Income Tax on Individuals

A. Classification of Individuals
1. RC
- Filipino + residing in PH
*”citizen” - Sec.1. Art. IV, 1987 Consti.
2. NRC
- a citizen but permanently resides abroad (definite intention to reside
therein);
- a citizen who leaves PH during the taxable yr. to reside abroad, either
as an immigrant or for employment on a permanent basis;
- a citizen who drives income abroad + physically present thereat most
of the time during the taxable yr.; or
*”most of the time” - at least 183 days
- prev. NRC + arrives in PH during the taxable yr. to reside
permanently in PH
3. RA
- an alien who resides in PH, whether temporarily or for a long period
of time
4. NRA-ETB
- an alien who does NOT reside in PH BUT stays for an aggregate
period of MORE THAN 180 days
5. NRA-NETB
- An alien who does NOT reside in PH

B. Sources of Income for Individual Taxpayers

1. Compensation Income

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 - Under ER-EE relationship
2. Business or Professional Income
- Fr. sole proprietorship, practice of profession, or sh. in income fr.
GPP
*Income owned in common w/ spouse: Gain is divided equally bet.
the H + the wife.
3. Passive Income
- Income generated w/o active conduct
- W/specific rates of final withholding tax
4. Gains fr. Prop
- Either capital gain or ordinary gain

C. Allowable Deductions for Individual Taxpayers

1. Compensation Income
a. Mandatory gov’t contributions (SSS, PAG-IBIG, PHILHEALTH)
b. Union dues
2. Business or Professional Income
a. Itemized deduction - incurred in conducting business/profession
b. Optional standard deduction (OSD)
- In lieu of itemized deduction
- 40% of gross sales or receipts (EXC. NRAs)
*Period to elect the use of itemized deduction or OSD - made on the 1st
quarter of the taxable yr. upon the filing of the 1t quarter return +
irrevocable for the said yr.
c. Special allowable itemized deductions - Those allowed by special laws
d. 8% gross receipts tax (GRT)

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 - Income Purely fr. Business and/or Profession: First P250k of
sales/receipts is NOT taxable.
- Mixed-Income fr. Compensation and Business/Profession: The
first P250K exempt is NOT applicable.

D. Format of Computations
1. Pure Compensation Income
Gross Compensation Income xx
Less: *Non-Taxable Compensation Income (xx)
Taxable Income xx

Income Tax Due xx

Less: Withholding Tax (xx)
Tax Payable (Refundable) xx

*BenefitS Provided by ER
- de minimis
- mandatory contributions
- union dues
- exempt bonuses up to P90k

2. Pure Business or Professional Income Availing of Graduated Rates

*Gross Sales/Receipts fr. Business or Profession xx
Less: Costs + Allow Deduc. (OSD or Itemized) (xx)
Taxable Income xx

Income Tax Due xx

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 Less: Withholding Tax (xx)
Creditable Tax (xx)
Tax Payable (Refundable) xx

*Business/Professional Income - gross of any withholding tax

3. Pure Business or Professional Income Availing of the 8% Income Tax

*Gross Sales/Receipts xx
Add: Other Non-Operating Income xx
Less: P250K Exempt fr. Income Tax (P250k)
Taxable Sales/Receipts xx
Tax Rate 8%
Income Tax Due xx
Less: Withholding Tax (xx)
Creditable Tax (xx)
Tax Payable (Refundable) xx

*No deduction for costs or any other items of deduction

- Save for sales returns, discount and allowances

4. Mixed Income Earner

a. Compensation Income: ALWAYS subj. to graduated rates
b. Income fr. Business/Practice of Profession:
i. If gross sales/receipts, together w/ other non-operating income,
do NOT exceed P3M - EITHER:
● 8% income tax rate (w/o the first P250K exempt)

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 - Here, the 8% applies only to the income fr.
business/profession (NOT to compensation income).
● Graduated rates
- Here, the taxable income fr. business/profession is added to
compensation income before determining the applicable
bracket.
ii. If gross sales/receipts, together w/ other operating income, exceed
P3M - graduated rates

E. The 8% Income Tax Rate

- Rules:
1. The 8% rate - applies ONLY to income fr. business/practice of
profession where gross sales/receipts do NOT exceed P3M + ONLY
beginning the 2018 taxable year
2. The tax base - gross sales/receipts including other non-operating income
*Returnable Deposits:
GR: part of gross receipts [Sec.2(g) of RR No. 8- 2018]
EXC: if held in trust + recorded as liability (e.g. security deposit)
3. For those earning PURELY fr. business/profession - The tax base shall
be that in excess of P250k.
4. For mixed-income earner (earning fr. compensation and
business/[profession) - The first P250k is NOT treated as non-taxable.
*If compensation income is less than P250k, the excess of P250k over the
actual compensation income is NOT deductible against the gross
sales/receipts fr. business/profession [Sec. 3(D) of RR No. 8-2018].

Ex. Compensation income is P200k.

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 Then:
P250k
(200k)
50k - NOT deductible against gross sales receipts fr.
business/profession

5. The 8% income tax- in lieu of percentage tax

*The taxpayer shall NOT be subj. to the 3% other percentage tax on
his/her gross sales/receipts.
6. Availment of the 8% income tax rate - made on the 1st quarter Income
Tax Return (ITR) or on the initial quarter return of the taxable yr. AFTER
commencement of business or practice of profession
*Such election shall be irrevocable. No amendment of option shall be
made for the taxable yr.
*If taxpayer fails to elect, he/she shall be presumed to have availed of the
graduated rates.
7. FS - NOT required to be attached to the final ITR
8. If gross sales/receipts + other non-operating income exceed P3M - The
taxpayer is subject to the graduated rates.
*Tax credit for the previous quarter/s income tax payments under the 8%
income tax rate shall be allowed.

F. Those NOT allowed to Avail the 8% Income Tax Rates

1. Taxpayers earning purely compensation income
2. VAT-registered taxpayers
3. Non-VAT taxpayers whose gross sales/receipts exceed P3M

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 4. Taxpayers subj. to percentage taxes other than the 3% OPT (e.g. common
carrier’s tax, amusement tax, gross receipts tax, etc.)
5. Partners of GPP as their share in the net income EXC. as their own
business income w/c can be subj. to the 8% rate if gross sales/receipts do
NOT exceed P3M

G. Special Aliens
1. Regional or Area HQ + Regional Operating HQ of Multinational Companies
- 15% of gross income received fr. such establishment provided the same
tax treatment shall apply to Filipinos employed + occupying the same
position as those employed by the multinational companies
*Requisites to avail of the 15% preferential tax rate:
a. Managerial/technical position
b. Gross compensation (exclusive of fringe benefits) - at least P975k
c. Exclusively working for the RAHQ/ROHQ
2. Offshore Banking Units (OBUs)
- 15% of gross income therefrom provided the same tax treatment …
3. Petroleum Service Contractor/Subcontractor
- 15% of salaries, wages, etc. received fr. such contractor/subcontractor
provided the same tax treatment …
4. Any other Income fr. Sources w/in PH
- Pertinent income tax imposed under the Tax Code
*15% preferential tax rate: applies to those availing it before TRAIN Law
*Fr. Jan 1, 2018, onwards, special aliens + their Filipino counterparts are
subj. to the graduated rates [RR No. 802918 + RR No. 11-2018].

H. NRA-NETB

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 - GR: 25% on the entire income received fr. all sources w/in PH
- EXC: a. Sale of capital assets (SOS + RP) - CGT
b. Int. income fr. FCDA - Exempt

I. Items Exempt fr. Income Tax

1. Remuneration Received as an Incident of Employment
a. Retirement benefits under RA7645
i. If received under a reasonable private benefit plan:
- Plan - reasonable
- Plan - approved by BIR
- Retiring EE - at least 10 yrs. of service in the same ER
- Retiring EE - 50 yrs. or older at the time of retirement
- Retiring EE - has NOT previously availed of this privilege
ii. If NO private retirement plan or retirement plan under the Collective
Bargaining Agreement (CBA)/employment contract:
- Retiring EE - served the company for at least 5 yrs.
- Retiring EE - at least 60 yrs. old but NOT more than 65 yrs. of
age at the time of retirement
b. Any amount received by an EE or his/her heirs fr. the ER due to death,
sickness, other physical disability, or for the cause beyond the control
of the EE such as retirement, redundancy, or cessation of business
c. Social security benefits, retirement gratuities, pensions, + other similar
benefits:
i. Received by RC, NRC, or RA; and
ii. Fr. foreign entities whether private or public
d. Benefits received under the law of the US administered by the US
Veterans Administration

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 e. Benefits received under SSS Act
f. Benefits received under GSIS Act
2. Compensation for Services by a Citizen or Resident PH Performed for a
Foreign Gov’t or Int’l Organization
- For services performed:
a. By ambassador, ministers + other diplomatic officers/EFs
b. As consular or other EE of a foreign gov’t OR a non-diplomatic
representative of such gov’t
3. Damages
- Actual, moral, exemplary + nominal damages received by an EE or
his/her heirs pursuant to a final judgment or compromise agreement
- Taxable if: compensatory in nature such as for lost profits,
backwages + interest on non-taxable damages
4. Life of Insurance Proceeds
- Paid to the heirs or the beneficiaries upon death of the insured
*Int. agreed upon the policy for the amounts held by the insured:
Included in gross income
5. Amount Received by the Insured as a Return of Premium
6. Compensation for Injuries or Sickness
a. Fr. accident/health insurance or Workmen’s Compensation Act
b. Received as damages whether by suit or agreement
7. Income Exempt Under Treaty
- Binding upon the gov’t
8. 13th Month Pay or Other Benefits
- Include:
a. Christmas bonus
b. Loyalty awards

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 c. Gifts in cash or kind
d. Other similar benefits
- NOT exceeding P90k (previously P82K)
9. GSIS, SSS, Medicare, Pag-IBIG Contributions, Union Dues + Other
Contributions
- These contributions are deducted to arrive at the taxable income.
- Maximum amount required by law: NOT taxable
*Amount in excess of the mandatory amount (voluntarily given as
contribution by the EE): Taxable
10. De Minimis Benefits
- Facilities or privileges or offered by an ER to his/her EE that are of
relatively small values + are furnished by the ER merely as a means of
promoting the health, goodwill, contentment or efficiency of the EE
- Include:
a. Monetized unused vacation leave (VL) credits
- Equivalent to 10 days VL
- Applies only to EEs of private entities
*For gov’t EEs: The conversion of SL + VL credits to cash is
considered EXEMPT fr. tax, regardless of number days.
b. Medical cash allowance to dependents, per EE
- P1,500 per EE per semester OR P250 per mo.
c. Rice Subsidy
- P24K (P2K or 1 sack of 50kg rice per mo.)
- Previously: P1,500 per mo.
d. Uniform + Clothing allowance
- P6K
- Previously: P5K annually

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 e. Actual medical assistance/allowance
- P10K
f. Laundry allowance
- P3,600 (P300 per mo.)
g. EE’s achievement awards
- P10K
- Tangible PP other than cash or gift certificate
- Under an established written plan w/c does NOT discriminate
in favor of highly paid EEs
h. Gifts given during Christmas + major anniversaries
- P5k
i. Daily meal allowance for OT or night/graveyard work
- 25% of base minimum pay on a per region basis
j. Benefits received by an EE by virtue of a CBA + productivity
incentive schemes
- P10k
*All of the above-mentioned de minimis benefits need no proof
EXC. medical assistance/allowance.
*Christmas bonus: may fall under gifts given during Christmas +
the excess thereof may form part of OTHER BENEFITS exempt
up to P90K
*Treatment of de minimis benefits:
-NOT taxable
-NOT included in the computation of taxable income +
withholding tax on compensation, as well as FBT

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 *Amount in excess of the above-mentioned ceiling will form part
of OTHER BENEFITS w/c are non-taxable only up to P90K
(RMC No. 50-2018).

11. Compensation Income of Minimum Wage Earners (MWEs)

- Work in the private sector
- Being paid the Statutory Minimum Wage (SMW)
- No tax + withholding of tax on:
a. SMW
b. Holiday pay
c. OT pay
d. Night shift differential
e. Hazard pay
*Other income earned in excess of the allowable statutory amount of P90K:
subj. to income tax + withholding of tax on compensation
*Tips + gratuities: If it is received by the EE, it is taxable + subj. to
withholding.
*Income fr. Whatever Source (whether legal or illegal): Taxable

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