Active Income a.

Graduated income tax rate; OR

b. 8% on gross sales or receipts if not exceeding P500k;
Compensation Income c. 8% plus 3% as percentage tax of gross quarterly sales
Sec 24 (A), Tax Code or receipts, if gross sales or receipts exceeds P500k
Rates of Income Tax on Individual Citizen and Individual Resident
Alien of the Philippines: 3. All income from business or practice of profession if total
gross sales or receipts and other non-operating income
Income tax is imposed on taxable income except: exceeds VAT threshold of P3M:
1. Certain passive income (interest, royalties, prizes, other a. Graduated income tax rate
winnings),
2. Capital gains from sale of shares of stock not traded in the RR No. 02-40
stock exchange; and Sec. 40: Compensation for personal services
3. Capital gains from sale of real property When no determination is made until the completion of services,
Of: amount received is ordinarily income:
1. Resident citizen, all sources 1. For the taxable year of its determination, if rendered on
2. Non-resident citizen, including overseas contract workers, accrual basis;
within PH sources 2. For the taxable year in which received, if rendered o
3. Resident alien, within PH sources receipts and disbursements basis.
 Does not include pensions awarded by one to whom no
Graduated income tax rates of individuals: services has been rendered as they are mere gifts, and not
1. 2018-2022: taxable.
Not over P250k 0%
P250k – P400k 20% of the excess over P250k Sec. 41: Compensation paid other than in cash
P400k – P800k P30k + 25% of the excess over  FMV of the thing taken in payment is the amount to be
P400k included as income
P800k – P2M P130k + 30% of the excess over  If services were rendered at a stipulated price, the price is
P800k presumed to be the fair value of the compensation, should
P2M – P8M P490k + 32% of the excess over there be no evidence to the contrary
P2M  If stocks paid to the employees of a corporation, treated as
Over P8M P2.410M + 35% of the excess if the corporation sold stocks at its market value and paid
over P8M employee in cash
 Living quarters also furnished in addition to salary, rental
2. 2023 onwards: value of quarters is reported as income
Not over P250k 0%
P250k – P400k 15% of the excess over P250k Sec. 42: Compensation paid in promissory notes
P400k – P800k P22.5k + 20% of the excess  Those received in payment for services and not merely for
over P400k security of payment constitutes income of the amount of
P800k – P2M P102.5k + 25% of the excess their FMV
over P800k  Taxpayer receiving compensation with a note good upon
P2M – P8M P402.5k + 30% of the excess maturity but not bearing interest, shall treat income as of
over P2M the time of receipt with the fair discounted value of the
Over P8M P2,202,500 + 35% of the excess note at that time
over P8M  If it appears that the note could be discounted, the
recipient is to include note in gross income its face value
 Husband and wife computing separate income tax returns
amount less discount computed at the prevailing rate
if income earned not purely from compensation. If cannot
be determined, divide equally.
RR No. 02-98
 Minimum wage earners are exempt from income tax
Sec. 2.78 A: Compensation Income Defined
payment on their taxable income, holiday pays also
 Compensation = all remuneration for services performed
exempt from income tax
by an employee for his employer under an EER
 Name is immaterial (salary, wage, honoraria, director’s
For purely self-employed individuals whose gross sales or gross
fees, allowances, commissions, taxable bonuses, fringe
receipts does not exceed VAT threshold of P3M:
benefits except those subject to fringe benefits tax)
1. Option to avail of the 8% tax on gross sales or gross
receipts in excess of P250k in lieu of the graduated income  Basis upon which remuneration is paid is immaterial in
tax rates determining whether the remuneration constitutes
compensation (piece work, percentage, daily, weekly, etc.)
For mixed income earners – compensation income and income from
business or practice of profession Sec. 2.78 B: Exemptions from withholding tax on compensation:
1. All income from compensation: 1. Retirement benefits received under a reasonable private
a. Graduated income tax rate benefit plan by a retiring employee in service for the same
employer for at least 10 years and at least 50 years old at
2. All income from business or practice of profession if total time of retirement who has not availed of such privilege
gross sales or receipts and other non-operating income before from either the same or different employer;
does not exceed VAT threshold of P3M: 2. Any amount received by the heirs due to the employee’s
caused beyond the control of the employee;
 3. Social security benefits
Business Income
RR No. 02-40
Sec. 43: Gross income from business
Formula:
Total Sales
- Cost of goods sold
+ Any income from investments and from incidental or outside
operations or sources
= Gross income
 Subtraction not made for depreciation, depletion, selling
expenses, losses or items not ordinarily used in computing
cost of goods sold
Sec. 44: Long term contracts
Means the following acts covering a period more than 1 year:
1. Building
2. Installation
3. Construction
 Taxable for the period income is determined
 Determined depending on the nature and terms of the
contract
May be reported based on:
1. Percentage completion
a. Accompanied by a certificate of architects/engineers
showing the percentage of completion during the
taxable year
b. There should be deducted from gross income all
expenditures made during the taxable year on the
materials and supplies on hand for use in connection
with the work, but not yet so applied
c. CIR may require an amended return if taxable net
income has not been clearly reflected upon
completion of the contract
2. In taxable year which contract is finally completed and
accepted
 Only if taxpayer elects as a consistent practice to
treat such income as long as the method clearly
reflects the net income
 There should be deducted from gross income all
expenditures during the life of the contract properly
allocated thereto,
If taxpayer wants to change the method of accounting, the following
should accompany the return:
1. Statement showing the composition of all items appearing
upon the balance sheet
2. Statement showing the use of the items in connection with
the method of accounting formerly employed
Sec. 45: Gross income of farmers
If reporting on the basis of receipts and disbursements, shall include
in gross income:
1. Amount of cash or value of merchandise received from the
sale of livestock and produce raised during the taxable
year or prior years;
2. Profit from the sale of any livestock or other items
purchased
 Ascertained by deducting the cost from the sales
price in the year which the sale occurred
 In case of sale of animals purchased as work animals,
or solely for breeding or dairy purposes and not for
resale, the profit is the amount of any excess of the
sales price over the difference between the cost and
depreciation, as long as taxpayer consistently follows
such practice
3. Gross income from all other sources
If reporting using accrual basis (inventory is used to determine
profits) gross profits include:
1. Adding value of livestock and products on hand at the end
of the year
2. Amount received from the sale of livestock products
3. Miscellaneous receipts for hire of teams and machinery
during the year
Deducting:
1. Inventory value of livestock and products on hand at the
beginning of the year
2. Cost of livestock and products purchased during the year
Sec. 46: Sale of patents and copyright
1. Difference between the selling price and the cost
Sec. 47: Sale of goodwill
1. Gain or loss results only when the business is sold,
determined by comparing the sale prince with the cost or
other basis of the assets, including goodwill
Sec. 48: Annuities and insurance policies
1. Paid by religious, charitable, and educational corporations
under annuity contracts are subject to tax to the extent
that the aggregate amount of payments to the annuitant
exceeds the consideration
Sec. 49: Improvement by lessees
1. Lessor may report as income pursuant to an agreement
with the lessee to build an improvement, not subject to
removal by the lessee
a. At the time when improvement are completed at
FMV
b. Each year of the lease an aliquot part of the
depreciated value of the improvement, spreading
over the life of the lease
Sec. 50: Forgiveness of indebtedness
1. May amount to income, gift, or a capital transaction
depending on the circumstances:
 Income: If debtor performs services to a creditor who later
on cancels the debt, the income to that amount is realized
by the debtor as compensation for the service rendered
 Gift: creditor desires to benefit a debtor without any
consideration, and cancels the debt
Passive Income
Individuals
Sec. 24 (B), Tax Code
Final tax of 20% on:
1. Interest from any:
a. Currency bank deposit and yield
b. Monetary benefit from deposit substitutes
c. Trust funds
d. Similar arrangements
 Interest income received from a depository bank
under the expanded foreign currency deposit system
shall be subjected to 15% interest income (not
applicable to non-residents)
 Interest income from the following are exempt from
interest income (passive income):
 a. Long-term deposit
b. Investment in the form of savings, common or
individual trust funds;
c. Deposit substitutes;
d. Investment management accounts;
e. Other investments evidenced by certificates in
such form prescribed by the BSP
 If holder of certificates mentioned in (e) pre-
terminate the deposit or investment before the 5 th
year, a final tax based on the following is imposed
based on the number of years remaining:
1. 4 to less than 5 years = 5%
2. 3 to less than 4 years = 12%
3. Less than 3 years = 20%
 This is to be deducted and withheld by the
depository bank from the proceeds of the long-
term deposit or investment certificate
2. Royalties;
Except the following which are taxed at 10%:
a. Books and other literary works;
b. Musical composition
3. Prizes and other winnings
Except:
a. P10k or less = subject to individual income tax
b. P10k or less from PCSO and lotto = tax exempt
Final tax of 10% on:
1. Cash and/or property dividends actually or constructively
received by an individual from:
a. Domestic corporation;
b. Joint stock company;
c. Insurance or mutual fund companies;
d. Regional operating headquarters of multinational
companies;
e. Share of an individual in the distributable net income
after tax of a partnership of which they are partners;
f. Share of an individual in the net income after tax of
an association, joint account, joint venture, or
consortium taxable as a corporation
 Tax on dividends applies only on income earned on or after
January 1, 1998
Sec. 24 (C), Tax Code
Capital gains from sale of shares of stock not traded in the stock
exchange
Final tax of 15% on:
1. Net capital gains realized during the taxable year from the
sale, barter, exchange, or other disposition of shares of
stock in a domestic corporation not traded in the stock
exchange
If not over P100k = 5%
If over P100k = 10%
Sec. 24 (D), Tax Code
Capital gains from sale of real property
Final tax of 6% on:
1. Gross selling price or current fair market value (FMV =
determined by comparing the higher of its zonal value by
the CIR and in the schedule of values by the city/province
assessor)
 If sold to government, political subdivisions, agencies, or
GOCC, the tax liability of the income can either be the
graduated tax rates, or the final tax of 6%, at the
taxpayer’s option.
 Capital gains presumed to have been realized from the
sale, exchange, or other disposition of real property in the
PH classified as a capital asset
Exempt if:
1. The capital gains proceeds are fully utilized in acquiring or
constructing a new principal residence within 18 calendar
months from date of sate
2. Historical cost or adjusted basis of real property is carried
over to the new principal residence built or acquired
3. Taxpayer must notify the CIR within 30 days from date of
sale through a prescribed return the intention to avail of
the tax exemption
4. Tax exemption only availed of once every 10 years
5. If there is no full utilization of the proceeds, the portion
remaining is subject to capital gains tax
6. The higher of the gross selling price or FMV is multiplied by
a fraction of the unutilized amount in order to determine
the taxable portion, at 6%
Corporations
Sec. 27 (D), Tax Code
Rate of tax in certain passive incomes:
1. Final tax of 20% on:
a. Interest from:
1. Currency bank deposit
2. Yield
3. Other monetary benefit from deposit substitutes
4. Trust funds
5. Similar arrangements received by domestic
corporations
 15% final tax if interest from a depository bank under
the expanded foreign currency deposit system
 10% final tax on interest from foreign currency loans
granted by depository banks under expanded foreign
system to:
a. Residents other than offshore banking units in the
PH
b. Other depository banks under the expanded
system
b. Royalties from sources within the PH
2. Final tax of 15% on:
a. Net capital gains realized during the taxable year from
sale, exchange, or other disposition of shares of stock
in a domestic corporation
 Except those sold through the stock exchange
3. Exempt from all taxes except net income as may be
specified by the SoF upon recommendation by the MB:
 Income from a depository bank under the expanded
foreign currency deposit system from foreign currency
transactions with:
a. Nonresidents;
b. Offshore banking units in the PH;
c. Local commercial banks;
d. Branches of foreign banks authorized by the BSP to
transact business with foreign currency deposit
system units;
 e. Other depository banks under the expanded foreign f. GSIS benefits
currency deposit system
 Any income of nonresidents from transactions with 7. Miscellaneous:
depository banks under the expanded foreign currency a. Income derived by foreign government – investments
system are exempt from income tax in the Philippines in the form of:
1. Loans
4. Intercorporate dividends, those received by a domestic 2. Stocks
corporation from another domestic corporation, are not 3. Bonds
subject to tax. 4. Other domestic securities
5. Interest deposits in banks in the Philippines
5. 6% final tax on:  By:
a. Gain realized from the sale, exchange, or disposition 1. Foreign governments
of lands and/or buildings which are not actually used 2. Financing institutions owned, controlled, or
in the business of a corporation and are treated as enjoying refinancing from foreign governments;
capital assets 3. International or regional financial institutions
established by foreign governments
Exclusions from gross income
Sec. 32 (B), Tax Code b. Income derived by the government or its political
subdivisions – from
1. Life insurance – all proceeds paid to the heirs or 1. Any public utility
beneficiaries upon the death of the insured 2. Exercise of any essential government function
 Included in gross income if: accruing to the government of the Philippines or
- Amounts are held by the insurer under an to any political subdivision
agreement to pay the interest on such amount
c. Prizes and awards – if recipient was:
2. Amount received by insured as return of premium – return 1. Selected without any action on his part to enter
of the premiums paid by insured under the following the contest or proceeding;
during the term or at the maturity of the term, or upon 2. Not required to render substantial future
surrender of contract: services as a condition to receiving the prize or
a. Life insurance award
b. Endowment  Made primarily in recognition of:
c. Annuity contracts 1. Religious
2. Charitable
3. Gifts, bequests, devises – the value of such property 3. Scientific
 Included in gross income: 4. Educational
- The income arising from such property 5. Artistic
6. Literary
4. Compensation for injuries or sickness – amounts received 7. Civic achievement
through the following on account of injuries or sickness:
a. Accident Insurance d. Prizes and awards in sports competition – to:
b. Health insurance 1. Athletes
c. Workmen’s Compensation Acts 2. Sanctioned by their national sports associations
d. Damages received whether by suit or agreement 3. Local and international sports competitions and
tournaments whether held in or outside
5. Income exempt under treaty – to the extent required by Philippines
any treaty obligation binding upon the Philippine
government e. 13th month pay and other benefits – all gross benefits
received by employees not exceeding P90K
6. Retirement benefits, pensions, gratuities
a. Retirement benefits received from private firms
according to a reasonable private benefit plan:
1. Retiring employee has been in service for the
same employer for the past 10 years;
2. Retiring employee is not less than 50 years old
3. Availed of by the retiring employee only once
b. Amounts received by an employee as consequence of
separation from service because of causes beyond the
control of the employee
c. Social security benefits, retirement gratuities,
pensions, other similar benefits received by aliens or
citizens
d. Benefits due to persons residing in the Philippines
under US laws administered by the US Veterans
Administration
e. SSS benefits