TAXATION OF INDIVIDUALS

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)
● Engaged in trade/business (NRA-ETB)
● Non-resident alien not engaged in trade or business (NRA-NETB Importance of classification:

They differ as to:

● Situs of income
● Manner of computing tax
● Treatment of certain passive incomes
● Allowable deductions
● References in the tax choice

CITIZENS OF THE PHILIPPINES

(Art. IV, Sec. 1 of the 1987 Constitution)
• Those who are citizens of the Philippines at the time of the adoption of the Constitution
• Born with father and/or mother as Filipino citizens
• Born before Jan. 17,1973 of Filipino mother who elects Philippine citizenship upon reaching the age of
maturity
• Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine Laws

NON-RESIDENT CITIZEN OF THE PHILIPPINES (Sec. 22(E) of the Tax Code)

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:
● As an immigrant
● For employment on a permanent basis
● 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 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.

ILLUSTRATION:
Pedro, an OFW, returned in the Philippines for good on May 2021. He shall be classified for 2021 taxable year
as follows:
January to April 2021 – nonresident citizen
From May 2021 onwards – resident citizen

The same rule shall apply to a resident citizen who leaves the Philippines anytime during the yea for the
following reasons:
• As an immigrant abroad or
• For employment abroad on a permanent basis

ILLUSTRATION:
 Ana, a resident citizen, left for the Philippines on July 1, 2021 to reside permanently in US together with her
family. She shall be classified for 2021 taxable year as follows:
January to June 2021 – resident citizen
From July 2021 onwards – nonresident citizen

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.

RESIDENT ALIEN (Sec. 22(F) of the Tax Code)

• An individual whose residence is within the Philippines and who is not a citizen thereof. He is one who is actually
present in the Philippines and who is not a mere transient or sojourner.
• 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, is a resident, regardless of his intention to return to his residence
abroad.

NON-RESIDENT ALIEN (Sec. 22(G) of the Tax Code)

• An individual whose residence is not within the Philippines and who is not a citizen thereof.
• Aliens who come to the Philippines for a definite purpose, which in tis nature may be promptly accomplished.
• Alien who are mere transients or non-residents
• Non-resident alien engaged in trade or business (NRA-ETB) – an alien who stayed in the Philippines for an
aggregate period of more than 180 days during the taxable year and/or alien who has business income in the
Philippines
Under Section 22(S) of the Tax Code, “trade or business” include performance of the functions of a public office
or performance of personal services in the Philippines (except performance of services by the taxpayer as an
employee).

• Non-resident alien not engaged in trade or business (NRA-NETB) – an alien who stayed in the
Philippines for only 180 days or less, or he is not deriving business income in 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: G.I. 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 G.I.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.

ILLUSTRATION: Determine the correct classification of the taxpayer from the independent cases provided below:
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.

ILLUSTRATION: Determine the correct classification of the taxpayer from the independent cases provided below:

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-ETB. 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:
❖ Classification of taxpayer
❖ Source of income
❖ 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.

ILLUSTRATION:
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.
• Case B: The taxpayer is a non-resident citizen.
• Case C: The taxpayer is an alien.
• Case D: The taxpayer is a non-resident alien engaged in trade or business.
• Case E: The taxpayer is a non-resident alien not engaged in trade or business.
•
TYPES OF INCOME
• Ordinary or regular income (GRADUATED RATE) – refers to income such as compensation income, business
income, and income from practice of profession
• Passive income (FINAL WITHHOLDING TAX) – subject to final withholding taxes are certain passive incomes
from sources within the Philippines such as:
⮚ Interest income
⮚ Dividend Income
⮚ Royalties
⮚ Prizes
⮚ Other winnings
• Capital gains subject to gains tax (CAPITAL GAIN TAX)
⮚ Capital gains from sale of shares of stocks of a domestic corporation
⮚ Capital gains from sale of real property in the Philippines

GRADUATED TAX RATE

ILLUSTRATION: Computation of basic income tax due.

Purely Compensation Income Earner
• Determine the income tax due assuming the taxable compensation income for 2018 is ₱240,000.
• Determine the income tax due assuming the taxable compensation income for 2018 is ₱300,000.
• Determine the income tax due assuming the net taxable compensation income for 2018 is ₱1,850,000.

COMPUTATION OF WITHHOLDING TAX (PURELY COMPENSATION)

SELF EMPLOYED AND/OR PROFESSIONALS (SEP)
1. Self Employed – 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”.
2. Professional - 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.

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 (Sec. 116).
Percentage tax under Section 116 of the Tax Code, as amended, is a business tax, not an income tax. It is
computed at 1% of gross sales/receipts and other operating income beginning July 1, 2020 up to June 30,2023 based on
CREATE Law.

RULES OF SELF EMPLOYED AND/OR PROFESSIONALS (SEP)

1. Purely SEP with gross sales/receipts

• ₱3M and Below
Regular Income Tax + Business Tax (1% percentage tax) OR 8% tax on Gross Sales/ Receipts and other
non-operating income in excess of 250,000 in LIEU of the graduated tax rate and SECTION 116
• Above ₱3M - regular income tax + 12% VAT unless engaged in vat exempt sales and trasactions

ILLUSTRATION:
CASE A: Purely SEP whos gross sales/receipts and other non-operating income does not exceed the VAT
threshold of P3,000,000.
• Determine the income tax due assuming the gross sales/receipts and other non-operating income was P240,000.
• Using the data below, determine the income tax due:
Gross sales P2,800,000
Cost of sales 1,500,000
Operating expenses 750,000
• Assuming the SEP in number 2 opted to avail the 8% tax under the TRAIN Law.

ILLUSTRATION:
CASE B: Purely SEP whos gross sales/receipts and other non-operating income exceed the VAT threshold of
P3,000,000.

Determine the income tax due assuming the following data:

Gross sales P5,000,000
Cost of sales 2,250,000
Operating expenses 1,250,000

2. Mixed Income Earner

➔ Compensation - regular income tax
➔ Business/Professional Income
• ₱3M and below: Regular income tax + Business Tax (1% percentage tax) OR 8% tax on Gross sales and
other non-operating income in LIEU of the graduated tax rate and Sec. 116
• ₱3M and above: Regular income tax + 12% VAT unless engaged in vat exempt sales and trasactions

ILLUSTRATION:
CASE A: Mixed income earner whose gross sales/receipts and other non-operating income does not exceed the
VAT threshold of P3,000,000.
Assume the following data for the year:
Compensation income P900,000
 Gross sales 2,800,000
Cost of sales 1,500,000
Operating expenses 750,000
• Determine the correct income tax due
• Assume the SEP opted to avail the 8% tax under the TRAIN Law, determine the income tax due.

ILLUSTRATION:
CASE B: Mixed income earner whose gross sales/receipts and other non-operating income exceed the VAT
threshold of P3,000,000.
Determine the income tax due assuming the following data:
Compensation income P900,000
Gross sales 5,000,000
Cost of sales 2,250,000
Operating expenses 1,250,000

REQUISITES TO AVAIL THE 8% PREFERENTIAL TAX RATE

In order to avail the 8% preferential tax, the SEP shall satisfy all the following conditions:
• The gross sales/receipts and other non-operating income does not exceed the vat threshold of P3,000,000
• The SEP shall be non-vat registered
• The gross sales/receipts were not derived from vat-exempt sales and transactions
• The SEP is not subject to Percentage Tax other than Section 116
• The SEP signifies his/her intention to elect 8% income tax

FINAL WITHHOLDING TAX

• a kind of tax, which is prescribed on “certain income” derived from the Philippine sources.

1. PASSIVE INCOME
is an income earned from allowing others to use one’s right, or game of chance or investment, which the
taxpayers merely waits 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. Passive income is classified as follows:
a. Interest, prizes, royalties, etc.,
b. Cash or property dividends
CAPITAL GAINS TAX

GAIN ON SALE OF ASSETS (Ordinary Gain)

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

NOTE: Gain on sale of ordinary assets are commonly known as ordinary or regular income, subject to graduated tax
rate.

• 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

APPLICABLE TAXES OF MWEs

FILING OF INCOME TAX RETURNS

1. BASIC TAX
➔ For Purely Compensation Income Earners
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)
FILING OF INCOME TAX RETURNS

2. FINAL WITHHOLDING TAX ON PASSIVE INCOME

• Prior to 2018:
January to November – 10th day of the month following the month the withholding was made
December – January 15 of the succeeding year
• 2018 – not later than the last day of the month following the close of the taxable quarter during which the
withholding was made.

3. CAPITAL GAINS TAX

a. Share of Stock
Ordinary Return – 30 days after each transaction
Final Consolidated Return – on or before April 15 of the following year
b. Real Property – 30 days following each sale or other disposition

MANNER OF FILING AND PAYMENT

a. Manual Filing
b. Electronic Filing and Payment System (EFPS)
c. eBIR Forms
3. Payment – PAY AS YOU FILE
1st installment: at the time of filing the annual ITR
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

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
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.