INCOME TAXATION
QUIZ 2
CHAPTER 2
INCOME TAX FOR
INDIVIDUALS
CLASSIFICATION OF INDIVIDUAL
TAXPAYERS
WHO ARE INDIVIDUAL TAXPAYERS?
● Individual taxpayers are natural persons
with income derived from within the
territorial jurisdiction of a taxing authority.
TAXPAYERS ARE CLASSIFIED INTO:
CITIZENS
1. Resident Citizens
2. Nonresident Citizens
ALIENS
1. Resident Aliens
2. Non-resident Alien Engaged in Trade or
Business
3. Non-resident Alien Not Engaged in Trade
or Business
WHO ARE RESIDENT CITIZENS?
● An individual whose residence is within
Philippines and is a citizen
● A Filipino citizen taxpayer not classified as
nonresident citizen is considered a resident
citizen for tax purpose
WHO ARE NONRESIDENT CITIZENS ((Sec. 22
(E))?
● A citizen who established, to the
satisfaction of the commissioner of internal
revenue, the fact of his physical presence
abroad with definite intention to reside
therein.
➔ Immigrants
➔ Physically Abroad
● A citizen who leaves the Philippines during
the taxable year (calendar 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 thereof requires him to be
physically abroad most of the time (at least
183 days) during the taxable year.
● NOTE: All those citizen taxpayers which
will not qualify on the above enumerations
will be considered as Resident Citizens.
CITIZENS CLASSIFIED BOTH AS RESIDENT
AND NONRESIDENT IN ONE TAXABLE YEAR
((Sec. 22 (E))
● A citizen who has been previously
considered as nonresident citizen and who
arrives in the Philippines at any time during
the year to reside permanently in the
Philippines shall likewise be treated as a
nonresident 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.
WHO ARE RESIDENT ALIENS ((Sec. 22(F))?
● An individual whose residence is within the
Philippines and who is not a citizen thereof.
➔ Taxable: income in the Philippines
● Aliens who are actually present in the
Philippines and who are not mere
transients or sojourners.
● An alien who lives in the Philippines with no
definite intention as to his stay is also a
resident alien.
● An alien who comes to the Philippines for
the purpose that requires extended stay for
its accomplishment, so he makes his home
temporarily in the Philippines.
WHO ARE NONRESIDENT ALIENS ((Sec.
22(G))?
● An individual whose residence is not within
the Philippines and who is not a citizen
thereof.
● They are aliens who come to the
Philippines for a definite purpose, which in
its nature may be promptly accomplished.
● They are alien who are mere transients or
non-residents
WHO ARE NONRESIDENT ALIENS
TAXPAYERS ENGAGED IN TRADE OR
BUSINESS?
● Aliens who have business income (with
active participation) in the Philippines.
● Aliens who stayed in the Philippines for an
aggregate period of more than 180 days
(even if it is not consecutive) during the
taxable year
Taxable Tax Tax Rate
Income Base
/Source
Resident Within Net Graduated
 Citizen and Income 8% Gross Sales and
Without other non-operating
income in excess of
Nonresident Within Net Graduated P250,000
Citizen Income
More than 3M Graduated Tax & 12%
Resident Within Net Graduated VAT
Alien Income

Non-resident Within Net Graduated

Alien Income REQUISITES TO AVAIL THE 8%
Engaged in PREFERENTIAL TAX RATE
Trade or
Business In order to avail the 8% preferential tax rate, the
SEP shall satisfy all the following conditions:
Non-resident Within Gross 25%FT 1. Gross Sales and other non-operating
Alien Not Income income does not exceed the vat threshold
Engaged in of P3,000,000
Trade or 2. Shall be non-vat registered
Business 3. The gross sales/receipts were not derived
from vat-exempt sales and transactions
4. Not subject to Percentage Tax other than
BASIC TAX TABLE/ GRADUATED TAX RATE Section 116;
Taxable Income Tax 5. Signifies his/her intention to elect the 8%
income tax
Not over P250K Exempt
SEP’s GROSS SALES/RECEIPTS EXCEED
Over P250K but not 20% of excess over THE VAT THRESHOLD DURING THE YEAR
over P400K P250K ● RR 8-2018 provides, that, if at any time
during a given taxable year, a taxpayer’
Over P400K but not P30K + 25% of excess
gross sales or receipts exceeded the VAT
over P800K over P400K
Threshold (P3,000,000), he/she shall
Over P800K but not P130K + 30% of automatically be subjected to the
over P2M excess over P800K graduated rates under Section 24 (A)(2)(a)
of the Tax Code, as amended, with the
Over P2M but not over P490K + 32% of following rules/guidelines:
P8M excess over P2M ➔ The taxpayer shall be allowed an
income tax credit of quarterly
Over P8M P2140K + 35% of payment initially made under the
excess over P8M 8% income tax option
➔ Taxpayers are likewise liable for
SELF EMPLOYED AND PROFESSIONALS business taxes, in addition to
(SEP) income tax.
● a sole proprietor or an independent ➔ For this purpose, the taxpayer is
contractor who reports earned income from required to update his registration
self employment from non-vat to vat taxpayer, within
● Subject to two types of taxes, basic tax and the 30 days from the close of the
business tax (either 12% tax or 1% month the vat threshold was
Percentage tax under CREATE LAW) breached.
➔ Percentage tax under Section 116
PURELY SEP shall still be imposed from the
beginning of the year until the
Gross Sales Income Tax Business taxpayer is liable to vat. The
Tax* Percentage tax pursuant to Section
116 of the Tax Code, as amended,
Not more than 3M Graduated Tax rate &
shall be imposed on the first
1% Percentage Tax
P3,000,000. The excess of the
threshold shall be subjected to
or
VAT. Thus, for the purpose, vat
shall be imposed prospectively.
 ➔ Percentage tax due on the PASSIVE INCOME SUBJECT TO FINAL
P3,000,000 shall be collected WITHHOLDING TAX (FWT)
without penalty, if timely paid on the
due date immediately following the
month the threshold was breached.

MIXED INCOME EARNERS

Gross Sales Income Tax /
Business Tax*

Not more than 3M Graduated Tax rate &

(exclude Percentage Tax
compensation
income) or

Compensation Income
- Basic Tax

Self Employment - 8%
Gross Sales and other
non-operating income
FINAL WITHHOLDING TAX
More than 3M Graduated Tax for both
● Final withholding tax is a kind of tax which
(exclude types of income & 12%
is prescribed on “certain income” (interest
compensation VAT
income, dividends, royalties, prizes and
income) winnings) DERIVED FROM PHILIPPINE
SOURCES and not creditable against the
TYPES OF INCOME income tax due of the payee on income
ORDINARY OR REGULAR INCOME subject to regular rates of tax for the
● refers to income such as compensation taxable year.
income, business income, income from ● Under the final withholding tax system,
practices of profession, income from sale payee received the income net of the
and/or dealings of property and applicable tax. The amount of tax withheld
miscellaneous income and passive income by the withholding agent is “constituted as
other than those subject to final taxes and a full and final payment” of the income tax
capital gains tax of the Tax Code due from the payee on the said income.
● Subject to graduated tax table/basic tax
DEPOSIT SUBSTITUTES
PASSIVE INCOME ● It is an alternative form of obtaining funds
● certain passive incomes from sources from the public other than deposits, through
WITHIN THE PHILIPPINES the issuance endorsement, or acceptance
● Specific passive incomes derived from the of debt instruments for the borrower’s own
Philippines are: account, for the purpose of re-lending or
➔ Interest Income purchasing of receivables and other
➔ Dividend Income obligations, or financing their own needs or
➔ Royalties the needs of their agent or dealer.
● Government debt instruments and
➔ Prizes
securities including Bureau of Treasury
➔ Other Winnings issued instruments and securities such as
● NOTE: unless exempt, other passive Treasury bonds (T-bonds), Treasury bills
incomes derived from the Philippines but (T-bills), and Treasury notes are classified
not in the list, if any, as well as passive as deposit substitutes IF SUCH
incomes derived abroad are subject to instruments or securities are to be traded
basic tax or exchanged in the secondary market.
● Subject to Final Withholding Tax ● Subject to applicable final tax rate
FINAL WITHHOLDING TAX ON INCOME expanded system
DERIVED BY DEPOSITORY BANKS
UNDER FCDS Any income of non- Exempt
● Tax on Income derived under the residents, whether
Expanded Foreign Currency Deposit individuals or
System. corporations, from
● Income derived by a depository bank under transactions with
the expanded foreighn currency depository depository banks
system from foreigh currency transactions under the expanded
with non-residents, offshore banking units system shall be
in the Philippines, local commercial banks, exempt from income
including branches of foreign banks that tax.
may be authorized by the Bangko Sentral
ng Pilipinas (BSP) to transact business with
foreign currency deposit system shall be INTEREST INCOME FROM LONG-TERM
exempt from all taxes, except net income DEPOSIT OR INVESTMENT CERTIFICATES
from such transactions as may be specified ● Long-term deposit or investment certificate
by the Secretary of Finance, upon refers to certificate of time deposit or
recommendation by the Monetary Board to investment in form of savings, common or
be subject to the regular income tax individual trust funds, deposit substitutes,
payable by banks. Provided, however, that investment management accounts and
interest income from foreign currency loans other investments with a maturity period of
granted by such depository banks under NOT LESS THAN 5 YEARS, the form
said expanded system to residents other which shall be prescribed the Bangko
than offshore banking units in the Sentral ng Pilipinas and ISSUED BY
Philippines or other depository banks under BANKS ONLY TO INDIVIDUALS (should
the expanded system, shall be subject to a not be under the name of a corporation or
final tax at the rate of 10% a bank or a trust department of a bank) in
● Any income of residents, whether denominations of P10,000 and other
individuals or corporations, from denominations as prescribed by BSP.
transactions with depository banks under
the expanded system shall be exempt from REQUISITES/CONDITIONS FOR
income tax. EXEMPTIONS
1. The depositor or investor is an individual
citizen, a resident alien or a nonresident
Income Tax alien engaged in trade or business in the
Philippines.
Income derided by a Exempt
2. The long-term deposits or investment
depository bank under
the expanded foreign certificates should be UNDER THE NAME
currency deposit OF THE INDIVIDUAL and not under the
system from foreign name of the corporation or the bank or the
currency transactions trust department/unit of the bank.
3. The long-term deposits or investments
with from foreign
currency with MUST BE IN THE FORM OF SAVINGS,
nonresidents, OBUs in COMMON OR INDIVIDUAL TRUST
the Philippines, local FUNDS, DEPOSIT SUBSTITUTES,
commercial bank INVESTMENT MANAGEMENT
including branches of ACCOUNTS AND OTHER
foreign banks INVESTMENTS evidenced by certificates
in such from prescribed by the BANGKO
Interest Income from 10% FWT SENTRAL NG PILIPINAS (BSP).
foreign currency loans 4. The long-term deposits or investments
granted by a MUST BE ISSUED BY BANKS ONLY and
depository bank under not by other financial institutions.
the expanded foreign 5. The long-term deposits or investments
currency deposit must have a maturity period of NOT LESS
system to residents THAN FIVE (5) YEARS.
other than depository 6. The long-term deposits or investments
banks under the must be in DENOMINATIONS OF P10,000
 and other denominations as may be
prescribed by BSP.
7. The long-term deposits or investments
SHOULD NOT BE TERMINATED BY THE
ORIGINAL INVESTOR before the fifth
year, otherwise they shall be subject to final
tax rates of 5%, 12%, or 20% on interest
income earnings.
8. Except those specifically exempted by law
or regulations, any other income such as
gains from trading, foreign exchange gain
shall not be covered by income tax
exemption.
INFORMER’S REWARD
● For violations of the National Internal
Revenue Code
➔ Any person, except an internal
revenue officer or employee, or
other public official or employee, or
his relative within the sixth degree
of consanguinity, who voluntarily
gives definite and sworn
information, not yet in the position
of BIR, leading to the discovery of
fraud upon the internal revenue
laws or violations of any of the
provisions, thereof thereby
resolution in recovery of revenues,
surcharges and fees, and/or the
conviction of the guilty party and/or
the imposition of any of the fine or
penalty, shall be rewarded in a sum
equivalent to 10% of the revenues,
surcharges or fees recovered
and/or fine or penalty imposed and
collected or One million pesos
(1,000,000) per case, whichever is
lower.
● For Discovery and Seizure of Smuggled
Goods
➔ To encourage the public to extend
full cooperation in eradication
smuggling.
➔ A cash reward equivalent to 10% of
the fair market value of the
smuggled and confiscated goods or
One million pesos (1,000,000) per
case, whichever is lower.
➔ The cash rewards of informers shall
be subject to income tax, collected
as a final withholding tax, at the rate
of 10%.
CAPITAL GAINS
● Capital Gains from sale of shares of
stocks of a DOMESTIC CORPORATION
NOT TRADED in the local stock exchange
● Capital gains from SALE OF REAL
PROPERTY in the Philippines
CAPITAL GAINS TAX
Citizens NRA- NRA-
and ETB NETB
Residents
Capital gains from 15% 15% 15%
sale of shares of
stocks of a domestic
corporation not
traded in the local
stock exchange
Capital gains from 6% 6% 6%
sale of real property
in the philippines
GAIN ON SALE OF ASSETS: CAPITAL
GAIN VS. ORDINARY GAIN
● Under the tax code, the following are
ordinary assets:
➔ Stock in trade if the taxpayer or
other property of a kind which would
properly be included in the
inventory of the taxpayer if on hand
at the close of the taxable year.
➔ Property used ub trade or business
subject to depreciation
➔ Real property held by taxpayer
primarily for sale to customers in
the ordinary course of trade or
business
➔ Real property used in trade or
business of the taxpayer
● Ordinary gains are subjected to the
graduated tax rate
● Gain on sale of capital asset are classified
as capital gains subject to the following
taxes:
➔ Capital Gains Tax
➔ Percentage Tax (pertaining to sale
of shares of stock traded and listed
in the local stock exchange)
➔ Basic Income Tax or graduated tax
rate (pertaining to sale of capital
assets other than those subjected
to CGT or Percentage Tax)
SALES OF SHARES CLASSIFIED AS
CAPITAL ASSET
Sales of Shares of Stock
1. Listed in the LSE
➔ Tax: 6/10 of 1% of gross selling
price
2. Not Listed in the LSE
➔ Shares of Domestic Corporation
- Tax: 15% of Capital Gain
 ➔ Shares of Foreign Corporation
- Tax: Subject to Basic Tax
FORMULA:
Selling Price xx
Cost (xx)
Capital Gain xx
Multiply. CGT rate 15%
Capital Gains Tax xx
(CGT)
DETERMINATION OF AMOUNT AND
RECOGNITION OF GAIN OR LOSS
● In the case of cash salem the selling price
shall be the total consideration per deed of
sale
● If the total consideration of the sale or
disposition consists partly in money and
partly in kind, the selling price shall be the
sum of money and the fair market value of
the property received.
● In the case of exchange, the selling price
shall be the fair market value of the
property received.
● In case the fair market value of the shares
of stock sold greater than the amount of
money and/or fair market value of the
property received, the excess of the fair
market value of the shares sold over the
amount of money and the fair market value
of the property, if any, received as
consideration shall be deemed a gift
subjected to the Donor’s Tax under Section
100 of the Tax Code.
DETERMINATION OF FAIR MARKET VALUE
● In the case of shares of stock not listed and
traded in the local stock exchange, the
following rules shall apply:
➔ For COMMON SHARES OF
STOCK, the book value based on
the latest available financial
statements duly certified by an
independent public accountant
prior to the date of sake, but not
earlier than the immediately
preceding taxable year, shall be
considered as the prima facie fair
market value.
➔ For PREFERRED SHARES OF
STOCK, the liquidation value,
which is equal to the redemption
price of the preferred shares as
balance sheet date nearest to the
transaction date, including any
premium and cumulative preferred
dividends in arrears, shall be
considered as the fair market value.
➔ In the case there are BOTH
COMMON AND PREFERRED
SHARES, the book value per
common shares is computed by
deducting the liquidation value of
the preferred shares from the total
equity of the corporation and
dividing the result by the number of
outstanding common shares as of
balance sheet date nearest to the
transaction date.
SALE OF REAL PROPERTY CLASSIFIED
AS CAPITAL ASSET
Real Property
1. Located Abroad
➔ Tax: Basic Tax
2. Located in the Philippines
➔ Buyer is other than the government
- Tax: 6% Selling Price or
FMV, whichever is higher
➔ Buyer is the government
- Tax: either 6% Selling Price
or FMV, whichever is
higher, or basic tax
FORMULA:
Selling Price xx
Multiply. CGT rate 6%
Capital Gains Tax xx
(CGT)
SALE OF PRINCIPAL RESIDENCE
● Under certain conditions, sale of property
located in the Philippines classified as
principal residence is exempt from capital
gains tax but subject to compliance with the
post-reporting requirements.
REQUISITES FOR TAX EXEMPTION
● As a rule, sale of principal residence is
subject to 6% capital gains tax based on
the selling price or fair market value,
whichever is higher, except, when the
proceeds are FULLY UTILIZED in
acquiring or constructing a new principal
residence subject to the following
conditions:
➔ The proceeds are fully utilized in
acquiring or constructing a new
principal residence within 18
calendar months from the date of
disposition. If there is no full
utilization, the portion of the gain
 presumed to have been realized
Add. Other Income xx
from the sale or disposition shall be
subject to capital gains tax: Taxable Income xx

Unutilized Portion xx
Income Tax Due xx
Divide. Gross Selling xx
Price Less. Creditable WT (xx)

Multiply. Gross xx Income Tax Payable xx

Selling price or fair
market value of sale, INCOME TAX DUE OF MARRIED
WHICHEVER IS
TAXPAYERS
HIGHER
● Husband and wife shall compute their
Taxable Amount xx individual income tax separately based on
the income earned by them separately.
Provided that if any income cannot be
➔ The historical cost or adjusted basis definitely identified as income exclusively
of the real property sold or disposed earned by either of the spouses, the same
shall be carried over the new shall divide equally between spouses.
principal residence built or
acquired. MINIMUM WAGE EARNERS
➔ The BIR shall have been duly ● Refer to a worker in the private sector paid
notified by the taxpayer within 30 the statutory minimum wage, or to an
days from the date of sale or employee in the public sector with
disposition through a prescribed compensation income not more than the
return of his intention to avail of the statutory minimum wage in the non -
tax exemption. agricultural sector where he/she is
➔ The tax exemption can only be assigned.
availed once every 10 years. ● Minimum Wage Earners are exempt from
income tax on:
FINAL WITHHOLDING TAX VS CREDITABLE ➔ Minimum wage
TAX ➔ Holiday Pay
FINAL WITHHOLDING TAX ➔ Overtime Pay
● The tax from the income earned is already
➔ Night Shift differential
withheld by the payor upon payment of the
➔ Hazard Pay
said income. No further liability on the said
● They are exempt from income tax as well
tax.
as creditable withholding tax.
● However, the following is subject to basic
Gross Interest Income xx tax and applicable creditable withholding
taxes
Less. Final WT (xx) ➔ other benefits exceeding 90k
Net Interest Income xx ➔ business income
● An employee who receives/earns
additional compensation such as
CREDITABLE TAX commissions, honoraria, fringe benefits,
● Method of collecting income tax in advance benefits in excess of the allowable
from the recipient through the payor. The P90,000, shall still enjoy the privilege of
recipient shall pay the difference between being a minimum wage earner.
the tax withheld and the tax due.
SENIOR CITIZENS AND PERSONS WITH
Gross Sales xx DISABILITIES
● Generally, they are still subject to income
Cost of Sales (xx) tax for the income they earned, unless they
are MWEs, and other taxes such as:
Gross Income xx ➔ The 20% final withholding tax on
interest income from any currency
Less. Deductions (xx) bank deposits
 ➔ The 15% final withholding tax on
interest from a depository bank
under the expanded foreign
currency deposit system
➔ Pre-termination of long-term
deposit or investment
➔ The 10% final withholding tax:
◆ on cash and/or property
dividends actually or
constructively received from
a domestic corporation or
from a joint stock company,
insurance or mutual fund
company and a regional
operating headquarters of a
multinational company
◆ on the share of an individual
in the distributable net
income after tax of a
partnership (except GPP) of
which he is a partner
◆ On the share of an
individual in the net income
after tax of an association, a
joint account, or a joint
venture or consortium
taxable as a corporation of
which he is a member or a
co-venture.
➔ The capital gains tax from sales of
shares of stock not traded in the
stock exchange
➔ The 6% final withholding tax on
presumed capital gains from sale of
real property, classified as capital
asset, except capital gains
presumed to have been realized
from the sale or disposition of
principal residence
➔ Other taxes.
● Senior Citizens and/or PWDs, as the case
may be, under the law are entitled the
following benefits:
➔ 20% discount and exemption from
VAT on their purchase of specified
goods and services
➔ 5% discount on basic and prime
commodities
➔ P500 monthly social pension, for
indigent senior citizens
➔ Death benefit assistance
➔ 5% discount on utilities; and
➔ Income tax exemption for minimum
wage earners or for senior
citizens/PWDs whose annual
taxable income is not more than
P250,000.