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Module 3 Individual Taxpayers
Module 3 Individual Taxpayers
MODULE 3
INDIVIDUAL TAXPAYERS
INTRODUCTION
This module introduces the relevant laws governing individual income taxation.
Topics include classification of individual taxpayers under Tax Code of the Philippines,
applicable taxes and tax rates, graduated rates under TRAIN Law 2018-2022, final
withholding tax, capital gains, requisites of tax exemption, format in computing taxable
income, benefits of senior citizens and person with disability, minimum wage earner (MWE),
filing of income tax returns, manner and place of filing income tax return, persons required to
file income tax returns, persons not required to file income tax returns and substituted filing
of income tax returns.
DEFINITION
INDIVIDUAL TAXPAYERS are natural persons with income derived from within the
territorial jurisdiction of taxing authority. They are classified as:
1. Resident Citizens (RC)
2. Nonresident Citizens (NRC)
3. Resident Aliens (RA)
4. Nonresident Aliens (NRA)
a. Engaged in trade/business (NRA-ETB)
b. Non-resident alien not engaged in trade or business (NRA-NETB)
Importance of classification
They differ as to:
1. Situs of income
2. Manner of computing tax
3. Treatment of certain passive incomes
4. Allowable deductions
5. References in the tax choice
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Tax 301 – Income Tax
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ILLUSTRATION
Pedro left the Philippines on July 1, 2018, to go abroad and work there
for two years. The following data were provided for 2018 taxable year
(assume 40% of gross income and business expenses presented below were
derived from abroad:
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 shall be treated as an overseas contract worker.
A Filipino citizen who was previously a nonresident citizen and who arrives and
resides permanently in the Philippines at any time during the taxable year shall likewise be
treated as a nonresident citizen for the same taxable year with respect to his income derived
from sources abroad until the date of his arrival to the Philippines.
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Tax 301 – Income Tax
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The term NONRESIDENT ALIEN under Section 22(G) of the Tax Code
means an individual whose residence is not in the Philippines and who is not
a citizen thereof.
Under Section 22(S) of the Tax Code, “trade or business” includes
performance of the functions of a public service or performance of personal
service in the Philippines.
A nonresident alien not engaged in trade or business is subject to 25%
income tax based on gross profit from all sources within the Philippines.
ILLUSTRATION
Determine the correct classification of the taxpayer from the independent
cases provided below:
Case 1
Allan is a natural born Filipino citizen. His family migrated to the
U.S. fifteen years ago. For personal reasons, he decided to return and
reside permanently in the Philippines on March 1, 2018.
Answer: From Jan.-Feb. 2018: Allan is classified as NRC
From March 1, 2018 onwards: Allan is classified as
RC
Case 2
Joe is an American information technology expert. He was signed
by Noypi Telecom (a local telecommunication company) from January to
March 2018 to improve its internet services. Due to the anticipated entry
of competitors from other countries, Noypi decided to extend indefinitely
the services of Joe.
Answer: He is 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, is a
resident, regardless of his intention to return to his
residence abroad.
Case 3
Greg Popovich, head coach of 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.
Answer: Greg Popovich is classified as NRA-NETB.
Case 4
Using the same data in Case 3, assume that Greg Popovich
invested in shares of stock of various domestic corporations during his
recent stay in the Philippines.
Answer: Greg Popovich is NRA-NETB.
Passive income such as dividend income is not
considered income derived from trade and business.
Case 5
Mika “The Iceman” Immonen, a Finnish cue artist and former world
billiard champion is a resident of Finland. He won the world 9-ball
championships in 2005 in the Philippines. He is also the owner of one of
the disco pubs in Malate since then.
Answer: NRA-NETB
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Tax 301 – Income Tax
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CLASSIFICATION OF TAXPAYER
It is important to properly classify the individual taxpayers because resident citizens
are taxable on their income derived from sources within and without the Philippines while
other taxpayers are taxable only on their income derived from the Philippine sources.
Moreover, individual taxpayers classified as non-resident aliens not engaged in trade and
business (NRA-NETB) are taxable based on the gross income while others are taxable
based on their net income.
SOURCES OF INCOME
It is important to know the source of income for tax purposes (income derived from
within and without the Philippines) because as resident citizens are taxable based on their
worldwide income while others are taxable only on their income derived from sources within
the Philippines.
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Tax 301 – Income Tax
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CASE F:
The income and expenses of a Filipino citizen for 2018 were provided as follows:
January to June Philippines Canada
Gross Income ₱5,000,000 ₱2,000,000
Allowable Deductions 2,000,000 1,000,000
July to December
Gross Income 2,000,000 3,000,000
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Tax 301 – Income Tax
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Assume that the taxpayer is a resident who left the country in July of the
current year to reside permanently in Canada, how much is his taxable income?
CASE G:
Assume the same data in Case F except that the taxpayer is a non-resident
who returned and resided permanently in the country in July of the current year. His
taxable income before personal exemptions is
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross income, Canada (July-Dec) 3,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (July-Dec) (1,200,000)
Taxable income ₱5,800,000
**Note: Personal exemptions will not be considered in computing
taxable income starting January 1, 2018, effect of the TRAIN Law.
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Tax 301 – Income Tax
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CASE B: Determine the income tax due assuming the taxable compensation income
for 2018 is ₱300,000.
Answer:
CASE C: Determine the income tax due assuming the net taxable compensation
income for 2018 is ₱1,850,000.
Answer:
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Tax 301 – Income Tax
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ILLUSTRATION
CASE A: PURELY SEP whose gross sales/receipts and other non-operating income does
not exceed the VAT threshold of ₱3,000,000.
1. Determine the income tax due assuming the gross sales/receipts and other non-
operating income for 2018 is ₱240,000.
Answer: Zero, Taxable income do not exceed P250,000
2. Using the data below, calculate the income tax due for 2018:
Answer:
CASE B: PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-
operating income exceeds the VAT threshold of ₱3,000,000 during the year.
Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his
1st quarter income tax return. However, his gross sales during the year exceeded the VAT
threshold of ₱3M as follows:
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Tax 301 – Income Tax
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Answer:
Answer:
CASE C: Mixed Earner whose gross sales/ receipts and other non-operating income does
not exceed the VAT threshold of ₱3,000,000
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Tax 301 – Income Tax
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2. Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax
due.
Answer:
CASE D: Mixed income earner whose gross sales/receipts and other non-operating income
exceeds the VAT threshold of ₱3,000,000.
1. Determine the income tax due assuming the following data for 2018:
Answer:
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Tax 301 – Income Tax
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PASSIVE INCOME
Passive income is the income earned from allowing others to use one’s right, or
game of chance or investment, in which the taxpayers merely wait for the income to come in.
The law subjects passive income to final tax. Once subjected to a final tax, it is no longer
included in the taxable income subject to normal (tabular) tax. Deductions and exemptions
do not apply to items subject to final tax.
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Tax 301 – Income Tax
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OTHER CONSIDERATIONS
Minimum Wage
The term “statutory minimum wage earner (SMW)” or “minimum wage earner (MWE)”
under RA 9504 shall refer to a worker in the private sector paid the statutory minimum wage.
The rate is fixed by the Regional Tripartite Wage and Productivity Board as defined by the
Bureau of Labor and Employment Statistics. MWE are exempt from income tax on:
1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay
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Tax 301 – Income Tax
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Manner of Filing
How:
a. Manual Filing
b. Electronic Filing and Payment System (EFPS)
c. eBIRForms
When:
Payment may be in installment if the Income Tax Due is more than P2,000
1st installment: at the time of filing the annual ITR (on or before April 15 of the
following year)
2nd installment: on or before October 15 following the close of the calendar year
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Tax 301 – Income Tax
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Tax 301 – Income Tax
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MODULE EXERCISES
Quarterly Income Tax Return
The following cumulative balances during the year on income and expenses were
provided by Juan Dela Cruz, a resident citizen:
Reference:
Tabag, E.D., Garcia, E.J. (2019) Income Taxation with Special Topics in Taxation based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
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