CHAPTER TWO:

TAXATION OF INDIVIDUALS

- Bayabay, Mary Jane S.

- Marquez, May B.
The code directs that a tax shall be
imposed on the taxable income of
every individual. Our present tax
system imposes progressive rates of
income taxes on citizens and
resident aliens. This system equitably
distributes the tax burden by
recognizing the paying ability of the
individual taxpayer.
SCHEDULAR SYSTEM
- the income tax treatment varies
depending on the kind of taxable
income of the taxpayer. It provides for
a different tax treatment of different
types of income so that a separate tax
return is required to be filed for each
type of income and the tax is
computed on a per return or per
schedule basis.
GLOBAL TREATMENT
- is a system where the tax treatment views
indifferently the tax base and generally
treats in common all categories of taxable
income of the taxpayer.
It is where the taxpayer is required to lump
up all items of income earned during a
taxable period and pay under a single set of
income tax rules on these different items
of income.

Unlike financial accounting, tax law does

not distinguish between a person and an
unincorporated business.
While all individuals are subject to tax
on their respective taxable incomes,
they are not all taxed at the same rate
for two reasons:
1. Tax rates are generally higher for
higher levels of income.
2. Even at the same level of income
and same basic personal exemption
of 50,000, tax dues will vary
depending on an individual’s claim
for additional exemptions on
dependents.
Classification of Individual Taxpayer
 1. Citizen
 whoare citizens of the Philippines at the time of the
adoption of the Feb 2, 1987 Constitution;

 whose fathers or mothers are citizens of the

Philippines

 born before Jan 17, 1973, the date of the adoption of

the 1973 Constitution, of Filipino mothers, who elect
Philippine citizenship upon reaching the age of
majority; and

 Those who are naturalized in accordance with law.

a.) Resident citizen – Filipino citizen who
permanently resides in the Philippines.

b.) Non-Resident Citizen – Filipino who does

not permanently resides in the Philippines,
income derives from abroad, physically present
abroad most of the time, intention of leaving
the Philippines to reside permanently abroad.

most of the time – interpreted to mean

presence abroad for at least 183 days during
the taxable year. (BIR Ruling 128-99,
Aug.18,1999)
2. Alien
a) Resident Alien – individual whose residence is
within the Philippines and who is not a citizen
thereof. He is one who actually present in the
Philippines and who is not a mere transient or
sojourner. But residence does not mean mere
physical presence.

b) Non-Resident Alien – individual whose residence is

not within the Philippines and who is not a citizen
thereof.
1. Engaged in Trade or business in the
Philippines

2. Not Engaged in trade or business in the

Philippines

3. Employed by
a.) Regional Are headquarters (RHQs)
and regional operating headquarters
(ROHQs) of multinational entities in the
Philippines that are engaged in international
trade with affiliates and subsidiary branch
offices in the Asia-Pacific region.
b.) Offshore banking Units (OBU) – shall
mean a branch, subsidiary or affiliate of a
foreign banking corporation which is duly
authorized by the BSP to transact off banking
system in the Philippines in accordance with
the provisions of Presidential Decree 1034 as
implemented by Central Bank (BSP) Circular
1389, as amended.

c.) Petroleum contractors and sub-

contractors.
 Reminders:
 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, becomes a resident
alien, though his intention at all times to return to
his domicile abroad when the purpose for which he
came has been accomplished.

 One who comes to the Philippines for a definite

purpose which in its nature may be promptly
accomplished is transient.
 Reminders:
 Mere ownership of shares of stock in the
Philippines is not enough constitute as engaging in
trade or business in the Philippines.

 Performing functions in a public office considered

engaged in trade or business in the Philippines.

 A resident alien left and abandon Philippines with

no intention of returning shall not anymore to be
considered a resident alien.
 Reminders:
 A resident alien abandon Philippines with Re-
entry permit is still a resident alien.

 “Uninterrupted period” should not be

interpreted literally.
SOURCES OF INCOME:
It is not a place but the property, activity or
service that produced the income. In case of:
 income derived from labor - place where
the labor is performed
 income derived from the use of capital -
place where the capital is employed; and
 profits from the sale or exchange of
capital assets - place where the sale
occurs.
It is important to know the source of income of all
individual taxpayer – whether from within the
Philippines or without – because not all individual
taxpayers are taxed on all their income. The following
rules to apply:

Individual Source Of Income

Within the Phils. Without the Phils.
1. Resident Citizen yes yes
2. Non-Resident Citizen yes no
3. Resident Alien yes no
4. Non-Resident Alient yes no
Categories of Income and
Tax Rates
1. Compensation Income
It is the services performed by an employee
for his employer under the employer-
employee relationship, unless specifically
excluded by the code. If a taxpayer is
receiving compensation income from two
or more employers, he/she must combine
all compensation income received from all
employers for a particular calendar year.
Taxed graduated rates from 5%-32%
(revised section 24(A) per R.A. 9504)
2. Business Income
Arises from self-employment or practice of
profession. This shall not include income
from performance of services by the
taxpayers as an employee. Taxed at
graduated rates from 5%-32%. The same
graduated tax schedule is used for
individual taxpayers earning compensation
income, business/professional income or
both.
 Problem Example:
Esrom, a resident alien, married to Mary Jane
with 5 children. He is in the business of selling
video games. He has the following Data for his
business for the year 2016:
• Sales of Video games = P760,000
• Cost of Video Games Sold = P340,000
• Operating Expenses (salary of employees,
electricity, rent, etc..) = P100,000
He has already paid P20,000 income tax in the
previous quarter. How much is his income tax
liability?
3. Passive Income
These are subject to a separate and final
tax. These are taxed at fixed rates ranging
from 5%-25%.
Examples:
 Interests
 Royalties
 Prizes
 Winnings; and
 Dividends
4. Capital gains from sale of shares of stock,
not traded through the local stock exchange.
Taxed at 5% and 10% final taxes on a per
transaction basis. This is discussed thoroughly
in another chapter.
On net capital gains:
Not over 100,000 5%
Excess of 100,000 10%
 Problem:
Melgen, a resident citizen, single but in a
relationship, owns and holds a capital assets,
shares of stocks of San Miguel Corporation, a
domestic corporation, costing P40,000. She
sold all the shares directly to Mr. Ancla, a
businessman, for P200,000. How much final tax
must be paid?
5. Capital gains from sale of real property.
Taxed at 6% final tax on the gross
selling price or current fair market value
at the time of sale, whichever is higher.
(fully discussed in another chapter)
 PROBLEM:
Yvonne, a non-resident citizen, sold her
residential house and lot in Silang, Cavite for
P2,000,000 to Ms. Jaleen, a medical doctor in
Silang Hospital. The cost of the house and lot
four years ago when she acquired the
property was P1,000,000 and the fair market
value at the time of sale is P2,500,000. How
much is the tax liability?
6. Fringe Benefits
Any good, service, or other benefit
furnished or granted by an employer in
cash or in kind in addition to basic salaries,
to an individual employee (except rank-and-
file employee) under an employer-employee
relationship. This topic is discussed in
chapter 8.
34% final tax - beginning January 1998
33% final tax - January 1999 and;
32% final tax - beginning January 2000.

The grossed up monetary value is not

to be included in the gross income of
the taxpayer for the purposes of
computing the income tax liability
under section 24(A).
Problem:
In 2016, kim, a resident citizen, received a
cash gift from her employer, SGV & Co., of
P150,000. This fringe benefits is subject to
fringe benefit tax. Compute the tax that
shall be paid by her employer?
 Categories of income and the tax rates applicable for
each type of individual taxpayer are presented below:
Resident Non-Resident Resident Non-resident Alien
INCOME
Citizen Citizen Alien Engaged Not Engaged
1. ON TAXABLE INCOME
as defined in Sec.31 the tax
5%-32% 5%-32% FT 25%
computed under the revised Sec.24(A)
except for NRA-NETB
ON PASSIVE INCOME
2. In general, interests, royalties,
20%
prizes and other winnings 20% FT 25%
3. Cash and /or property dividends 6%, 8%, 10%
ON CAPITAL GAIN
4. Sale of shares of stock not traded
5-10%
in stock exchange 5%-10%
5. Sale of real property 6% 6%
PASSIVE INCOME
Passive income is subject to a separate and
final tax at fixed rates ranging from 5% to
25%. They are not included in the
computation of taxable income from
compensation or business/professional
income, the tax due on which is computed in
accordance with the graduated income tax
schedule for individuals in Section 24 (A).
Problem:
Vivienne Anne, single, non-resident citizen has the
following passive income for the year 2016:
• Savings deposit interest from Landbank – P5,000
• Interest Income from depository foreign Bank –
P10,000
• Interest Income from long-term investment bond,
terminated after 36 months – P20,000
• Royalty from writing accounting books – P80,000
• Prize in singing competition – P10,000
• Dividends received from Jollibee foods corporation
– P10,000
Determine the final tax she have to pay from her
passive income.
ALLOWABLE DEDUCTIONS
Allowable deductions are items or
amounts, which the law allows to be
deducted from gross income in order to
arrive at the taxable income.

1. From Compensation Income

a.) Basic personal and/or additional
exemptions; and
b.) Premium payments on health
and/or hospitalization insurance
2. From Business Income
a.) Basic personal and/or additional
exemptions;
b.) Premium payments on health
and/or hospitalization insurance;
c.) Itemized deductions under the Tax
code; and
d.) Optional standard deduction.
Individual taxpayer may opt for the
optional standard deduction not to
exceed 40% of his gross sales or gross
receipts.
 If the individual is on accrual basis of
accounting for his income and deductions,
the OSD shall be based on the gross sales
during the taxable year.
 If the individual employs the cash basis for
his income and deductions, the OSD shall
be based on his gross receipts during the
taxable year
 Cost of sales in case of individual seller of
goods, or services, cost of sales are not
allowed to be deducted for the purposes of
determining OSD.
Premium Payments on health and/or
Hospitalization Insurance
1. The insurance shall be taken by the
individual taxpayer himself for his family.
2. The amount being claimed shall not
exceed 2,400 a year or 200 a month per
family;
3. The family has gross income of 250,000
or less for the taxable year.
TAX treatment of Income Sources of Individual
Taxpayers:
Citizen
Sources Of Income subject to TAX Resident Non-Resident
WITHIN OUTSIDE WITHIN OUTSIDE
1. COMPENSATION INCOME
2. BUSINESS / PROFESSIONALS
3. PASSIVE INCOME
A. ROYALTIES
B. PRIZES AND OTHER TAXABLE WINNINGS
C. INTEREST INCOME FROM PHILIPPINE
CURRENCY BANK DEPOSITS
D. INTEREST INCOME FROM LONG-TERM
DEPOSITS INSTRUMENTS PRE-TERMINATED
BEFORE THE 5TH (5) YEAR
E. INTEREST INCOME FROM FOREIGN CURRENCY
DEPOSITS
F. CASH AND OTHER PROPERTY DIVIDENDS
4. OTHER SOURCES OF INCOME
TAX treatment of Income Sources of Individual
Taxpayers continuation...
ALIEN
Non-Resident
Sources Of Income subject to TAX Resident
ETB NETB
WITHIN OUTSIDE WITHIN OUTSIDE WITHIN OUTSIDE
1. COMPENSATION INCOME YES NO YES NO YES NO
2. BUSINESS / PROFESSIONALS YES NO YES NO - NO
3. PASSIVE INCOME
A. ROYALTIES YES NO YES NO YES NO
B. PRIZES AND OTHER TAXABLE WINNINGS YES NO YES NO YES NO
C. INTEREST INCOME FROM PHILIPPINE
CURRENCY BANK DEPOSITS YES NO YES NO YES NO
D. INTEREST INCOME FROM LONG-TERM
DEPOSITS INSTRUMENTS PRE-TERMINATED
BEFORE THE 5TH (5) YEAR YES NO YES NO YES NO
E. INTEREST INCOME FROM FOREIGN CURRENCY
DEPOSITS YES NO NO NO NO NO
F. CASH AND OTHER PROPERTY DIVIDENDS YES NO YES NO YES NO
4. OTHER SOURCES OF INCOME YES NO YES NO YES NO
PERSONAL EXEMPTIONS
Allowed deductions from the
compensation, business or practice of
profession.
Kinds of Personal Exemptions
1. Basic Personal Exemptions
2. Additional exemption. This exemption is
further allowed to the taxpayer by
reason of his qualified dependent
children.
Rules on Change of Status
1. If the employee should have additional
dependents.
2. If the taxpayer dies during the taxable
year.
3. If the spouse dies or any dependents
dies, or marries, becomes 21 years old,
gets gainfully employed.
Basic Personal and additional Exemptions
(before July 06, 2008)
Before R.A. 9504, for purposes of
determining the tax due in accordance with
the graduated tax schedule for individuals
in section 24 (A), allowed the basic
exemption as follows:
Single, married, legally separated – 20,000
Head of the family - 25,000
Married - 32,000
Now, the status is either married or
single only. The Head of the family
was removed.
50,000 – is the basic personal
exemption
25,000 – is the additional personal
exemption per qualified dependent
not exceeding four.
Individual Taxpayers Allowed Personal
Exemptions
1. Citizens
2. Resident Alien
3. Non-Resident Alien under certain
conditions.
4. estates and trusts, which are, for
purposes for personal exemptions,
treated as a single individual.
Thank you for listening..
May you have learned something from
our report. 

-Mary Jane
-May