Introduction to Income

Taxation
Income Tax – is a tax on a person’s income, emoluments, profits
arising from property, practice of profession, conduct of trade or
business or on the pertinent items of gross income specified in the Tax
Code of 1997 (Tax Code), as amended, less the deductions and/or
personal and additional exemptions, if any, authorized for such types
of income, by the Tax Code, as amended, or other special laws.

A person means an individual, a trust, estate or corporation.

Income Tax Systems:
1. Global – all income received by the taxpayer are grouped
together, without any distinction as to the type or nature of the
income, and after deducting therefrom expenses and other
allowable deductions, are subjected to a tax at a fixed rate.
Income Tax Systems:
2. Schedular – the various types/items of income are classified
accordingly and are accorded different tax treatments in
accordance with schedules characterized by graduated tax
rates
 Net Taxable Income Rate

over but not over

1 - P250,000 0%
2 P250,000 P400,000 15% of the excess over P250,000
3 P400,000 P800,000 P22,500 + 20% of the excess over P400,000

4 P800,000 P2,000,000 P102,500 + 25% of the excess over P800,000

P402,500 + 30% of the excess over
5 P2,000,000 P8,000,000 P2,000,000
P2,202,500 + 35% of the excess over
6 P8,000,000 - P8,000,000
Income Tax Systems:
3. Semi-schedular or semi-global – partly global or partly
schedular in features
Characteristics of Philippine Income Tax:
● National Tax as to taxing authority

● General tax as to purpose

● Excise as to subject matter

● Progressive as to rate (except for Corporations – proportionate)

● Direct tax as to incidence (who bears the burden)

A taxable item of income is referred to as an “item of gross income”
or “inclusion in gross income”

Gross Income - ANY INFLOW OF WEALTH to the taxpayer from

whatever source, legal or illegal, that increases net worth
Elements of Gross Income:
1. It is a return on capital that increases net worth.
2. It is a realized benefit.
3. It is not exempted by law, contract, or treaty.
Requisites of Realized Benefit:
1. There must be an exchange transaction.
2. The transaction involves another entity.
3. It increases the net worth of the recipient.
Types of Transfers:
1. Bilateral transfers or exchanges – subject to income tax
a) Sale
b) Barter
2. Unilateral transfers
a) Succession
b) Donation
Complex Transactions:
Fair value 180,000
50,000 Subject to transfer tax
SP 130,000
30,000 Subject to income tax
Cost 100,000
Sources of Income for Individual Taxpayers:
1. Compensation Income
2. Business or Professional Income
3. Passive Income
4. Gains from disposition of property
Mode of Receipt/Realization Benefits:
1. Actual Receipt
2. Constructive Receipt
Capital Items deemed with infinite value (Return of Capital – not taxable)

Examples:

1. Life

2. Health

3. Human reputation
Classification of Individuals
a. Resident Citizens (RC) –
1) Those who are citizens of the Philippines at the time of the adoption of
this Constitution;

2) Those who are fathers or mothers are citizens of the Philippines;

3) Those born before January 17, 1973, of Filipino Mothers, who elect
Philippine citizenship upon reaching the age of majority; and

4) Those who are naturalized in accordance with law.

b. Nonresident Citizens (NRC)
1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner of the
fact of his physical presence abroad with a definite intention to reside therein.

2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either 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 to be physically present abroad most of the time during
the taxable year.

4) A citizen who has been previously considered as nonresident citizen who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall
be considered a nonresident 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.
c. Resident Aliens (RA)
1) An alien actually present in the Philippines who is not a mere transient or
sojourner. A person who comes to the Philippines for a definite purpose which
in its nature may be promptly accomplished is a transient.

2) An alien, who comes to the Philippines for a definite purpose, which, by its
nature, would require an extended stay making his home temporarily in the
Philippines.

3) An alien who shall come to the Philippines with no definite intention as to his
stay.
d. Nonresident Aliens (NRA) – Engaged in Trade or Business
1) An alien individual actually engaged in trade or business in the Philippines.
2) An alien who comes in the Philippines for an aggregate period of more
than 180 days during the calendar year.

Nonresident Aliens (NRA) – Not Engaged in Trade or Business

1) Aliens who come to the Philippines for a definite purpose which in its
nature may be promptly accomplished;
2) Aliens who shall come to the Philippines and stay therein for an aggregate
period of not more than 180 days during the year.
General Classification Rule for Individuals:
1. Intention

Documents purporting short term stay such as tourist visa shall not result
the reclassification of the taxpayer’s normal residency.

Documents purporting long term stay such as immigration visa or working

visa for an extended period would result in the automatic reclassification
of the taxpayer’s residency.
General Classification Rule for Individuals:
2. Length of Stay

a) Citizens staying abroad for a period of at least 183 days are considered
non-resident.
b) Aliens who stayed in the Philippines for more than 1 year as of the end of
the taxable year are considered resident.
c) Aliens who are staying in the Philippines for not more than 1 year but more
than 180 days are deemed NRA-ETB.
d) Aliens who stayed in the Philippines for not more than 180 days are
considered NRA-NETB.
1. A sole proprietorship
2. A foreigner naturalized by law
3. A cute American tourist
4. Employed Filipino working under a secondment assignment abroad
5. Filipino who migrated in China
6. An OFW
7. An alien with a 2-year working visa
8. A Filipino who stayed abroad for 182 days
9. An alien who is staying in the Philippines for 181 days
10. Juan Miguel, a Filipino citizen, left the Philippines and stayed abroad
from March 15, 2020 to April 1, 2021 before returning to the
Philippines.
 Tax Base Tax Rate

Resident Citizens (RC) Income Within or Outside

PH
Non-resident Citizens (NRC) Income Within PH

Resident Alien (RA) Ordinary Income Tax

Non-resident Aliens
Engaged in Trade or
Business (NRAETB)
Non-resident Aliens NOT 25% Final Withholding Tax
Engaged in Trade or
Business (NRANETB)
Classification of Items of Gross Income:
1. Gross income subject to final tax
2. Gross income subject to capital gains tax
3. Gross income subject to regular tax
Final Income Taxation
Final Income Taxation
- Full taxes are withheld by the income payor at source
- The recipient income taxpayer receives the income net of taxes
- The payor is the one required by law to remit the tax to the
government
- The recipient income taxpayer does not need to file income tax returns
because the withheld tax constitutes the full tax due and are therefore
deemed final payments
- Applies only to certain passive income earned from sources within the
Philippines
Passive Income subject to Final Tax:
1. Interest or yield from bank deposits or deposit substitutes
2. Domestic dividends, in general
3. Dividend Income from a Real Estate Investment Trust
4. Share in the net income of a business partnership, taxable associations,
joint ventures, joint accounts, or co-ownership
5. Royalties, in general
6. Prizes exceeding P10,000
7. Winnings
8. Informer’s tax reward
9. Interest income on tax-free corporate covenant bonds

Passive Incomes are earned with very minimal or even without active
involvement of the taxpayer in the earning process.
Reminders on Tax Accounting Methods:
1. Absence of accounting method or use of one that do not clearly reflect
the income
2. Consolidation of gross income from two or more methods
3. Change of Tax Method
4. Expenditures benefiting future periods
5. Advanced receipt of items of gross income
Interest Income or Yield

RC NRC RA NRA-ETB NRA-NETB

Interest
Interest on Philippine currency bank deposit, yield or other monetary benefit
from deposit substitute, trust fund and similar arrangement 20% 20% 20% 20% 25%

Interest on foreign currency deposit under the expanded foreign currency

deposit system (FCDS) 15% Exempt 15% Exempt Exempt

Proceeds of pre-terminated long-term deposit or investments, with

Exempt Exempt Exempt Exempt 25%
holding period of:

More than 5 years Exempt Exempt Exempt Exempt 25%

4 years to less than 5 years 5% 5% 5% 5% 25%
3 years to less than 4 years 12% 12% 12% 12% 25%
Less than 3 years 20% 20% 20% 20% 25%
 On interest income Recipient – Individuals

From banks

- Short-term deposits/certificates 20%

- Long-term deposits/certificates Exempt

From non-bank institutions

- Short-term deposits/certificates RIT

- Long-term deposits/certificates RIT

Short-term deposits are those made for a period of less than five years
Deposit Substitutes Recipient – Individuals

Issued by banks

- Short-term 20%

- Long-term dep Exempt

Issued by non-banks

- Short-term 20%

- Long-term 20%
Trust funds or investment management accounts

To claim final tax exemption on long-term investment:

a) The investment of the individual investor in the common or individual trust
fund or investment management account must be held/managed by the bank
for at least 5 years.
b) The underlying investments of the individual trust account or investment
management account must qualify as a deposit substitute issued by a bank.
c) The individual trust account or investment management account must hold on
to such underlying investment for at least 5 years.
Illustration:

6-month time deposit P 8,000

2-year time deposit 12, 000
5-year time deposit 40, 000
Total Interest Income P 60, 000
Illustration:

A resident taxpayer received a P16,000 interest income from a bank. Determine

the tax withheld at source.
 Illustration:

Banko Puti incurs the following interest in its savings and time deposit accounts
from the following depositors:

Resident Individuals P 600,000

Non-resident aliens not 200,000
engaged in business
800,000

Compute the total final income tax to be withheld by Bank Puti.

Illustration: Foreign currency deposit wit foreign currency depositary banks

Mr. Seeman is an OFW. He deposits all his savings in a savings account under the
foreign currency deposit unit (FCDU) of a domestic bank. During the month, the
savings deposit account earned $1,000 interest equivalent to P41,500.
Illustration: Pre-termination of long-term deposits or investment of individuals

On January 1, 2020, Patricia invested P1,000,000 in Baguio Bank’s 5-year time

deposit. The deposit pays 10% interest annually. Alice pre-terminated the deposit
on July 1, 2023
Interest Income subject to regular tax

1. Lending activities, whether or not in the course of business

2. Investments in corporate bonds
3. Promissory notes
4. Foreign sources, whether bank or non-bank
5. Penalty for legal delay or default
Cash and/or Property Dividend

TO
NRA-
FROM RC NRC RA NRA-ETB
NETB
DC 10% 10% 10% 20% 25%
RFC tax table tax table* tax table* tax table* 25%*
NRFC tax table N/A** N/A** N/A** N/A**

*assuming it passed the predominance test (earned inside the Philippines)

**assuming it did not pass the predominance test (earned outside the Philippines)
Situs of Dividend Income
● IF from Domestic Corporation = INCOME WITHIN (ALL CASES)
● IF from Foreign Corporation = General Rule: INCOME WITHOUT
However, if the ratio of gross income from the Philippine sources over
world income for the past (3) years is available, the following rules shall
apply:
Ratio is less than 50% = treated as derived purely from without the
Philippines
Ratio is at least 50% = treated as derived partly from within and without
the Philippines
Illustration:

Sandara, a nonresident Korean stockholder, received a dividend income of

P300,000 in 2018 from Super Bowl Corporation, a foreign corporation doing
business in the Philippines. The gross income of the foreign corporation from
sources within and without the Philippines for the past 3 years preceding 2018 is
provided as follows:

Source 2015 2016 2017

Philippines 16,000,000 15,000,000 17,000,000
Abroad 8,000,000 11,000,000 13,000,000
Royalties

RC NRC RA NRA-ETB NRA-NETB

Royalties from books, literary works and
10% 10% 10% 10% 25%
musical compositions
Royalties (others) 20% 20% 20% 20% 25%
Prizes

RC NRC RA NRA-ETB NRA-NETB

Prizes of P10,000 or less tax table tax table tax table tax table 25%
Prizes over P10,000 20% 20% 20% 20% 25%
Exempt Prizes

1. Prizes received by a recipient without any effort on his part to join a contest.
2. Prizes from sports competitions that are sanctioned by their respective
national sports organizations

Requisite of exemption

1. The recipient was selected without any action on his part to enter the contest.
2. The recipient is not required to render substantial future services as a
condition to receiving the price or reward.
 Winnings

RC NRC RA NRA-ETB NRA-NETB

PCSO and Lotto winnings of P10,000 or less Exempt Exempt Exempt Exempt 25%
PCSO and Lotto winnings over P10,000 20% 20% 20% 20% 25%
Other winnings, in general 20% 20% 20% 20% 25%

PCSO winnings shall be applied on a per ticket basis

Winnings not subject to FT are subject to RIT. Winnings from foreign sources are
subject to regular income tax (RIT).
Illustration:

Apolinario won P10,000 first place in the singing contest sponsored by Syd
Company during their company anniversary celebration.
Illustration:

Roy’s raffle ticket was selected as the second winning ticket in the raffle draw of
ZFT Mall for P10,000 dubbed as “2nd Prize”
Illustration:

Mr. Dante Paya made three bets to the PCSO lotto draws. All tickets won. The
details of the winnings were:
● EZ2 – P4,000
● 6/42 – P10,000 (3-digit winning numbers)
● 6/45 – P20,000,000 Grand prize (sole winner)
 Share in business partnership net income

RC NRC RA NRA-ETB NRA-NETB

Share in the distributable net income after tax of a
partnership (except GPPs), associations, joint 10% 10% 10% 20% 25%
accounts, taxable joint ventures and consortiums
 Illustration:

The partnership profit distribution of partners Andy and Mar based on their agreed profit
distribution scheme is as follows:
Assuming the salaries, interest and bonus are not expense in the book, final tax shall be:

Andy Mar

Salaries to industrial partner P 40,000 P0 Profit P 73,000 P36,000

Interest to capitalist partner - 12,000 sharing
Bonus to industrial 25,000 - Final Rate 10% 10%
Residual profit sharing 8,000 24,000 Final tax P7,300 P3,600
Profit sharing P 73,000 P36,000
Tax Informer’s Reward

A cash may be given to any person instrumental in the discovery of violations of the
National Internal Revenue Code or discovery and seizure of smuggled goods.

Amount of Cash Reward – whichever is the lower of the following per case:
1. 10% of revenues, surcharges, or fees recovered and or fine or penalty imposed
and collected or
2. P1,000,000
Illustration:

Ms. Kristen provided information to the BIR leading to the recovery of

P12,000,000 unpaid taxes.