Tax 301 – Income Tax

Prepared by: Mark Paul I. Ramos

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

CITIZENS OF THE PHILIPPINES

1. Born with father and/or mother as Filipino citizens
2. Born before Jan. 17,1973 of Filipino mother who elects Philippine citizenship
upon reaching the age of maturity
3. Acquired Philippine citizenship after birth (naturalized) in accordance with
Philippine Laws

NON-RESIDENT CITIZEN OF THE PHILIPPINES

1. 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. Leaves the Philippines during the taxable year to reside abroad:
a. As an immigrant
b. For employment on a permanent basis
c. For work and derives income that requires him to be physically abroad
most of the time during the taxable year
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.
a. A non-resident citizen who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines shall be
considered a non-resident 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.

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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:

Gross Income Business

Expenses
January 1 to June 30 ₱ 600,000 ₱ 280,000
July 1 to December 31 400,000 120,000

Question 1: His taxable income is

Question 2: Assuming he arrived from abroad on July 1, 2018, to

permanently resettle in the Philippines, his taxable income for 2018 is:

OVERSEAS CONTRACT WORKER (OCW)/OVERSEAS FILIPINO WORKER (OFW)

Revenue Regulation 1-2011 defines OCWs as Filipino citizens employed in foreign
countries commonly referred to as OFWs, who are physically present in a foreign country as
a consequence of their employment. Their salaries and wages are paid by an employer
abroad and are not borne by entities or persons in the Philippines. Hence, OFWs are
classified as non-residents citizens for tax purposes.

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.

 A Filipino citizen taxpayer not classified as nonresident citizen is considered a

RESIDENT CITIZEN for tax purposes.
 An ALIEN is a foreign-born person who is not qualified to acquire Philippine
citizenship by birth of after birth.
 Section 22(F) of the Tax Code defines RESIDENT ALIENS as an individual
whose residence is within the Philippines and who is not a citizen thereof.

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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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He is engaged in actual trade and business in the

Philippines but is non-resident.

APPLICABLE TAXES AND TAX RATES

The applicable taxes for individuals depend on several factors such as but not limited
to:
1. Classification of taxpayer
2. Source of income
3. Type of income

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.

Taxpayer Tax Base Source of taxable

Income
RC Net Income Within and without
NRC, RA, NRA-ETB Net Income Within
NRA-NETB Gross Income Within

TYPES OF INCOME (APPLICABLE TAX)

1. Ordinary or regular income (GRADUATED RATE) - refers to income such
as compensation income, business income, and income from practice of
profession

2. Passive income (FINAL WITHHOLDING TAX) - subject to final withholding

taxes are certain passive incomes from sources within the Philippines such
as:
1. Interest income
2. Dividend Income
3. Royalties
4. Prizes
5. Other winnings

3. Capital gains subject to gains tax (CAPITAL GAINS TAX)

a. Capital gains from sale of shares of stocks of a domestic corporation
b. Capital gains from sale of real property in the Philippines

Type of Income Applicable tax

Regular income Graduated rate
Passive income (Phils.) Final withholding tax
Capital gains subject to CGT Capital gains tax

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ILLUSTRATION (Cases A-G)

Use the following data for Cases A-E
An individual taxpayer provided the following information for 2018:
Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000
Determine the taxable income assuming:

CASE A: The taxpayer is a resident citizen

Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines (3,000,000)
Business expenses, Canada (1,000,000)
Business expenses, Singapore (500,000)
Taxable income ₱3,500,000

CASE B: The taxpayer is a non-resident citizen

Gross business income, Philippines ₱5,000,000
Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000

CASE C: The taxpayer is an alien

Gross business income, Philippines ₱5,000,000
Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000

CASE D: The taxpayer is a non-resident alien engaged in trade or business

Gross business income, Philippines ₱5,000,000
Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000

CASE E: The taxpayer is a non-resident alien not engaged in trade or business

Gross business income, Philippines ₱5,000,000
Taxable income ₱5,000,000
**NRA-NETB are taxable on their gross income**

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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Allowable Deductions 1,000,000 1,200,000

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?

Gross income, Philippines (Jan-Dec) ₱7,000,000

Gross income, Canada (Jan-June) 2,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (Jan-June) (1,000,000)
Taxable income ₱5,000,000

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.

INCOME TAX TABLE FOR INDIVIDUAL TAXPAYERS

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ILLUSTRATION – Computation of Basic Income Tax Due

PURELY COMPENSATION INCOME EARNER

CASE A: Determine the income tax due assuming the taxable compensation income
for 2018 is ₱240,000.
Answer: Zero, Taxable income do not exceed P250,000

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:

SELF EMPLOYED AND/OR PROFESSIONALS (SEP)

Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for
Acceleration and Inclusion Law (TRAIN LAW), regular income of Self- Employed
and Professionals (SEP) 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.

Self-Employed Individual - is defined as a sole proprietor or an independent

contractor who reports income earned from self-employment. He or she controls who
he/she works for. It includes professionals whose income is derived purely from the
practice of profession and not under an “employer-employee relationship”

Professional individual - 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 an established set of standards. It also refers to a person engaged in some
art or sport of money.

TAX RULES OF SELF EMPLOYED AND/OR PROFESSIONALS (SEP)

Purely SEP with gross sales/receipts

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 If income is ₱3M and Below

 Regular Income Tax (graduated tax table) OR 8% tax on
Gross Sales/ Receipts and other operating income in excess of
250,000 in LIEU of the graduated tax rate and SECTION 116
 Above ₱3M - regular income tax (graduated tax table)

Mixed Income Earner

 Compensation - regular income tax (graduated tax table)
 Business Professional Income
 If income is ₱3M and below
o Regular income tax OR 8% tax on Gross sales and
other operating income in LIEU of the graduated tax
rate and Sec. 116
 Above ₱3M – regular income tax (graduated tax table)

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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1. How much is Pedro’s annual income tax due?

Answer:

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

Answer:

CASE C: Mixed Earner whose gross sales/ receipts and other non-operating income does
not exceed the VAT threshold of ₱3,000,000

Assume the following data for 2018:

1. Determine the correct income tax due:

Answer:

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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:

FINAL WITHHOLDING TAXES

Final withholding taxes is a kind of tax, which is prescribed on “certain income”
derived from the Philippine sources.
PASSIVE INCOME DERIVED FROM PHILIPPINE SOURCES SUBJECT TO FINAL
WITHHOLDING TAXES
1.INTEREST Citizens and NRA-ETB NRA-NETB
Residents
a. Interest from any currency bank deposit 20% 20% 25%
b. Yield or any other monetary benefit from 20% 20% 25%
deposit substitutes
c. Yield or any other monetary benefit from 20% 20% 25%
trust funds and similar arrangements

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d. Interest income received from a depositary RC: 15% Exempt Exempt

bank under expanded foreign currency deposit NRC: exempt
system
NOTE: Only residents are subject to this
type of tax. Nonresident taxpayers are exempt
from tax on this particular income
e. Interest income from long-term deposit or Exempt Exempt 25%
investment
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%
II. ROYALTIES
a. Royalties, in general (other than royalties 20% 20% 25%
described in letter B)
b. Royalties on books, as well as other literary 10% 10% 25%
works and musical compositions
III. PRIZES
a. Prizes (except prizes amounting to P10,000 20% 20% 25%
or less which shall be subject to regular tax)
b. Other winnings 20% 20% 25%
c. PCSO and/or Lotto winnings in the Exempt Exempt 25%
Philippines amounting to P10,000 or less
d. PCSO and/or Lotto winnings in the 20% Exempt 25%
Philippines amounting to more than P10,000
IV. DIVIDENDS
a. Cash and/or property dividends actually or 10% 20% 25%
constructively received from:
 Domestic corporation
 Joint stock company
 Insurance or mutual fund companies
 Regional operating headquarters of
multinational companies
 On the share of an individual partner
in the distributable net income after
tax of partnership (except GPP)
 On the share of an individual in the
net income after tax of an association,
a joint account, or a joint venture or
consortium of which he is a member
or co-venturer

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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Passive income is classified as follows:

a. Interest, prizes, royalties, etc.,
b. Cash or property dividends,

GAIN ON SALE OF ASSETS

Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind
2. Property used in trade or business subject to depreciation
3. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of business
4. Real property used in trade of the taxpayer

CAPITAL GAINS TAX

CAPITAL GAINS may be:
1. Subject to CAPITAL GAINS TAX (CGT) pertain to sale of:
i. Shares of stock of a domestic corporation sold directly to a buyer
Prior to 2018 – 5% to 100,000; 10% to excess
2018 – 15% of capital gain
ii. Sale of real properties located in the Philippines
CGT = 6% of the higher of GSP (gross selling price) and FMV (fair
market value)

OTHER CONSIDERATIONS

Format in Computing Taxable Income

a. Pure Compensation Income Earner
b. Pure Business Income Earner
c. Mixed Income Earner

Benefits for Senior Citizen and PWDs

 20% discount and exemption from VAT on their purchase of specified goods and
services
 P500 monthly social pension, for indigent senior citizens
 Death benefit assistance
 5% discount on utilities
 Income tax exemption for minimum wage earners of for SC/PWDs whose annual
taxable income is not more than 250,000

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

Filing of Income Tax Returns

BASIC TAX
 For Purely Compensation Income Earners

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On or before April 15 of the succeeding year

 For Business Income Earners

The individual taxpayer is required to file a quarterly tax return (May 15, Aug 15, Nov
15, and April 15)

FINAL WITHHOLDING TAX ON PASSIVE INCOME

 Prior to 2018 - January to November – 10th day of the month; December – January
15
 2018 onwards – not later than the last day of the month

CAPITAL GAINS TAX

 Share of Stock
Ordinary Return – 30 days after each transaction
Final Consolidated Return – on or before April 15 of the following year

 Real Property – 30 days following each sale or other disposition

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

Place of Filing Income Tax Return

1. Authorized Agent Banks
2. Revenue District Officer
3. Collection Agent
4. Duly Authorized City or Municipal Treasurer
5. ePayment Channels (Gcash, PayMaya, Online Banking)

Persons Required to File Income Tax Return

1. Individuals engaged in business and/or practice of profession
2. Individuals deriving compensation from two or more employers concurrently at any
time during the taxable year
3. Employees deriving compensation income, the income tax of which has not been
withheld correctly
4. Individuals deriving other non-business, non-professional-related income in addition
to compensation income not otherwise subject to final tax
5. Individuals receiving purely compensation income from a single employer
6. Non-resident alien engaged in trade or business in the Philippines deriving purely
compensation income

Persons NOT Required to File Income Tax Return

1. An individual earning purely compensation income whose taxable income does not
exceed 250,000.
2. An individual whose income tax has been correctly withheld by his employer
3. An individual whose sole income has been subjected to final withholding tax

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4. Minimum wage earners, the Certificate of Withholding filed by the respective

employers, duly stamped “Received” by the Bureau

Substituted Filing of Income Tax Returns (ITR)

Under RA 9504 and RR 10-2008, individual taxpayers may no longer file income tax
return provided he has (all the requirements must be satisfied):

1. Receiving purely compensation income, regardless of amount

2. The amount of income tax withheld by the employer is correct (Tax due = Tax
withheld)
3. Only one employer during taxable year
4. If married, the employee’s spouse also complies with all the three aforementioned
conditions, or otherwise receives no income.

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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:

1st Q 2nd Q 3rd Q 4th Q

Gross Profit from Sales P300,000 P650,000 P910,000 P1,200,000
Business expenses 120,000 262,000 405,890 426,000
Dividends-domestic corp. 20,000 20,000 30,000 30,000
Interest income from,
BPI 4,000 8,000 12,000 16,000
UCPB 8,000 12,000 16,000 18,000
Metro Bank 5,000 10,000 15,000 30,000
Capital gain on sale of Land: 150,000 150,000 150,000 150,000
Selling price: P600,000; Cost: P450,000

REQUIRED: Using the above information, compute the following:

i. Income tax payable, first quarter
ii. Income tax payable, second quarter
iii. Income tax payable, third quarter
iv. Income tax payable, fourth quarter
v. Total final taxes (for the year) on passive income
vi. Total capital gain tax

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)

Bureau of Internal Revenue, https://www.bir.gov.ph/index.php/tax-information/income-

tax.html

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