amended.
Definition of Terms
Offshore banking unit (OBU)- shall mean
a branch, subsidiary or affiliate of a foreign
banking corporation which is duly
authorized by the BSP to transact offshore
banking business in the Philippines in
accordance with the provision of Presidential
Decree 1034 as implemented by Central Bank
Circular 1389, amended.
Definition of Terms
Deposits - in connection with offshore
banking shall mean funds in foreign
currencies which are accepted and held by an
Offshore Banking Unit of Foreign Currency
Deposit Unit in the regular course of
business, with the obligation to return an
equivalent amount to the owner thereof, with
or without interest.
Definition of Terms
Deposit substitute – shall mean an alternative from
obtaining funds from the public (borrowing from 20 or
more individuals or corporate lender) other than
deposit, through the issuance, endorsement, or
acceptance of debt instrument for the borrower own
account, for the purpose of relending or purchasing or
receivables and other obligations, or financing their
own needs or the needs of their agent dealer.
Ex. Promissory notes, banker’s acceptance, repurchase
agreement, certificate of assignment
Individual Exempt from Tax
1. Non-resident citizen who intend to resides permanently
abroad, required to stay abroad most of the time and
those who return during the year to reside permanently in
the Philippines
2. Overseas Contract Workers including Seaman
3. Barangay Micro Business Enterprises (RA1978)
4. Expanded Senior Citizen Act of 2010
5. Personal Equity and Retirement Act of 2008(PERA)
6. Philippine nationals and alien employed in foreign
government, embassies, diplomatic mission, and
international organization situated in the Philippines
Personal Equity and Retirement Act of
2008 (RA9505)
PERA – shall refer to an individual’s voluntary
retirement account established from his PERA
contribution and/or his employer contribution, for the
purpose of being invested solely in an eligible PERA
investment products, duly approved by the concerned
regulatory authority, such as:

Unit investment trust fund, mutual fund, annuity

contract, pension plan, share of stocks traded in local
stock change, exchange traded-bonds, gov’t securities.
Filing and Declaration of Income Tax
Philippine nationals and alien individuals not covered by
tax exemptions either international or local laws shall
file their annual income tax returns on or before the
15th day of APRIL each year using BIR Form 1700 or
1701.

The annual tax return shall be filed with the RDO,

Authorized Agent Bank or other office with
jurisdiction.
Consequence of non-filing/non-payment of
Tax Returns covered Individuals

Failure to file annual income tax return and to

pay the income tax due thereon constitute a
violation of Section 254 and 255 of the Tax
Code. The BIR shall issue tax assessments,
inclusive of surcharges, interest and
compromise penalties (SIC) and initiate the
pertinent criminal actions.
Confirmation of Tax Exemption/Treatment

International organizations maintaining

offices, HQ or operation in the Philippines
or their respective employees claiming
exemption shall file an application for
confirmation of tax exemption/tax
treatment with the International Tax Affairs
Division (ITAD) of the BIR.
The End