Classification of

Individual Taxpayer
Individual Taxation

Marilou Pacho-Garcia, CPA, MBA

 General Classification Rule
for Individuals
1. Intention
The intention of the taxpayer
regarding the nature of his stay
within or outside the Philippines
shall determine his appropriate
residency classification.
The taxpayer shall submit to the CIR
of the BIR documentary proofs such
as visas, work contracts and other
documents indicating such
intentions.
 General Classification Rule
for Individuals
2. Length of Stay
In default of such documentary proof, the length of stay
of the taxpayer is considered:
a. Citizen staying abroad for a period of at least 183 days
are considered as non-resident.
b. Aliens who stayed in the Philippines for more than 1
year as of the end of the taxable year are considered
resident.
c. Aliens who are staying in the Philippines for not more
than 1 year but more than 180 days are deemed non-
resident aliens engaged in business.
d. Aliens who stayed in the Philippines for not more than
180 days are considered non-resident aliens not
engaged in trade or business
 Classifications of Individual
Taxpayers (based on Residency)

1. Resident Citizen (RC)

2. Non-Resident Citizen (NRC)
3. Resident Alien (RA)
4. Non-Resident Alien (NRA)
a. Engaged in Trade
/Business (NRA-ETB)
b. Not Engaged in Trade
/Business (NRA-NETB)

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 1. Citizen – under the Constitution:
a. Citizens of the Philippines at the
time of the adoption of the
Constitution on February 2, 1987
Classification
b. Born with father and mother as
s of Filipino citizens
Individual c. Born before January 17, 1973 of
Taxpayers Filipino mother who elects
Philippine citizenship upon
Based on reaching the age of majority
Residency d. Acquired Philippine citizenship
after birth in accordance with
Philippine laws. (Naturalized)
 2. Resident Citizen (RC) – Filipino citizen residing in
the Philippines
3. Non-Resident Citizen (NRC) – is a citizen who:
a. Establishes the fact of his physical
Classification presence abroad with the definite
intention to resides therein;
s of b. Leaves the Philippines during the taxable
Individual year to reside abroad:
As immigrant
Taxpayers For employment on a permanent basis
Based on For work (derives income) whose
Residency employment requires him to be
physically abroad most of the time
during the taxable year.
c. Those who shall have stayed outside the
country for 183 or more by the end of the
year.
 4. Resident Alien (RA)
Individual whose residence is
WITHIN the Philippines but is NOT
citizen thereof.
Classification Actually present in the Philippines
s of and who is not mere transient or
Individual sojourners.
Taxpayers Live in the Philippines with no
As to definite intention as to his stay.
Comes to the Philippines for a
Residency definite purpose the nature of
which requires an extended stay for
the accomplishment of such
purpose.
 5. Non-Resident Alien (NRA)
Individual whose residence is NOT
in the Philippines and who are NOT
Classification citizen thereof.
s of Comes to the Philippines for
Individual definite purpose, which in its nature
Taxpayers maybe promptly accomplished.
Are mere transients or non-
As to residents.
Residency Sub-classification
Engage in trade or business
Not-engage in trade or business
 Non-Resident Alien (sub-classification)
a. Engage in trade or business (NRA-ETB)
Stayed for an aggregate period of more
Classification than 180 days during the taxable year
Have business income in the Philippines
s of
Individual b. Not-engage in trade or business (NRA-NETB)
Taxpayers Comes to the Philippines for a definite
purpose which in its purpose can be
Based on promptly accomplished
Residency Stayed for an aggregate period for 180
days or less (NOT more than) during the
taxable year
Not deriving business income
Classifications of Individual Taxpayers
As to How income is Earned

1. Pure Compensation Income Earner

Refers to any individual who is a recipient of
wages/salaries and his/her sole source on
income is thru employer-employee
relationship, thus are referred to as
“employee”. Employees are group accordingly:
As to functions (managerial,
supervisory, rank & file)
As to taxability (MWE, regular
employees)

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 Managerial – those who are given powers
or prerogatives to lay down and execute
managerial policies and/or to hire,
Types of transfer, suspend, lay-off, recall, discharge,
Employees as assign or discipline.
to Functions Supervisory – those who effectively
recommend such managerial actions if the
exercise of such authority is not merely
routinary or clerical in nature but requires
the use of independent judgement.
Rank and File – those who hold neither
managerial nor supervisory function.
 Minimum Wage Earners – refer to
Types of workers in the private sector who is
Employees paid with a statutory minimum wage
(SWS) rates, or to an employee in the
as to public sector with compensation
Taxability income of not more than the SWS
rates.
Supervisory – are those who is
subject to the regular progressive
income tax.
 Classifications of Individual
Taxpayers
As to How income is Earned
2. Self Employed and/or Professionals (SEP)

Self-employed is defined under RA10963 (Train

Law) as a sole proprietor or an independent
contractor who reports income earned from
self-employment.
Professional is a person formally certified by a
professional body belonging to a specific
profession by virtue of having completed a
required course of studies and/or practice,
whose competence can usually be measured
against an establish set of standards.
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 Classifications of Individual
Taxpayers
As to How income is Earned
2. Mixed Income Earners

Refers to a compensation-earner
who at the same time is engaged
in business or practice of
profession.

This Photo by Unknown Author is licensed under CC BY-SA-NC

 Other Classification
Overseas Contract/Filipino Worker (OCW) or (OFW)
Defines as Filipino citizen employed in foreign countries
who are physically present in a foreign country as a
consequence of their employment thereat.
OCW or OFW must be duly registered to the POEA with a
valid OEC and MARINA (for seafarers or seamen).
OCW or OFW are considered as NRC for tax purposes.
Income by an OCW or OFW are earned outside the
country and therefore is exempted from Philippine
income tax.
SAMPLE: Determine the Classifications of Taxpayers
Luiz Facundo, a Mexican actor, was contracted by Philippine television
company to do project in the Philippines. He arrived in the country on
February 29, 2019 and returned to Mexico three weeks later upon
completion of the project. What is his classification?

Answer: Luiz Facundo shall be classified as NRA-NETB in 2019. His stay is

for a definite purpose which in its nature will be accomplished immediately.
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?

Answer: 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, though it may be his
intentions at all times to return to his domicile (place of habitual or
permanent residence) abroad when the purpose for which he came has been
accomplish.
SAMPLE: Determine the Classifications of Taxpayers
A British cultural performer was engaged in the Philippines for two weeks
after which he returned to his country. Is he a resident alien?

Answer: No. One who comes to the Philippines for a definite purpose which
in its nature may be prompt accomplish is a transient.
An alien owns shares of stock in the Philippines. Is he considered as
engaged in business or trade in the Philippines?

Answer: No, mere ownership of shares of stock in the Philippines is not

enough to constitute as engaging in trade or business in the Philippines.
A resident alien left the Philippines and abandoned his residency thereof
without any intention of returning. May he still be considered a resident
alien?

Answer: No, because he has no intention at all to return to the Philippines.

SAMPLE: Determine the Classifications of Taxpayers
A non-resident citizen went to Manila under the Balikbayan Program. Does
his return to Manila interrupt his residence abroad?

Answer: No, his trip to Manila did not interrupt his residence abroad. The
phase “uninterrupted period” should not be interpreted literally. His trip to
Manila did not affect the continuity of his residence abroad.
Virinder Paul, an Indian national arrived in the country on November 4,
2019. Mr. Paul stayed in the Philippines since then without any working visa
or work permit. What is his status as taxpayer in 2019?

Answer: For the year 2019, Mr. Paul would be considered as NRA-NETB
because he stayed in the Philippines for less than 180 days as of December
31, 2019. If he is still within the Philippines until December 31, 2020, he
will qualify as resident alien for 2020.
EXERCISES#1: Determine the Classifications of Taxpayers
Do not go to the next slide without answering this. Write your answers (RC, NRC, RA, NRA-ETB,
NRA-NETB) in a piece of paper and check how many “correct” answers you got.
PERSON CLASSIFICATION
1 A fat Mexican tourist
2 A hardworking overseas Filipino worker
3 An Expatriate employee
4 A Filipino who is privately employed in the Philippines
5 An unemployed Filipino residing in the Philippines
A Chinese businessman who has his domicile in the
6
Philippines for 6 months
A Japanese who married a beautiful Filipina and has
7
been residing in the Philippines for 2 years
A 2nd year Korean college student studying in the
8
Philippines
A Filipino businessman, who went on business trip
9
once a year
Mr. Hashim, a Turkish and a resident of Turkey, stayed
10 in the Philippines from July 1-15, 2018 to watch the
2018 FIBA Asia World Cup Qualifier held in MOA.
ANSWER TO THE EXERCISE:
PERSON CLASSIFICATION
1 A fat Mexican tourist NRA-NETB
2 A hardworking overseas Filipino worker NRC
3 An Expatriate employee NRC
4 A Filipino who is privately employed in the Philippines RC
5 An unemployed Filipino residing in the Philippines RC
A Chinese businessman who has his domicile in the
6 NRA-ETB
Philippines for 6 months
A Japanese who married a beautiful Filipina and has
7 RA
been residing in the Philippines for 2 years
A 2nd year Korean college student studying in the
8 RA
Philippines
A Filipino businessman, who went on business trip
9 RC
once a year
Mr. Hashim, a Turkish and a resident of Turkey, stayed
10 in the Philippines from July 1-15, 2018 to watch the NRA-NETB
2018 FIBA Asia World Cup Qualifier held in MOA.
 Exercise#2: Determine the Classifications of Taxpayers
1. Mario Aresmendi, a Mexican actor, was contracted by a Philippine
television company to do a project in the Philippines. He arrived
in the country on February 29, 2018 and returned to Mexico three
weeks later upon completion of the project.
2. Mamoud Jibril, a Libyan national, arrived in the country on
November 4, 2018. Mr. Jibril stayed in the Philippines since then
without any working visa or work permit.
3. Without any definite intention as to the nature of his stay, Juan
Masipag, a Filipino citizen, left the Philippines and stayed aboard
from March 15, 2017 to April 1, 2018 before returning to the
Philippines.
 Some Definition of Terms
(Rev. Reg. 8-2018)

1. Compensation income. In general, means all remunerations for

services performed by an employee for his employer under an employer-
employee relationship, unless specifically excluded by the Code.
2. Compensation income earners. Individuals whose source of
income is purely derived from an employer-employee relationship.
3. Employee. An individual performing services under employer-
employee relationship.
4. Employer. Any person for whom an individual performs or performed
any services, of whatever nature, under an employer-employee
relationship.
 Some Definition of Terms
(Rev. Reg. 8-2018)
5. Fringe benefits. Means any goods, services 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 as defined herein.
6. Gross receipts. Refers 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.
7. Gross sales. Refers to the total sales transactions net of VAT, if applicable reported
during the period, without any other deductions.
8. Taxable income. Refers to the pertinent items of gross income specified in the Code,
less deductions, if any, authorized for such type income by Code or other special laws.
9. VAT threshold. Refers to the ceiling fixed to determine VAT registrable taxpayer. The
VAT threshold is set at P3,000,000.
 Applicable Taxes and Tax Rates
Taxpayer Tax base Source of Taxable Income

RC Net Income Within & Without

NRC, RA, NRA-ETB Net Income Within only

NRA-NETB Gross Income Within only

TYPES OF INCOME
1. Ordinary or regular
2. Passive income derived from Philippine source
3. Capital gains subject to capital gains tax
 Taxable
Income of Gross Compensation Income Pxxx
Pure Less: Non-taxable compensation xxx
Compensatio Taxable Compensation Income Pxxx
n Income
Earner

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 Taxable
Gross Income from Business/profession Pxxx
Income of
Add: Non-operating Income xxx
Pure Business Total Gross Income Pxxx
or Less: Allowable deductions xxx
Professional Taxable Net Income Pxxx
Income Earner

This Photo by Unknown Author is licensed under CC BY

 Sample: Determine Income Subject to Philippine Income Tax
An individual taxpayer provided the following information for 2018:
Gross business income, Philippines P5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Determine the taxable income assuming taxpayer is:

a) RC c) RA e) NRA-NETB
b) NRC d) NRA-ETB
Answers: Determine Income Subject to Philippine Income Tax
Philippines Canada Singapore Total
Gross business income 5,000,000 2,000,000 1,000,000 8,000,000
Less Business Income 3,000,000 1,000,000 500,000 4,500,000
Net business income 2,000,000 1,000,000 500,000 3,500,000

Taxable Source of
ANSWERS Income Tax Base Taxable Income
a RC 3,500,000 net income w/in & w/out
b NRC 2,000,000 net income w/in
c RA 2,000,000 net income w/in
d NRA-ETB 2,000,000 net income w/in
e NRA-NETB 5,000,000 gross income w/in
Sample: Determine Income Subject to Philippine Income Tax
The income and expenses of a Filipino citizen for 2018 were provided as follows:
January to June Philippines Canada
Gross income P5,000,000 P2,000,000
Allowable deductions 2,000,000 1,000,000

July to December
Gross income P2,000,000 P3,000,000
Allowable deductions 1,000,000 1,200,000

Assume the taxpayer is a resident who left the country in July of the current year
to reside permanently in Canada, how much is his taxable income?
 Answer: Determine Income Subject to Philippine Income Tax

Gross income, Philippines (Jan - Jun) 7,000,000

Gross income, Canada (Jul - Dec) 2,000,000
Allowable deductions, Philippines (Jan - Jun) - 3,000,000
Allowable deductions, Canada (Jul - Dec) - 1,000,000
Taxable income 5,000,000

 From January to June, the taxpayer is considered as Resident Citizen,

therefore all income generated from within and without are taxable.
 From July to December, the taxpayer is considered as Non-Resident Citizen,
therefore all income generated from within only are taxable.