Lesson 2 Taxation of

Individuals
 Objectives
• Identify the individual income tax payers
• Define the individual taxpayers and the related terms used
• Illustrate the different classification of individual taxpayers
• Recognize the categories of income and state the tax rates to be used by each type of
individual taxpayer
• List the sources of passive income and state the final tax rates to be used by each
type of individual taxpayer
• Discuss the treatment of passive income in the computation of taxable income from
compensation or business/professional income
• Define the allowable deductions from gross income
• Identify the kinds of personal exemptions
• Discuss the guidelines on change of status
• Define and compute taxable income and tax due for each type of individual taxpayer
depending on income category.
• Be familiar with individual taxpayers exempt from income tax.
 Tax System
• Progressive Rates of income taxes on citizens and
resident aliens.
• Schedular system – income tax treatment varies
depending on the kind of taxable income of the
taxpayer.
• 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.
Classification of Individual Taxpayers
DEFINITION OF TERMS
1.Resident citizen
2.Citizen
3.Non-resident citizen
4.Resident Alien
5.Non-resident alien
6.Non-resident alien engaged in trade or business (NRAETB)
7.Non-resident alien not doing business in the Philippines (NRANETB)
8.OCWs or OFWs
9.Foreign Currency Deposit System (FCDS)
10.Foreign currency deposit unit
11.Offshore banking system
 CITIZENS
• Those who are citizens of the Phil. at the time of
the adoption of the Feb. 2, 1987 Constitution;
• Those whose fathers or mothers are citizens of the
Philippines;
• Those 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.
 TWO TYPES OF FILIPINO CITIZENS
RESIDENT CITIZEN NON-RESIDENT CITIZEN
• Established to the Commissioner that his
• Resident citizen – is a presence abroad will be definite and he will
Filipino citizen who reside therein.
permanently resides in • Filipino citizen who leaves the Phil. During
the taxable year to reside abroad, either as
the Philippines an immigrant or for employment on a
permanent basis
• Filipino 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. Most of the time means at least 183
days during the taxable year
 TWO TYPES OF ALIENS(FOREIGNERS)
RESIDENT ALIEN
NON-RESIDENT ALIEN
• Resident alien – means an individual
whose residence is within the Phil.
and who is not a citizen thereof. He is • Non-resident alien-
one who is actually present in the
Philippines and who is not a mere means an individual
transient or sojourner. But resident whose residence is not
does not mean mere physical
presence. An alien is considered a within the Philippines
resident or a non-resident depending and who is not a citizen
on his intention with regard to the
length and nature of stay. thereof.
 TWO TYPES OF Non- Resident ALIEN
NRAETB
NRANETB
• Non-resident alien engaged in trade or
business (NRAETB) – means that the • NRA who stayed for 180
alien is carrying on a business in the
Philippines. It connotes more than a
days or less is
single act or isolated transactions. It considered a Non-
involves some continuity of action. resident alien not doing
• A NRA who has stayed in the Philippines business in the
for more than 180 days during any Philippines (NRANETB)
calendar year shall be deemed doing
business in the Philippines.
OCWs or OFWs
This refer to Filipino citizens employed in foreign
countries who are physically present in a foreign
country as a consequence of their employment thereat.

To be considered as an OCW or OFW, they must be

duly registered as such with the Philippine Overseas
Employment Administration (POEA), with a valid
Overseas Employment Certificate (OEC)
Foreign Currency Deposit System
(FCDS)
This shall refer to the conduct of banking transactions
whereby any person, whether natural or juridical, may
deposit foreign currencies forming part of the Philippine
International reserves, in accordance with the provisions
of R.A. 6426 entitled “ An Act Instituting a Foreign
Currency Deposit System in the Philippines, and For
Other Purposes.”
Foreign Currency Deposit Unit
(FCDU)
This shall refer to that unit of a local bank or a
local branch of a foreign bank authorized by
the Bangko Sentral ng Pilipinas (BSP) to
engage in a foreign currency-denominated
transactions, pursuant to the provisions of RA
6426, as amended.
Offshore Banking System And Offshore Banking
Unit
OBS - shall refer to the conduct of banking transactions in
foreign currencies involving the receipt of funds principally
from external and internal sources and the utilization of such
fund pursuant to the Presidential Decree 1034 as implemented
by Central Bank (now BSP)) Circular 1389, as amended.
OBU – shall mean a branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by the BSP to
transact offshore banking business in the Philippines with the
provisions of Presidential Decree 1034 as implemented by
BSP.
Other terms:
• Deposits
• Deposit substitutes
• Mixed income earner
• Marginal income earner
• Self-employed individual
• Regional or area headquarters
• Regional operating headquarters
 Terms (RA 10165, the Foster Care Act of
2012):
• Agency

• Child

• Child with special needs

• Foster Care

• Foster Child

• Foster Family

• Foster Family Care License

 Rule 5 of the IRR of RA 10165
The following may be placed under Foster Care:
 A child who is abandoned, surrendered, neglected, dependent or
orphaned;
 A child who is a victim of sexual, physical, or any other form of abuse or
exploitation;
 A child with special needs;
 A child whose family members are temporarily or permanently unable or
unwilling to provide the child with adequate care;
 A child awaiting adoptive placement and who would have to be prepared
for family life, including a child who has already been matched for
adoption but continues to receive institutional care;
Rule 5 of the IRR of RA 10165
• A child whose adoption has been disrupted;
• A child who is under socially difficult circumstances such as,
but not limited to, a street child, a child in armed conflict or a
victim of child labor or trafficking;
• A child who committed a minor offense but has been released
on recognizance, or who is in custody supervision, or whose
care has been dismissed; and
• A child who is in need of special protection as assessed by a
Social Worker, and Agency, or the DSWD. Provided, that in the
case of b,c,f,h,I and j, the child must have no family willing and
capable of caring and providing for him/her.
 Rule 6 of the IRR of RA 10165
Qualifications to possess to be eligible as Foster Parent:
• Must be of legal age;
• Must be at least sixteen (16) years older than the Foster Child unless the applicant is
a relative of the Foster Child;
• Must have a genuine interest, capacity and commitment is parenting the Foster Child
and able to provide the Foster Child with a familial atmosphere;
• Must have a healthy and harmonious relationship with each family member living with
him/her;
• Must be of good moral character
• Must be physically mentally capable and emotionally mature
• Must have sufficient resources to be able to provide for the family’s needs
• Must be willing to be trained or receive advice for the purpose of increasing or
improving his or her knowledge, attitudes and skills in caring for a child.
 Illustrations:

1. A British computer expert was hired by a Philippine corporation

to assist in its computer system installation for which he had to
stay in the Philippines for 6 months. Is he a resident alien?
 Illustrations:

2. A British cultural performer was engaged to perform in the

Philippines for two weeks after which he returned to his country.
Is he a resident alien?
 Illustrations:

3. An alien owns shares of stock in the Philippines. Is he

considered as engaged in business or trade in the Philippines?
 Illustrations:
4. An alien temporarily serves as executive manager of an airline
in Manila. Is he considered engaged in trade or business in the
Philippines?
 Illustrations:
5.A resident alien left the Philippines and abandoned his
residency thereof without any intention of returning. May he still
be considered a resident alien?
 Illustrations:
6.A resident alien left the Philippines with a re-entry permit. Is he
still a resident alien?
 Illustrations:
7.A non-resident citizen went to Manila under the Balikbayan
Program. Does his return to Manila interrupt his residence
abroad?
 SOURCES OF INCOME:

Sources of income
Individual Within the Phils. Without the Phils.
1. Resident Citizen ∕ ∕
2. Non-resident Citizen ∕
3. Resident Alien ∕
4. Non-resident Alien ∕
 SOURCES OF INCOME:

Guide to determine whether an income

Type is within or without

Labor Place where the labor performed

Use of capital Place where the capital is employed

Profits from sale or exchange of Place where the sale or transaction

capital assets occurs
CATEGORIES OF INCOME
1.Compensation Income
2.Business Income
3.Passive Income
4.Capital gains from sale of shares of stock, not traded through
the local stock exchange.
5.Capital gains from sale of real property
6.Fringe benefits
 TAX RATE PER CATEGORY

Tax rate per category

TAX RATE PER CATEGORY

Tax rate per

category
TAX RATE PER CATEGORY

Tax rate per category

Tax rate per category
• Passive income – • Capital gains form sale of
subject to final tax (5% shares of stock, not traded
to 25% depending on the through the local stock
exchange
type of passive income)
On the Net Capital Gains:
Not over P100, 000
5%
Amount in excess of
P100, 000 10%
 Tax rate per category
• Capital gains from Fringe Benefits – 32% of Grossed-up
Monetary Value (Jan. 2000)
sale of real property –
6% of Gross selling
Monetary value xx
price or current FMV
Divide by 68%
at the time of sale
Grossed-up monetary value xx
(whichever is higher)
Multiply by 32%
Fringe benefit tax xx
Definition of terms per Rev. Reg. 8-2018
Implementing TRAIN
1. Compensation Income – salaries, wages, emoluments and
honoraria, allowances, commissions, fees including director’s
fees, taxable bonuses and fringe benefits.
2. Compensation income earners – classification for
individuals whose source of income is purely derived from
employer-employee relationship.
3. Fringe benefits – any good, service or other benefit furnished
or granted in cash or in kind other than the basic
compensation, by an employer to an individual employee
(except rank and file employee)
Fringe Benefits
1.Fringe benefits include but not limited to the following:
• Housing;
• Expense account
• Vehicle of any kind
• Household personnel
• Interest on loan less than market rate to the extent of the difference between the
market rate and actual rate granted
• Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations
• Expenses for foreign travel
• Holiday and vacation expenses
• Education assistance to the employee or his dependents
• Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows.
 Definition of terms per Rev. Reg. 8-2018
Implementing TRAIN (continued)
4.Gross receipts – refer to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services, and
deposits and advance payments actually or constructively received during
the taxable period for the services performed or to be performed for another
person, except returnable security deposits for purposes of these regulations.
In the case of VAT taxpayers, this shall exclude the VAT component.
5.Gross sales – refers to the total sales transactions net of VAT, if applicable,
recorded without any deduction. Gross sales subject to 8% income tax rate
option shall be net of sales returns and allowances and sales discount.
6. Minimum wage earners (MWE) – refers to any worker in public or private
sector who is paid with not more than the statutory minimum wage rates. MWE
are exempted from paying income tax from earned income (compensation, HP,
OP, NSDP, HaP)
 Definition of terms per Rev. Reg. 8-2018
Implementing TRAIN (continued)
7. Mixed income earner – individuals who earns both
compensation income form employment and income from
business, practice of profession and/or other sources aside
from employment.
8. Non-resident Alien engaged in trade and business
(NRAETB) – NRA who shall come to the Phil and stay for an
aggregate period of more than one hundred eighty (180) days
during any calendar year.
9. Non-resident Alien not engaged in trade and business
(NRANETB)– NRA who shall come to the Phil. And stay for an
aggregate period of one hundred eighty (180) days or less
during any calendar year.
 Definition of terms per Rev. Reg. 8-2018 Implementing TRAIN
(continued)

9. Rank and file employee – employee holding neither

managerial nor supervisory position.
10. Self-employed – sole proprietor or an independent
contractor.
11. Taxable income – income after allowable deductions or
OSD subject to income tax.
12. VAT Threshold – ceiling fixed by law to determine VAT
registrable taxpayers. Ceiling (P3,000,000.00) used as
guide to identify who is required to be VAT registered.
 Definition of terms per Rev. Reg. 8-2018 Implementing
TRAIN (continued)

13.Mixed income earner – individuals who earns both

compensation income form employment and income
from business, practice of profession and/or other
sources aside from employment.
14.Non-resident Alien engaged in trade and business
(NRAETB) – NRA who shall come to the Phil and stay
for an aggregate period of more than one hundred
eighty (180) days during any calendar year.
 Definition of terms per Rev. Reg. 8-2018
Implementing TRAIN (continued)

Rank and file employee – employee holding

neither managerial nor supervisory position.
Self-employed – sole proprietor or an
independent contractor.
Taxable income – income after allowable
deductions or OSD subject to income tax.