SPECIAL HANDOUTS ON

Individual Taxation

INCOME TAX (INDIVIDUALS)

1. Classification of Individuals
a. Citizens 1) Those who are citizens of the Philippines at the time of the adoption of the
Constitution (on February 2, 1987);
2) Those whose fathers or mothers are citizens of the Philippines;
3) Those born before January 17, 1973 of Filipino mothers who elect Philippine
citizenship upon reaching the age of majority;
4) Those who are naturalized in accordance with law.
1) Resident citizen A citizen of the Philippines residing therein.
2) Non-resident 1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the
citizen fact of his physical presence abroad with a definite intention to reside therein;
2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;
3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year;
4) A citizen who has been previously considered as non-resident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently in the
Philippines shall likewise be treated as a non-resident citizen for the taxable year in
which he arrives in the Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines;
5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as
the case may be.
b. Aliens Individuals who are not Filipinos.
1) Resident alien;
2) Non-resident alien doing business in the Philippines;
3) Non-resident alien not doing business in the Philippines.
1) Resident alien An individual whose residence is within the Philippines and who is not a citizen thereof.
1) An alien who lives in the Philippines with no definite intention as to his stay;
2) One who comes to the Philippines for a definite purpose which in its nature would
require an extended stay and to that end makes his home temporarily in the Philippines,
although it may be his intention at all times to return to his domicile abroad;
3) An alien who has acquired residence in the Philippines retains his status as such until
he abandons the same and actually departs from the Philippines.
2) Non-resident alien An individual whose residence is not within the Philippines and who is not a citizen thereon.
1) One who comes to the Philippines for a definite purpose which in its nature may be
promptly accomplished.
2) A non-resident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall be deemed a
“non-resident alien doing business in the Philippines.”

2. Formats of Computation (Annual Return)

a. Pure compensation Gross compensation income P xxx
income Less: Non-taxable compensation xxx
(BIR Form No. 1700) Taxable compensation income P xxx
Tax due [Sec. 24 (A)] P xxx
Less: Tax withheld on compensation xxx
Foreign tax credits xxx xxx
Tax payable (overpayment) Pxxx
b. Pure business or Gross business/professional income Pxxx
professional income Less: Allowable deductions xxx
(BIR Form No. 1701) Taxable net income Pxxx
Tax due [Sec. 24 (A)] Pxxx
Less: Tax credits/payments
Prior years’ excess credits xxx
Tax payments for the previous quarters xxx
Creditable tax withheld xxx xxx
Tax payable (overpayment) Pxxx
c. Mixed income Gross compensation income Pxxx
(BIR Form No. 1701) Less: Non taxable compensation xxx
Taxable compensation income xxx
Gross business income xxx
Less: Allowable deductions xxx
Net income xxx
Total taxable income Pxxx
Tax due [Sec. 24 (A)] Pxxx
Less: Tax credits/payments
Prior years’ excess credits xxx
Tax payments for the first three quarters xxx
Creditable tax withheld for the first 3 quarters xxx
Creditable tax withheld for the 4th quarter xxx
Tax withheld from compensation xxx
Foreign tax credits xxx xxx
Tax payable (overpayments) Pxxx

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3. Tax Base and Tax Rate

Taxpayer Tax Base Tax Rate
a. Resident citizen Net income within and without Sec. 24 (A)
b. Non-resident citizen Net income within Sec. 24 (A)
c. Resident alien Net income within Sec. 24 (A)
d. Non-resident alien engaged in trade or business Net income within Sec. 25 (A) (1)
e. Non-resident alien not engaged in trade or business Gross income within Sec. 25 (B)
f. Estate and trust Net income within and without Sec. 24 (A)

4. Optional Standard Deductions (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)
1) Persons covered The following may be allowed to claim OSD in lieu of the itemized deductions (i.e. items of
ordinary and necessary expenses allowed under Section 34 (A) to (J) and (M), Section 37,
other special laws, if applicable):
a) Individuals b) Corporations
(1) Resident citizen (1) Domestic corporation
(2) Non-resident citizen (2) Resident foreign corporation
(3) Resident alien
(4) Taxable estates and trusts
2) Determination of a) The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of
the amount of OSD gross sales (if on accrual basis) or gross receipts (if on cash basis) during the taxable year.
for individuals b) The “cost of sales” in case of individual seller of goods, or the “cost of services” in the case
of individual seller of services, are not allowed to be deducted for purposes of determining
the basis of the OSD
c) For other individual taxpayers allowed by law to report their income and deductions under a
different method of accounting (e.g. percentage of completion basis, etc.) other than cash
and accrual method of accounting, the “gross sales” or “gross receipts” shall be determined
in accordance with said acceptable method.
1) Exercises Jun Castro, married with five (5) dependent children, had the following income and expenses
during the year:
Income:
Salary from Manding Pural Company P 200,000
Gross receipts from business (Cost of Sales P450,000) 950,000
Gross receipts from professional income 150,000
Gain on sale of capital asset 30,000
Expenses/Losses:
Salaries of employees 500,000
Rent of office space 24,000
Depreciation of office and store equipments 30,000
Taxes and licenses 10,000
Bad debts 7,500
Light and water 18,000
Loss on sale of capital asset 20,000

Required: Compute for the income tax due assuming Castro availed of:
1. Itemized deduction
2. Optional standard deduction
3. Given the above data, which option will you choose- the itemized deduction or the
optional standard deduction?
Answer:

Exercises:
1. Classify the following individual taxpayers and indicate the situs of their taxable income.
a. Alonte, a native of Fabrica, Camarines Sur is working as a contract worker in Saudi Arabia.
b. Barbie, a Taiwanese singer. She was invited to hold a three-day concert in Manila in July of the
current year.
c. Cariaso, a Filipino, now residing in Vancouver, Canada
d. Dennis, American married to a Filipina. He has been living in the Philippines since 1987.
e. El Cid, Spanish Citizen, a resident of Madrid, Spain, spent a one (1) week vacation in vacation in
Boracay and another week in Dapitan City
f. Furokuto, a Japanese Engineer, stayed in the Philippines for seven (7) months during the current
year to manage the rehabilitation of the railroad tract going to Bicol.

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5. Income Tax Returns (Individuals, Estates and Trusts)

a. Pure compensation The income tax return shall be filed on or before April 15 of the succeeding year.
income earner
b. Income from business Quarterly declarations:
or practice of First quarter May 15
profession Second quarter August 15
Third quarter November 15
Final adjusted return April 15 of the succeeding year

c. Place of filing of return 1) Authorized agent banks;

2) Revenue District Officer;
3) Collection agent;
4) Duly authorized city or municipal Treasurer in which the taxpayer has his legal
residence or principal place of business.
d. Payment of tax The tax is paid as the return is filed.

f. Exercises
1. A single resident citizen has two (2) qualified dependent children. During the year 2019, he earns and spends the
following:
Gross receipts from practice of profession P 750,000
Cost of services 500,000
Expenses in connection with the practice of profession 50,000
Hospitalization insurance premium paid 2,000
How much is the taxable net income?

2. A married individual has three (3) qualified dependent children. Aside from the three (3) children, he is also supporting
a brother, 25 years old, who is a person with disability. He has the following data on income and expenses for the year
2014:
Salary, Philippines gross of withholding tax of P5,000 P 160,000
Gross business income, Philippines (gross sales of P800,000) 500,000
Business expenses, Philippines 80,000
Gross business income, USA (gross sales, P1,100,000) 900,000
Business expenses, USA 100,000
Compute the taxable net income in the Philippines assuming he is:
a. Resident citizen using optional standard deduction
b. Non-resident citizen using itemized deduction
3. An individual taxpayer asked you to assist him in the preparation of his tax return for his income in 2009.
He provided you the following information:

Gross sales, Philippines P1,500,000

Cost of sales, Philippines 500,000
Gross sales, Japan 7,000,000
Cost of sales, Japan 2,000,000
Business expenses, Philippines 200,000
Business expenses, Japan 800,000

How much was the taxable income assuming the taxpayer was a:
a. resident citizen, married and has six (6) qualified dependent children.
b. non-resident citizen, head of family with two (2) qualified dependent brothers under optional standard
deduction.
c. non-resident alien engaged in business, single (his country allows personal exemption of P40,000 to single
Filipinos not residing in that country).
d. non-resident alien not engaged in business, married with four (4) qualified dependent children (his country
allows basic personal exemption of P40,000 to married individuals and additional exemption of P10,000 for
each dependent child to non-resident alien including Filipinos in that country).

4. A husband and wife, resident citizens, with one (1) qualified dependent child, had the following income and expenses
for the year 2009. The husband waived the additional exemption in favor of his wife.
Salary of the husband, net of P50,000 withholding tax P 450,000
Salary of the wife, gross of P60,00 withholding tax 600,000
Gross professional income, husband, gross of 15% withholding tax 1,500,000
Cost of services, husband 500,000
Expenses, practice of profession 300,000
Gross sales, wife 800,000
Cost of sales, wife’s business 300,000
Business expenses, wife 100,000
Gross rent income, lease of common property, gross of 5% withholding tax 700,000
Expenses, leased common property 200,000
Business income, Singapore 600,000
Business expenses, Singapore 150,000

Question 1 - How much was the taxable income of the husband and wife using itemized deduction?
2 – How much was the taxable income of the husband and wife using optional standard deduction?

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TAXATION – Individual Taxation #sanaakonalangulit

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