LESSON 4

TAXATION OF INDIVIDUAL TAXPAYERS

Learning Objectives:

At the end of the chapter, the student should be able to:

➢ Discuss the classification of individual taxpayers.
➢ Explain what the sources of income are.
➢ Compute for the income tax on an individual taxpayer

From the concept of taxation, individual taxpayer means any person who derives income from
their practice of profession, of having trade or business, or that receiving compensation as an employee.
Therefore, individual taxpayer is a natural person. The term does not include judicial entity created by the
operation of law and having personality separate and distinct from the owner or owners, these are
business entities in the form of sole proprietorship, partnership or corporation.

Person in Taxation Means

→ Individual – refers to a person deriving income from his/her practice of profession, trade or business
or earning compensation as an employee.
→ Corporation – shall include partnerships, no matter how created or organized, joint stock companies,
joint accounts (cuentas en participacion), associations, or insurance companies, but does
not include general professional partnerships and a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating or consortium
agreement under a service contract with the Government (Tax Code).
→ Estate – refers to the mass of all property, rights and obligations of a person which are not
extinguished by his death.
→ Trust – a right on property, real or personal, held by one party for the benefit of another.

CLASSIFICATION OF INDIVIDUAL TAXPAYERS

CLASSIFICATION OF INDIVIDUAL TAXPAYERS

Based on citizenship *Based on filing status

Citizen of the Philippines

1. Single
1. Resident citizen
2. Head of the family
1 2. Non-resident citizen
3. Married

Alien
1. Resident alien
2
2. Non-resident alien
a. Engaged in business
b. Not engaged in

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*The classification of individual taxpayers based on filing status is no longer applicable under the new tax law, the
Tax Reform for Acceleration and Inclusion (TRAIN) Act also known as Republic Act 10963.

Taxpayers According to Citizenship

1. Citizens of the Philippines. The following individuals are citizens of the Philippines:
a. Those who are citizens of the Philippines at the time of the adoption of the 1987
Constitution (on February 2, 1987);
b. Those whose fathers or mothers are citizens of the Philippines;
c. Those born before January 17, 1973 of Filipino mothers who elect Philippine citizenship
upon reaching the age of majority;
d. Those who are naturalized in accordance with law.

Sub-classification of Citizen Taxpayer

For income tax purposes, a citizen is further classified into:
1) A resident citizen is a Filipino citizen who:
a. resides or stay in the Philippines permanently; or
b. stays outside the Philippines for less than 183 days during a particular taxable year.
2) A non-resident citizen is a Filipino citizen who may be:
a. A citizen of the Philippines who establishes to the satisfaction of the BIR Commissioner
the fact of his/her physical presence abroad with a definite intention to reside therein;
b. 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;
c. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him/her to be physically present abroad most of the time
during the taxable year;
d. A citizen who has been previously considered as a non-resident citizen and who arrives in
the Philippines at any time during the taxable year to reside permanently therein shall
likewise be treated as a non-resident citizen for the taxable year in which he arrives with
respect to his income derived from sources abroad until the date of his/her arrival in the
Philippines;
e. 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 maybe.

2. Aliens. Individuals who are not Filipinos:

Sub-classification of Aliens
For income tax purposes, aliens are further classified as follows;
1) Resident alien refers to an individual whose residence is within the Philippines, but is not a
citizen thereof.
2) Non-resident alien means an individual who does not reside in the Philippines and who is not
a citizen thereon.
A non-resident alien is further classified as follows:
a. A non-resident alien engaged in trade or business refers to:
i. An individual who is not a citizen and who is not a resident of the Philippines,
but has a business, particularly a sole proprietorship, established and
operating in the Philippines; or

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 ii. A non-resident alien who comes to the Philippines and stays for an aggregate
period of more than 180 days during the taxable year.
b. A non-resident alien not engaged in trade or business refers to:
i. One who comes to the Philippines for a definite purpose which in its nature
may be promptly accomplished.
c. Special aliens are individuals with source of income under special employment
contracts, in offshore banking units, petroleum contractors, and regional or area
headquarters of multinational corporations operating in the Philippines.

SOURCES OF INCOME

Source of income only refers on how you earned the income, from property, activity or by way of
service. It is important to know the source of income of individual taxpayers, whether it was earned from
within the Philippines or outside, because not all individual taxpayers are taxed on all of their income.

TAXABLE INCOME BASED ON CLASSIFICATION OF INDIVIDUAL TAXPAYERS

Taxable income is defined as the pertinent items of gross income less the deductions, if any,
authorized for such types of income by the Tax Code or other special laws. The taxable income is also
known as the tax base upon which tax rate is to be applied to arrive at the tax due/payable by a taxpayer.
The following guidelines will help to determine the taxable income of individual taxpayers based on
the sources of income:
1. Resident citizen (RC). Resident citizens are taxable on all income derived from sources within
and outside the Philippines.
2. Non-Resident citizen (NRC). These type of individual taxpayers are taxable on their income from
within the Philippines only.
3. Resident Alien (RA). The resident aliens are taxable on their income from within the Philippines
only.
4. Non-resident alien engaged in trade or business in the Philippines (NRAETBP). These taxpayers
are taxable on their income from within the Philippines only.
5. Non-resident alien not engaged in trade or business in the Philippines (NRANETBP). These
taxpayers are taxable on their gross income from within the Philippines at 25%. The taxpayer
cannot claim personal exemptions and expenses as deductions.
6. Special individuals/alien (SI/A). These type of taxpayers are taxable on their income from
within the Philippines at 15% based on gross income. (The 15% shall not be applicable to RHQs
registering with the SEC after January 1, 2018)
Types of Income Taxes
1. A. Graduated/Schedular or basic normal tax. The basic normal tax for citizen, resident alien and
non-resident alien engaged in trade or business shall be computed in accordance with and at the
rates established in the following schedule:

Effective January 1, 2018

If the taxable income is:
Income Tax Table
Not over ₱ 250,000 0%
Over ₱ 250,000 but not over ₱ 400,000 20% of the excess over ₱ 250,000
Over ₱ 400,000 but not over ₱ 800,000 ₱ 30,000 + 25% of the excess over ₱ 400,000
Over ₱ 800,000 not over ₱ 2,000,000 ₱ 130,000+ 30% of the excess over ₱ 800,000
Over ₱ 2,000,000 but not over ₱ 8,000,000 ₱ 490,000 +32% of the excess over ₱ 2,000,000
Over ₱ 8,000,000 ₱ 2,419,000 + 35% of the excess over ₱ 8,000,000

Illustration

Mr. Bulandos, a resident citizen, married with three qualified dependent children, had a gross
compensation income of ₱ 875,000.

Required: Compute the income tax due of the taxpayer for the following taxable year 2018
Answer: The income tax due is computed as follows:

For Taxable Year 2018

Gross Compensation Income ₱ 875,000
Net Compensation Income 875,000
Tax Due:
On ₱ 800,000 ₱ 130,000
On the excess [(₱ 875,000- ₱ 800,000)= ₱ 75,000 x 30%] 22,500
Tax due ₱ 152,500

INDIVIDUALS EXEMPT FROM INCOME TAX

A. Non-resident citizen who is:

1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of
his/her physical presence abroad with a definite intention to reside therein.

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 2. A citizen of the Philippines who leaves the country 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/her to be physically present abroad most of the time during the taxable year.
4. A citizen who has been previously considered as a non-resident citizen and who arrives in the
Philippines at any time during the year to reside permanently in the Philippines will likewise be
treated as a non-resident citizen during the taxable year in which he/she arrives in the Philippines,
with respect to his/her income derived from sources abroad until the date of his/herarrival in the
Philippines.

B. Overseas Contract Worker, Including Overseas Seaman

An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker is taxable only on income from sources within the Philippines. A seaman
who is a citizen of the Philippines and who receives compensation for services rendered abroad as a
member of the complement of a vessel engaged exclusively in international trade will be treated as an
overseas contract worker.
C. Barangay Micro Business Enterprises (Republic Act 9178 or BMBE Law)
BMBEs refer to any business enterprise engaged in the production, processing or
manufacturing of products or commodities, including agro-processing, trading and services, whose
total assets including those arising from loans but exclusive of the land on which the particular
business entity’s office, plant and equipment are situated, should not be more than ₱ 3,000,000.
Services shall exclude the practice of a licensed profession.

D. Expanded Senior Citizens Act of 2010

The exemption from the payment of individual income taxes is available to senior citizens who
are considered to be minimum wage earners in accordance with Republic Act 9504. Senior citizens
are also exempted from value-added tax (VAT) on certain good and services as discussed in Chapter 8
Value-Added Tax.

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Assignment:

Compute the tax due for the following individual gross income in Php for the year 2020:

1. 898,890
2. 1,001,890
3. 290,010
4. 782,000
5. 2,290,021
6. 450,000
7. 150,000
8. 250,000
9. 990,450
10. 376,901
11. 3,900,282
12. 6,972,000
13. 509,022
14. 210,000
15. 278,000