TAXATION

Individual Tax Payers

 INTENDED LEARNING OUTCOMES
• ILO 1 Define and discuss the different classifications of
individual taxpayers.

• ILO 2 Explain TRAIN LAW 2018-2022.

• ILO 3 Execute skills in solving problems regarding

individual taxation.
 INDIVIDUAL TAXPAYERS
• are natural persons with income derived from within
the territorial jurisdiction of taxing authority.
 CITIZENS OF THE PHILIPPINES
1. Born with father and/or mother as Filipino citizens
2. Born before Jan. 17,1973 of Filipino mother who
elects Philippine citizenship upon
reaching the age of maturity
3. Acquired Philippine citizenship after birth
(naturalized) in accordance with Philippine Laws
CLASSIFICATION OF INDIVIDUAL TAXPAYERS
1. Resident Citizens(RC)
2. Nonresident Citizens (NRC)
3. Resident Aliens (RA)
4. Nonresident Aliens (NRA)
– Engaged in trade/business (NRA-ETB)
– Non-resident alien not engaged in trade or business (NRA-
NETB
 RESIDENT CITIZEN
• A Filipino citizen who permanently resides in the
Philippines
 NON-RESIDENT CITIZEN
• A citizen of the Philippines who:
– Establishes to the satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
– Leaves the Philippines during the taxable year to reside abroad
– Works and derive income from abroad and his employment requires him
to be physically present abroad most of the time (at least 183 days) during
the taxable year
– Have been previously considered as non-resident citizen and who arrives
in the Philippines at any time during taxable year to reside permanently
 RESIDENT ALIEN
• Individual whose residence is within the Philippines
and who is not a citizen thereof.
 NON-RESIDENT ALIEN
• Individual whose residence is not within the Philippines and
who is not a citizen thereof.
• NON-RESIDENT ALIEN ENGAGE IN TRADE OR BUSINESS
– Alien is carrying on a business in the Philippines
– Has stayed in the Philippines for more than 180 days
• NON-RESIDENT ALIEN NOT ENGAGE IN TRADE OR BUSINESS
– has stayed in the Philippines for 180 days or less
 IMPORTANCE OF CLASSIFICATION
• They differ as to:
● Situs of income
● Manner of computing tax
● Treatment of certain passive incomes
● Allowable deductions
● References in the tax choice
 ILLUSTRATION 1

• Pedro left the Philippines on July 1, 2018 to go

abroad and work there for two years. The following
data were provided for 2018 taxable year (assume
40% of gross income and expenses presented below
were derived from abroad:
 GROSS INCOME BUSINESS EXPENSE
January 1 to June 30 ₱ 600,000 ₱ 280,000
July 1 to December 31 ₱ 400,000 ₱ 120,000
Question 1: His taxable income is
Answer: P488,000

Gross Income, Jan.-June ₱ 600,000

Gross Income, July-December @60% 240,000
Business Expenses, Jan-June (280,000)
Business Expenses, July-December @60% ( 72,000)
Taxable Income ₱ 488,000
Question 2: Assuming he arrived from abroad on July 1, 2018 to permanently
resettle in the Philippines, his taxable income for 2018 is:

Answer: ₱ 472,000

Gross Income, Jan.-June @60% ₱ 360,000

Gross Income, July-December 400,000
Business Expenses, Jan-June @60% (168,000)
Business Expenses, July-December @60% (120,000)
Taxable Income ₱ 472,000
OVERSEAS CONTRACT WORKER (OCW)/OVERSEAS FILIPINO WORKER (OFW)

• Filipino citizens who are physically present in a

foreign country as a consequence of their
employment. Their salaries and wages are paid by an
employer abroad.
 ILLUSTRATION
Case 1:
Allan is a natural born Filipino citizen. His family
migrated to the U.S. fifteen years ago. For personal
reasons, he decided to return and reside permanently
in the Philippines on March 1, 2018.
 ILLUSTRATION
Case 2:
G.I. Joe is an American information technology expert. He was
signed by Noypi Telecom (a local telecommunication company)
from January to March 2018 to improve its internet services.
Due to the anticipated entry of competitors from other
countries, Noypi decided to extend indefinitely the services of
G.I.Joe.
 ILLUSTRATION
Case 3:
Greg Popovich, head coach of San Antonio Spurs in the
NBA is in the Philippines for a month-long NBA
promotional tour. He also expressed his intention to
regularly visit the Philippines.
Case 4:
Mika “The Iceman” Immonen, a Finnish cue artist and
former world billiard champion is a resident of Finland.
He won the world 9-ball championships in 2005 in the
Philippines. He is also the owner of one of the disco
pubs in Malate since then.
 APPLICABLE TAXES AND TAX RATES
– The applicable taxes for individuals depend on
several factors such as but not limited to:
❖ Classification of taxpayer
❖ Source of income
❖ Type of income
 CLASSIFICATION OF TAXPAYER
Resident citizens
- taxable on their income derived from sources within and without
the Philippines while other taxpayers are taxable only on their
income derived from the Philippine sources.

Non-resident aliens not engaged in trade and business (NRA-NETB)

- are taxable based on the gross income while others are taxable
based on their net income.
 SOURCES OF INCOME
• Resident citizens are taxable based on their
worldwide income while others are taxable only on
their income derived from sources within the
Philippines.
 TYPES OF INCOME (APPLICABLE TAX)
Ordinary or regular income (GRADUATED RATE)
– refers to income such as compensation income,
business income, and income from
practice of profession
 TYPES OF INCOME (APPLICABLE TAX)
Passive income (FINAL WITHHOLDING TAX)
– subject to final withholding taxes are certain passive incomes from
sources within the Philippines such as:
– Interest income
– Dividend Income
– Royalties
– Prizes
– Other winnings
 TYPES OF INCOME (APPLICABLE TAX)
Capital gains subject to gains tax (CAPITAL GAIN TAX)
- Capital gains from sale of shares of stocks of a
domestic corporation
- Capital gains from sale of real property in the
Philippines
 SUMMARY OF INCOME AND APPLICABLE INCOME TAX
TYPE OF INCOME APPLICABLE TAX
Regular Income Graduated rate Table 2-1
Passive Income Final withholding tax Table 2-2
Capital gains subject to CGT Capital gains tax Table 2-3
 ILLUSTRATION
An individual taxpayer provided the following information for
2018:
Gross business income, Philippines ₱5,000,000
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
 CASE A: The taxpayer is a resident citizen:
Gross business income, Philippines ₱5,000,000
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)
Taxable income ₱3,500,000
 Case B: The taxpayer is a non-resident citizen
Gross income, Philippines ₱5,000,000
Business expenses Philippines (3,000,000)
Taxable income ₱2,000,000
 Case C: The taxpayer is an alien
Gross income, Philippines ₱5,000,000
Business expenses Philippines (3,000,000)
Taxable income ₱2,000,000
 Case D: The taxpayer is a non-resident alien engaged in trade or business

Gross income, Philippines ₱5,000,000

Business expenses Philippines (3,000,000)
Taxable income ₱2,000,000
Case E: The taxpayer is a non-resident alien not engaged in trade or business.

Answer: ₱5,000,000

- NRA-NETB are taxable on their gross income

Case F: The income and expenses of a Filipino citizen for 2018
were provided as follows:
JANUARY TO JUNE PHILIPPINES CANADA
Gross Income ₱ 5,000,000 ₱ 2,000,000
Allowable Deductions 2,000,000 1,000,000
JULY TO DECEMBER
Gross Income ₱ 2,000,000 ₱ 3,000,000
Allowable Deductions 1,000,000 1,200,000
Case F: The income and expenses of a Filipino citizen for 2018
were provided as follows:
Assume that 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?

Solution:
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross income, Canada (Jan-June) 2,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (Jan-June) (1,000,000)
Taxable income ₱5,000,000
Case G: Assume the same data in Case F except that the taxpayer is a non-resident
who returned and resided permanently in the country in July of the current year. His
taxable income before personal exemptions is
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross income, Canada (Jan-June) 2,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (Jan-June) (1,200,000)
Taxable income ₱5,800,000
TABLE 2-1 GRADUATED TAX RATE
 ILLUSTRATION
Purely Compensation Income Earner
1. Determine the income tax due assuming the taxable
compensation income for 2018 is
₱240,000.

Answer: ₱0, tax exempt

 ILLUSTRATION
2. Determine the income tax due assuming the taxable compensation
income for 2018 is
₱300,000.

Solution: tax on first ₱250,000 ₱0

In excess of ₱250,000 10,000
50,000 x 20%
Tax due ₱10,000
 ILLUSTRATION
3. Determine the income tax due assuming the net taxable
compensation income for 2018 is ₱1,850,000.

Solution: tax on first ₱800,000 ₱130,000

In excess of ₱800,000 315,000
1,050,000 x 30%
Tax due ₱445,000
 SELF EMPLOYED AND/OR PROFESSIONALS (SEP)
Self Employed – is defined 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
Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for
Acceleration and Inclusion Law (TRAIN LAW) , regular income of Self-
Employed and Professionals (SEP) amounting to more than P250,000
in a taxable year but with a gross sales/receipts and other non-
operating income not exceeding the revised vat threshold of
P3,000,000 shall have the option to avail of 8% tax on gross
sales/receipts and other operating income in excess of
P250,000 IN LIEU of the graduated income tax rate and business tax.
 RULES OF SELF EMPLOYED AND/OR PROFESSIONAL (SEP)

Purely SEP with gross sales/receipts

– ₱3M and Below

• Regular Income Tax OR 8% tax on Gross Sales/ Receipts
and other operating income in excess of 250,000 in LIEU
of the graduated tax rate and SECTION 116
 RULES OF SELF EMPLOYED AND/OR PROFESSIONAL (SEP)
Above ₱3M-regular income tax
Mixed Income Earner
➔ Compensation - regular income tax
➔ Business Professional Income
₱3M and below
Regular Income Tax +Regular income tax OR 8% tax on Gross sales and other
operating income in LIEU of the graduated tax rate and Sec. 116

₱3M and above-regular income tax

 Tax Distinguished From Other Terms Or Imposts
Case A - PURELY SEP whose gross sales/receipts and other non-operating
income does not exceed the VAT threshold of ₱3,000,000.

1. Determine the income tax due assuming the gross sales/receipts and
other non-operating
income for 2018 is ₱240,000.

Answer: ₱0, exempt from income tax

 Double Taxation
2. Using the data below, calculate the income tax due for 2018:

Gross sales ₱2,800,000

Cost of sales (1,500,000)
Operating expenses ( 750,000 )
Net income ₱550,000

First ₱400,000 income 30,000

Excess of 400,000 37,500
150,000 x 25% ₱67,500
 Avoiding/Minimizing the Burden of Tax
PURELY SEP using 8% tax rate but whose gross sales/receipts and
other non-operating income
exceeds the VAT threshold of ₱3,000,000 during the year.

Pedro signified his intention to be taxed at 8% income tax rate on

gross sales in his 1st quarter income tax return. However, his gross
sales during the year exceeded the VAT threshold of ₱3M
as follows:
 Question: How much is Pedro’s annual income tax payable?

Sales ₱6,500,000
Cost of sales (3,000,000)
Gross income 3,500,000
Operating expenses (1,440,000)
Net taxable income ₱2,060,000

Income tax due using graduated rate ₱509,200

Less: quarterly payments (Q1-Q3) based
on 8% tax rate (₱3M-₱250,000) x 8% (220,000)
Annual income tax payable ₱289,200
Mixed Earner whose gross sales/ receipts and other non-operating income does
not exceed the VAT threshold of ₱3,000,000

Assume the following data for 2018:

Compensation income ₱900,000
Gross sales 2,800,000
Cost of sales (1,500,000)
operating expenses (750,000)
Total taxable net income ₱1,450,000
Determine the correct income tax due:

Tax on first ₱800,000 ₱130,000

Excess of 800,000 (650,000 x 30%)

Tax due ₱325,000

Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax due.
On his compensation income:
First ₱800,000 ₱130,000
In excess of 400,000 30,000 ₱160,000
₱100,000 x 30,000

On his business income 224,000

₱2.8M x 8%
Total tax due ₱384,000
Mixed income earner whose gross sales/receipts and other non-operating income exceeds the
VAT threshold of ₱3,000,000.

Determine the income tax due assuming the following data for 2018:
Compensation income ₱900,000
Gross sales 5,000,000
Cost of sales (2,250,000)
operating expenses (1,250,000)
Total taxable net income ₱2,400,000

Tax on first ₱2,000,000 income ₱490,000

In excess of 2M income (400,000 x 32%) 128,000
Tax due ₱618,000
Table 2-2
Table 2-2
 FINAL WITHHOLDING TAX
- a kind of tax, which is prescribed on “certain income”
derived from the Philippine sources.
 Passive Income
Passive income is an income earned from allowing others to use one’s right, or game of
chance or investment, which the taxpayers merely waits for the income to come in. The
law subjects passive income to final tax. Once subjected to a final tax, it is no longer
included in the taxable income subject to normal (tabular) tax. Deductions and
exemptions do not apply to items subject to final tax.

Passive income is classified as follows:

a. Interest, prizes, royalties, etc.,
b. Cash or property dividends,
The applicable rates for passive income are shown in the Table above.
Gross business income, Philippines ₱2,000,000

Gross business income, Canada 3,000,000

Business expenses, Philippines 1,400,000

Business expenses, Canada 2,050,000

Interest income, BDO Philippines 100,000

Interest income, BDO Canada 50,000

Dividend income from a domestic corporation 125,000

Dividend income-resident foreign corporation 75,000

Dividend income-non resident foreign corporation 102,000

Interest income received from a depository bank 50,000

under FCDS,
Philippines
Philippine lotto winnings 10,000

Philippine Charity Sweepstakes winnings 500,000

Singapore Sweepstakes winnings 200,000

Other winnings, Philippines 50,000

Raffle draw winnings-Robinson’s Manila 8,000

Raffle draw winnings-SM Manila 20,000

Raffle draw-SM Shanghai China 30,000

 Determine the following:
1. Taxable income
Gross business income, Philippines ₱2,000,000

Gross business income, Canada 3,000,000

Business expenses, Philippines 1,400,000

Business expenses, Canada 2,050,000

Interest income, BDO Canada 50,000

Dividend income-resident foreign corporation 75,000

Dividend income-non resident foreign corporation 102,000

Singapore Sweepstakes winnings 200,000

Raffle draw winnings-Robinson’s Manila 8,000
Raffle draw-SM Shanghai China 30,000
2,015,000
 DEPOSIT SUBSTITUTES
• an alternative form of obtaining funds from the
public other than deposits.
 GAIN ON SALE OF ASSET
Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind
2. Property used in trade or business subject to depreciation
3. Real property held by the taxpayer primarily for sale to
customers in the ordinary course of business
4. Real property used in trade of the taxpayer
 CAPITAL GAINS TAX
CAPITAL GAINS may be:
Subject to CAPITAL GAINS TAX (CGT) pertain to sale of:
a. Shares of stock of a domestic corporation sold directly to a buyer
Prior to 2018 – 5% to 100,000 ; 10% to excess
2018 – 15% of capital gain
b. Sale of real properties located in the Philippines
CGT = 6% of the higher of GSP (gross selling price) and FMV (fair market
value)
OTHER PERCENTAGE TAX is not an income tax but a business tax. The applicable tax for this is
known as “stock transaction tax.”

Prior to 2018 – 1⁄2 of 1% of GSP

2018 – 6/10 of 1% of GSP

Subject to Basic Tax – examples:

a. Sale of Share of foreign corporations
b. Sale of real properties located abroad
c. Sale of other personal assets other than share of stock of domestic corporations
 PRINCIPAL RESIDENCE
the family home of the individual taxpayer which refers
to his dwelling house including his family.
 REQUISITES OF TAX EXEMPTION
1. The proceeds are fully utilized in acquiring or constructing a new
principal residence within 18 calendar months from the date of disposition.
2. The historical cost or adjusted basis of the real property sold or disposed
shall be carried over to the new principal residence built or acquired.
3. The BIR shall have been duly notified by the taxpayer within 30 days from
the date of sale or disposition through a prescribed return of his intention
to avail of the tax exemption.
4. The tax exemption can only be availed of once every 10 years.
FORMAT IN COMPUTING TAXABLE INCOME
a. Pure Compensation Income Earner
b. Pure Business Income Earner
c. Mixed Income Earner
 Benefits for Senior Citizen and PWDs:
• 20% discount and exemption from VAT on their purchase of
specified goods and services
• P500 monthly social pension, for indigent senior citizens
• Death benefit assistance
• 5% discount on utilities
• Income tax exemption for minimum wage earners of for SC/PWDs
whose annual taxable income is not more than 250,000
 MINIMUM WAGE EARNER
• a worker in the private sector paid the statutory
minimum wage. The rate is fixed by the Regional
Tripartite Wage and Productivity Board as defined by
the Bureau of Labor and Employment Statistics.
MWE are exempt from income tax on:
1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay
 FILING OF INCOME TAX RETURNS
BASIC TAX
➔ For Purely Compensation Income Earners
On or before April 15 of the succeeding year
➔ For Business Income Earners
The individual taxpayer is required to file a quarterly tax return ( May 15, Aug
15, Nov 15, and April 15)
FINAL WITHHOLDING TAX ON PASSIVE INCOME
Prior to 2018 - January to November – 10th day of the month
December – January 15
2018 – not later than the last day of the month

CAPITAL GAINS TAX

a. Share of Stock
Ordinary Return – 30 days after each transaction
Final Consolidated Return – on or before April 15 of the following year
b. Real Property – 30 days following each sale or other disposition
 MANNER OF FILING
a. Manual Filing
b. Electronic Filing and Payment System (EFPS)
c. eBIR Forms
1st installment: at the time of filing the annual ITR
2nd installment: on or before October 15 following the
close of the calendar year
 PLACE OF FILING INCOME TAX RETURN
1. Authorized Agent Banks
2. Revenue District Officer
3. Collection Agent
4. Duly Authorized City or Municipal Treasurer
 PERSONS REQUIRED TO FILE INCOME TAX RETURN
1. Individuals engaged in business and/or practice of profession
2. Individuals deriving compensation from two or more employers concurrently at any time
during the taxable year
3. Employees deriving compensation income, the income tax of which has not been
withheld correctly
4. Individuals deriving other non-business, non-professional-related income in addition to
compensation income not otherwise subject to final tax
5. Individuals receiving purely compensation income from a single employer
6. Non-resident alien engaged in trade or business in the Philippines deriving purely
compensation income
 PERSONS NOT REQUIRED TO FILE INCOME TAX RETURN
1. An individual earning purely compensation income whose taxable income
does not exceed 250,000.
2. An individual whose income tax has been correctly withheld by his employer
3. An individual whose sole income has been subjected to final withholding tax
4. Minimum wage earners, the Certificate of Withholding filed by the
respective employers,
duly stamped “Received” by the Bureau of Internal Revenue
 SUBSTITUTED FILING OF INCOME TAX RETURNS (ITR)
Under RA 9504 and RR 10-2008, individual taxpayers may no longer file
income tax return provided he has (all the requirements must be satisfied):
1. Receiving purely compensation income, regardless of amount
2. The amount of income tax withheld by the employer is correct (Tax due =
Tax withheld)
3. Only one employer during taxable year
4. If married, the employee’s spouse also complies with all the three
aforementioned conditions, or otherwise receives no income.