Introduction to

Income Tax
Atty. C. Llamado
 2

Concept of Income Tax

An income tax is one levied on the
income from property or
an occupation.
It is a direct tax upon the thing called
income.
 3

Purpose of Income Tax

The imposition of the income tax is intended:

1. To raise revenue to defray the expenses of the

government and;

2. To mitigate the evils arising from the inequalities

of wealth by a progressive scheme of taxation which
places the burden on those best able to pay.
 4

Characteristic of Tax
1. A national tax

It is imposed and collected by the National Government throughout the country.

2. A general tax

It is levied without a specific or predetermined purpose. Thus, the revenue from income
tax may be appropriated for general public purposes.

3. An excise tax

- It is payable by the person upon whom it is directly imposed by law. It cannot

be shifted or passed on to others.
 5

Characteristic of Tax
4. 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.
5. In general, a progressive tax for individual taxpayers

for individual taxpayers - It is based upon one's ability to pay. The higher the taxable net
income of the individual, the higher the marginal tax rate."

6. The income tax system is a comprehensive system

is a comprehensive system. It adopts the citizen principle, the residence principle,

and the source principle.
 6

Characteristic of Tax
7. 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).
 7

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:

a). The use or employment of labor or capital, or both labor

and capital; and/or

b) From the sale or other disposition of assets or property

(both ordinary and capital).
 8

Income Distinguished 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.

“Amounts received as a return of

capital are not income."
 9

Theory of Separability or
Severance Test of Income

Under the doctrine of severance 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.

 10

Theory of Separability or
Severance Test of Income

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:

1) Stock dividends;

2) Mere increase in the value of property.

 11

Requisites for Taxability of Income

1. There must be a gain or profit whether in cash or its

equivalent;

2. The gain must be realized or received; and

3. The gain must not be excluded by law or

international treaty from taxation.
 12

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.

income is classified as follows:

1. Income from sources within the Philippines;

2. Income from sources without the Philippines; and

3. Income from sources partly within and partly without the

Philippines."
 13

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 -

1. The place where the taxpayer is a citizen;

2. The place where the taxpayer is a resident; and

3. The place where the income is earned or derived.

 14

Income Tax System of the Philippines

The income tax system of the Philippines may be characterized

under two general categories, namely:

1. Gross income taxation, whereby a final tax is imposed on

the gross amount of specified types of income, such as interest
income, royalty, prizes, dividends, and capital gains. This is
also known as the schedular system of taxation.
 15

Income Tax System of the Philippines

2. Net income 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 therefrom. This is also known as the
global system of taxation.
 16
Types of Taxable Income
Passive Income subject to Final Capital Gains subject to Capital
"Returnable" Income Tax ("FT") Gains Tax (CGT)
a) Compensation income from being Earned without any further action Arise from the sale of 2 types of
an employee on the part of the taxpayer. Ex. capital assets, namely:
dividends, interest income on bank
b) Income from trade, business, or deposits a) Real property in the Philippines
practice of profession a Gain from sale classified as capital asset; and
of ordinary assets;
b) Shares of domestic corporations
d) Net capital gain from sale of "other (provided the seller or taxpayer is not
capital assets" and dealer in securities)

e) Other taxable income not subject to

FT or CGT.

Income Tax Return (ITR) Final Tax Income Tax Return (ITR)
 17

Steps on How to Compute the Tax of an Individual

Step 1: Type of
Returnable Income Passive Income Capital Gains
Income

Generally, subject to
Step 2: Type of Tax Net Income Taxation Subjects to Capital Gains
Subject to Final Tax (FTW)
Liability Tax (FTW)
EXC: NRANETB

Gross Income XXX

Less Deductions (XXX)
Step 3: Actual Net Taxable Income XXX “Capital Gains” X CGT
Passive Income X FT Rate
Computation THEN rate
Compute Tax
(using graduated rate table)
 18

General Categories of Individual Tax

1. Resident Citizen
Under Sec. 1, Art IV of the 1987 Constitution, the following are citizens of the Philippines:

(1) Those who are citizens at the time of the adoption of the 1987 Constitution; or

(2) Those whose fathers and mothers are citizens; or

(3) Those born before January 17, 1973 of Filipino mothers, and who elect Philippine
citizenship upon reaching majority age; or (4) Those who are naturalized in accordance
with law.

AND Whose residence is within the Philippines

 19

General Categories of Individual Tax

2. Non-Resident Citizen

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

b. Citizen who leaves for abroad either as an immigrant, or for employment on a

permanent basis;

c. 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))
 20

General Categories of Individual Tax

3. Overseas Contract Worker or OCW

a) Citizen working or deriving income from abroad. Must be registered with the POEA;

b) Seaman who is a citizen and works as a member of the complement of a vessel

engaged exclusively in international trade (Sec. 22(F))
 21

General Categories of Individual Tax

4. Resident Alien

Not a citizen but whose residence is within the Philippines.

His purpose in coming to the Philippines requires an extended stay in the country, and
makes his home temporarily in the Philippines (ex. expatriates or those employed in the
Philippines).

Not a mere transient or sojourner as determined by his intention regarding the nature and
length of stay.
 22

General Categories of Individual Tax

5. Non-resident alien

a) ETB (Note 2) = If stay in the Philippines is for > 180 days during the year

b) NETB =If stay in the Philippines is for 180 days during the year
(Sec. 25(A)(1))
 23

General Categories of Individual Tax

6. Special Individual taxpayers
a) Non-resident alien cinematographic film owner, lessor, or distributor

b) Subcontractor, whether citizen, resident alien, or NRAETB, of service contractors

engaged in petroleum operations

c) Filipinos registered with the BOI availing of the Income Tax Holiday ("ITH")

d) PEZA-registered individuals availing of ITH incentive

e) PEZA-registered individuals availing of 5% gross income tax (GIT) incentive

f) Individual registered as a BMB

 24

General Categories of Individual Tax

7. Exempted Minimum Wage Earners or MWEs
Worker, whether in the public or private sector, who is paid not more than the
statutory minimum wage (Sec. 22 (HH)).

Notes:
1) A non-resident citizen who arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines shall be treated as a non-resident citizen for the taxable year
in which he arrives in the Philippines with respect to his income from sources abroad until the
date of his arrival in the Philippines.

2) "Trade or business" includes functions of public office, performance of personal services, but
normally does not include performance of services as an employee.
 25

Special Individual Taxpayers

1. BOI-Registered Filipinos Availing of Income Tax Holiday (ITH)

All registered individuals shall be granted the ITH incentive to the

extent they are engaged in a preferred area of investment as declared
by the Board of Investments (BOI) under E.O. No. 226 (Omnibus
Investments Code).
 26

Returnable Income
7. Special Individual Type of Income Tax Base Tax Rates
Taxpayers

a. Non-resident Income from film Gross Income 25% FT

alien leasing and
cinematographic distribution within the
film Philippines (including
owner,lessor,or royalties)
distributor
 27

Returnable Income
b.) Subcontractor, Income derived from Gross Income 8%FT
whether citizen , contract with a service
resident, alien, or contractor engaged in
NRAETB, of service petroleum operations in
contractors engaged in the Philippines.
petroleum operations.

c.) Filipinos registered Income from registered Exempt

with the BOI availing of activities
the Income Tax Holiday
(“ITH)

d.) PEZA- registered Income from registered Exempt

individuals availing of activities
ITH incentive
 28

Returnable Income
e.) PEZA- registered Income from registered Gross Income 5%
individuals availing of activities
5% gross income tax
(GIT) incentive.

f.) Individual registered Income arising purely Exempt

as BMBE from its operation as a
BMBE

8.MWEs Statutory Minimum Exempt

Wage (SMW) including
holiday pay, overtime
pay, night shift
differential pay, and
hazard pay.
 29

Special Individual Taxpayers

1. BOI-REGISTERED FILIPINOS AVAILING OF INCOME TAX
HOLIDAY (ITH)
All registered individuals shall be granted the ITH incentive to the extent they are
engaged in a preferred area of investment as declared by the Board of Investments
(BOI) under E.O. No. 226 (Omnibus Investments Code).
To qualify for BOI registration, and individual must be engaged or is proposing to engage:

1) In an area of activity listed in the Investment Priorities Plan ("IPP");

2) If not so listed, at least fifty percent (50%) of its production is for export if a
Philippine national, or at least seventy percent (70%) of its production is for export
if a foreigner,
 30

Special Individual Taxpayers

3) exporting part of its production under such terms and conditions and/or limited incentives as
the BOI may determine;

4) producing or manufacturing a product which is used as input to an export product;

5) export trading of export products bought by it from one or more export producers;

6) rendering service to domestic and foreign tourists if listed in the IPP,

7) in rendering technical, professional or other services as may be determined by the BOI which
are paid for in foreign currency, or

8) in exporting television and motion pictures and musical recordings made or produced in the
Philippines, either directly or through an export trader.
 31

Special Individual Taxpayers

ITH - exemption from income taxes levied by the National
Government.Registered individuals may avail of the ITH to the extent they are
engaged in a preferred area of investment (either pioneer or non-pioneer).

Period of availment shall be as follows:

(1) New registered pioneer firms-for 6 years from commercial operations.

(2) New registered non-pioneer" firms-for 4 years from commercial operations.

(3) Expanding firms-for 3 years from commercial operations of the expansion.

 32

Special Individual Taxpayers

Rule 1, Sec. 1(1), IRR of EO. No. 226.

Pioneer Enterprise shall mean a registered enterprise:

(1) Engaged in the manufacture, processing or production, and not merely in the
assembly or packaging of goods, products, commodities or raw materials that have
not been or are not being produced in the Philippines on a commercial scale, or

(2) Which uses a design, formula , scheme, method, process or system of production
or transformation of any element, substance or raw materials into another raw
material or finished goods which is new and untried in the Philippines, or
 33

Special Individual Taxpayer

(3) Engaged in the pursuit of agricultural, forestry and mining activities and/or
services including the industrial aspects of food processing whenever appropriate,
pre-determined by the BOL, in consultation with the appropriate Department, to be
feasible and highly essential to the attainment of the national goal, in relation to a
declared specific national food and agricultural program for self-sufficiency and
other social benefits of the project; or

(4) Which produces non-conventional feels or manufactures equipment which utilize

non- Conventional sources of energy, or uses or converts to coal or other non-
conventional fuels or sources of energy in its production, manufacturing or
processing operations.
 34

Special Individual Taxpayers

"Non-Pioneer Enterprise" shall include all registered producer enterprises
other than pioneer enterprises (Art. 18, E.O. No. 226)

In exceptional cases, existing firms undertaking new activities distinct from existing
operations may qualify as new projects subject to the setting up of separate books of
account. In such cases, only sales of such registered products shall be entitled to the
ITH exemption.

Export traders and service exporters shall be entitled to the ITH if they will export
products and services which are new exports for the Philippines , or will serve new
export markets.
 35

Special Individual Taxpayer

Additional Period of Availment For new registered firms, the ITH incentive
may be extended for an extra year for each of the following cases, but in no case to
exceed the total period of eight (8) years for pioneer registered enterprises:

(1) If the average cost of indigenous raw materials used in the manufacture of the
registered product is at least fifty percent (50%) of the total cost of raw materials for the
preceding years prior to the extension unless the BOI prescribes a higher percentage; or

(2) If the annual or average net foreign exchange savings or earnings ("NFEE") amount
to at least US$500,000.00 during the first three (3) years of operations to be determined
by the BOI at the end of such three-year period.
 36

Special Individual Taxpayer

2.PEZA"-REGISTERED ENTERPRISES IN ECOZONES"
1) Income Tax Holiday ("ITH")-Individuals registered as ECOZONE (a) Export
Enterprises or (b) Free Trade Enterprises may choose to avail of this incentive under
E.O. No. 226.

Note: PEZA-registered entities enjoying ITH also enjoy the following incentives:

(a) exemption from duties and taxes on importation into the ECOZONE:

(b) exemption from payment of the RPT on machineries and equipment they acquire or use
in their production operations, during the first three (3) years of use of such machinery and
equipment; and

(c) exemption from payment of local taxes. liceman and fees. except the real estate tax
 37

Special Individual Taxpayer

2) Five (5%) on Gross Income ("5% GIT")-5% of the gross income earned by
the business enterprise within the ECOZONE shall be paid and remitted as
follows:

a) Three percent (3%) to the National Government;

b) Two percent (29%) which shall be directly remitted by the business establishments to the
treasurer's office of the municipality or city where the enterprise is located.

The 5% GIT shall be in lieu of all other taxes (national or local), except for real property
taxes on land owned by an ECOZONE developer/operator.
 38

Special Individual taxpayer

The 5% GIT shall be available to:

(a) Individuals registered as ECOZONE

(1) Export Enterprises or

(2) FreeTrade Enterprises, upon expiry of the ITH if such individual chose to avail of
the ITH at the start of its operations, and

(b) Other individuals registered as ECOZONE

(1) Developers/Operators ,(2) Export Enterprises, (3) Free Trade Enterprises,

(4)Domestic Market Enterprises ,(5) Utilities Enterprises, (6) Facilities Enterprises, or (7)
Tourism Enterprises.
 39

● *"Gross Income" refers to gross sales or gross revenues derived from business
activity within the ECOZONE, net of sales discounts, sales returns and
allowances, and minus costs of sales or direct costs but before any deduction is
made for administrative expenses or incidental losses during a given taxable
period (Rule 1, Sec. 2 (nn), IRR of R.A. No. 7916).
● *National taxes shall mean all internal revenne taxes including: (1) Regular
Income Tax: (2) VAT: (3) OPT; (4) DST: (5) Excise Tax; and (6) Customs duties
and import charges.
● *Local taxes shall include: (1) Business taxes; (2) Real Property Tax, sacent on
lands owned by an ECOZONE Developer or IT Park/Building Developer, and (3)
Other taxes, fees, and charges imposed by Local Government Units (LCUs). (BIR
Ruling DA-326-07)
 40

● Developer/Operator develops, operates, and maintains an ECOZONE, and the

required infrastructure facilities and utilities such as light and power systems,
water supply and distribution systems, sewerage and drainage systems, pollution
control devices, communication facilities, paved road network, administration
building and other facilities as may be required by the PEZA.
● *Domestic Market Enterprise- engages in manufacturing, assembling or
processing activities resulting in the sale of its finished products (1) in the
Customs Territory, or (2) in the non restricted or authorized areas within the
ECOZONE in its entirety, or (3) if exporting a portion of its production, it
continually fails to export at least 50% thereof for a period of 3 years without any
justifiable reason.
 41

(a) The exemption from all other taxes under the ITH and 5% GIT regimes does

not include the following:

1) Withholding taxes at source (expanded withholding tax ("EWT") and Final Withholding
Tax ("FWT")) on income payments by PEZA registered individuals;

2) Withholding tax on compensation income of employees of PEZA registered individuals;

and

3) Fringe Benefits Tax ("FBT") on fringe benefits given to managerial or supervisory

employees of PEZA-registered individuals.

Notes
 42

(b) On the other hand, income payments received from its customers related to its
registered activities, by a PEZA-registered enterprise, whether availing the ITH or 5%
GIT incentive, are exempt from the withholding tax.
(c) Income derived by an individual registered with the PEZA from its registered
activities shall be subject to such treatment as may be specified in its terms of
registration, i.e. (a) the ITH where such income shall be exempt from the regular
income tax; or (b) the 5% preferential GIT, if the same has been approved.
However, the following shall be subject to the regular internal revenue taxes (Le.,
regular individual income taxes; final taxes on bank deposits, capital gains taxes, etc.):
(1) Income realized by registered individuals from activities which are not registered:
(2) Income of all other persons and entities which are not registered (ie. income
payments to entities in the Customs Territory, to shareholders, and to non-registered
creditors, etc.)
 43

(3) Income of Service Enterprises or providers (eg those providing customs brokerage,
transportation, parcel, janitorial, restaurant, banking. insurance services, etc.) which are
required by locator enterprises but which need not be physically based inside the
ECOZONE.

3.INDIVIDUALS REGISTERED AS BARANGAY MICRO BUSINESS

ENTERPRISE (BMBE)

A Barangay Micro Business Enterprise or BMBE refers to any business entity or

enterprise engaged in the production, processing, or manufacturing of products or
commodities, including agro-processing, trading, and services", which activities are
barangay-based and micro-business" in nature, and whose total assets including those
arising from loans but exclusive of the land on which the particular business entity's
office, plant and equipment are situated, shall not be more than Three Million Pesos
(P3,000,000.00)
 44
● "Services" shall exclude those rendered by anyone, who is duly licensed by the
government after having passed a government licensure examination, in connection
with the exercise of one's profession (eg, lawyer, doctor, accountant, etc.) (Sec. 3(a), R.A.
No. 9178).
● It shall also exclude services rendered by juridical persons such as partnerships or
corporations engaged in consultancy, advisory, and similar services where the
performance of such services are essentially carried out through licensed professionals
(DOF DO. 17.04).
● It shall be considered "micro-business in nature and scope" if

(i) its principal activity is primarily for livelihood, or determined by the Small and Medium
Enterprises Development (SMED) Council or DTI as a priority areas for development or
government assistance;

(ii) the enterprise is not a branch, subsidiary, division or office of a large-scale enterprise;
and
 45

(iii) its policies and business modus operandi are not determined by a large-scale enterprise
or by persons who are not owners or employees of the enterprise (ie. franchises) (DOF D.O.
No. 17-04).

Fiscal Incentives
Registered BMBEs can avail of the following incentives:

(1) Income tax exemption from income arising from the operations of the enterprise;
 46

A duly registered BMBE shall be exempt from income tax on income arising purely from
its operations as such BMBE.

Provided:
(i) the income tax exemption shall not apply to (a) income subject to final taxes, (b) capital
gains subject to the capital gains tax, and (c) compensation income (of employees) (d) income
from practice of a profession received directly from clients or from a general professional
partnership; and (e) other income not effectively connected with the operations of the BMBE

(ii) The exemption also does not extend to business taxes (VAT or OPT).

(iii) The exemption does not extend to local taxes. However, the LGUs are encouraged either to
reduce the amount of local taxes, fees and charges imposed or to exempt the BMBES from
local taxes, fees and charges.
 47

(2) Exemption from the coverage of the Minimum Wage Law, BMBE employees
will still receive the same social security and health care benefits as other
employees;

(3) Priority to a special credit window set up specifically for the financing
requirements of BMBEs; and

(4) Technology transfer, production and management training, and marketing

assistance programs for BMBE beneficiaries.
 48

(4) MINIMUM WAGE EARNERS

(MWES)
MWEs shall be exempt from the payment of income tax on their statutory minimum
wage Holiday pay, overtime pay, night shift differential pay, and hazard pay received by
such minimum wage earner shall likewise be exempted from income tax

Notes
An employee who has 2 or more employers each paying him an SMW, shall remain to
be an MWE exempt from income tax and withholding tax on the SMW he receives from
each employer.
 49
However, the Following Income Payments to MWEs are Taxable and
Subject to Withholding:

1) Additional compensation received from his employer, other than the

SMW holiday pay, overtime pay, hazard pay, and night shift differential
pay, such as (a)commissions, (b) honoraria, (c) fringe benefits, (d) benefits
in excess of the allowable statutory amount of "13" month pay and other
benefits" of P90,000, (e) taxable allowances, and (f) other taxable income.

2) Income from the conduct of trade, business, or practice of a profession

(except income subject to final tax), in addition to his compensation
income.
 50

Interest on foreign currency deposit is taxable if received by an individual taxpayer,

except a non-resident individual, who may be a non-resident citizen or a non-
resident alien

An OCW shall be exempt from the 15% final tax on interest income from a foreign
currency bank deposit in the Philippines. However, if the deposit account is jointly
in the name of an OCW and another individual (spouse or dependent) who is a
Philippine resident, only 50% of the interest income shall be exempt, while the other
50% shall be subject to the 15% FWT.

4. Interest income from savings and time deposits of members with their credit
cooperative-exempt from the 20% FWT.
 51

5. BIR Forms filed by the Payor of the Income

Monthly Remittance ( form 06101F )
Quarterly Remittance (form 1601f )
Filed not later than the 10th day of the month following the month when
withholding was made. Filed for the first two (2) months of each calendar
quarter.
Filed not later than the last day of the month following the close of the quarter
during which withholding was made.

Attachment: Quarterly Alphabetical List of Payees (QAP) reflecting the name of

the payees, their TIN, amount of income paid to each, and FT withheld from
each.
Quarterly Remittance of FTs Withheld on
Interest paid on Deposits/Deposit
Substitutes/Trusts/Etc (Form 1602Q) Filed not later than the last day of the month following the close of the quarter.

Filed on or before January 31 of the year following the calendar year in which the
income payments subject to FWTs were paid or accrued.
Annual Information Return of FWTs Annual alphalist of payees, income payments, and FWTS shall be reflected in the
(Form 1604-F) Schedules of Form 1604-F.
 52
6. Dividends received from a Foreign Corporation:

IF RECEIVED BY:

RC NRC, RA, NRAETB NRAETB

GR: such dividend is Included in the ITR Exempt Exempt

income tax

EXC: when dividend is 100% of dividend is Part without shall be Part without shall be
sourced partly within included in the ITR exempt exempt
and partly without
Part within shall be Part within shall be
included in the ITR subject to a 25% FT

1. To be subject to the final withholding tax ("FWT"), (a) the income must be taxable by the
Philippine government and (b) the payor must be under the jurisdiction of the BIR. This
means that such income must necessarily be sourced within the Philippines.
 53
6. Dividends received from a Foreign Corporation:

if received by:

RC NRC, RA, NRAETB NRANETB

GR: such dividend is Included in the ITR Exempt Exempt

income tax

EXC: when dividend is sourced 100% of dividend is included Part without shall be exempt Part without shall be exempt
partly within and partly without in the ITR
Part within shall be included in Part within shall be subject to a
the ITR 25% FT

1. To be subject to the final withholding tax ("FWT"), (a) the income must be taxable by the Philippine government and (b) the payor
must be under the jurisdiction of the BIR. This means that such income must necessarily be sourced within the Philippines.

2. The payor of the income must withhold the tax. In the case of interest income on a bank deposit,
the bank must withhold the tax.

3.The income subject to final WT is not returnable. This means that the interest
income in number (2) does not have to be reported or included in the ITR of the
taxpayer.
 54

Passive Income Subject to Final Withholding Tax (FWT)

Some types of income, collectively referred to as passive income, like interest
income, dividends, royalty income, etc. are subject to final withholding taxes.

Notes:

1. To be subject to the final withholding tax (FWT"), (a) the income must be taxable by the
Philippine government and (b) the payor must be under the jurisdiction of the BIR. This
means that such income must necessarily be sourced within the Philippines.

2. The payor of the income must withhold the tax. In the case of interest income on a bank
deposit, the bank must withhold the tax.

3. The income subject to final WT is not returnable. This means that the interest income in
number (2) does not have to be reported or included in the ITR of the taxpayer.
 55

TAXATION OF PASSIVE INCOME

NRAETB

Passive income Citizen and RA NRANETB

a. Interest from any currency bank deposit 20% Generally, 25% of gross
20%
in55
₱ income received from all
sources within the
b. Yield or monetary benefit from deposit Philippines as interest,
substitutes,trust funds, and similar 20% 20% dividends, rents, salaries,
arrangements premiums, annuities,
(notes 1) compensation etc.
C. Royalties 20%
20%
Except royalties on books, literary works.and 10%
10%
musical compositions
D, Prizes of more than ₱ 10,000 20% 20%

Exempt prizes of ₱10,000 less Included in ITR Included in ITR

 56

NRAETB
NRANETB
Passive income Citizen and RA

20%
e.) .Winnings 20%
Exempt if ₱10,000 or
Philippine Charity Sweepstakers and Lotto winnings Exempt
less

f.) Interest from a depositary bank under the expanded 15%

Exempt
foreign currency deposit system (note 3) ( EXC:NRC -Exempt)

g.) Interest income from long term deposit or invesment of

Exempt Exempt
5 years or more (NOTE 2)

20%
h.) Cash or property dividend received from domestic 10%
corporation headquarter of an MNC

i.) Share of an individual partner in the after - tax net

20%
income of a business partnership, or an 10%
organization,JV,or consortium
 57

III. Capital gains subject to final tax (Capital gains Tax )

A. On the sale of domestic shares of stock
1.Shares of stock in a domestic corporation not traded in the stock exchange.
a.) Tax Base - Net Capital Gain which is the excess of the amount realized on the sale (selling price) over the basis or adjusted
basis of the shares
Selling price - the total consideration of the sale consisting of the sum of money and/or the fair market
value of property received, if any.
Adjusted basis - the basis of the shares sold plus expenses of sale/disposition
(b) Tax rate on net capital gain:
15A
(c) Withholding agent - The payor of the income who, in this case, is the buyer.
(d) Who are subject? All individual taxpayers, except the following:

(1) Dealers in securities. The gains from such sales by dealers shall be included as ordinary income
in their income tax returns;

(2) Investors in shares of stock in a mutual fund company.

(3) All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws.
 58
(e) The sale, barter, or exchange of stock options is treated as a sale, barter, or 43 exchange of shares of stock not listed on
the stock exchange."

(f) BIR Forms to be filed:

Form 1707 Filed within (30) days after each transaction

Form 1707-A (Final Consolidated Filed on or before April 15 of each yr covering all stock transactions of the
preceding yr.

Taxable as a corporation

2. Shares of stock listed and traded thru the local stock exchange"
-Before January 1, 2018, the FT was 5% on the first P100,000 of gain plus 10% on any gain in excess of
P100,000

.NOTES
1. Deposit substitutes - alternative form of obtaining funds from the public other than deposits. "Public" means
borrowing from 20 or more lenders at any one time. Exs. Banker acceptances, PNs, repurchase agreements,
government debt instruments and securities.

-If the debt instrument is not a deposit substitute, interest income shall not be subject to a final
withholding tax. Instead, the interest income shall be included in the taxpayer's ITR, and the same
shall be subject to CWT.
 59
2. Long-term deposit or investment certificate - Certificate of time deposit or investment certificates with a maturity of at
least 5 years issued by a bank, and not by a non-bank financial intermediary. The exemption only covers interest income.
Any gain from trading such certificates is not covered by the exemption.
- NRANETB shall not be exempt
- the LT deposit or investment certificate must be issued by a bank
- may be in the form of savings, common, or individual trust funds, deposit substitutes, investment management
accounts
- investment must have a maturity of at least 5 years from the time it is held
- investment must be held for at least 5 years for the interest income to be exempt
Pre-termination of investment
If the deposit or investment is pre-terminated before the 5th year, the entire income shall be subject to final tax to be
withheld by the depositary bank from the proceeds of the long-term deposit or investment based on the holding period
of the taxpayer:
Less than 3 years 20%
3 years to less than 4 years 12%
4 years to less than 5 years 5%

3. Interest on foreign currency bank deposits

Government debt instruments and securities shall be considered deposit substitutes irrespective of the number of
lenders at the time of origination, if the same are to be traded or exchanged in the secondary market.
(2) Effect of Non-Payment of Tax - The sale or exchange cannot be registered in the books of the corporation unless the
receipts of payment of the tax imposed is filed with and recorded by the stock transfer agent or secretary of the corporation.
Any stock transfer agent or secretary of the corporation or the stockbroker, who caused the registration of transfer of ownership
or title on any share of stock in violation of the aforementioned requirement shall be punished in accordance with the provisions
of the Tax Code.*
 60
3. Redemption of preferred shares. If redeemed by issuing corporation which is not contemplating dissolution, any capital
gain or loss of the preferred shareholder from the redemption shall be subject to the regular income tax.

B. On the Sale of Real Property Classified as Capital Assets

1. Transaction subject - Sale, transfer, or other disposition of real property located in the Philippines, classified as capital
assets, including pacto de retro sales and other forms of conditional sales.

2. Rate and Base of Tax - Six percent (6%) of the gross selling price or current fair market value of the property,
whichever is higher. The fair market value of the property is the higher of zonal value or assessor's value.

3. Final Tax-The tax to be withheld by the payor (buyer) is a final tax and the capital gain from the sale is not
returnable.
4. Who are Subject? All individual taxpayers.

5. Forced Sale to the State Under Eminent Domain If the sale is made to the government or any of its political
subdivisions or agencies, or to government-owned or -controlled corporations, the taxpayer may choose either (a)
to have the gain included in the ITR and taxed under the graduated rates or the 8% tax under Section 24(A), or (b)
to be subject to the capital gains tax under Section 24(D).

6. Exemption from the Capital Gains Tax:

(a) Sale of raw lands to be used for "socialized housing" projects, or sold under the Community Mortgage
Program (CMP).9

(b) Land transfers under the Comprehensive Agrarian Reform Law of 1988.

(c) Sale of principal residence, and subsequent acquisition or construction of another principal residence:
 61
(a) Rate and Base - Six-tenths of one percent ("/10 of 1%) of the gross selling price or gross value in money of the shares of
stock sold.

(b) Withholding agent - The tax must be deducted and withheld by the stockbroker who effected the sale at the stock
exchange.

(c) Who are subject? All individual taxpayers, except the following:
(1) Dealers in securities;

(2) Investors in shares of stock in a mutual fund company;

(3) All other persons, whether natural or juridical, who are specifically exempt from national internal revenue taxes under
existing investment incentives and other special laws.

(4) Sellers of shares of a publicly-listed company which is non-compliant with the mandatory minimum public ownership
("MPO")" - subject to the 15% capital gains tax.

(5) Sellers of shares of stock in the stock exchange where the transaction excludes the public by pre-arranging the sale or
pre-determining the buyers. Ex. Block sale- subject to the 15% capital gains tax.
(d) Kind of tax-Business tax. Strictly speaking, this is a tax on the sales transaction and not on the income or gain
from such sale.

(e) BIR Form to be filed by the Stockbroker who effected the sale:

Form NO. 2552 Field within five banking days from the date of collection
 62

WITHOLDING TAX ON INCOME PAYMENTS

Final Withholding Tax ("FWT")
a) FTs on passive income
b) CGT on sale of domestic shares,
and sale of real property classified
as capital asset
TWO TYPES

Creditable Withholding Tax

("CWT")
a) On compensation income
b) On certain income payments
(EWT)
 63

Withholding Tax System:

a) For the income payment to be subject to the CWT and to the FWT, the following
must concur:
(1) The income payment must be taxable to the payee; and
(2) The BIR must have jurisdiction over the payor of the income (in most cases, this
means that the income must be sourced within the Philippines).

b) Not all income payments are subject to creditable WT. Only those payments specified
or enumerated in the law or internal revenue regulations are subject to the creditable
withholding tax system.

c.) The income subject to FWT is not returnable, i.e. not included in the ITR of the recipient
of the income.
On the other hand, the income subject to CWT shall be included in the ITR of the payee of
the income. The amount to be reported by the payee shall be gross of the CWT.
 64
d) The CWT withheld by the payor shall be allowed as a tax credit against the income tax
liability of the payee in the taxable year or quarter in which the income was earned or received.

There is no need for the taxpayer-claimant to prove actual remittance by the withholding agent to
the BIR." As long as the taxpayer-claimant receives the BIR Form No. 2307 from his
customer/client and attaches the same to his ITR, the former can avail of a tax credit equivalent to
the amount reflected therein as tax withheld.

e) Time of withholding. When an income payment is paid or payable, or when it is accrued or

recorded as an expense or asset by the payor, whichever comes first.

The withholding of the income tax and the remittance thereof are the responsibility of the
withholding agent and not of the taxpayer-claimant. The latter therefore has no control
over the remittance of the taxes withheld from its income by the withholding agent or
payor. (McKinsey Co. vs. CIR, CTA Case No. 9332, May 28, 2019.)
 65
Final Tax on Informer's Reward

Informer person (except a BIR employee, or other public

employee, or his relative within the 6 degree of consanguinity)
who gives information that leads to the discovery of frauds or
violations of tax laws, which results in the recovery of taxes, or in
the conviction of the tax evader, or in a compromise agreement
with the BIR.
 66

Reward LOWER of (a) Ten percent (10%) of the revenues,

surcharges, or fees recovered and/or fine, or penalty imposed and
collected, or the value of smuggled and confiscated goods, OR (b)
One million pesos (P1,000,000) per case. Final Tax-10% of the
reward.
 67

TYPES OF CWTs
CWT on Compensation CWT on Other Income (Expanded WT)
Who Withholds: Who Withholds:

Employer Files a Form 1601-C2 monthly and Customer or Client - Files a Form 0619E and
remits the WT to the BIR. remits the WTs within ten (10) days after the end
of the month in which the withholding was made.
At the end of the year, employer files a Form 1604- This is filed for the first two (2) months of each
C, which lists the total WTs on compensation from calendar quarter.
all its employees for the taxable year.

Shall also attach an Alphalist of Employees

containing compensation F income of each
employee, and taxes t withheld from each.

TYPES OF CWTs
CWT on Compensation
Amount of CWT:
Depends on the compensation of the employee,
and on his income tax rate.
Employee:
Will receive from his employer at the end of the
year a Form 2316 stating his total gross taxable
compensation income, non-taxable payments
made by the employer, and the total taxes withheld
by the employer.
68
CWT on Other Income (Expanded WT)
Amount of CWT:
Depends on the nature of the income payment and
the CWT rate as provided by law.
Payee (Vendor or Supplier):
Will receive a Form 2307 from the customer or
client showing the tax withheld from the income
payment within 20 days from the close of the
quarter, or upon request of the payee.
 69

Notes to EWT
[ PAGE 27, 28, 29 on our handouts (intro to income taxation) at google classroom]

(a) For income payments numbers 1 to 9, 14, 15, and 21, two withholding rates are

prescribed, 5% or 10%

The payor/withholding agent shall withhold the higher rate of 10% if

(1) the payer fails to provide the income payor/withholding agent of the required
declaration or (2) the income payment exceeds 3.0 Million, despite receiving the
sworn declaration from the income payee."

b) For number 9, if the director is also an employer, the fees shall form part of
compensation income subject to the WT on compensation.
 70

(c) An individual payee shall not be subjected to withholding if

(1) the source of income comes from a lone income payor, and

(2) the total income payment is less than 250,000 in taxable year,
and

the concerned payee executes an Income Payee's Sworn

Declaration of Gross Receipts Sales that shall be submitted to
the lone payor. The payee's sworn.
 71
Income Payer's worn Declaration of Grom Recipe/Soler (for Self-
Employed and/or Engaged the Practice of Profession with Several
Income Payors) that his gross receipts will not exceed 3.0 Million and
that he is not VAT-registered (Annex B-1 of Rev. Reg No. 11-2018)

Individual payees whose gross moeipts sales in a taxable year shall not
exceed 3.0 Million, are required to submit such Sworn Declaration of
Gross Receipa Sales, together with a copy of his Certificate of
Registration ("COR") to all income payors/withholding agents not later
than January 15 of each year or at least to the prior initial payment of
the professional fees/commission/talent fees, etc in order for them to be
subjected to five percent (5%)
 72

Sec. 2.57.3 of Rav Reg. No. 2-98, as amended by Rev Reg. No. 11-
2018

Income Payer Sworn Declaration of Gross Receips Sales (for

Self-Employed and/or Engaged in the Practice of Profession with
Lone Income Payor) (Annex B-2 of Bev. Reg No. 11-2018)
declaration shall be submitted to the lone income payor before
the initial payment of income on or before January 15 of each
year, whichever is applicable.
 73
In the event that the individual payee's cumulative gross receipts in
a year exceed P250,000, the income payor/withholding agent shall
withhold the prescribed withholding as based on the amount in
excess of 250,000, despite the prior submission of the individual
income payee's sworn declaration. On the other hand, if the
individual income payee failed to submit an income payee's sworn
declaration to the lone income payor/withholding agent, the
income payment shall be subject to the applicable withholding tax
even though in a taxable year the income payment is P250,000 and
below,
 74

(b) The income payors withholding agents shall subsequently

execute a sworn declaration" stating the number of payees who
have submined the income payees' sworn declarations with the
accompanying copies of their CORs. Such declaration of the
income payors withholding agents shall be submitted, together
with the list of payees, to the concerned BIR office where
registered on or before January 31 of each year or fifteen (15)
days following the month when a new income recipient has
submitted the payee's sworn declaration.
Introduction to
Income Tax
Atty. C. Llamado