Chapter 3 Taxation of Individuals

 Classification of Taxpayers
1. Individuals
2. Corporations
3. Partnerships
4. Estates and Trusts

 Classification of Individuals
For purposes of income tax, individual taxpayers are classified as follows:

1. Resident Citizen. An individual whose residence is within the Philippines and who is a
citizen thereof.

2. Non-resident Citizen. Means:

 A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite
intention to reside therein.
 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.
 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.
 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. (Sec. 22 E, NIRC)

A citizen of the Philippines who shall have stayed outside the Philippines for one
hundred eighty-three (183) days or more by the end of the year shall be
considered a non-resident citizen by the mere fact of his length of stay abroad.

Illustration 1
Mr. Binay a citizen of the Philippines went to Saudi Arabia for a one-year
employment contract on June 1, 2014. He returned to the Philippines on
December 20, 2014 for one week Christmas vacation. For the year 2014 Mr. Binay
would be considered a non-resident citizen.

3. Resident Alien. An individual whose residence is within the Philippines and who is not
a citizen thereof (Sec. 22 F, ibid.). An alien who shall have stayed in the Philippines for more
than one (1) year by the end of the calendar year is a resident alien.

Illustration 2
Mr. De Leon an alien came to the Philippines on June 5, 2013. He stayed in the
Philippines until February 2, 2015. For the year 2014 Mr. De Leon was a resident
alien.

22
Chapter 3 Taxation of Individuals

4. Non-resident Alien. An individual whose residence is not within the Philippines and
who is not a citizen thereof (Sec. 22 G, ibid.). A non-resident alien is further classified into:

 Engaged in Trade or Business in the Philippines – an alien who comes

and stays in the Philippines for an aggregate period of more than 180 days
during any calendar year.

 Not engaged in Trade or Business in the Philippines – an alien whose

stay in the Philippines is not more than 180 days.

Illustration 3
Mr. Esteban an alien came to the Philippines on January 1, 2014 and stayed up to
February 1, 2014. During his stay in the Philippines he was actively in commerce
with a gross income of P1,000,000 and expenses related to the income of
P200,000. Mr. Esteban would be considered a non-resident alien not engaged in
business in the Philippines for the year 2014.

Illustration 4
Mr. Fernandez an alien came to the Philippines on January 1, 2014 as a tourist.
He stayed up to September 1, 2014. During his stay in the Philippines his activities
were spending except on August 31, 2014, when he sold his laptop for P50,000 for
a gain of P6,000. Mr. Fernandez would be considered a non-resident alien
engaged in business in the Philippines for the year 2014.

Illustration 5
Mr. Gomez an alien came to the Philippines and stayed for one hundred days in
2014 and one hundred days in 2015. Mr. Gomez would be considered a non-
resident alien not engaged in business in the Philippines for the year 2014 and
2015.

 Sources of Income

Individual Within the Without the

Philippines Philippines
Resident Citizen Taxable Taxable
Non-resident Citizen Taxable
Resident Alien Taxable
Non-resident Alien (ETB) Taxable
Non-resident Alien (NETB) Taxable
(Sec. 23, ibid.)

 Classification of Income and Tax Rates

1. Capital gains from sale of shares of stock of a domestic corporation not listed and
traded thru a local stock exchange, held as capital asset.

23
Chapter 3 Taxation of Individuals

Figure 3-1 Citizens and Resident Aliens: Capital gains tax (RA 10963)
On the net Capital gain*: 15%
* Net capital gain is selling price less cost.

Figure 3-2 Non-resident Aliens: Capital gains tax (RA 10963)

On the net Capital gain*:
Not over P100,000 Final tax of 5%
On any amount in excess of P100,000 Final tax of 10%
Note: if the shares of stocks are listed and traded in the stock exchange the sale is subject to other percentage tax (stock transaction tax) at a
rate if 6/10 of 1% of the gross selling price.

2. Capital gains from sale of real property in the Philippines held as capital asset
Figure 3-3 Uniform rules for individuals: Capital gains tax (Sec. 24 D, ibid.)

On the gross selling price or current fair market value at the

time of sale or zonal value whichever is higher Final tax of 6%

3. Passive income. Income in which the taxpayer merely waits for the amount to come in.
Examples of passive income are interest, royalties, prizes, winnings, and dividends. Tax rates
see figure 3-5

4. Compensation income. Income derived from employer-employee relationship.

(See Chapter 7 Gross Income)

5. Business income. Income derived from the conduct of trade or business or the exercise of
profession.
Figure 3-4 Tax rates for individuals: Compensation/Business income/Others
TAX TABLE (January 1, 2018 until December 31, 2022)
ANNUAL TAXABLE INCOME TAX RATE
Not over 250,000 0%
Over 250,000 but not over 400,000 20% of excess over P 250,000
Over 400,000 but not over 800,000 30,000 + 25% of excess over 400,000
Over 800,000 but not over 2,000,000 130,000 + 30% of excess over 800,000
Over 2,000,000 but not over 8,000,000 490,000 + 32% of excess over 2,000,000
Over 8,000,000 2,410,000 + 35% of excess over 8,000,000

6. Fringe benefits. Any good, service or other benefit furnished or granted in cash or in kind by
an employer to an individual employee (except rank and file employees). In general, final tax
of 35% on the grossed-up monetary value of fringe benefits.

 For Purely Self-Employed Individuals and/or Professionals Whose Gross Sales/Receipts and Other Non-Operating Income Do Not Exceed the
VAT Threshold of P3,000,000, the tax shall be, at the taxpayer’s option:
1. 8% Income Tax on Gross Sales or Gross Receipts in Excess of P250,000 in Lieu of the Graduated Income Tax Rates and the
Percentage Tax; Or
2. Income Tax Based on the Graduated Income Tax Rates
 For Individuals Earning Both Compensation Income and Income from Business and/or Practice of Profession, their income taxes shall be:
1. For Income from Compensation: Based on Graduated Income Tax Rates; and
2. For Income from Business and/or Practice of Profession:
a. If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of P3,000,000, the Individual Taxpayer May Opt to Avail:
i. 8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income in Lieu of the Graduated Income Tax
Rates and the Percentage Tax; Or
ii. Income Tax Based on Graduated Income Tax Rates
b. If the total Gross Sales/Receipts Exceed VAT Threshold of P3,000,000
i. Income Tax Based on Graduated Income Tax Rates

Figure 3-5 Passive income: Final tax (RA 10963)

24
Chapter 3 Taxation of Individuals

From sources within the Philippines, Resident Non- Resident Non- Non-
on passive income of: Citizen resident Alien resident resident
Citizen Alien (ETB) Alien (NETB)
a. Interest under the expanded 15% Exempt 15% Exempt Exempt
foreign currency deposit system
b. Royalty from books, literary 10% 10% 10% 10%
works and musical compositions
c. Dividend from a domestic 10% 10% 10% 20%
corporation, or from a joint stock
company, and insurance or
mutual fund company, and
regional operating headquarters
of multinational company, or
share in the distributive net
income after tax of a partnership
(except a general professional
partnership), joint or joint 25%
venture or consortium taxable as
a corporation
d. Interest on any currency bank 20% 20% 20% 20%
deposit, yield or other monetary
benefits from deposit substitute,
trust fund and similar
arrangement; royalty other than
(b) above; Prizes* exceeding
P10,000 and other winnings**,
Philippine Charity Sweepstakes
Office and lotto winnings
exceeding P10,000
e. Interest on long-term deposit or Exempt Exempt Exempt Exempt
investment in banks (with
maturity of 5 years or more)***

*Prize is the result of an effort (e.g. prize in a beauty contest).

**Winning is the result of a transaction where the outcome depends upon chance (e.g. betting).
Prizes and other winnings amounting to P10,000 and below shall be subject to tax under (tax table 0% to 35%).
From PCSO and Lotto amounting to P10,000 and below is exempt from income tax.

***Upon pre-termination before the fifth year, there should be imposed on the entire income from the
proceeds of the long-term deposit based on the remaining maturity thereof:
  
Holding Period
Four (4) years to less than five (5) years - 5%
Three (3) years to less than four (4) years - 12%
Less than three (3) years - 20%

 
 
    

25
Chapter 3 Taxation of Individuals

 Exclusion from Gross Income of Special Significance to an Employee

1. 13th month pay and other benefits such as Christmas bonus, productivity incentive
bonus, loyalty award, gifts in cash or in kind and other benefits of similar nature
actually received by officials and employees of both public and privates entities.
Provided that the total exclusion shall not exceed P90,000 (RA10963)
2. GSIS, SSS, Philhealth and Pag-ibig contributions, and union dues of individuals.
3. Benefits received from or enjoyed under the Social Security System (SSS) or benefit
received from Government Service Insurance System (GSIS), including the retirement
gratuity received by government officials and employees.

 De Minimis Benefits
De minimis benefits are facilities or privileges  furnished or offered by an employer to his
employees, that are of relatively small value and are offered or furnished by the employer
merely as a means of promoting the health, goodwill, contentment, or efficiency of his
employees. 
The following are considered as de minimis benefits granted to each employee:
1. Monetized unused vacation leave credits of private employees not exceeding ten (10)
days during the year
2. Monetized value of vacation and sick leave credits paid to government officials and
employees
3. Medical cash allowance to dependents of employees, not exceeding P1,500 per
employee per semester or P250 per month (RR 11-2018 on TRAIN RA 10693)
4. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month amounting to not
more than P2,000 (RR 11-2018 on TRAIN RA 10693)
5. Uniform and clothing allowance not exceeding P6,000 per annum; (RR 11-2018 on TRAIN RA
10693)
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare
needs, annual medical/executive check-up, maternity assistance, and routine
consultations, not exceeding P10,000 per annum
7. Laundry allowance not exceeding P300 per month
8. Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees
9. Gifts given during Christmas and major anniversary celebration not exceeding P5,000
per employee per annum
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic minimum wage on a per region basis.
11. Benefits by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total monetary value received from
both CBA and productivity incentive schemes combined do not exceed P10,000 per
employee per taxable year.
If the employee is given benefits that exceed the maximum limits, the excess is added to the
13th month pay, productivity incentives and Christmas bonus if the total of the computation is
greater than P90,000, it becomes taxable as part of the employee's gross income.

26
Chapter 3 Taxation of Individuals

Illustration
Mr. Gimpes is citizen and resident of the Philippines with three minor children he works as
a concierge in a hotel. He had the following data during the calendar year:
Gross salaries………………………………………….. P300,000
Overtime pay…………………………………………… 9,000
Night shift differential pay…………………………….. 2,700
Payroll deductions:
SSS contribution……………………………………. 6,975
Philhealth contribution……………………………… 5,250 The income tax due
Pagibig contribution………………………………… 1,200 on compensation at
Labor union dues…………………………………… 1,500 the end of the year
Advances from employer …………………………. 12,000 from Mr. Gimpes is
Thirteenth month pay………………………………….. 25,000 computed as
Productivity incentive pay……………………………... 70,000 follows:
Rice subsidy……………………………………………. 27,000
Gross salaries…………………………………………….. 300,000
Overtime pay…………….……………………………….. 9,000
Night shift differential pay…..…………………………… 2,700
Total……………………………………………………….. 311,700
Less: Exclusions
SSS, Philhealth, Pagibig, and Union dues……. (14,925)
Total………………………………………………………. 296,775
Other benefits:
13th month pay………………………… 25,000
Productivity incentive pay 70,000
Rice subsidy (27,000 – 24,000).......... 3,000
Total benefit………………………. 98,000
Less: Exempt benefit………………... (90,000) 8,000
Taxable income………………………………………… 304,775

Income tax due/payable………………………………. 10,955

27