Introduction of Income Tax

Income Tax on Individuals

Concept of Income Tax

• Income tax is a tax on all yearly profits arising from property,

profession, trade, or business, or is a tax on a person’s income,
emoluments, profits and the like.
• Simply, an income tax is one levied on the income from property or an
occupation.
• It is a direct tax upon the thing called income.
Purpose of Income Tax

• To raise revenue to defray the expenses of the government; and

• To mitigate the evils arising from the inequalities of wealth by a
progressive scheme of taxation which places the burden to those best
able to pay
Characteristics of Philippine Income Tax

• A national tax – It is imposed and collected by the National

Government throughout the country.
• A general tax – It is levied without a specific or predetermined
purpose. Thus, revenue from income tax may be appropriated for the
general public purpose.
• An excise tax – It is imposed on the right or privilege of a person to
receive or earn income.
• A direct tax – It is payable by the person upon whom it is directly
imposed by law. It cannot be shifted or passed on to others.
Characteristics of Philippine Income Tax
• A progressive tax – It is based upon one’s ability to pay.
• The income tax system is a comprehensive system – It adopts the citizen
principle, the residence principle, and the source principle.
• Semi-global or semi-schedular system – Some types of taxable income are
compounded or grouped together without distinction, and after deducting
expenses, and other allowable deductions therefrom, are then subjected to
the same set of tax rate(s). This is known as the global tax system (or net
income tax system).
• However there are some types of taxable income like passive income and
certain capital gains which are classified into different categories, and are
accorded different tax treatments. Each category of income has its own
schedule of tax rates. This is known as the schedular tax system (or gross
income tax system).
Meaning of Income

• Income means all wealth which flows into the taxpayer other than a
mere return of capital. Income is a gain derived from:
• The use or employment of labor or capital, or both labor and capital; and/or
• From the sale of other disposition of assets or property (both ordinary and
capital).
Income Distinguish From “Capital”

• Capital is a fund, income is a flow. Capital is wealth, while income is

the service (or fruit) of wealth. Capital is the tree, income the fruit.
Theory of Separability or Severance Test of
Income
• Under the doctrine of severance of test of income, in order that
income may exist, it is necessary that there be a separation from
capital of something of exchangeable value.
• The concept of income requires a realization of gain.
• The following are examples which do not give rise to income nor to a
realization of gain, and therefore no income tax shall be imposed:
• Stock dividend
• Mere increase in the value of property.
Requisites for Taxability of Income

• There must be a gain or profit whether in cash or its equivalent;

• The gain must be realized or received; and
• The gain must not be excluded by law or international treaty from
taxation.
Classification of Income According to Source

• For income tax purposes, the word “source” refers to the activity, or
property, or labor that gave rise or produced the income.
• Based on source, income is classified as follows:
• Income from sources within the Philippines;
• Income from sources without the Philippines; and
• Income from sources partly within and partly without the Philippines.
How to Determine Income Within and Income
Without
Income Test Source of Income
1. Interest income Residence of the debtor
2. Income from services Place of performance
3. Rent Location of property
4. Royalty Place of use of intangible
5. Gain on sale of real Location of property
property
6. Gain on sale of Place of sale
personal property
purchased in one country
and sold in another
How to Determine Income Within and
Income Without
Income Test Source of Income
7. Dividend  
A. From Domestic Corporation Income within

B. From Foreign Corporation 1) Income within, if 50% or more of the

gross income of the foreign corporation
for the preceding three (3) years prior to
the declaration of dividend or for such
part of such period as the corporation
has been in existence, was derived from
sources within the Philippines.
 
(Phil. Gross Income/Total Gross
Income) x Dividend = Income within
 
2) Income without, if less than 50% or more
of the gross income of the foreign
corporation for the preceding three (3)
years prior to the declaration of dividend
or for such part of such period as the
corporation has been in existence, was
derived from sources within the
Philippines.
How to Determine Income Within and
Income Without

Income Test Source of Income

8. Sale of domestic shares Income within
9. Sale of foreign shares Income without
10. Income from Partly within and partly
transportation and without
other services
rendered partly within
and partly without the
Philippines
Situs of Income

• The situs of the income is the place of taxation of the income or the
country which has jurisdiction to impose the tax. For income tax
purposes, income may be taxed in one or more or all of the following
places or countries –
• The place where the taxpayer is a citizen;
• The place where the taxpayer is a resident; and
• The place where the income is earned or derived.
General Categories of Individual Taxpayers

1. Resident Citizen
Under Sec. 1, Art IV of the 1987 Constitution, the following are citizens
of the Philippines:
a) Those who are citizens at the time of the adoption of the 1987
Constitution; or
b) Those whose fathers and mothers are citizens; or
c) Those born before January 17, 1973 of Filipino mothers, and who
elect Philippine citizenship upon reaching majority age; or
d) Those who are naturalized in accordance with law;
e) AND whose residence is within the Philippines
General Categories of Individual Taxpayers
2. Non-resident citizen
• Citizen who establishes the fact of his physical presence abroad with a
definite intention to reside therein;
• Citizen who leaves for abroad either as an immigrant, or for employment on a
permanent basis;
• Citizen who derives income from abroad which requires him to be physically
present abroad most of the time (≥183 days) during the year (Sec. 22(E))
General Categories of Individual Taxpayers
3. Resident Alien
• Not a citizen but whose residence is within the Philippines.
• Not a mere transient or sojourner as determined by his intention regarding
the nature and length of stay.
General Categories of Individual Taxpayers
4. Non-resident alien (NRA)
• Not a citizen, not a resident of the Philippines
4.1 Engaged in Trade or Business (ETD)
• If stay in the Philippines is for >180 days during the year
4.2 Not Engaged in Trade or Business (NETD)
• If stay in the Philippines is for ≤180 days during the year (Sec 25(A)(1))
Other Categories of Individual Taxpayers
• Overseas Contract Worker (OCW)
• Citizen working or deriving income from abroad. Must be registered with the
Philippine Overseas Employment Administration (POEA);
• Seaman who is a citizen and works as a member of the complement of a
vessel engaged exclusively in international trade (Sec 22(F))
Other Categories of Individual Taxpayers
• Special Individual taxpayer
• Non-resident alien cinematographic film owner, lessor, or distributor
• Subcontractor, whether citizen, resident alien, or NRAETB, of service
contractor engaged in petroleum operations
• Filipinos registered with the BOI availing Income Tax Holiday (ITH)
• PEZA-registered individuals availing of ITH incentive
• PEZA- registered individuals availing of 5% gross income tax (GIT) incentives
• Individual registered as a Barangay Micro Business Enterprise (BMBE)
Other Categories of Individual Taxpayers
• Minimum Wage Earners (MWEs)
• Worker, whether in the public or private sector, who paid not more than the
statutory wage (Sec. 22 (HH))
Income Tax System of the Philippines

• The income tax system of the Philippines may be characterized under

two general categories; namely:
• Gross income taxation, whereby a final tax is imposed on the gross amount of
specific types of income, such as interest income, royalty, prizes, dividends,
and capital gains. This is also known as the schedular system of taxation.
• Net income of taxation, whereby certain deductions are allowed and
subtracted from the aggregate of incomes not subject to final tax, and the tax
computed is based on the resulting net income derived therefrom. This is also
known as the global system of taxation.
Types of Taxable Income

“Returnable” Income Passive Income subject to Capital Gains subject to

Final Tax (FT) Capital Gains Tax (CGT)
a. Compensation income Earned without any active Arise form the sale of 2
from being an action on the part of the types of capital assets,
employee; taxpayer. Ex. Dividends, namely:
b. Income from trade, interest, income on bank a. Real property in the
business, or practice of deposits Philippines classified as
a profession; capital asset; and
c. Gain from sale of b. Shares of domestic
ordinary assets; corporations (provided
d. Net capital gain from the seller or taxpayer is
sale of “other capital not a dealer in
assets”; and securities)
e. Other taxable income
not subject to FT or
CGT.
• “Returnable” Income means taxable income as defined in Section 31
of National Internal Revenue Code, the tax is computed under the
revised Sec 24(A), except for NRA-NETB
Steps on How to Compute the Tax of an
Individual
Step 1: Type of “Returnable” Passive Income Capital Gains
Income Income
Step 2: Type of Generally, Subject to Final Subject to
Tax Liability subject to Net Tax Capital Gains
Income Tax
Taxation
 
Exc. NRANETB

Step 3: Actual Gross Income Passive income Capital Gains x

Computation less deduction x FT rate CGT rate
= Net Taxable
Income then
compute tax
using table
Returnable Income
Individual Sources of Type of Tax Base Tax Rate
Taxpayer Taxable Returnable
Income Income
1. Resident Within and Compensation Taxable Graduated
Citizen Without the Income Compensation Rates
Philippines   Income  
       
Income from Gross Income  
2. Non-resident Within the
Business, Trade less Deductions Graduated
citizen Philippines
or Practice of   Rates
3. OCWs/OFWs Within the Profession OR Gross  
Philippines Sales/Receipts  
4. Resident Alien Within the Plus Non- 8%
Philippines operating
5. Non-resident Within the Income
alien ETB Philippines
6. Non-resident Within the   Gross Income 25%
alien NETB Philippines
Tax Rates: January 1, 2018 to December 31,
2022
Range of Taxable Income (TI) Tax Due = a + [b x (TI - c)]
Of Excess
Over Not Over Basic Amount Additional Rate 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
Tax Rates: Effective January 1, 2023 onwards

Range of Taxable Income (TI) Tax Due = a + [b x (TI - c)]

Additional Of Excess
Over Not Over Basic Amount Rate Over
    (a) (b) (c)
- - -
250,000  
-
250,000 400,000 15% 250,000

400,000 800,000 22,500 20% 400,000

800,000 2,000,000 102,500 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
Gross Sales and Gross Receipts

• Gross sales, for the purpose of the 8% income tax, shall be the total sales,
net of VAT, and net of the following deduction: 1) sales return and
allowances; and 2) discounts determined and granted at the time of sale.
• Gross receipts, for the purpose of the 8% income tax, refers to the total
amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged
for materials supplied with the services, and deposits and advance
payments, actually or constructively received during the taxable period for
the service performed or to be performed for another person, except for
returnable security deposits. In the case of a VAT taxpayer, this shall exclude
the VAT. (RR 8-2018)