INCOME TAXATION

HANDOUT 02

INDIVIDUAL TAXPAYERS

Individual taxpayers are natural persons with income derived from within the territorial jurisdiction of a
taxing authority. Under the Tax Code, individual taxpayers are classified as:
1. Resident citizens (RC)
2. Non-resident citizens (NRC)
3. Resident aliens (RA)
4. Non-resident aliens (NRA)
a. Engaged in trade/business (NRA-ETB)
b. Not engaged in trade/business (NRA-NETB)

CITIZENS OF THE PHILIPPINES

Under Section I, Article III of the Philippine Constitution, a Filipino Citizen is a natural person who
is/has:
1. Born (by birth) with father and/or mother as Filipino citizens;
2. Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching
the age of majority;
3. Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine Laws.

NON-RESIDENT CITIZEN OF THE PHILIPPINES

The following are considered nonresident citizens (Section 22(E), RA 8424):
1. A citizen of the Philippines who establishes, to the satisfaction of the Commissioner of Internal
Revenue, the 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
a. As an immigrant; or
b. For employment on a permanent basis; or
c. For work and derives income from abroad and whose employment thereat requires him to
be physically abroad most of the time during the taxable year. (OFW)
3. A citizen of the Philippines who shall have stayed outside the Philippines for one hundred
eighty-three days (183) or more by the end of the year. (6 months)

Note: A nonresident citizen who arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall be considered a nonresident citizen for the taxable year in which
he arrives in the Philippines with respect to income derived from sources abroad until the date of his
arrival in the Philippines.

4. Overseas Contract Workers (OCWs). These are Filipino citizens employed in foreign countries,
commonly referred to as Overseas Filipino Workers (OFWs), who are physically present in a
foreign country as a consequence of their employment thereat. Their salaries and wages are paid
by an employer abroad and is not borne by any entity or person in the Philippines.

The following are considered as OCWs or OFWs:

i. Those who are be duly registered as such with the Philippine Overseas
Employment Administration (POEA) with a valid Overseas Employment
Certificate (OEC). (RR No. 1-2011)
ii. A seaman/seafarer who is a citizen of the Philippines and who:
1. receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade.
(Section 23(C), RA 8424)
2. is duly registered as such with the POEA with a valid OEC and Seafarer’s
Identification Record Book (SIRB) or Seaman’s Book issued by the
Maritime Industry Authority (MARINA).
*A Filipino taxpayer not classified as nonresident citizen is considered as resident citizen for tax
purposes.
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RESIDENT ALIENS
Resident alien means an individual whose residence is within the Philippines and who is not a citizen
thereof. (Section 22(F), RA 8424).

Under RR No. 2, the following are considered as resident alien:

1. An alien actually present in the Philippines who is NOT a mere transient or sojourner;
Note: A person who comes to the Philippines for a definite purpose which in its nature may
be promptly accomplished is a transient. – impermanently
2. An alien, who comes to the Philippines for a definite purpose, which, by its nature, would
require an extended stay making his home temporarily in the Philippines.
3. An alien who shall come to the Philippines with no definite intention as to his stay.
Note: An alien who has acquired residence in the Philippines retains his status as a resident
alien until he abandons the same and actually depart from the Philippines.

NON-RESIDENT ALIENS
Non-resident aliens are aliens who come to the Philippines for a definite purpose, which by its nature,
may be promptly accomplished. They are aliens who are merely transients.
1. Engaged in trade or business (Section 2(A), RA 8424)
a. An alien individual ACTUALLY engaged in trade or business in the Philippines; and
b. An alien who comes in the Philippines for an aggregate period of more than 180 days during
the calendar year
Note: Under Section 22(S) of the Tax Code, “trade or business” include performance of the
functions of a public office or performance of personal services in the Philippines (except
performance of services by the taxpayer as an employee)
2. Not engaged in trade or business. Those NRA not included in no.1 above. A NRA-NETB is
subject to 25% income tax based on gross income from all sources within the Philippines (ordinary
income or passive income except for income subject to capital gains tax).

APPLICABLE TAXES AND TAX RATES

The applicable taxes for individuals depend on several factors such as but not limited to:
 Classification of the taxpayer
 Source of income
 Type of income

Taxpayer Tax Base Sources of Taxable Income

RC Net Income Within & Outside
NRC, RA, NRA-ETB Net Income Within
NRA-NETB Gross Income Within

TYPES OF INCOME
For purposes of income taxation, there are three types of incomes subject to income tax:
 Ordinary or regular income. Refers to income that are subject to graduated tax table such as:
 compensation income (salaries or wages),
 business income,
 income from practice of profession,
 income from sale and/or dealings of property,
 miscellaneous income, and
 passive income other than those subject to final taxes under Section 24 (B) and capital
gains tax under Section 24 (C) & (D) of the Tax Code.

 Passive Income. These are income from sources within the Philippines as enumerated under
Section 24(B) of the Tax code and are subject to final withholding taxes. These passive incomes
are not subject to graduated tax rate or basic tax.
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The specific passive income derived from Philippine sources subject to final withholding
taxes are as follows: (PIDRO)
 Interest income;
 Dividend income;
 Royalties;
 Prizes; and
 Other winnings

 Incomes from sale of capital assets subject to Capital Gains Tax (CGT). These includes:
 Capital gains from sale of shares of stocks of a domestic corporation not traded in the
local stock exchange (Sec. 24(C), NIRC); and
 Capital gains from sale of real property in the Philippines (Sec 24(D), NIRC).

TYPE OF INCOME APPLICABLE TAX

Regular income Graduated rate
Passive income, Phils. Final Withholding Tax
Capital gains subject ot CGT Capital Gains Tax

GRADUATED TAX TABLE

Tax rate
Annual income
For the years 2018-2022 For the years 2023 onwards
P250,000 and below None None
more than P250,000 to P400,000 20% of excess over P250,000 15% of excess over P250,000
P30,000 + P22,500 +
more than P400,000 to P800,000
25% of excess over P400,000 20% of excess over P400,000
P130,000 + P102,500 +
more than P800,000 to P2,000,000
30% of excess over P800,000 25% of excess over P800,000
P490,000 + P402,500 +
more than P2,000,000 to P8,000,000
32% of excess over P2,000,000 30% of excess over P2,000,000
P2.41 million + P2,202,500 +
more than P8,000,000
35% of excess over P8,000,000 35% of excess over P8,000,000

SELF-EMPLOYED AND/OR PROFESSIONALS (SEP)

Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for Acceleration and Inclusion Law),
regular income of self-employed and professionals amounting to more than P250,000 in a taxable year but with
a gross sales/receipts and other non-operating income NOT exceeding the revised VAT threshold of P3,000,000
shall have the option to avail of 8% tax on gross sales/receipts and other operating income in excess of
P250,000 in lieu of the graduated income tax rate and business tax under Section 116 of the Tax Code.

Additionally, the option to be taxed at 8% is available only to taxpayers who are:

a) Non-VAT registered;
b) Not engaged in vat-exempt sales/transactions; and
c) Not subject to other percentage taxes other than the 3% percentage tax under Sec. 116 of the
NIRC

Note: “Self-employed”, under the TRAIN Law, is a sole proprietor or an independent contractor who reports
income earned from self-employment. “Professional” is a person formally certified by a professional body
belonging to a specific profession by virtue of having completed a required course of studies and/or practice,
whose competence can usually be measured against established set of standards.
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PURELY SELF-
EMPLOYED/PROFESSIONAL MIXED INCOME EARNER
with gross sales/receipt of
Business/profession with gross
P3M and below Above P3M Compensation sales/receipt of
P3M and below Above P3M
Regular Income Tax Regular Regular Income Tax Regular Income Tax Regular
OR Income Tax OR Income Tax
8%** tax on Gross 8%** tax on Gross
Sales/Receipts and Sales/Receipts and
other operating other operating
income in excess of income in excess of
P250,000 IN LIEU P250,000 IN LIEU
of the graduated tax of the graduated tax
rate and 3% rate and 3%
Percentage tax in Percentage tax in
Section 116 Section 116
**Provided, all other requisites are satisfied.

FINAL WITHHOLDING TAX TABLE

INTEREST INCOME
RC, NRC, RA NRA-ETB NRA-
NETB
A. Interest from any currency bank deposit 20% 20% 25%
B. Yield or any other monetary benefit from: 20% 20% 25%
i. Deposit substitutes
ii. Trust funds
iii. Similar arrangements as above
C. Interest from a depositary bank under the Prior to 2018- 7 ½ % Exempt Exempt
Expanded Foreign Currency Deposit System NRC= Exempt
(EFCDS)
Beginning 2018- 15%
Note: Only residents are subject to this type of NRC= Exempt Exempt Exempt
tax.
D. Interest income from long-term deposits or Exempt Exempt 25%
investments (at least 5 years maturity)

If pre-terminated before fifth year, a final tax

shall be imposed based on remaining maturity as
follows:
 4 years to less than 5 years 5% 5% 25%
 3 years to less than 4 years 12% 12% 25%
 Less than 3 years 20% 20% 25%
ROYALTIES
A. Royalties from: 10% 10% 25%
i. Literary works
ii. Books
iii. Musical composition
B. Other royalties 20% 20% 25%
PRIZES
Prizes exceeding P10,000 20% 20% 25%
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Note: Prizes less than or equal to P10,000 are
subject to basic tax except those received by NRA-
NETB which are subject to 25% FWT
OTHER WINNINGS
Prior to 2018: 20% 20% 25%
Regardless of amount except: including
PCSO and/or Lotto winnings (tax exempt) PCSO/Lotto

Beginning 2018:
OTHER WINNINGS regardless of amount 20% 20% 25%

PCSO/Lotto Winnings:
 Less than or equal to P10,000 Exempt Exempt 25%
 More than P10,000 20% Exempt 25%

CASH and/or PROPERTY DIVIDENDS

A. Cash and/or property dividends 10% 20% 25%
actually/constructively received from:
i. Domestic corporation
ii. Joint stock company
iii. Insurance or mutual fund companies
iv. ROHQ of multinational companies
beginning January 2000
B. Share of an individual in the distributable net 10% 20% 25%
income after tax of a PARTNERSHIP (other than
a GPP) beginning January 1, 2000
C. Share of an individual in the net income after tax 10% 20% 25%
of:
i. Association
ii. Joint Account
iii. Taxable Joint Venture or Consortium

DEPOSIT SUBSTITUTES
RR 14-2012 defines “deposit substitutes” as an alternative form of obtaining funds from the public other
than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own
account, for the purpose of re-lending or purchasing receivables and other obligations or financing their own
needs or the needs of their agent or dealer. With this, the mere issuance of government debt instruments or
securities is deemed as falling under deposit substitutes irrespective of the number of lenders at the time of
origination, and therefore interest income derived therefrom shall be subject to applicable final tax rate.
Government debt instruments and securities including Bureau of Treasury issued instrument such as Treasury
bonds (T-bonds), Treasury bills (T-bills), and Treasury notes are classified as deposit substitutes if such
instruments or securities are to be treated or exchanged in the secondary market.

INTEREST INCOME FROM LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATES

Long-term deposits or investment certificates refers to certificate of time deposit or investment in the
form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and
other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed
by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only to individuals (should not be under the
name of a corporation or a bank or a trust department of a bank) in denominations of P10,000 and other
denominations as prescribed by BSP (RR 14-2012).

PRE-TERMINATION OF LONG-TERM DEPOSIT

Interest income from long-term deposit or investment that is pre-terminated by the depositor or
the investor before the 5th year shall be subject to the following graduated rates of final withholding tax on the
entire income and shall be withheld by the depository bank from the proceeds of the long-term deposit or
investment certificate based on the remaining maturity (holding period) thereof as follows:
4 years to less than 5 years 5%
3 years to less than four years 12%
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Less than 3 years 20%

INFORMER’S REWARD
Under Section 282 of the Tax Code, a cash reward may be given to any person instrumental in the
discovery of violations of the NIRC or discovery and seizure of smuggled goods. The informer’s reward is
subject to 10% final tax which shall be withheld by the government.
Amount of cash reward- whichever is lower of the following per case:
1. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed and collected
or
2. P1,000,000

CAPITAL GAINS TAX TABLE

CAPITAL GAINS RC, NRC, RA NRA-ETB NRA-

NETB
A. Capital gains from sale of shares of stocks
of a domestic corporation not traded in the
local stock exchange or directly to a buyer

Prior to 2018: 5% 5% 5%
 1st P100,000 of capital gain 10% 10% 10%
 in excess of P100,000 capital gain

Beginning Jan. 1, 2018

 Basis: Capital gain 15% 15% 15%

*The value of the shares of stock at the time of sale

shall be the fair market value. In determining the value
of the shares, use the Adjusted Net Asset Method, i.e.,
all assets and liabilities are adjusted to market values.
B. Sale of real property located in the 6% 6% 6%
Philippines

Tax base: Gross selling price (GSP) or

Fair Market Value (FMV), whichever is
higher.
*FMV refer to the higher between Fair Market
Value as provided by City or Provincial assessor
and Zonal Value as provided by the Commissioner
of Internal Revenue.

Note: The assets sold in the table above must refer to capital assets. Capital assets are assets not
used in business nor for sale in the ordinary course of trade or business.

CLASSIFICATION OF TAXPAYER’S PROPERTIES

1. Ordinary Assets. Assets used in business, such as:
a. Stock in trade of a taxpayer or other real property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close of taxable year.
b. Property used in trade or business subject to depreciation.
c. Real property held by the taxpayer primarily for sale to customers in the ordinary course of trade
or business.
d. Real property used in trade or business of the taxpayer.
2. Capital assets. Any assets other than ordinary assets such as:
a. Personal (non-business) assets
b. Business assets of taxpayer which are:
i. Financial assets- such as cash, receivables, prepaid expenses, and investments
ii. Intangible assets- such as patents, copyrights, leasehold rights, and franchise rights.
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The gain on sale of ordinary assets are classified as ordinary gains.
The gain on sale of capital assets are classified as capital gains.

CAPITAL GAINS may be subject to:

1. Capital Gains Tax if it pertains to sale of:
a. Shares of stock of a domestic corporation sold directly to a buyer (shares of closely-held or non-
listed domestic corporation); and
b. Sale of real properties located in the Philippines. (Refer to table above for tax rates)

SALE OF REAL PROPERTY TO THE GOVERNMENT

If real property classified as capital asset is sold to the government, individual taxpayer shall
have the option to be taxed at:
a. 6% CGT or
b. Regular income tax using the graduated tax rate

SALE OF PRINCIPAL RESIDENCE

Principal residence is the family home of the individual taxpayer. It refers to the dwelling house,
including the land on which it is situated, wherein an individual including his family resides as a
permanent dwelling, or whenever absent, wherein the said individual intends to return. It should be
certified by the Barangay Chairman over the place, or the Building Administrator if the residence is
a condominium or the individual taxpayer’s address as indicated in his latest tax return.
Taxability:
a. General rule: 6% capital gains tax based on the selling price or fair market value,
whichever is higher.
b. Exception: Exempt.
Requisites for exemption:
1. The proceeds is fully utilized in acquiring or constructing a new
principal residence within 18 calendar months from the date of sale
or disposition.
If there is no full utilization of the proceeds of sale or disposition,
the portion of the gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax as follows:

Gross selling price or

Taxable Amount = Utilized portion X FMV at the time of
Gross selling sale, whichever is
price higher

*The tax on the unutilized portion shall be paid within 30 days after the expiration of
18-month period.

2. The historical cost or adjusted basis of the real property sold or

disposed shall be carried over to the new principal residence built
or acquired.
3. The BIR shall have been duly notified by the taxpayer within 30
days from the date of sale or disposition through a prescribed return of
his intention to avail of the tax exemption.
4. The tax exemption can only be availed of once every 10 years.

2. Other Percentage Tax (OPT) if it pertains to sale of

a. Shares of stock of a domestic corporation listed in the local stock exchange.
The applicable business tax for this type of transaction is known as “stock transaction
tax” and is computed as follows:
Prior to 2018 = ½ of 1% of Gross Selling Price
Beginning 2018 = 6/10 of 1% of Gross Selling Price
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Since the tax rate is based on gross selling price, stock transaction tax is computed
regardless of whether the transaction resulted to a gain or loss.

Note: OPT is not an income tax but a business tax.

3. Regular tax. Capital gains not subject to capital gains tax and stock transaction tax are subject to
regular tax or the graduated tax rate under Section 124(A) of the Tax Code (as amended). Examples of
capital gains subject to regular tax are gains derived from:
a. Sale of shares of foreign corporations
b. Sale of real properties located abroad
c. Sale of other personal assets other than shares of domestic corporation such as cars, jewelries,
and the like.

FORMAT IN COMPUTING TAXABLE INCOME

A. PURE COMPENSATION INCOME EARNER

Gross compensation income xx
Less: Nontaxable compensation income (xx)
Taxable compensation income xx

Tax due (using Graduated tax rate) xx

Less: Creditable withholding tax on compensation (xx)
Income Tax Payable xx

B. PURE BUSINESS INCOME EARNER

Gross sales/receipts xx
Less: Cost of sales/services (xx)
Gross income xx
Less: Allowable business expenses (xx)
Taxable income xx

Tax due (using Graduated tax rate) xx

Less: Creditable withholding taxes
Prior year’s excess credit xx
Tax payment for the previous quarters xx
Tax withheld at source xx
Foreign income tax credit xx (xx)
Income Tax Payable xx

C. MIXED INCOME EARNER

Gross compensation income xx
Gross sales/receipts xx
Less: Nontaxable compensation income xx
Cost of sales/services xx (xx)
Gross income xx
Less: Allowable business expenses (xx)
Taxable income xx

Tax due (using Graduated tax rate) xx

Less: Creditable withholding taxes
Creditable withholding taxes on compensation xx
Prior year’s excess credit xx
Tax payment for the previous quarters xx
Tax withheld at source xx
Foreign income tax credit xx (xx)
Income Tax Payable xx
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CREDITABLE WITHHOLDING TAXES

Certain regular incomes not subject to final taxes on passive income and capital gains tax are subject to
“creditable withholding taxes” (CWT). CWT is not an internal revenue tax but a method of collecting income
tax “in advance” from the recipient of income through the payor thereof, which is constituted by law as the
withholding agent of government. The recipient of income is still required to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of the NIRC, as amended, to report the income and/or pay the difference
between the tax withheld and the tax due on the income.
fd The most common example of creditable withholding tax for an individual taxpayer is the tax withheld
by an employer from the compensation income of an employee. The amount of tax withheld will be remitted by
the employer to the BIR.
On the other hand, the withholding taxes at source are amounts withheld by the payor (other than
employer) such as creditable withholding taxes for the purchase of goods, services, and rentals. The most
commonly known CWT rates are provided under RR 11-2018 as follows:

Purchase of/Payment for: CWT %

Goods 1%
Professional Fees 5%; 10%
Services 2%
Rentals 5%
Income payments to beneficiaries of estates/trusts 15%
Income payments to partners of GPPs 10%; 15%
Certain income payments made by credit card companies 1%

QUARTERLY TAX RETURNS

Income Tax Returns for income derived from business and/or practice of profession are required to be
filed on a quarterly basis (regardless of the results of operations) using the formula below:

Q1 Q2 Q3 Q4
Gross income (cumulative amounts) xx xx xx xx
Business Expenses (cumulative amounts) (xx) (xx) (xx) (xx)
Taxable net income xx xx xx xx

Tax Due xx xx xx xx
Less: Creditable withholding taxes
Prior year's excess credit (xx) (xx) (xx) (xx)
Quarterly wothholding taxes (xx) (xx) (xx) (xx)
Quarterly tax payments (xx) (xx) (xx) (xx)
Foreign tax credits (xx) (xx) (xx) (xx)
Income tax payable xx xx xx xx

INCOME TAX DUE OF MARRIED TAXPAYERS

Under RA 10963, husband and wife shall compute separately their income tax based on their respective
total taxable income. Provided, that if any income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses
for the purpose of determining their respective taxable income.

MINIMUM WAGE EARNERS

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The term statutory minimum wage earner (SMW) under RA 9504 shall refer to a worker in the private
sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of
not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.
The rate is fixed by the Regional Tripartite Wage and Productivity Board as defined by the Bureau of
Labor and Employment Statistics of the Department of Labor and Employment. Regional Tripartite Wage and
Productivity Boards of each region determine the wage rates in the different region based on established criteria
and shall be the basis of exemption from income tax. Minimum wage earners are exempt from the income tax
on:
 Minimum wage
 Holiday pay
 Overtime pay
 Night shift differential
 Hazard pay

FILING OF INCOME TAX RETURNS (ITR)

WHEN:
1. BASIC TAX
a. For purely compensation income earners: On or before April 15 of the succeeding
years
b. For business income earners including income from practice of profession: The
individual taxpayer is required to file a QUARTERLY tax return (regardless of the
results of operations) as follows:
1st Quarter May 15
2nd Quarter August 15
rd
3 Quarter November 15
Final Adjusted/annual return April 15 of the succeeding year

2. FINAL WITHHOLDING TAX ON PASSIVE INCOME

Beginning 2018, for final and creditable withholding taxes, the return shall be
filed and paid not later than the last day of the month following the close of the taxable
quarter during which the withholding was made.

3. CAPITAL GAINS TAX

a. Shares of stocks:
 Ordinary Return- 30 days after each transaction
 Final Consolidated Return- on or before April 15 of the following year
b. Real property:
30 days following each sale or other disposition

MANNER:
Filing of ITS may be mad through:
a. Manual filing
b. eBIR Forms
c. Electronic Filing and Payment System (EFPS)

PAYMENT:
Generally, the income tax payable shall be paid at the time the return is filed (also known as
“Pay as you file system”). However, RA 10963 (TRAIN Law) provides, that when the tax due is in
excess of P2,000, the individual taxpayer may elect to pay the tax in two equal installments as follows:
1st installment: at the time of filing the annual ITR
2nd installment: on or before October 15 following the close of the calendar year

WHERE:
The income tax return shall be filed and paid with any of the following:
 Authorized agent banks
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 Revenue District Officer
 Collection agent
 Duly authorized city or municipal Treasurer

SAMPLE PROBLEMS

1. Determine the correct classification of the taxpayer from the independent cases provided below:

a. Allan is a natural born Filipino. His family migrated in Canada ten (10) years ago. Due to personal
reasons, he decided to return and reside permanently in the Philippines on March 1, 2020.

b. Neil Smith is an American information technology expert. He was signed by Globe Telecom from
January to March of 2020 to improve its internet services. Due to the anticipated entry of
competitors from other countries, Globe decided to extend indefinitely the service of Mr. Smith.

c. Greg Popovich, head coach of the San Antonio Spurs in the NBA is in the Philippines for a month-
long NBA promotional tour. He also expressed his intention to regularly visit the Philippines.

d. Using the same data in no. 3, assuming that Mr. Popovich invested in shares of stocks of various
domestic corporations during his recent stay in the Philippines.

e. Mika “The Iceman” Immonen, a Finnish cue artist and former world billiard champion is a resident
of Finaland. He won the world 9-ball championship in 2005 in the Philippines. He is also the owner
of one of the disco pubs in Malate since then.

2. Use the following data for a-e:

Mr. X provided the following information in 2019:

Gross business income, Philippines P 3,000,000
Gross business income, Mexico 2,500,000
Gross business income, Hongkong 1,300,000
Business expenses, Philippines 1,800,000
Business expenses, Mexico 1,000,000
Business expenses, Hongkong 700,000

Determine the taxable income assuming Mr. X is:

a. Resident citizen
b. Nonresident citizen
c. Resident alien
d. NRA-ETB
e. NRA-NETB

3. Self Employed and/or Professionals (SEP)

a. PURELY SEP whose gross sales/receipts and other non-operating income does not exceed the VAT
threshold of P3,000,000.

Mr. A had the following information in 2019:

Gross sales P 2,300,000
Cost of sales (1,000,000)
Operating expenses ( 550,000)
Net income P 750,000
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i. Determine the income tax due for 2019.
ii. Assume Mr. A opted to avail the 8% tax under the TRAIN Law.

b. PURELY SEP whose gross sales/receipts and other non-operating income exceeds the VAT
threshold of P3,000,000;

Mr. A had the following information in 2019:

Gross sales P 6,000,000
Cost of sales (3,800,000)
Operating expenses (1,250,000)
Net income P 950,000.00

iii. Determine the income tax due for 2019.

iv. Assume Mr. A opted to avail the 8% tax under the TRAIN Law.

c. PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-operating income
exceeds the VAT threshold of P3,000,000 during the year

Pedro signified the intention to be taxed at 8% income tax rate on gross sales in his 1 st quarter
income tax return. However, his gross sales during the year exceeded the vat threshold of P3M as
follows:

Q1 Q2 Q3 Q4
₱
Sales ₱ 500,000.00 600,000.00 ₱ 2,300,000.00 ₱ 3,500,000.00
₱
Cost of Sales ₱ 300,000.00 300,000.00 ₱ 1,200,000.00 ₱ 1,200,000.00
₱
Gross Income ₱ 200,000.00 200,000.00 ₱ 800,000.00 ₱ 2,300,000.00
₱
Operating Expenses ₱ 120,000.00 120,000.00 ₱ 480,000.00 ₱ 720,000.00
₱
Net Taxable Income ₱ 80,000.00 180,000.00 ₱ 620,000.00 ₱ 1,580,000.00

v. How much is Pedro’s annual income tax payable?

d. MIXED Income Earner whose gross sales/receipts and other non-operating income does not exceed
the VAT threshold of P3,000,000.

Mr. Y reported the following data for 2019:

Compensation income P 400,000
Gross sales 2,900,000
Cost of sales (1,500,000)
Operating expenses ( 750,000)
Net income P 1,050,000

vi. Determine the correct income tax due for 2019

vii. Assume Mr. Y opted to avail the 8% tax under the TRAIN Law

e. MIXED Income Earner whose gross sales/receipts and other non-operating income exceeds the VAT
threshold of P3,000,000.

Mr. Z reported the following data for 2019:

Compensation income P 900,000
Gross sales 5,000,000
Cost of sales (2,250,000)
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Operating expenses (1,250,000)
Net income P 2,400,000

viii. Determine the correct income tax due for 2019

ix. Assume Mr. Y opted to avail the 8% tax under the TRAIN Law

4. Final Withholding Tax

A resident citizen taxpayer provided the following information for 2019:

Gross business income, Philippines P 2,000,000
Gross business income, USA 3,000,000
Business expenses, Philippines 1,400,000
Business expenses, USA 2,050,000
Interest income—BPI 100,000
Interest Income—BDO (long-term time deposit) 150,000
Interest income—JPMorgan Chase 50,000
Interest income received from a depositary bank
Under FCDS, Philippines 50,000
Royalties on books 70,000
Dividend income from San Miguel Corporation 125,000
Dividend income—resident foreign corporation 75,000
Dividend income—nonresident foreign corporation 102,000
Philippine lotto winnings 10,000
Philippine charity sweepstakes winnings 500,000
Other winnings—Philippines 200,000
Raffle draw winnings—Robinsons Lipa 8,000
Raffle draw winnings—SM Manila 20,000
Raffle draw winnings—Walmart New York 30,000

Determine the following:

a. Taxable income
b. Final taxes on passive income

5. Pre-termination of long-term deposit

a. An instrument with a maturity period of ten (10) years was held by Pedro (resident citizen) for two
(2) years and was transferred to Mark (resident alien), who, in turn, held it for eight (8) years. What
are the final withholding taxes applicable to Pedro and Mark, respectively?

b. An instrument with a maturity period of 10 years was held by Juan (NRC) for 3 years and transferred
it to Smith (NRA). Smith held it for 2 years before subsequently transferring it to Pedro (RC) who
held it until the day of maturity. What is the final withholding taxes applicable to Juan, Smith, and
Pedro, respectively?

6. Capital Gains Tax

Determine the amount of capital gains tax (CGT) for 2019:

a. Shares of Stocks
i. George sold 5000 shares of Ayala Corporation in PSE at P200. The shares were purchased 3
years ago for P130 per share.
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ii. George sold 3,000 shares of Converge Corporation directly to Clint at P150 per share. The
shares were acquired 5 months ago at P100 per share.

iii. George sold 3,000 shares of Converge Corporation directly to Clint at P150 per share. The
shares were acquired 5 months ago at P210 per share.

b. Real properties situated in the Philippines

The following are the transactions of Mr. L pertaining to sale of real properties for 2019:
 Sale of parcel of land used in his trading business. Selling price is P3,000,000. The
property was acquired 5 years ago at P1,500,000.
 Sale of Mr. L’s residential lot for P5,000,000. The fair market value of the property was
P6,000,000. The property was acquired 3 years ago at P4,000,000.

iv. What is the amount of CGT for both transactions?

v. Assume that the residential lot in 2nd bullet was sold at P3,000,000. What should be the
correct amount of CGT on the transaction?

7. Sale of Principal Residence

On December 1, 2018, Janet sold her principal residence for P6,500,000 when its fair market value was
P6,200,000. The house was acquired 5 years ago for P4,000,000.

a. Compute the capital gains tax on the sale of principal residence.

b. Assume Janet acquired a new principal residence on January 15, 2020 for P6,900,000, how
much of the CGT will be released to Janet and to the BIR, respectively?
c. Using the information in letter b, compute the tax basis of the new residence.
d. Using the information above and assume Janet uses only P4,875,000 in acquiring her new
residence, how much of the capital gains tax held in escrow shall be released to Janet and to
the BIR, respectively?
e. Using the information in letter d, compute the tax bases of the new residence.

8. Income Tax Payable

Mr. B, resident citizen, provided the following information in 2019:

Compensation income P 1,000,000
Gross business income, Philippines 2,000,000
Gross business income, Mexico 3,000,000
Business expenses, Philippines 1,400,000
Business expenses, Mexico 2,050,000
Income tax withheld by Mr. B’s employer
on his compensation income 150,000
Income tax withheld by certain payors
on business income in the Philippines 100,000
Income tax payments for the first 3 quarters of the year 125,000

Determine the Income Tax Payable in 2019 of Mr. B.

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9. Quarterly Income Tax

The following cumulative balances on income and expenses in 2019 of Juan Dela Cruz were given to
you:
Q1 Q2 Q3 Q4
₱1,200,000.0 ₱2,100,000.0 ₱3,000,000.0 ₱3,700,000.0
Sales
0 0 0 0
₱1,200,000.0 ₱1,800,000.0 ₱2,200,000.0
Cost of Sales ₱700,000.00
0 0 0
Operating Expenses ₱200,000.00 ₱325,000.00 ₱550,000.00 ₱700,000.00

Dividend received
from:
Domestic
₱10,000.00 ₱10,000.00 ₱20,000.00 ₱20,000.00
Corporation

Interest income from:

BPI ₱2,000.00 ₱4,000.00 ₱6,000.00 ₱8,000.00
UCPB ₱800.00 ₱1,200.00 ₱1,600.00 ₱1,800.00
Metrobank ₱5,000.00 ₱10,000.00 ₱15,000.00 ₱20,000.00

Additional Information:
 Juan Dela Cruz sold a land for P350,000 with a FMV of P400,000. The cost of the land is
P300,000
Using above information, compute the following for 2019:
a. Income tax payable, 1st quarter
b. Income tax payable, 2nd quarter
c. Income tax payable, 3rd quarter
d. Income tax payable, 4th quarter
e. Final tax on passive income
f. Capital gains tax