A.

GENERAL CONCEPTS AND PRINCIPLES OF TAXATION

Learning Objectives. At the end of this module, students are expected to:
a) Understand the inherent powers of the State
b) Understand the purposes of taxation
c) Identify the nature, scope and limitations of taxation
d) Have knowledge on the basic principles of a sound tax system
e) Identify the situs of taxation
f) Identify the sources of tax laws
g) Identify other doctrines in taxation

TAXATION – the process by which the sovereign, through its law-making body,
imposes burdens for the purpose of raising revenues to carry out legitimate objects of
the government

TAXES – the enforced contributions levied by the law-making body of the state for the
support of the government and all the public needs.

3 INHERENT POWERS OF THE STATE

1. Police Power- the power of promoting public welfare and regulating the use of liberty and
property.
2. Power of Taxation – the power which raises revenue for the expenses of the government
3. Power of Eminent Domain – the power to acquire private property for public purpose upon
payment of just compensation

PURPOSES OF TAXATION
1. Primary: Revenue or Fiscal Purpose
- to provide funds or property with which to promote general welfare and protection of
its citizens

2. Secondary: Regulatory Purpose

- employed as a devise for regulation or control
• Effects: - Promotion of General Welfare
- Reduction of Social Inequality
- Economic Growth

THEORIES OF TAXATION
1. Necessity Theory
- to preserve the state’s sovereignty
- a means to give for protection and facilities

2. Lifeblood Theory
- used to continue to perform the government’s basic function of serving and protecting its
people
- give tangible and intangible benefits

Basis of Taxation – The government may be able to perform its functions while the citizens
may be secured in the enjoyment of the benefits.

MANIFESTATION OF LIFEBLOOD THEORY

1. Rule of “No Estoppel against the government”
2. Collection of taxes cannot be stopped by injunction
 Court of Tax Appeals – have the authority to grant injunction to restrain collection
of internal revenue tax, fee or charge
3. Taxes could not be the subject of compensation or set-off
 Tax is compulsory not bargain.
4. Right to select objects (subjects) of taxation
a) Subject or object to be taxed
b) Purpose of the tax (as long as it is a public purpose)
c) Amount or rate of the tax
d) Kind of tax
e) Apportionment of the tax
f) Situs (place) of taxation
g) Manner, means, and agencies of collection of the tax
5. A valid tax may result in the destruction of the taxpayer’s property.
 Lawful tax cannot be defeated.
 Bring out the insolvency of the taxpayer
 Forfeiture of property through police power

NATURE, SCOPE AND LIMITATIONS OF

TAXATION SCOPE OF TAXATION

The power of taxation is the most absolute of all the powers of the government.
a) Comprehensive – covers all (persons, businesses, professions)
b) Unlimited – absence of limitations
c) Plenary – it is complete
d) Supreme –

ESSENTIAL ELEMENTS OF TAX

a) It is an enforced contribution.
b) It is generally payable in money.
c) It is proportionate in character.
d) It is levied on persons, property or right.
e) It is levied by the law-making body of the state.
f) It is levied for public purpose.

ASPECTS OF TAXATION
a) Levying or imposition of tax
b) Assessment or determination of the correct amount
c) Collection of tax

NATURE/ CHARACTERISTICS OF THE STATE’S POWER OF TAX

a) It is inherent in sovereignty.
-can enforce contribution in the absence of law
b) It is legislative in character.
-cannot be exercised by executive and juridical branches
c) Exemption of government entities, agencies and instrumentalities.
d) International Comity
e) Limitation of territorial jurisdiction
 f) Strongest among all the inherent powers of the state
 Agencies performing governmental function are tax exempt unless expressly taxed
 Agencies performing proprietary functions are subject to tax unless
expressly exempted
 GOCCs performing proprietary functions are subject to tax, however the following
are granted tax exemptions:
 Government Service Insurance System (GSIS)
 Social Security System (SSS)
 Philippine Health Insurance Corporation (PHIC)
 Philippine Charity Sweepstakes Office (PCSO)
 Local Water Districts (RA 10026)

CLASSIFICATION OF TAXES
1. As to scope:
 National- imposed by the national government
 Local – imposed by the local government
2. As to subject matter or object:
 Personal, poll, or capitation – tax of a fixed amount
imposed upon individual residing within a specified
territory.
 Property – tax imposed on property in proportion to its value
 Excise – tax on certain rights and privileges (sin products
or imported goods)

3. As to who bears the burden:

 Direct – taxpayer cannot shift to another
 Indirect – indemnify himself at the expense of another

4. As to determination of fixed amount:

 Specific- tax of fixed amount by number, standard of
weight, or measurement
 Ad valorem – tax of fixed proportion of the value of
the property
5. As to purpose:
 Primary, Fiscal, or Revenue Purpose
 Secondary, Regulatory, Special, or Sumptuary Purpose

6. As to graduation or rate:
 Proportional – tax based on fixed percentages of amount
 Progressive – tax the rate of which increases as the tax base
or bracket increases
 Regressive - tax the rate of which decreases as the tax base
or bracket increases

7. As to taxing authority:
 National – imposed under National Internal Revenue
Code, collected by Bureau of Internal Revenue
 Local – imposed by LGUs

BASIC PRINCIPLES OF A SOUND TAX

SYSTEM ELEMENTS OF SOUND TAX

SYSTEM
a. Fiscal Adequacy – sources must be adequate
b. Theoretical Justice or Equity – tax should be proportionate
c. Administrative Feasibility – law must be capable of effective and efficient enforcement

LIMITIATIONS ON THE STATE’S POWER TO TAX

1. Inherent Limitations
2. Constitutional Limitations
 Progressive System – emphasis on direct taxes
 Regressive System – more indirect taxes imposed
 Regressive Tax Rates – tax rates which decreases as tax base or bracket
increases

SITUS OF TAXATION

FACTORS IN DETERMINING THE SITUS OF TAXATION

a. Subject matter ( person, property, or activity)
b. Nature of tax
c. Citizenship
d. Residence of the taxpayer
e. Source of Income
f. Place of excise, business or occupation being

taxed OTHER DOCTRINES IN TAXATION

 TOLL is a sum of money for the use of something which is paid of the use of a road,
bridge or public nature.
 PENALTY is a sanction imposed as a punishment for violation of law or acts deem injurious.
 SPECIAL ASSESSMENT is an enforced proportional contribution from owners of the
lands for special benefits resulting from public improvements.
Characteristics: a. Levied only on land
b. Not a personal liability of the person assessed
c. Based wholly on benefits (not necessary)
d. Exceptional both as to time and place
 REVENUE refers to all funds or income derives by the government.
 SUBSIDY is a pecuniary aid directly granted by the government to an individual or
enterprise deemed beneficial to the public.
 PERMIT or LICENSE is a charge imposed under the police power for purposes of regulation.
 CUSTOMS DUTIES are taxes imposed on goods exported from or imported into a country.
 TARIFF is the system of imposing duties on the importation or exportation of goods.

DIRECT DOUBLE TAXATION means taxing twice:

1. By the same taxing authority, jurisdiction or taxing district
2. For the same purpose
3. In the same year or taxing period
4. Same subject or object
5. Same kind or character of the tax
 MEANS OF AVOIDING THE BURDEN OF TAXATION
1. Shifting – the transfer of the burden of tax by the original payer to someone else
2. Transformation – the producer pays the tax and endeavor to recoup himself by
improving his process of production
3. Evasion – the use of illegal means to defeat or lessen tax
4. Tax Avoidance – the exploitation of legally permissible alternative tax rates of
assessing taxable income to reduce tax liability
5. Exemption – the grant of immunity to particular persons of a particular class
6. Capitalization – the reduction in the selling price of income producing property by
an amount equal to the capitalized value
7. Avoidance – the tax saving device within the means sanctioned by law.

SOURCES OF TAX LAWS

1. Constitution
2. National Internal Revenue Code
3. Tariff and Customs Code
4. Local Government Code (Book II)
5. Local tax ordinances/ City or municipal tax codes
6. Tax treaties and international agreements
7. Special Laws
8. Decision of the Supreme Court and the Court of Tax Appeals
9. Revenue rules and regulations and administrative ruling and opinion

B. CONCEPTS OF INCOME
Learning Objectives. At the end of this module, students are expected to:
1. Define income for taxation purposes
2. Identify the inclusions in gross income;
3. Identify the taxable and non-taxable gross income;
4. Identify the classification of gross income for individuals
5. Identify the classification of gross income from business
6. Discuss the treatment of fringe benefits for taxation purposes.
7. Determine the taxability of passive income;
8. Identify the tax rates applicable to income subject to creditable withholding tax at
source and final taxes.

A. INDIVIDUAL
Income – refers to all earnings derived from:
 Rendered service (labor/employment)
 Capital (business or investment)
 Or both rendered service or business
 Gain derived from sale or exchange of personal or real property either ordinary or
capital asset

All income from whatever source, derived within and without the Philippines, legal or illegal.

Sources of Income
 The place wherein the income is earned
 Governed by the situs of taxation
 Necessity to determine whether such income is subject to tax or not
  Income may be earned from:
1. Within the Philippines
2. Without the Philippines
3. Partly within and partly without the Philippines

Classifications of Income for Individuals

1. Compensation income
2. Profession or Business Income
3. Passive Income
4. Capital Gain

Taxable income
 These are pertinent items of gross income enumerated in the Tax Code less
deductions, if any, and/or personal exemptions authorized by law.
 Amount of income upon which the tax rate prescribed by law is applied to obtain the
amount of income tax payable
 Gains, profits or income which are subject to income either at gross or net amount

Requisites for Income to be taxable

1. There must be gain or profit
2. The gain must be realized or received – whether actual realization or constructive
receipt
3. The income earned must not be exempted from income taxation

Taxable Income Defined. -The term ‘taxable income means the pertinent items of gross
income specified in this Code, less the deductions, if any, authorized for such types of income
by this Code or other special laws.

Gross Income. - gross income are all income derived from whatever source, including:

a. Compensation for services in whatever form paid, including, but not limited
to fees, salaries, wages, commissions, and similar items;
b. Gross income derived from the conduct of trade or business or the exercise of
a profession;
c. Gains derived from dealings in property;
d. Interests;
e. Rents;
f. Royalties;
g. Dividends;
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partner's distributive share from the net income of the general professional
partnership.

Exclusions from Gross Income. - The following items shall not be included in gross Income:
a. Life Insurance. –
b. Amount Received by Insured as Return of Premium.
c. Gifts, Bequests, and Devises
d. Compensation for Injuries or Sickness.
e. Income Exempt under Treaty.
f. Retirement Benefits, Pensions, Gratuities, etc.-
g. Miscellaneous Items. –
 Income Derived by Foreign Government
 Income Derived by the Government or its Political Subdivisions
 Prizes and Awards.
 Prizes and Awards in sports Competition.
 13th Month Pay and Other Benefits.
 GSIS, SSS, Medicare and Other Contributions. –
 Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness.
 Gains from Redemption of Shares in Mutual Fund
Special Treatment of Fringe Benefit.
- Fringe Benefit Defined. –
a. Housing;
b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and others;
e. Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
f. Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his dependents; and
j. Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.

Fringe Benefits Not Taxable. –

a) Fringe benefits which are authorized and exempted from tax under special laws;
b) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;
c) Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and
d) De minimis benefits as defined in the rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of the Commissioner.

Taxable and Non-Taxable Gross Income

Effective 1, 2018, compensation income earners, self-employed and professional taxpayers

(SEPs) whose annual taxable incomes are P250,000 or less are exempt from the
personal income tax (PIT). The 13th month pay and other benefits amounting to P90,000 are
also tax-exempt.

B. CORPORATE INCOME
Determination of Taxable
Income
Domestic Corporation - taxable on the entire net income received from sources within and
without the Philippines. Net taxable income is the amount equal to gross income less
allowable deductions
Sources of Income:
1. Sale of Goods
2. Sale of Services
Other Income
Dividends and Profit Remittances
 Dividends from a domestic corporation are tax-exempt in the hands of other domestic
corporations. The tax is 10% if these are paid to citizens and residents, and 25% if
paid to non-resident foreign nationals not engaged in business in the Philippines.
 Dividends received by non-resident foreign corporations from domestic corporations
are taxed at 30% or the treaty rate. A lower rate of 15% applies if the recipient’s home
country does not impose a tax on foreign-sourced dividends or when there are tax-
sparing provisions.
 A 15% tax rate also applies on the remittance of profits of Philippine branches to their
foreign head office.

Interest and Royalties

 Royalties payable to non-resident foreign corporations are subject to the 30% final
withholding tax. A lower rate of 25% is imposed on non-resident foreign nationals.
 Interest on foreign loans paid to non-resident foreign corporations is taxed at 20%.
Preferential rates are available under tax treaties.
Other Passive Income
Scheduled rates apply on most passive income, including the following:
• Interest from bank deposits, yields from deposit substitutes and similar arrangements,
royalties, prizes and other winnings from Philippine sources: 20%;
• Interest from foreign currency deposits in a local bank: 7.5% (non-residents are
exempt);
• Interest income from long-term deposits: individuals are exempt;
• Gains from the sale of shares listed and traded through the local exchange: exempt
from income tax, but subject to a transaction tax at 0.5% of the selling price;
• Capital gains from the sale of land and buildings classified as capital assets: 6% of the
gross selling price or market value, whichever is higher (not applicable to non-
resident foreign individuals and corporations); and
• Capital gains from the sale of shares in a domestic corporation, not traded through the
local stock exchange: 5% on the first P100,000 ($2120) of net gain and 10% on the
excess, imposed on the cumulative net gain from the sale of shares during the taxable
year. Gains from the surrender of shares on dissolution of the issuing company are
taxed at the regular corporate/individual tax rates.

Other Capital Assets

Gains from the sale or disposition of capital assets other than land, buildings and shares in
domestic corporations are taxed as business income. For individuals, only 50% of the gain is
taxed if the asset is held for more than 12 months. Capital losses are deductible only to the
extent of the gains.

Deductions from Income– same as individual taxpayer except premium payments on health
and/or hospitalization insurance
Withholding of Tax at Source

The withholding tax is a mechanism designed to facilitate the collection of taxes from
taxpayers. The withholding tax may be creditable or final. If creditable, the amount of tax
withheld is allowed to be credited against the taxpayer’s final tax liability and adjusted
accordingly. If final, no such tax credit and adjustments are to be made by the taxpayers.

Final Withholding Tax

What and When to File and Pay Final Withholding Tax?

Source: http://reliabooks.ph/final-withholding-tax-under-train-law/

• Commonly use BIR Form here are the 0619F, 1601FQ, and 1604CF.
• BIR Form No. 1600 is usually use by the Government to Withhold
Final Withholding VAT to their supplier.
• BIR Form No. 1602Q is usually use by the Banks.
• BIR Form 1603Q is use by Companies who give Fringe Benefits to its
Employees other than Rank and File
Income Payments to Individuals that are Subject to Final Withholding Tax (FWT).

Source: http://reliabooks.ph/final-withholding-tax-under-train-law/
Income Payments to Corporations that are Subject to Final Withholding Tax.

Source: http://reliabooks.ph/final-withholding-tax-under-train-law/
Income Payments on Interest Paid to Bank Deposits, Amount withdrawn on
Decedent’s Deposit Account, etc.

Source: http://reliabooks.ph/final-withholding-tax-under-train-law/

Income Payments from the Government that are Subject to Withholding of 5% to 12% VAT
and 3% Percentage Tax.

Source: http://reliabooks.ph/final-withholding-tax-under-train-law/
Creditable Withholding Tax Rates on Certain Payments

The current and prior rates (before TRAIN Law) are listed below:
Type of income payment Previous CWT rate New CWT rate

Individuals:

 5% if annual gross
Professional fees, talent fees income does not
and commissions exceed PHP 3
million;
Professional fees paid to  10% on the full
medical practitioners and amount of annual
veterinarians Individuals: 8% gross income if
annual gross income
Income payments to certain Other exceeds PHP 3
brokers and agents taxpayers: million
10%/15%
Commissions of independent Other taxpayers:
and/or exclusive sales
representatives, and marketing  10% if annual gross
agents of companies income does not
exceed PHP
720,000;
 15% if annual gross
income exceeds
PHP 720,000
Income distributions to
beneficiaries of estates and 8% 15%
trusts

 10% if annual gross

Income payments to partners income does not
of general professional 8% exceed PHP
partnerships 720,000;
 15% if annual gross
exceeds PHP
720,000
Source: Deloitte
C. ALLOWABLE DEDUCTIONS
Learning Objectives. At the end of this module, students are expected to:
1. Identify allowable deductions for both individual and corporate taxpayers;
2. Identify the differences between itemized and optional standard deductions;
3. Identify deductible expenses;
4. Identify expenses that are fully and partly deductible

INDIVIDUAL

Deductions from Gross Income.

– Employment expenses

Aliens, whether residents or not, who are receiving only salary or compensation income are
not allowed any deduction against such income.

Personal deductions

Home mortgage interest, medical expenses, contributions, and other personal expenses
cannot be claimed as deductions for income tax purposes. However, social security
contributions, up to the prescribed amount of maximum mandatory contributions, are
excluded from gross income.

Business deductions

In the case of individuals engaged in business or the practice of a profession, and who opted
to be taxed at the regular graduated income tax rates, the following expenses are allowed as
deductions from gross income:
 All ordinary and necessary expenses paid or incurred during the taxable year in
connection with the trade, business, or profession, including raw materials, supplies,
and direct labor.
 Wages and other forms of compensation for personal services actually rendered,
including the grossed-up monetary value of fringe benefits and travel expenses
incurred in the pursuit of the trade or profession.
 Business rentals.
 Interest paid or incurred within a taxable year in connection with the conduct of a
taxpayer’s profession, trade, or business, less an amount equal to a certain percentage
of the interest income subject to final tax.
 Entertainment, amusement, and recreation expenses, not to exceed the following
ceilings:
o 0.50% of net sales for taxpayers engaged in sale of goods or properties.
o 1% of net revenue for taxpayers engaged in sale of services,
including professionals and lessors of properties.
 Taxes.
 Losses.
 Bad debts.
 Depreciation.
 Charitable and other contributions, subject to certain limitations.
 Research and development (R&D) expenditures.
CORPORATION

Corporate – Deductions and Optional Standard Deduction

Corporate taxpayers can avail themselves of the optional standard deduction computed at
40% of gross income. The optional standard deduction is in lieu of the itemized operating
expenses.

1. Depreciation and Depletion -Depreciation is usually computed on a straight-line basis,

although any reasonable method may be elected if the aggregate amount of depreciation,
plus salvage value at the end of the useful life of the property, will equal the cost of the
property.

A cost depletion allowance is allowed:

 For oil and gas wells, depletion is based on actual reduction in flow and production
ascertained, not by flush flow, but by the settled production or regular flow.
 For mines, depletion is allowable up to an amount not to exceed the market value, as
used for purposes of imposing the mining ad valorem taxes, of the products mined
and sold during the year.

2. Goodwill - Amortization of goodwill is not deductible for tax purposes.

3. Start-up expenses - Start-up expenses are deductible when incurred.
4. Interest expenses- The allowable deduction for interest expense shall be reduced by an
amount equal to 33% of interest income that is subject to final tax, if any.
5. Bad debts- Bad debts are deductible expenses when written-off, subject to certain
requirements.
6. Charitable contributions - The deduction for charitable contributions ordinarily may not
exceed 5% of taxable income. However, contributions to certain institutions are 100%
deductible, subject to certain conditions.
7. Entertainment expenses- Entertainment, amusement, and recreation expenses should not
exceed 0.5% of net sales for taxpayers engaged in the sale of goods or properties, or 1%
of net revenue for taxpayers engaged in the sale of services, including professionals and
lessors of properties.

Special deductions - Special deductions are allowed for certain businesses (e.g. insurance,
mining, petroleum, and real estate investment trust).

1. Fines and penalties - Interest penalties are deductible. Surcharge and compromise
penalties imposed for non-payment or late payment of taxes are not deductible for tax
purposes.

2. Taxes - Corporate taxpayers can claim a deduction for all taxes paid or accrued within the
taxable year in connection with their trade or business, except for the following:
 Philippine CIT.
 Income taxes imposed by authority of any foreign country, unless the taxpayer elects
to take a deduction in lieu of a foreign tax credit. For a resident foreign corporation,
the only option is to deduct; foreign tax credit is not allowed to be claimed
 Donor’s tax and estate tax.
 Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.
In the case of a foreign corporation, deductions for taxes are allowed only if they are
connected with income from sources within the Philippines.

3. Net operating losses - A net operating loss for any taxable year immediately preceding the
current taxable year, which had not been previously offset as a deduction from gross
income, may be carried over as a deduction from gross income for the next three
consecutive taxable years immediately following the year of this loss (except losses
during
the period when the taxpayer was tax-exempt),

4. Loss carrybacks are not allowed.

5. Payments to foreign affiliates – A Philippine corporation can claim a deduction for

royalties, management service fees, and interest charges paid to foreign affiliates,
under arm's-
length terms, where the appropriate WHTs are withheld and remitted.

6. Head office expense allocations –A resident foreign corporation is allowed to claim

allocated head office expenses as a deduction, subject to certain requirements.

Expenses. - Ordinary and Necessary Trade, Business or Professional Expenses

1. Advertising and Promotions
2. Amortizations
3. Bad Debts
4. Charitable Contributions (Note: Donations should be made to BIR accredited
donee institutions, otherwise individual taxpayers can only claim 10% of the
donation as deductible)
5. Commissions
6. Communication, Light and Water
7. Depletion
8. Depreciation
9. Director’s Fees
10. Fringe Benefits
11. Fuel and Oil Insurance
12. Interest (Note: The taxpayer’s allowable deduction for interest expense shall be
reduced by an amount equal to the 33% of the interest income subjected to final tax.
Moreover, all interest incurred or paid to related parties cannot be claimed as
deductions to income)
13. Janitorial and Messengerial Services
14. Losses
15. Management and Consultancy Fee (Note: A portion of expenses must be withheld and
paid to BIR.)
16. Miscellaneous
17. Office Supplies
18. Other Services
19. Professional Fees (Note: A portion of expenses must be withheld and paid to BIR.)
20. Rental (Note: A portion of expenses must be withheld and paid to BIR.)
21. Repairs and Maintenance-Labor
22. Repairs and Maintenance-Materials/Supplies
23. Representation and Entertainment (Note: Limited to 0.5% of net sales for sellers of
goods or 1% of net revenue for seller/provider of services.)
 24. Research and Development
25. Royalties
26. Salaries and Allowances
27. Security Services
28. SSS, GSIS, Philhealth, HDMF and Other Contributions
29. Taxes and Licenses
30. Tolling Fees
31. Training and Seminars
32. Transportation and Travel

As a general rule, allowable deductible expenses must meet the following criteria:
 Relates to the business
 Supported by substantiated documents
 Not contrary to law, public morals, policy and order
 Reasonable in Amount
 Complied with Withholding Tax Requirements

Items not Deductible.

General Rule. - In computing net income, no deduction shall in any case be allowed in respect
to -
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;
3. Bribes, Kickbacks and Other Similar Payments.
4. Losses from Sales or Exchanges of Property.
5. Special Provisions Regarding Income and Deductions of Domestic or
Foreign Insurance Companies
a. Special Deduction Allowed to Insurance Companies.
b. Mutual Insurance Companies.
c. Mutual Marine Insurance Companies.
d. Assessment Insurance Companies.

6. Losses from Wash Sales of Stock or Securities

D. INCOME TAX ON INDIVIDUALS

Learning Objectives. At the end of this module students are expected to:
1. Identify and classify individual taxpayers;
2. Identify income tax rates for individuals;
3. Compute the individual income tax.

Persons Subject to Income Tax

Individual taxpayers – are natural persons with income derived within the territorial
jurisdiction of a taxing authority. It may be either (a) Citizens or (b) Aliens.
a. Citizens – defined under Section I, Article III of the Philippine Constitution as
a Filipino citizen who:
o is Born (by birth) with father and/or mother as Filipino citizens
o is Born before January 17, 1973 of Filipino mother who elects
Philippine citizenship upon reaching the age of majority
o has Acquired Philippine citizenship after birth (naturalized) in accordance
with Philippine laws.
b. Alien – foreign born person who is not qualified to acquire Philippine citizenship
by birth or after birth.

Classification of Individual Taxpayers

1. Citizens
a. Resident Citizen (RC)
b. Nonresident Citizen (NRC)
2. Aliens
a. Resident Alien (RA)
b. Nonresident Alien (NRA)

Resident Citizen (RC)– Filipino citizen who:

a. resides permanently in the Philippines
b. resides outside the Philippines for less than 183 days during the taxable year
- Taxable for all income derived from sources within and outside the Philippines

Non-Resident Citizen (NRC) – Filipino citizen who:

a. Resides outside the Philippines for 183 days or more during the taxable year
b. Established proof to the BIR Commissioner of his physical presence abroad with
definite intention to reside outside
c. Leaves the Philippines during the taxable year to reside abroad
d. Was previously a non-resident citizen and who arrives in the Philippines at any
time during the taxable year to reside permanently in the Philippines
- Taxable for income derived from sources within the Philippines only.

Resident Alien (RA) – persons who are not citizens of the Philippines (foreign individuals) but:
a. Are residing within the Philippines
b. Stayed in the Philippines for more than one year from date of arrival
c. Actually present in the Philippines and who are not mere transients or sojourners
d. Lives in the Philippines with no definite intention as to his stay
e. Who comes to the Philippines for the purpose that requires extended stay for its
accomplishment making Philippines as his temporary home, regardless of his intention to
return to his residence abroad.
Non-Resident Alien (NRA) – persons who are not citizens of the Philippines
(foreign individuals):
a. Whose residence are not within the Philippines
b. Aliens who are mere transients or sojourners who come to the Philippines for a
definite purpose which in its nature may be promptly accomplished

Classification of NRA:
 Those engaged in trade or business within the Philippines (NRAETB)
i. Stayed in the Philippines for an aggregate period of more than 180 days during the
taxable year.
ii. Aliens who have business income in the Philippines

 Those not engaged in trade or business within the Philippines (NRANETB):

i. Stayed in the Philippines for only 180 days or less during the taxable year
ii. Aliens who do not have business in the Philippines.

3. Special Taxpayers
a. NRANETB
b. Special Aliens/Filipino Workers (SAFE)
c. Minimum Wage Earners (MWE)

Special Aliens/Filipino Workers (SAFE)

 Those with managerial and technological position in:
i. Regional Area Headquarters (RAH)
ii. Regional Operating Headquarters (ROH)
iii. Offshore Banking Units (OBU)
iv. Foreign Petroleum Service Contractor and Subcontractor

Regional Area Headquarters (RAH)

 Branch establish in the Philippines by a multinational company
 Does not earn income from Philippines
 Merely acts as supervisory, communications and coordinating center for its
affiliates, subsidiaries or branches in the Asia Pacific Region and other
foreign markets.

Regional Operating Headquarters (ROH)

 Branch establish in the Philippines by a multinational company
 Engage in any of the following services:
o General administration and planning
o Business planning and coordination
o Sourcing of raw materials
o Corporate finance advisory services
o Research and development services
o Technical support and maintenance
o Data processing and communication
o Business development

Offshore Banking Unit (OBU)

 A foreign banking corporation
 Authorized to engage in foreign business transaction with the Philippines
 Minimum Wage Earners (MWE)
 Workers in the private and public sector who are being paid the Statutory
Minimum Wage as fixed by the:
o Regional Tripartite Wage and Productivity Board
o National Wages and Productivity Commission as applicable to the
place where he/she is assigned and/or working

Types of Individual Taxpayers

1. Employed
2. Self-employed or Professionals
3. Mixed Income Earners

Individual - Taxes on personal

income

a. Resident citizens are taxed on their worldwide income.

b. Non-resident citizens and aliens, whether or not resident in the Philippines are taxed
only on income from sources within the Philippines.

Rates of tax on income of resident or non-resident aliens, depend on the nature of their
income, i.e. compensation income, income subject to final tax, or other income.

Income Tax Rates

Compensation tax rates

For resident aliens and non-resident aliens doing business and receiving compensation
income, the tax rates are based on the graduated tax as follows:

Beginning 1 January 2018:

Source: PinoyMoneyTalk.com
Fringe benefits tax (FBT)

 Fringe benefits furnished to managerial and supervisory-level employees by the

employer are subject to a final FBT of 35% on the grossed-up monetary value of
the benefits.
 25% for non-resident alien not engaged in trade or business.

Tax rates for income subject to final tax

 For resident and non-resident aliens engaged in trade or business in the

Philippines, the maximum rate on income subject to final tax: 20%.
 For non-resident aliens not engaged in trade or business in the Philippines: 25%.

Tax rates for business income

An individual, citizen or resident alien, who is self-employed or practices a profession, is also

subject to the graduated income tax rates.

However, an individual who has gross sales/receipts and other non-operating income not
exceeding the value-added tax (VAT) threshold of PHP 3,000,000 may opt to be taxed either
at:
 8% tax on gross sales/receipts and other non-operating income in excess of PHP
250,000 in lieu of the graduated income tax rates and percentage tax (business tax),
or the graduated tax rates.

Tax Rates for Self-employed Individuals and Professionals

Revenue Regulation RR 8-2018 details the implementation of income taxes under the TRAIN
law or Republic Act (RA) No. 10963, which subjects self-employed individuals and
professionals to the following tax regulations:

A. If annual gross sales or income is ₱3 Million or below

Self-employed and professionals with annual gross sales or income receipts not exceeding the
VAT threshold of P3 Million may choose between these two tax rates:

1. Eight percent (8%) of gross sales or receipts and other income, in excess of
₱250,000 instead of the graduated income tax rates and percentage tax (no option to
register for VAT);

2. Graduated income tax rates of 0% to 35% on net taxable income, plus 3%

percentage tax (No change in computation of Net Taxable Business Income)

8% Withholding Tax for Self-employed and Professionals

 The 8% withholding tax rate replaces the two-tier rate of 10% (for self-employed
and professionals earning less than ₱720,000 income every year) or 15% (for those
earning more than ₱720,000 per year).
  The 8% withholding rate is applied on the income, regardless of the amount
as provided in BIR’s Revenue Memorandum Circular No. 1-2018 issued on
January 4, 2018 which states the change in the creditable withholding tax
rate on income payments to self-employed individuals or professionals.

The following lncome Payments to Self-employed individuals or

Professionals shall be subject to 8%:
1. professional fees, talent fees, commissions, etc. for services
rendered by individuals;
2. income distribution to beneficiaries of Estates and Trusts;
3. income Payment to certain brokers and agents;
4. income Payments to partners of general professional partnership;
5. Professional fees paid to medical practitioners; and
6. Commission of independent and/or exclusive sales
representatives, and marketing agents of companies.

B. If annual gross sales or income is above ₱3 Million

Self-employed and professionals receiving annual gross sales or receipts exceeding

the ₱3 Million VAT threshold are subject to the graduated income tax rates on the net
taxable income.