Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977
TAX.3402-1
CLASSIFICATION OF TAXPAYERS
CLASSIFICATION OF INDIVIDUALS
A. Citizens of Philippines
under 1987 Constitution
1. Resident citizen (RC)
2. Non-resident Citizen1. A citizen of the Philippines who establishes to the satisfaction of the
(NRC)
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NARANJO/SIAPIAN/WONG/GUDANI
MAY 2023
LECTURE NOTES
1. Those who are citizens of the Philippines at the time of the adoption of
the Constitution (on February 2, 1987)
2. Those whose fathers or mothers are citizens of the Philippines (jus
sanguinis)
3. Those born before January 17, 1973 of Filipino mothers who elect
Philippine citizenship upon reaching the age of majority
4. Those who are naturalized in accordance with law
1.
Filipino by birth
a. Jus soli (right of soil) which is the legal principle that a person’s
nationality at birth is determined by the place of birth (e.g. the
territory of a given state)
b. Jus sanguinis (right of blood) which is the legal principle that, at
birth, an individual acquires the nationality of his/her natural
parent/s. The Philippine adheres to this principle.
2. Filipino by naturalization which is the judicial act of adopting a
foreigner and clothing him with the privileges of a native-born citizen
A citizen of the Philippines residing therein.
Commissioner 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 as 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
a. Overseas Contract Workers – OCW is not synonymous with
OFW. If an OFW has a contract, he is an OCW
b. Seaman – requisites:
i. Member of complement
ii. Vessel is engaged in international shipping
4. A citizen who has been previously considered as non-resident citizen and
who arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines shall likewise be treated as a non-
resident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines
Note: The taxpayer shall submit proof to the Commissioner to show his
intention of leaving the Philippines to reside permanently abroad or to
return to and reside in the Philippines as the case may be.
Illustration:
Nicanor is an NRC. From January to June 2022, he earned Php 1 Million from
his business in the Philippines and another Php 1 Million from his
employment abroad. On July 1, 2022, he returned to the Philippines to live
permanently herein. Upon his return and until the end of the year, he earned
Php 1 Million from his business and another Php 1 Million from sources
outside the Philippines.
Discussion Questions:
1. What is the treatment of the income from sources derived from
WITHIN the Philippines for the period January to June?
Answer:
2. What is the treatment of the income from sources derived from
WITHOUT the Philippines for the period January to June?
Answer:
3. What is the treatment of the income from sources derived from
WITHIN the Philippines for the period July to December?
Answer:
4. What is the treatment of the income from sources derived from
WITHOUT the Philippines for the period July to December?
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Answer:
B. Aliens Individuals who are not Filipino citizens.
1. Resident alien
2. Non-resident alien engaged in trade or business in the Philippines
3. Non-resident alien not engaged in trade or business in the Philippines
1. Resident alien (RA) An individual whose residence is within the Philippines and who is not a
citizen thereof.
1. An alien who lives in the Philippines with no definite intention as to
his stay
2. One who comes to the Philippines for a definite purpose which in its
nature would require an extended stay and to that end makes his
home temporarily in the Philippines, although it may be his
intention at all times to return to his domicile abroad

2. Non-resident alien
3. Aliens Employed by an
Offshore Gaming Licensee
and Service Providers
Notes:
• An alien who has acquired residence in the Philippines retains his
status as such until he abandons the same and actually departs
from the Philippines
• Alien must not merely transients or sojourners
• To become a resident alien, presence of at least two (2) years is
required
• RA 11055 (Philippine Identification System Act) has been defined as
an individual who is not a citizen of the Philippines but has
established residence in the Philippines for an aggregate period of
more than one hundred eighty (180) days
NRAETB
1. NRA who is engaged in trade or business in the Philippines
2. NRA who has practiced his profession in the Philippines
3. NRA who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall
be deemed a “non-resident alien doing business in the Philippines”.
NRANETB
1. NRA who is not engaged in trade or business in the Philippines
2. NRA who has not practiced his profession in the Philippines
3. NRA who shall come to the Philippines and stay therein for an
aggregate period of NOT more than 180 days during any calendar year
Alien individuals regardless of residence and who are employed and
assigned in the Philippines, regardless of term and class of working or
employment permit or visa by an offshore gaming licensee or its service
provider shall pay a final withholding tax of 25% on their gross income
provided that the minimum final withholding tax due for any taxable month
from said persons shall not be lower than Php 12,500.00.

Gross income shall include whether in cash or in kind basic salary, wages,
annuities, compensation, remuneration and other emoluments such as
honoraria and allowances received from such service providers or offshore
gaming licensee (providers and licensees are required to submit contracts
of employment to the BIR). DOLE shall issue gaming employment license to
the employee and shall be issued TIN.

Penalty in case of failure to obtain TIN on part of employer – Fine of Php

20,000 for every foreign national and revocation of primary and other
licenses and/or perpetual or temporary ban employing or engaging
foreign nationals for their operations.
SPECIAL CONSIDERATIONS DUE TO COVID-19
Treatment of Compensation of Aliens in the Philippines
Exempt Compensation Taxable Compensation
1. The employee has NOT been present in the 1. The employee is present for more than 183
Philippines for more than 183 days (120 for days (120 for Poland and 90 days for US)
residents of Poland and 90 days for the US) in
aggregate in the year of income
2. Remuneration is paid by, or no behalf of, a non- 2. The employer is a resident of the Philippines
resident employer
3. Remuneration is NOT deductible against the 3. A non-resident employer has a PERMANENT
profits of a PERMANENT ESTABLISHMENT which the ESTABLISHMENT in the Philippines which bears the
foreign employer has in the Philippines remuneration

ILLUSTRATIONS
1. On January 1, 2020, Mr. Trumpy, a non-resident alien, was sent by his Singaporean employer to the
Philippines to work for a domestic company for a period of 90 days. He was supposed to return to Singapore

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on March 31, 2020 but due to the travel restrictions and quarantine measures imposed by the Philippine
government, Mr. Trumpy was prevented from leaving the country. He has since been renting an apartment
in Makati City. He left the Philippines in August 1, 2020

Under the Phils-Singaporean tax treaty, the State where the employment is exercised may tax the employee
on his/her employment income if the employee is present for more than 183 days in the host State.

Is the compensation taxable or exempt given that he exceeded the 183 period in the treaty?

Answer: No. Mr. Trumpy’s tax residence will not change due to the temporary dislocation. His extended stay
in the Philippines due to him being stranded will not be considered. However, if the domestic company is the
real employer, or when the remuneration is borne by a permanent establishment of the Singaporean
employer in the Philippines.
2. Roqueta is quarantined in Indonesia, her country of residence, and is temporarily out of work due to
the COVID-19 crisis. She has a pending contract with her employer in Indonesia and was supposed to be in
the Philippines starting March 17, 2020 for a seven-month audit and advisory assignment for a local client.
However, due to the travel restrictions imposed by the Philippine government she was unable to go to the
Philippines. Though not working, she continues to receive a wage subsidy from her employer in Indonesia,
which is equivalent to her month pay.

Suppose the travel restrictions continue until June 30, 2020, is the compensation taxable or exempt?
Answer: The income is subject to tax in the Philippines
3. Hamilton was on holiday vacation in the Philippines when COVID-19 broke out and was thus
prevented from leaving the country on his scheduled departure. He usually work in the UK and has been on
leave since arriving in the Philippines. During his extended stay in the Philippines, he received monetized
leave credits from his employer in the UK.

Does Hamilton have to declare the income for income tax purposes in the Philippines?

Answer: No because the income he receives from a foreign employer is not from a Philippine source.

Note: Even if Hamilton will be stranded over 183 days in the Philippines but gets paid while working
remotely, his income will not be taxed provided the following conditions are met:
a. There are no other connections to the Philippines
b. He should leave the country as soon as the circumstances would permit him to do so.
TAXPAYER, TAX BASE AND TAX RATE
Classification of Taxpayer Tax Base and SOURCE Tax Rate
Resident citizen Taxable income within and without Graduated or 8% option*
Non-resident citizen Taxable income within Graduated or 8% option*
Resident alien Taxable income within Graduated or 8% option*
Non-resident alien engaged in Taxable income within Graduated or 8% option*
trade or business
Non-resident alien not engaged Gross income within Final tax (%)
in trade or business
Estate and trust Taxable income within and without Graduated tax
*Business income only

1. Compensation income earner – individuals whose source of income is purely derived from an employer-
employee relationship
2. Self-employed – a sole proprietor or independent contractor who reports income earned from self-
employment.
• Contract of service
• Job order
• Professionals
3. Mixed – earning both from employment and from business (other sources aside from employment)
EXERCISES:
Classify the taxpayers:
1. Nicanor is employed as an Accountant at ABC Corp. Classification
2. Nicanor is a CPA and is purely engaged in the practice of accounting, tax and
other related services only.
3. Nicanor is a CPA engaged in the practice of accounting, tax and other related
services from which he earned Php 1 Million and at the same time he is engaged
in trading where he earned another Php 1 Million.
4. Nicanor is a CPA engaged in the practice of accounting, tax and other related
services only from which he earned Php 1 Million and at the same time he is
employed as an accounting teacher where he earned another Php 1 Million.
5. Nicanor is a vlogger and social media content creator.
END

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DISCUSSION QUESTIONS
Classify the taxpayers mentioned in the problems:
1. RC – Resident Citizen
2. NRC – Non-resident Citizen
3. RA – Resident Alien
4. NRAETB – Non-resident Alien Engaged in Trade or Business
5. NRANETB – Non-resident Alien Not Engaged in Trade or Business

SITUATIONS/PROBLEMS:

1. Nicanor, a Filipino citizen residing in the Philippines borrowed money from Inday, a Filipino working abroad. Interest
income is Php 10,000.00

2. Nicanor, a Filipino citizen residing in the United States borrowed money from Inday, a Filipino working abroad.
Interest income is Php 10,000.00

3. Nicanor, a Filipino citizen residing in the United States borrowed money from Inday, a Filipino working in Makati City,
Philippines. Interest income is Php 10,000.00

4. Nicanor, a Filipino citizen residing in the United States invested in a corporation established under the laws of the
Philippines. The corporation, which has sales in the United States amounting to Php 100M and another Php 200M
declared dividends. Nicanor will receive Php 100,000.00

5. Nicanor, a Filipino citizen residing in the Philippines invested in a corporation established under the laws of the United
States. The corporation, which has sales in the United States amounting to Php 100M and another Php 200M,
declared dividends. Nicanor will receive Php 100,000.00

6. BlackPink, a popular band in Korea held a one-night concert in the Philippines and were paid Php 1 Million.

7. Jordan Clarckson, with Filipino descent playing in the NBA, was paid $1M for playing with Cleveland Cavaliers.

8. Nicanor, a Filipino citizen residing in the United States invested in a corporation established under the laws of the
Philippines. He sold the shares of stocks with a gain of Php 1M in the Philippines.

9. Nicanor, a Filipino citizen residing in the Philippines invested in a corporation established under the laws of the United
States. He sold the shares of stocks with a gain of Php 1M in the Philippines.

10. The National Basketball Association opened an NBA store in the Philippines. It earned Php 1M.

End of TAX.3402-1

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 Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977

TAX.3402-2 NARANJO/SIAPIAN/WONG/GUDANI
TAXATION OF INDIVIDUAL TAXPAYERS MAY 2023

LECTURE NOTES

TAXATION OF INDIVIDUAL TAXPAYERS UNDER TRAIN LAW

Taxpayer Option 1 Option 2
Compensation Income Earner Graduated tax ONLY
Self Employed 8% Optional (no more PT) Graduated tax plus PT
Mixed Income Earner:
Compensation Graduated tax ONLY
Business Income 8% Optional (no more PT) Graduated tax plus PT
RULES ON AVAILMENT OF OPTIONAL 8% INCOME TAX RATE
• Applicable to Self-employed or Mixed Income earner
• Gross sales or receipts should not exceed the VAT threshold of Php 3 Million
• Signified intention to elect 8% on 1st quarterly income tax return or initial return
• The choice is irrevocable for the taxable year
• The 8% is in lieu of graduated income tax and percentage tax
• Basis is actual gross sales/receipts and other non-operating income
• If no intention was made, deemed graduated tax rate
• Audited financial statements is not a requirement
• Bookkeeping and Invoicing Rules apply
• Taxpayer is registered and:
• Subject to Percentage tax under Section 116 of the Tax Code, or
• Exempt from VAT or PTs

8% NOT AVAILABLE TO:

• Purely compensation income earners
• VAT-registered Taxpayers
• VAT or PT exempt taxpayers whose gross sales and non-operating income exceeded the VAT
threshold of Php 3 Million
• Taxpayers subject to Other Percentage Taxes
• Partners of a General Professional Partnership (GPP)
• Taxpayers enjoying income tax exemption e.g. Barangay Micro Business Enterprises (BMBE)
• Taxpayers who opted for Optional Standard Deduction (OSD)
• Taxpayers who did not signify their intent to be taxed at 8%

1. Inday operates a convenience store while she offers bookkeeping services to her clients. In 2019, her
gross sales amounted to Php 800,000.00, in addition to her receipts from bookkeeping services of Php
300,000.00. She already signified her intention to be taxed at 8% income tax rate in her 1st
quarter return.

Discussion Questions:
a. Is Inday qualified to avail the preferential/commuted tax of 8%?
Answer:
b. Is Inday entitled to the deduction of P250,000.00?
Answer:
c. What is the treatment of the 8% income tax payment by Inday?
Answer:

Compute Inday’s tax liability:

Gross Sales - Convenience Store Php 800,000
Gross Receipts - Bookkeeping 300,000
Total Sales/Receipts 1,100,000
Less: Amount allowed as deduction 250,000
Taxable Income 850,000
Multiply by tax rate 8%
Tax due 68,000
Less: Tax credits (Tax withheld at source - Form 2307)* 15,000
Tax Payable Php 53,000

*Assuming withholding tax rate is 5% of gross receipts

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TAXPAYER IS SELF-EMPLOYED/PROFESSIONAL - GRADUATED TAX

2. Inday above, failed to signify her intention to be taxed at 8% income tax rate on gross sales in
her initial Quarterly lncome Tax Return, and she incurred cost of sales and operating expenses
amounting to Php 600,000.00 and Php 200,000.00, respectively, or a total of Php 800,000.00.

Discussion Questions:
a. Is Inday qualified to avail the preferential/commuted tax of 8%? If not, what rate will be applied?
Answer: No. Graduated tax rates.
b. Is Inday entitled to the deduction of P250,000.00?
Answer: No. Under the graduated tax table, the 250,000 is integrated in the 1st tier/level/bracket
c. Is Inday liable to pay percentage tax?
Answer: Yes

Compute the tax liability/ies of Inday using the above scenario:

Income Tax:
Gross Sales - Convenience Store Php 800,000
Gross Receipts - Bookkeeping 300,000
Total Sales/Receipts 1,100,000
Less: Cost of sales 600,000
Gross Income 500,000
Less: Operating expenses 200,000
Taxable Income Php 300,000

Tax due (graduated tax rate (Php 300,000-250,000)x20% 10,000

Less: Tax credits (Tax withheld at source - Form 2307)* 15,000
Tax Payable (Overpayment) (Php 5,000)
*Assuming withholding tax rate is 5% of gross receipts

Percentage Tax:
Total Sales/Receipts Php 1,100,000
Multiply by rate 3%*
Percentage Tax Php 33,000
* Rate under CREATE Law is 1% beginning July 1, 2020 until June 30, 2023

TAXPAYER OPTED 8% BUT EXCEEDED THRESHOLD DURING THE YEAR

3. Rey signified his intention to be taxed at 8% income tax rate on gross sales in his 1st Quarter Income
Tax Return. He has no other source of income. His total sales for the first three (3) quarters amounted
to P3,000,000.00 with 4th quarter sales of P3,500,000.00. Other information were made available:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter TOTAL

(8%) (8%) (8%)
Total sales 500,000.00 500,000.00 2,000,000.00 3,500,000.00 6,500,000.00
Less: COS 300,000.00 300,000.00 1,200,000.00 1,200,000.00 3,000,000.00
Gross income 200,000.00 200,000.00 800,000.00 2,300,000.00 3,500,000.00
Less: Opex 120,000.00 120,000.00 480,000.00 720,000.00 1,440,000.00
Taxable 80,000.00 80,000.00 320,000.00 1,580,000.00 2,060,000.00
income

Discussion Questions:
a. Is Rey qualified to avail the preferential/commuted tax of 8%? If not, what rate will be applied?
Answer: Yes, but up to 3rd Quarter only. In filing annual AITR, since Rey exceeded the VAT threshold
of Php 3,000,000, he shall be liable to pay income tax under graduated tax rates
b. What will be the treatment of the 8% tax payments for the three quarters?
Answer: Rey shall be allowed an income tax credit of quarterly payments initially made under the 8%
income tax option computed net of the allowable deduction of P250,000.00 granted for purely business
income
c. Is Rey liable to pay percentage tax? VAT?
Answer: Yes to percentage tax on his gross sales of Php 3 Million. Yes to VAT on the excess of the Php
3 Million

NOTES:
• The taxpayer is required to update his registration from non-VAT to VAT taxpayer.
• Percentage tax pursuant to Section 116 of the Tax Code, as amended, shall be imposed from the
beginning of the year until taxpayer is liable to VAT.
• Percentage tax due on the non-VAT portion of the sales/receipts shall be collected without penalty, if
timely paid on the due date immediately following the month/quarter when taxpayer ceases to be a
non-VAT.
• VAT shall be imposed prospectively

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Compute the income tax payable and applicable business taxes:

(1) Annual income tax liability
(2) Percentage Tax Payable
(3) Output VAT

(1) Annual Income Tax Liability:

Income tax due (graduated due to mandatory VAT registration Php 509,200
Less: Tax previously paid for three quarters (Php 3M-250,000)x8% 220,000
Annual Income Tax Payable Php 289,200

(2) Percentage Tax Payable

Gross sales within threshold Php 3,000,000
Multiply by rate 3%*
Percentage Tax Payable Php 90,000
* Rate under CREATE Law is 1% beginning July 1, 2020 until June 30, 2023

(3) VAT Payable:

Gross sales exceeding threshold Php 3,500,000
Multiply by rate 12%
Output tax* Php 420,000
*Transitional input tax can be credited from the output tax.

TAXPAYER IS SUBJECT TO OTHER PERCENTAGE TAX

4. In 2019, Bryan owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000.00. His cost
of sales and operating expenses are P1,000.000.00 and P600,000.00, respectively, and with non-
operating income of P100,000.00.

Discussion Questions:
a. Is Bryan qualified to avail the preferential/commuted tax of 8%? If not, what rate will be applied?
Answer: No because Bryan is subject to Percentage Tax under Section 116 of the Tax Code. Bryan’s
income tax shall be computed using the graduated tax rates
d. Is Bryan liable to pay business tax? If yes, what kind?
Answer: Yes. Amusement Tax.

Compute the income and business taxes:

Income tax from Business:

Gross sales Php 2,500,000
Less: Cost of Sales 1,000,000
Gross Income 1,500,000
Less: Operating expenses 600,000
Net income from operation 900,000
Add: Non-operating income 100,000
Taxable Income Php 1,000,000

Tax Due Php 190,000

Business tax:
Gross sales Php 2,500,000
Multiply by rate 18%
Amusement Tax Php 450,000

TAXPAYER IS MIXED INCOME EARNER

5. Rian, a Financial comptroller of ABC Corp, earned annual compensation in 2019 of Php 1,500,000.00,
inclusive of 13th month and other benefits in the amount of Php 120,000.00 but net of mandatory
contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store,
with gross sales of Php 2,400,000.00. His cost of sales and operating expenses are Php 1,000,000.00
and Php 600,000,00, respectively, and with non-operating income of Php 100,000.00. ABC Corp.
withheld tax on Rian’s compensation in the amount of Php 313,000 as shown in his Certificate of
Compensation Payment/Tax Withheld (BIR Form 2316).

Discussion Questions:
a. Is Rian qualified to avail the preferential/commuted tax of 8% on his business
income? Answer: Yes
b. Can Rian apply the 8% tax rate on his compensation? If not, what rate shall be used?
Answer: No. Graduate tax rates.
c. Is Rian entitled to a Php 250,000 deduction on his business income? If no, why?

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Answer: No. The P250,000.00 is already incorporated in the first tier of the graduated income tax rates
applicable to compensation income
d. Are the costs of sales and operating expenses relevant in computing Rian’s income tax?
Answer: No
e. Is Rian liable to pay percentage tax?
Answer: No
f. Is Rian qualified for substituted filing?
Answer: No, Rian is NOT entitled to substituted filing because he is engaged in trade or business

Scenario 1: Compute Rian’s (1) tax due if he opted 8% income tax rate, and (2) tax payable:
Compensation Income Business Income (8%)
Total compensation Php 1,500,000 Gross sales Php 2,400,000
Less: non-taxable 90,000* Add: Non-operating inc 100,000
Taxable compensation Php 1,410,000 Total business income Php 2,500,000
Multiply by rate 8%
Tax due (graduated) Php 313,000 Tax due on Business Php 200,000

Total tax due (1) Php 513,000

Less: Tax Credits (Withholding Tax on Compensation per Form 2316) 313,000
Income Tax Payable (2) Php 200,000

Scenario 2: Compute Rian’s income tax and the amount payable if he did not opt for the eight percent (8%)
income tax based on gross sales/receipts and other non-operating income and business tax:

Income tax due and tax payable:

Total compensation income Php 1,500,000
Less: non-taxable 13th month pay and OB (max) 90,000
Taxable compensation income Php 1,410,000
Add: Taxable income from business Php 2,400,000
Less: Cost of sales 1,000,000
Gross income 1,400,000
Less: Operating expenses 600,000
Net income from operation 800,000
Add: Non-operating income 100,000 900,000
Total taxable income Php 2,310,000

Income tax due Php 589,200

Less: Tax Credits (per Form 2316) 313,000
Income Tax Payable 276,200

Business Tax
Gross sales including NOI* Php 2,500,000
Multiply by rate 3%*
Percentage Tax Payable Php 75,000
* Rate under CREATE Law is 1% beginning July 1, 2020 until June 30, 2023

NOTES:
• The taxable income from both compensation and business shall be combined for purposes of computing
the income tax due if the taxpayer chose to be subject under the graduated income tax rates.
• The Regulation did not include the Php 100,000 NOI in the computation.

Scenario 3: Compute the income tax payable assuming on February 2019 the taxpayer tendered his
resignation to concentrate on his business. His total compensation income amounted to P150,000.00, inclusive
of benefits of P 20,000.00. His business operations for taxable year 2019 remains the same. He opted for the
eight percent (8%) income tax rate.

Compensation Income Business Income (8%)

Total compensation Php 150,000 Gross sales Php 2,400,000
Less: non-taxable 20,000 Add: Non-operating income 100,000
Taxable compensation Php 130,000 Total business income Php 2,500,000
Multiply by rate 8%
Tax due (graduated) Php 0 Tax due on Business Php 200,000

Total tax due Php 200,000

Less: Tax Credits (Withholding Tax on Compensation per Form 2316) 0
Income Tax Payable Php 200,000

Discussion Questions:
a. Is Rian qualified to avail the preferential/commuted tax of 8% on his business income?

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Answer: Yes
b. Can Rian apply the 8% tax rate on his compensation? If not, what rate shall be used?
Answer: No. Graduate tax rates.
c. Is Rian entitled to a Php 250,000 deduction on his business income? If no, why?
Answer: No. The P250,000.00 is already incorporated in the first tier of the graduated income tax rates
applicable to compensation income
d. Is Rian liable to pay percentage tax?
Answer: No
e. Can Rian carry-over or use as credit the excess of the P250,000.00 over the actual taxable
compensation income?
Answer: No. The excess of Php 120,000 is not creditable against the taxable income from
business/practice of profession under the 8% income tax rate option.

TAXPAYER EXCEEDED THE THRESHOLD OF Php 3 Million

Bryan, an officer of ABC International Corp., earned in 2022 an annual compensation of Php 1,200,000.00,
inclusive of 13th month and other benefits in the amount of P120,000.00. Aside from employment income, he
owns a farm, with gross sales of Php 3,500,000. His cost of sales and operating expenses are P1,000,000.00
and P600,000.00, respectively, and with non-operating income of P100.000.00.

Discussion Questions:
1. Is Bryan qualified to avail the preferential/commuted tax of 8% on his business income? Why? Answer:
No. The taxpayer has no option to avail of the 8% income tax rate on his income from business since
his gross sales exceeds the VAT threshold.
2. Can Bryan apply the 8% tax rate on his compensation? If not, what rate shall be used?
Answer: No. Graduate tax rates.
3. Since Bryan exceeded the VAT threshold, is he now subject to VAT?
Answer: No, he is still not subject to business tax since the nature of his business transactions is VAT
exempt.

Compute Bryan’s total income tax in 2022:

Total compensation income Php 1,200,000

Less: non-taxable 13th month pay and OB (max) 90,000
Taxable compensation income Php 1,110,000
Add: Taxable income from business Php 3,500,000
Less: Cost of sales 1,000,000
Gross income 2,500,000
Less: Operating expenses 600,000
Net income from operation 1,900,000
Add: Non-operating income 100,000 2,000,000
Total taxable income Php 3,110,000

Income tax due Php 845,200

TAXPAYER IS A SPECIAL ALIEN

Ms. Elle, an alien employed in ABC Corporation that is a Petroleum Service Contractor, received compensation
income of Php 5,000,000.00 for 2022, inclusive of P400,000.00 13th month pay and other benefits. Compute
Ms. Elle’s tax due on her taxable compensation:

Compensation income Php 5,000,000

Less: non-taxable 13th month pay and OB (max) 90,000
Taxable compensation income Php 4,910,000

Tax due Php 1,421,200

NOTES:
• All employees of RHQs/ROHQs/OBUs, and Petroleum Service Contractors and Subcontractors shall be subject to
regular income tax rate under Section 24 (A) (2) (a) of the Tax Code, as amended, without prejudice to the
application of preferential tax rates under existing international tax treaties, if warranted.
• ROHQs and OBUs are taxed as an RFC under CREATE Law.

ALIEN INDIVIDUALS EMPLOYED BY POGO ENTITIES

Foreign nationals or non-Filipino citizens, regardless of their residency, term and class of working or
employment permit or visa, who are employed and assigned in the Philippines by an Offshore Gaming Licensee
(OGL) or its accredited service provider shall have a TIN and pay a final withholding tax of 25% on their gross
income provided that the minimum final withholding tax due for any taxable month from said persons shall not
be lower than Php 12,500.00.

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The gross income shall include, whether in cash or in kind, basic salary/wages, annuities, compensation,
remuneration, and other emoluments, such as honoraria and allowances, received by the alien employee from
a POGO entity.

Any income earned from all other sources within the Philippines by foreign employees shall be subject to
income tax under the NIRC.

SOCIAL MEDIA INFLUENCERS (SMIs)

Includes all taxpayers, individuals or corporations, receiving income, in cash or in kind, from any social
media sites and platforms (YouTube, Facebook, Instagram, Twitter, TikTok, Reddit, Snapchat, etc.) in
exchange for services performed as bloggers, video bloggers or "vloggers" or as an influencer, in general, and
from any other activities performed on such social media sites and platforms.

Classification of Social Media Influencers

1. Individuals – Self-employed (sole proprietors / professionals)
2. Partnerships
3. Corporations

Sources of Income:
1. YouTube Partner Program - this allows an influencer to make money from:
• Advertising revenue - the influencer gets ad revenue from display, overlay, and video ads.
• Channel membership - the influencer makes recurring monthly payments in exchange for special
perks that he/she/it offers.
• Merch shelf - followers can browse and buy official branded merchandise from the influencer's
watch pages.
• Super Chat and Super Stickers - followers pay to get their messages highlighted in chat streams.
• YouTube Premium Revenue - the influencer gets a part of a YouTube Premium subscriber's
subscription fee when followers watch his/her/its contents.

2. Sponsored social and blog posts - an influencer features a product or concept he/she/it is paid to
promote.
3. Display advertising - influencers also have the ability to earn money passively through display
advertising. Here, the ad is similar to radio commercials because it interrupts the program.
4. Becoming a brand representative/ambassador - the influencer would promote the products on
his/her/its social media account in exchange for free products from the brand. Some brands may pay
an additional fee for every piece of content or conversion the influencer creates or drives.
5. Affiliate marketing - In this type of arrangement, an affiliate marketer for the brand or the influencer
would be provided with a unique link or code that will be used for tracking his/her conversions. For
every conversion resulting from the said link or code, the influencer will eam a commission.
6. Co-creating product lines - a brand would partner with an influencer to co-create products for their
brand and the latter, in tum, gets paid based on a certain percentage of the profits.
7. Promoting own products - the influencer may come up with his/her own line of products.
8. Photo and video sales - influencers may create and sell frame-worthy pictures, high-quality videos, or
the rights over them as well.
9. Digital courses, subscriptions, e-books - influencers sell digital products.
10. Podcasts and webinars - these may include sponsored ads that generate money or the influencer may
charge a small fee to access the content.

Notes:
• If a social media influencer receives free products in exchange for the promotion thereof on his/her/it
YouTube channel or other social media accounts, he/she/it must declare the fair market value of such
products as income.
• Income treated as royalties in another country, including payments under the YouTube Partner
Program, shall likewise be included in the computation of the gross income of the social media
influencer and shall be subjected to the schedular or corporate tax rates.
• For resident aliens, any income derived from Philippine-based contents shall generally be taxable.
Thus, the burden of proof that the income was derived from sources without the Philippines lies upon
the resident alien. Absent such proof, the income will be assumed to have been derived from sources
within the Philippines
• Allowable Deductions may include:
1. filming expenses (cameras, smartphones, microphone and other filming equipment)
2. computer equipment
3. subscription and software licensing fees
4. internet and communication expenses
5. home office expenses (ex. proportionate rent and utilities expenses)
6. office supplies
7. business expenses (e.g. travel or transportation expenses related to YouTube business, payment to
an independent contractor or company for video editing, costume designer, advertising and marketing
costs (cost of contests and giveaway prizes, etc.)
8. depreciation expense

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9. bank charges and shipping fees

• SMI may opt for OSD
• SMI may avail tax treaty benefits by obtaining a Tax Residency Certificate
• Payments by Youtube are treated as royalties

Illustration:
In 2020, GBG, a Filipino social media influencer residing in the Philippines, received USD200,000 or Php 10
Million from Google LLC, an enterprise resident of the US, as her share from advertising revenues. Under the
US tax law, payments from YouTube through the YouTube Partner Program are considered royalties which are
generally subject to tax at 24%. GBG did not receive any other income during the year. When she filed her tax
return, she claimed Php 1 Million as deductions and opted to avail of tax credit for taxes paid in the US.

a. What is the tax implication if GBG does not inform the income payor that she is a resident of the
Philippines?
Answer: GBG's earnings from YouTube will be subjected to tax at the maximum rate of 24% if she
does not claim treaty benefit. Google LLC should therefore withhold USD 48,000 or Php 2.4 Million
before remitting the royalties to GBG.
b. What is the tax implication if GBG submits her tax information to Google LLC and proves that she is a
resident of the Philippines?
Answer: Under Article 13(2)(a) of the Philippines-US tax treaty, royalties derived by a resident of the
Philippines may be taxable in the US but such tax shall not exceed 15% of the gross amount of
royalties. If GBG invokes the provisions of the treaty and claims treaty benefit, Google LLC will only
impose 15% tax (USD30,000 or Php 1.5 Million) on her royalty payments from viewers in the US.
c. How much should be allowed as credit for taxes paid in the US?
Answer: Generally, credit for taxes paid in a foreign country shall be limited to that paid or accrued in
the said foreign country. Where, however, a treaty exists between the source state and the Philippines
but the taxpayer fails to invoke the provisions thereof, the tax credit that may be claimed by the
taxpayer shall be limited to the tax that should have been paid by the taxpayer had he/she/it claimed
the benefits under the said treaty. In this case, GBG shall only be allowed to claim as credit against
her tax due in the Philippines the amount of Php 1.5 million.
d. How much would be the tax payable of GBG in the Philippines?
Answer: Whether or not GBG claimed treaty benefit, she still has to declare in her Income Tax Return
the royalties earned from YouTube and pay the remaining income tax due, i.e., net of allowable tax
credit, as computed below:

Gross income Php 10,000,000.00

Less: Allowable Deductions 1,000,000.00
Taxable Income 9,000,000.00

Tax Dude Php 2,760,000.00

Less: foreign tax credits 1,500,000.00
Tax Still Due and Payable Php 1,260,000.00
END

End of TAX.3402-2

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 Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977

TAX.3402-3 NARANJO/SIAPIAN/WONG/GUDANI
TAXATION OF ESTATES AND TRUSTS MAY 2023

LECTURE NOTES

ESTATES AND TRUSTS

Estate refers to the mass of all property, rights and obligations of a person which are not extinguished by
his death.
Trust is a right on property, real or personal, held by one party for the benefit of another.

Kinds of Trusts:
1. Express – created by the acts of the parties
2. Implied - by operation of law, either to carry a presumed intention of the parties or to satisfy the
demands of justice or protect against fraud

Kinds of Implied Trusts:

1. A resulting trust exists when a person makes or causes to be made a disposition of property under
circumstances which raise an inference that he/she does not intend that the person taking or
holding the property should have the beneficial interest in the property.

2. A constructive trust exists when a person holding title to property is subject to an equitable duty to
convey it to another on the ground that he/she would be unjustly enriched if he/she were permitted
to retain it. The duty to convey the property arises because it was acquired through fraud, duress,
undue influence, mistake, through a breach of a fiduciary duty, or through the wrongful disposition
of another's property.
ILLUSTRATION
Estate Trust

TAXATION OF ESTATES AND TRUSTS

General Rule: Estates and Trusts are taxable.

Example of taxable estates and trusts:

1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with
contingent interests, and income accumulated or held for future distribution under the terms of the will
or trust
2. Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected
by a guardian of an infant which is to be held or distributed as the court may direct
3. Income received by estates of deceased persons during the period of administration or settlement of
the estate
4. Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumulated

Exception:

Employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the
benefit of some or all of his employees
1. if contributions are made to the trust by such employer, or employees, or both for the purpose of
distributing to such employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and
2. if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect
to employees under the trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees.

Note: Any amount actually distributed to any employee or distributee shall be taxable to him in the year in
which so distributed to the extent that it exceeds the amount contributed by such employee or distribute.

IMPORTANT CONSIDERATIONS ON ESTATES AND TRUSTS

Estate as a taxpayer An estate is a taxpayer for income tax purposes if it is under settlement or administration
and the estate derives income.

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Trust as a taxpayer 1. A trust is a taxpayer if under the terms of the trust the fiduciary must
accumulate the income.
2. A trust is a taxpayer if under the terms of the trust the fiduciary may
accumulate or distribute the income, in his discretion.
Treatment of income When an estate or a trust is a taxpayer, a distribution of the year’s income to
distribution of the year’s an heir or beneficiary is:
income to heir or 1. A special item of deduction for the estate/trust
beneficiary 2. A special item of income to the heir/beneficiary
Computation of taxable Gross Income Php 100,000
income of the estate or Less: Deductions:
trust Business expenses Php 50,000
Distribution of income 30,000 Php 80,000
Taxable Income Php 20,000

Tax Due (graduated tax) Php 0.00

Creditable Tax 15%
FILING OF RETURNS AND PAYMENT OF TAX (ESTATE AND TRUST)
Who files the return? The following persons acting in any fiduciary capacity shall file the income tax
return for an estate or trust: CAR-GATE
1. Conservators
2. Administrators
3. Receivers
4. Executors
5. Guardians
6. All other persons or corporations acting as fiduciary
7. Trustees
In case of two or more In case of two or more joint fiduciaries, return filed by one of them shall be a
joint fiduciaries sufficient compliance with the requirements of the Tax Code.
END

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DISCUSSION QUESTIONS

Illustration of Trust ABC Trust earned gross income in the amount of Php 1 Million. Business
expenses amounted to Php 500,000.00. The trustee equally distributed the Php
300,000.00 to the trustors A, B and C.

Compute the following:

a. Taxable net income of trust; and
b. Taxable income of A assuming the proceeds are the only source of income of A.

Trust Trustor A

Illustration on Estate The Estate of Nicanor earned rents in the amount of Php 1 Million. Business
expenses amounted to Php 500,000.00. Inday and Junior, the compulsory heirs,
equally distributed the Php 300,000.00 between themselves.

Compute the following:

a. Taxable net income of the Estate of Nicanor; and
b. Taxable income of Inday assuming the proceeds are the only source of income
of Inday.

Estate of Nicanor Inday

Nicanor as Trustor, entrusted his money or property to FS Trust Corp. (trustee) with Nicanor as the beneficiary.
FSTC invested the money or property. The following information were made available for the year 2019:
Trust
Gross income P500,000
Business expenses 100,000
Income distribution to beneficiary 100,000*

*Subject to 15% creditable withholding tax under RR 11-2018.

Assuming Nicanor has no other source of income, compute the tax due of:
1) Trust
2) Nicanor

End of TAX.3402-3

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 Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao
Since 1977

TAX.3402-4 NARANJO/SIAPIAN/WONG/GUDANI
ADMINISTRATIVE PROVISIONS ON INDIVIDUALS, ESTATES AND TRUSTS MAY 2023

LECTURE NOTES
WHO IS REQUIRED TO FILE THE RETURN?
Taxpayer or any authorized representative.
ANNUAL INCOME TAX RETURNS (INDIVIDUALS, ESTATES AND TRUSTS)
Classification Form/Return Deadline
1. Purely Compensation Income Earner (Employee 1700 The income tax return
only) shall be filed on or
2. Purely Self-Employed who availed 8% taxation 1701-A before April 15 of the
OR who chose Optional Standard Deduction succeeding year
3. Mixed Income Earner, Estates and Trusts 1701
Note: If deadline falls on Saturday, Sunday or Holiday, filing is the next working day.
TAX FILING AND PAYMENTS
PERIOD INDIVIDUAL (1701Q) NON-INDIVIDUAL (1702Q)
1st Quarter May 15 60 days after close of quarter
2nd Quarter August 15 60 days after close of quarter
3rd Quarter November 15 60 days after close of quarter
th
Annual April 15 of following year 15 day of the fourth month following the close
(Form 1700, 1701A, 1701) of the taxpayer’s taxable year
(Form 1702-RT, 1702-EX, 1702-MX)
Notes:
1. No quarterly filing for compensation income earners
2. No 4th quarter filing for individual and non-individual taxpayers
Place of filing of return General Rule:
1. Authorized agent banks (AAB)
2. Revenue District Officer (RDO)
3. Revenue Collection Officers (Collection agents)
4. Duly authorized city or municipal Treasurer
in which the taxpayer has his legal residence or principal place of business.
Exceptions:
1. Electronic Filing may be done anywhere
2. In meritorious cases (e.g. During COVID-19 era, CIR allowed filing
outside RDO)
Modes of Filing Electronic Filing and Payment System (EFPS) or e-BIR Forms Package (online
submission/manual filing)
During filing season, pre-printed filing of return is allowed only to:
1. Police officers
2. Military officers
3. Bureau of Fire Protection employees
4. Senior Citizens with respect to their returns only

Installment Payments
1. Electronic payment
• bank debit in EFPS
• e-Payment Gateways or Channels (credit/debit cards)
- LandBank (PESONet)
- Development Bank of the Philippines
- Union Bank
- Globe GCash
- PayMaya
2. Manual Payment - the tax is paid as the return is filed. Can be paid
using cash or acceptable checks (e.g. manager’s, corporate etc.)
When the tax due is in excess of Two thousand pesos (P2,000.00), the
individual may elect to pay the tax in two (2) equal installments

1st installment - shall be paid at the time the annual income tax return is filed

2nd installment – to be paid on or before October 15 following the close of

the calendar year (use Payment Form 0605)

If any installment is not paid on or before the date fixed for its payment, the
whole amount of the unpaid tax becomes due and payable, together with
the delinquency penalties to be reckoned on the original date when the tax
is required to be paid.

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INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN

1. An individual earning purely compensation income whose taxable income does not exceed Two
Hundred Fifty Thousand pesos (P250,000.00)
The Certificate of Withholding filed by the respective employers, duly stamped “Received” by the
Bureau, shall be tantamount to the substituted filing of income tax returns by said employees.
2. An individual whose income tax has been correctly withheld by his employer, provided that such
individual has only one employer for the taxable year - the Certificate of Withholding filed by the
respective employers, duly stamped "Received" by the Bureau shall be tantamount to the substituted
filing of income tax returns by said employees
3. An individual whose sole income has been subjected to final withholding tax
4. A minimum wage earner

In all cases, all individuals deriving compensation income, regardless of the amount, from two (2) or more
concurrent or successive employers at any time during the taxable year are not qualified for substituted filing.
Thus, they are still required to file a return.
GRADUATED TAX TABLE UNDER TRAIN LAW (January 1, 2018 to December 31, 2022)
Over But not over The tax shall be Plus Of excess over
0 250,000 0 0 -
P 250,000 400,000 0 20% P 250,000
400,000 800,000 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 - 2,410,000 35% 8,000,000
GRADUATED TAX TABLE UNDER TRAIN LAW (January 1, 2023 and onwards)
Over But not over The tax shall be Plus Of excess over
0 250,000 0 0 -
P 250,000 400,000 0 15% P 250,000
400,000 800,000 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 - 2,202,500 35% 8,000,000
EXERCISES:
Taxable Income (2022) Tax Due
1. Php 300,000
2. Php 500,000
3. Php 1 Million
4. Php 2 Million
5. Php 10 Million
END

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DISCUSSION QUESTIONS
MULTIPLE CHOICE QUESTIONS:
1. Which of the following income tax return is NOT required to filed by individual/corporate taxpayers?
a. 1st Quarter
nd
b. 2 Quarter
c. 3rd Quarter
th
d. 4 Quarter
e. Annual Income Tax Return

2. S1 – Employees are not required to file quarterly income tax returns?

S2 – If there is no tax due, the taxpayer is not required to file quarterly income tax returns?
a. S1 is true
b. S2 is true
c. Both are true
d. Both are false
3. Assuming the April 15 filing of annual ITR falls on a Saturday, until when can the taxpayer file the return?
a. April 14, Friday
b. April 15, Saturday
c. April 16, Sunday
d. April 17, Monday
4. S1 – Taxpayers can file returns only with the RDO where it is registered.
S2 – The Commissioner can authorize the filing of returns outside of the revenue jurisdiction of a taxpayer.
a. S1 is true
b. S2 is true
c. Both are true
d. Both are false
5. S1 – When the tax due is at least Php 2,000.00, an individual taxpayer can request for installment payment.
6. S2 – When the tax due exceeds Php 2,000.00, a non-individual taxpayer can request for installment payment.
a. S1 is true
b. S2 is true
c. Both are true
d. Both are false
7. S1 – If an individual taxpayer qualifies for installment payment, the first installment should be paid on April 15.
8. S2 – In the second (2nd) installment, a second AITR is required to be filed to reflect the payment.
a. S1 is true
b. S2 is true
c. Both are true
d. Both are false
9. S1 – Filing of income tax returns can be electronically or manually.
S2 – Exemption from income tax does not mean exemption from filing.
a. S1 is true
b. S2 is true
c. Both are true
d. Both are false
10. Who is required to file Annual Income Tax Return?
S1 – Nicanor, whose sole income is from employment and whose taxable income is Php 250,000
S2 – Nicanor, whose employer withheld Php 1M tax on his compensation where tax due is Php 1M
S3 – Nicanor, whose sole income is from passive income and in which final taxes were withheld therefrom
S4 – Nicanor, receiving minimum wage payments from his full-time employment at ABC Corp and part-time
employment at XYZ Corp
a. S1
b. S2
c. S3
d. S4

Indicate the Deadlines / Periods:

1. 1st Quarter ITR of Individual taxpayer.
2. 2nd Quarter ITR of Individual taxpayer.
3. 3rd Quarter ITR of Individual taxpayer.
4. Annual Quarter ITR of Individual taxpayer.
5. Taxable year of an individual taxpayer.
6. Individual taxpayer died on February 14, 2021.
7. Corporation closed on February 14, 2021 and uses the calendar year
8. Individual taxpayer registered on February 14, 2021.
9. Individual taxpayer registered on December 15, 2021.
10. Corporate taxpayer applies fiscal year ending June 30 and changed to calendar year
December 31.

Type of Taxpayer Period Covered Deadline

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DC/RFC - Calendar 1st Quarter

DC/RFC - Calendar 2nd Quarter
DC/RFC - Calendar 3rd Quarter
DC/RFC – FY Feb 28 Annual
DC/RFC – FY May 31 Annual
DC/RFC – FY Aug 31 Annual
DC/RFC – FY Nov 30 Annual

End of TAX.3402-4

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