MODULE 3 a.

A non-resident citizen who arrives in the Philippines at

INDIVIDUAL TAXPAYERS any time during the taxable year to reside permanently in
INTRODUCTION the Philippines shall be considered a non-resident citizen
This module introduces the relevant laws governing for the taxable year in which he arrives in the Philippines
individual income taxation. Topics include classification of with respect to income derived from sources abroad until
individual taxpayers under Tax Code of the Philippines, the date of his arrival in the Philippines.
applicable taxes and tax rates, graduated rates under TRAIN
Law 2018-2022, final withholding tax, capital gains, requisites ILLUSTRATION
of tax exemption, format in computing taxable income, Pedro left the Philippines on July 1, 2018, to go
benefits of senior citizens and person with disability, abroad and work there for two years. The following data
minimum wage earner (MWE), filing of income tax returns, were provided for 2018 taxable year (assume 40% of gross
manner and place of filing income tax return, persons income and business expenses presented below were derived
required to file income tax returns, persons not required to from abroad:
file income tax returns and substituted filing of income tax Gross Income Business
returns. Expenses
January 1 to June 30 ₱ 600,000 ₱ 280,000
DEFINITION July 1 to December 400,000 120,000
INDIVIDUAL TAXPAYERS are natural persons with 31
income derived from within the territorial jurisdiction of
taxing authority. They are classified as:
Question 1: His taxable income is
1. Resident Citizens (RC)
2. Nonresident Citizens (NRC)
3. Resident Aliens (RA)
4. Nonresident Aliens (NRA)
a. Engaged in trade/business (NRA-ETB)
b. Non-resident alien not engaged in trade or business
(NRA-NETB)
Question 2: Assuming he arrived from abroad on July 1, 2018,
Importance of classification
to permanently resettle in the Philippines, his taxable income
They differ as to:
for 2018 is:
1. Situs of income
2. Manner of computing tax
3. Treatment of certain passive incomes
4. Allowable deductions
5. References in the tax choice

CITIZENS OF THE PHILIPPINES

1. Born with father and/or mother as Filipino citizens OVERSEAS CONTRACT WORKER (OCW)/OVERSEAS FILIPINO
2. Born before Jan. 17,1973 of Filipino mother who elects WORKER (OFW)
Philippine citizenship upon reaching the age of maturity Revenue Regulation 1-2011 defines OCWs as Filipino
3. Acquired Philippine citizenship after birth (naturalized) in citizens employed in foreign countries commonly referred to
accordance with Philippine Laws as OFWs, who are physically present in a foreign country as a
consequence of their employment. Their salaries and wages
NON-RESIDENT CITIZEN OF THE PHILIPPINES are paid by an employer abroad and are not borne by entities
1. Establishes to the satisfaction of the Commissioner of or persons in the Philippines. Hence, OFWs are classified as
Internal Revenue, the fact of his physical presence non-residents citizens for tax purposes.
abroad with a definite intention to reside therein A seaman who is a citizen of the Philippines and who
2. Leaves the Philippines during the taxable year to reside receives compensation for services rendered abroad as a
abroad: member of the complement of a vessel engaged exclusively in
a. As an immigrant international trade shall be treated as an overseas contract
b. For employment on a permanent basis worker.
c. For work and derives income that requires him to be A Filipino citizen who was previously a nonresident
physically abroad most of the time during the taxable citizen and who arrives and resides permanently in the
year Philippines at any time during the taxable year shall likewise
3. A citizen of the Philippines who shall have stayed outside be treated as a nonresident citizen for the same taxable year
the Philippines for one hundred eighty-three days (183) with respect to his income derived from sources abroad until
or more by the end of the year. the date of his arrival to the Philippines.
  A Filipino citizen taxpayer not classified as nonresident
citizen is considered a RESIDENT CITIZEN for tax Case 5
purposes. Mika “The Iceman” Immonen, a Finnish cue artist
 An ALIEN is a foreign-born person who is not qualified to and former world billiard champion is a resident of Finland.
acquire Philippine citizenship by birth of after birth. He won the world 9-ball championships in 2005 in the
 Section 22(F) of the Tax Code defines RESIDENT ALIENS Philippines. He is also the owner of one of the disco pubs in
as an individual whose residence is within the Philippines Malate since then.
and who is not a citizen thereof.  Answer: NRA-NETB
 The term NONRESIDENT ALIEN under Section 22(G) of He is engaged in actual trade and business in the Philippines
the Tax Code means an individual whose residence is not but is non-resident.
in the Philippines and who is not a citizen thereof.
 Under Section 22(S) of the Tax Code, “trade or business” APPLICABLE TAXES AND TAX RATES
includes performance of the functions of a public service The applicable taxes for individuals depend on
or performance of personal service in the Philippines. several factors such as but not limited to:
 A nonresident alien not engaged in trade or business is 1. Classification of taxpayer
subject to 25% income tax based on gross profit from all 2. Source of income
sources within the Philippines. 3. Type of income

ILLUSTRATION CLASSIFICATION OF TAXPAYER

Determine the correct classification of the taxpayer from It is important to properly classify the individual
the independent cases provided below: taxpayers because resident citizens are taxable on their
income derived from sources within and without the
Case 1 Philippines while other taxpayers are taxable only on their
Allan is a natural born Filipino citizen. His family income derived from the Philippine sources. Moreover,
migrated to the U.S. fifteen years ago. For personal reasons, individual taxpayers classified as non-resident aliens not
he decided to return and reside permanently in the engaged in trade and business (NRA-NETB) are taxable based
Philippines on March 1, 2018. on the gross income while others are taxable based on their
 Answer: From Jan.-Feb. 2018: Allan is classified as NRC net income.
From March 1, 2018 onwards: Allan is classified as
RC SOURCES OF INCOME
It is important to know the source of income for tax
Case 2 purposes (income derived from within and without the
Joe is an American information technology expert. Philippines) because as resident citizens are taxable based on
He was signed by Noypi Telecom (a local telecommunication their worldwide income while others are taxable only on their
company) from January to March 2018 to improve its internet income derived from sources within the Philippines.
services. Due to the anticipated entry of competitors from Taxpayer Tax Base Source of
other countries, Noypi decided to extend indefinitely the taxable Income
services of Joe. RC Net Income Within and
 Answer: He is a resident alien. without
An alien who comes to the Philippines for the purpose that NRC, RA, NRA-ETB Net Income Within
requires extended stay for its accomplishment, so he makes
NRA-NETB Gross Income Within
his home temporarily in the Philippines, is a resident,
regardless of his intention to return to his residence abroad.
TYPES OF INCOME (APPLICABLE TAX)
Case 3 1. Ordinary or regular income (GRADUATED RATE) - refers
Greg Popovich, head coach of San Antonio Spurs in to income such as compensation income, business
the NBA is in the Philippines for a month-long NBA income, and income from practice of profession
promotional tour. He also expressed his intention to regularly
visit the Philippines. 2. Passive income (FINAL WITHHOLDING TAX) - subject to
 Answer: Greg Popovich is classified as NRA-NETB. final withholding taxes are certain passive incomes from
sources within the Philippines such as:
1. Interest income
Case 4
2. Dividend Income
Using the same data in Case 3, assume that Greg
3. Royalties
Popovich invested in shares of stock of various domestic
4. Prizes
corporations during his recent stay in the Philippines.
5. Other winnings
 Answer: Greg Popovich is NRA-NETB.
Passive income such as dividend income is not considered
3. Capital gains subject to gains tax (CAPITAL GAINS TAX)
income derived from trade and business.
a. Capital gains from sale of shares of stocks of a domestic The income and expenses of a Filipino citizen for 2018 were
corporation provided as follows:
b. Capital gains from sale of real property in the Philippines

January to June Philippines Canada

Type of Income Applicable tax Gross Income ₱5,000,000 ₱2,000,000
Regular income Graduated rate Allowable Deductions 2,000,000 1,000,000
Passive income (Phils.) Final withholding tax July to December
Capital gains subject to CGT Capital gains tax Gross Income 2,000,000 3,000,000
ILLUSTRATION (Cases A-G) Allowable Deductions 1,000,000 1,200,000
Use the following data for Cases A-E
An individual taxpayer provided the following information for
Assume that the taxpayer is a resident who left the
2018:
country in July of the current year to reside permanently in
Gross business income, Philippines ₱5,000,000
Canada, how much is his taxable income?
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000 Gross income, Philippines (Jan- ₱7,000,000
Business expenses, Philippines 3,000,000 Dec)
Gross income, Canada (Jan-June) 2,000,000
Business expenses, Canada 1,000,000
Allowable deductions, Philippines (3,000,000)
Business expenses, Singapore 500,000
(Jan-Dec)
Determine the taxable income assuming: Allowable deductions, Canada (1,000,000)
(Jan-June)
CASE A: The taxpayer is a resident citizen
Taxable income ₱5,000,000
Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
CASE G:
Gross business income, Singapore 1,000,000
Assume the same data in Case F except that the taxpayer
Business expenses, Philippines (3,000,000)
is a non-resident who returned and resided permanently in
Business expenses, Canada (1,000,000)
the country in July of the current year. His taxable income
Business expenses, Singapore (500,000)
before personal exemptions is
Taxable income ₱3,500,000
Gross income, Philippines (Jan- ₱7,000,000
Dec)
CASE B: The taxpayer is a non-resident citizen
Gross income, Canada (July-Dec) 3,000,000
Gross business income, Philippines ₱5,000,000
Allowable deductions, Philippines (3,000,000)
Business expenses, Philippines (3,000,000)
(Jan-Dec)
Taxable income ₱2,000,000 Allowable deductions, Canada (1,200,000)
(July-Dec)
CASE C: The taxpayer is an alien Taxable income ₱5,800,000
Gross business income, Philippines ₱5,000,000 **Note: Personal exemptions will not be considered in
Business expenses, Philippines (3,000,000) computing taxable income starting January 1, 2018, effect of
Taxable income ₱2,000,000 the TRAIN Law.

INCOME TAX TABLE FOR INDIVIDUAL TAXPAYERS

CASE D: The taxpayer is a non-resident alien engaged in trade
or business
Gross business 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
Gross business income, Philippines ₱5,000,000
Taxable income ₱5,000,000
**NRA-NETB are taxable on their gross income**

CASE F:
 Self-Employed Individual - is defined as a sole proprietor or
an independent contractor who reports income earned from
self-employment. He or she controls who he/she works for. It
includes professionals whose income is derived purely from
the practice of profession and not under an “employer-
employee relationship”

ILLUSTRATION – Computation of Basic Income Tax Due

Professional individual - is a “person formally certified by a
PURELY COMPENSATION INCOME EARNER professional body belonging to a specific profession by virtue
CASE A: Determine the income tax due assuming the taxable of having completed a required course of studies and/or
compensation income for 2018 is ₱240,000. practice, whose competence can usually be measured against
Answer: Zero, Taxable income do not exceed an established set of standards. It also refers to a person
P250,000 engaged in some art or sport of money.

CASE B: Determine the income tax due assuming the taxable

compensation income for 2018 is ₱300,000. TAX RULES OF SELF EMPLOYED AND/OR PROFESSIONALS
Answer: (SEP)
Purely SEP with gross sales/receipts
 If income is ₱3M and Below
 Regular Income Tax (graduated tax table) 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
 Above ₱3M - regular income tax (graduated tax table)

Mixed Income Earner

 Compensation - regular income tax (graduated tax table)
 Business Professional Income
CASE C: Determine the income tax due assuming the net  If income is ₱3M and below
taxable compensation income for 2018 is ₱1,850,000. o Regular income tax OR 8% tax on Gross sales and other
Answer: operating income in LIEU of the graduated tax rate and Sec.
116
 Above ₱3M – regular income tax (graduated tax table)

ILLUSTRATION
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

SELF EMPLOYED AND/OR PROFESSIONALS (SEP) sales/receipts and other non-operating income for
Beginning 2018 or upon the effectivity of RA 10963 (Tax 2018 is ₱240,000.
Reform for Acceleration and Inclusion Law (TRAIN LAW), Answer: Zero, Taxable income do not
regular income of Self- Employed and Professionals (SEP) exceed P250,000
amounting to more than P250,000 in a taxable year but with 2. Using the data below, calculate the income tax due
a gross sales/receipts and other non-operating income not for 2018:
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.
CASE B: 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:

CASE C: 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:

1. How much is Pedro’s annual income tax due?

1. Determine the correct income tax due:

Answer:
Answer:

2. Assume the SEP opted to avail the 8% tax under the

2. How much is Pedro’s annual income tax payable? TRAIN LAW, determine the tax due.
Answer:

Answer:
 expanded foreign
currency deposit system
NOTE: Only residents are
subject to this type of tax.
Nonresident taxpayers
are exempt from tax on
this particular income
e. Interest income from
long-term deposit or
investment Exempt Exempt 25%
If pre-terminated before
fifth year, a final tax shall
be imposed based on
remaining maturity as
follows:
 4 years to less 5% 5% 25%
than 5 years 12% 12% 25%
CASE D: Mixed income earner whose gross sales/receipts and 20% 20% 25%
other non-operating income exceeds the VAT threshold of  3 years to less
₱3,000,000. than 4 years
 Less than 3 years
1. Determine the income tax due assuming the II. ROYALTIES
following data for 2018: a. Royalties, in general
(other than royalties 20% 20% 25%
described in letter B)
b. Royalties on books, as
well as other literary
10% 10% 25%
works and musical
compositions
Answer:
III. PRIZES
a. Prizes (except prizes
amounting to P10,000 or
20% 20% 25%
less which shall be subject
to regular tax)
b. Other winnings 20% 20% 25%
c. PCSO and/or Lotto
winnings in the
FINAL WITHHOLDING TAXES Exempt Exempt 25%
Philippines amounting to
Final withholding taxes is a kind of tax, which is
P10,000 or less
prescribed on “certain income” derived from the Philippine
sources. d. PCSO and/or Lotto
winnings in the
PASSIVE INCOME DERIVED FROM PHILIPPINE SOURCES 20% Exempt 25%
Philippines amounting to
SUBJECT TO FINAL WITHHOLDING TAXES
more than P10,000
Citizens
NRA- NRA- IV. DIVIDENDS
1.INTEREST and
ETB NETB a. Cash and/or property 10% 20% 25%
Residents
a. Interest from any dividends actually or
20% 20% 25% constructively received
currency bank deposit
from:
b. Yield or any other
monetary benefit from 20% 20% 25%  Domestic
deposit substitutes corporation
 Joint stock
c. Yield or any other
company
monetary benefit from
20% 20% 25%  Insurance or
trust funds and similar
mutual fund
arrangements
companies
d. Interest income RC: 15% Exempt Exempt
 Regional
received from a NRC:
operating
depositary bank under exempt
headquarters of
 multinational a. Pure Compensation Income Earner
companies b. Pure Business Income Earner
 On the share of c. Mixed Income Earner
an individual Benefits for Senior Citizen and PWDs
partner in the  20% discount and exemption from VAT on their
distributable net purchase of specified goods and services
income after tax  P500 monthly social pension, for indigent senior
of partnership citizens
(except GPP)  Death benefit assistance
 On the share of  5% discount on utilities
an individual in  Income tax exemption for minimum wage earners of
the net income for SC/PWDs whose annual taxable income is not
after tax of an more than 250,000
association, a Minimum Wage
joint account, or The term “statutory minimum wage earner (SMW)”
a joint venture or “minimum wage earner (MWE)” under RA 9504 shall refer
or consortium of to a worker in the private sector paid the statutory minimum
which he is a wage. The rate is fixed by the Regional Tripartite Wage and
member or co- Productivity Board as defined by the Bureau of Labor and
venturer Employment Statistics. MWE are exempt from income tax on:
1. Minimum wage
PASSIVE INCOME 2. Holiday pay
Passive income is the income earned from allowing 3. Overtime pay
others to use one’s right, or game of chance or investment, in 4. Night shift differential
which the taxpayers merely wait for the income to come in. 5. Hazard pay
The law subjects passive income to final tax. Once subjected
to a final tax, it is no longer included in the taxable income Filing of Income Tax Returns
subject to normal (tabular) tax. Deductions and exemptions BASIC TAX
do not apply to items subject to final tax.  For Purely Compensation Income Earners
Passive income is classified as follows: On or before April 15 of the succeeding year
a. Interest, prizes, royalties, etc.,  For Business Income Earners
b. Cash or property dividends, The individual taxpayer is required to file a quarterly
tax return (May 15, Aug 15, Nov 15, and April 15)

GAIN ON SALE OF ASSETS FINAL WITHHOLDING TAX ON PASSIVE INCOME

Under tax code, the following are ordinary assets:  Prior to 2018 - January to November – 10th day of
1. Stock in trade of the taxpayer or other property of a the month; December – January 15
kind  2018 onwards – not later than the last day of the
2. Property used in trade or business subject to month
depreciation
3. Real property held by the taxpayer primarily for sale CAPITAL GAINS TAX
to customers in the ordinary course of business  Share of Stock
4. Real property used in trade of the taxpayer Ordinary Return – 30 days after each transaction
Final Consolidated Return – on or before April 15 of
CAPITAL GAINS TAX the following year
CAPITAL GAINS may be:
1. Subject to CAPITAL GAINS TAX (CGT) pertain to sale of:  Real Property – 30 days following each sale or other
i. Shares of stock of a domestic corporation sold directly to disposition
a buyer
Prior to 2018 – 5% to 100,000; 10% to excess Manner of Filing
2018 – 15% of capital gain How:
ii. Sale of real properties located in the Philippines a. Manual Filing
CGT = 6% of the higher of GSP (gross selling price) and b. Electronic Filing and Payment System (EFPS)
FMV (fair market value) c. eBIRForms

OTHER CONSIDERATIONS When:

Format in Computing Taxable Income
  Payment may be in installment if the Income Tax The following cumulative balances during the year
Due is more than P2,000 on income and expenses were provided by Juan Dela Cruz, a
 1st installment: at the time of filing the annual ITR resident citizen:
(on or before April 15 of the following year)
 2nd installment: on or before October 15 following 1st Q 2nd Q 3rd Q 4th Q
the close of the calendar year Gross Profit P300,00 P650,00 P910,00 P1,200,00
from Sales 0 0 0 0
Place of Filing Income Tax Return Business 120,000 262,000 405,890 426,000
1. Authorized Agent Banks expenses
2. Revenue District Officer Dividends- 20,000 20,000 30,000 30,000
3. Collection Agent domestic
4. Duly Authorized City or Municipal Treasurer corp.
5. ePayment Channels (Gcash, PayMaya, Online Interest
Banking) income from,
BPI 4,000 8,000 12,000 16,000
Persons Required to File Income Tax Return
1. Individuals engaged in business and/or practice of UCP 8,000 12,000 16,000 18,000
profession B
2. Individuals deriving compensation from two or more Met 5,000 10,000 15,000 30,000
employers concurrently at any time during the taxable ro
year Ban
3. Employees deriving compensation income, the income k
tax of which has not been withheld correctly Capital gain 150,000 150,000 150,000 150,000
4. Individuals deriving other non-business, non- on sale of
professional-related income in addition to compensation Land:
income not otherwise subject to final tax Selling price: P450,00
5. Individuals receiving purely compensation income from a P600,000; 0
single employer Cost:
6. Non-resident alien engaged in trade or business in the
Philippines deriving purely compensation income REQUIRED: Using the above information, compute the
following:
Persons NOT Required to File Income Tax Return i. Income tax payable, first quarter
1. An individual earning purely compensation income ii. Income tax payable, second quarter
whose taxable income does not exceed 250,000. iii. Income tax payable, third quarter
2. An individual whose income tax has been correctly iv. Income tax payable, fourth quarter
withheld by his employer v. Total final taxes (for the year) on passive income
3. An individual whose sole income has been subjected to vi. Total capital gain tax
final withholding tax
4. Minimum wage earners, the Certificate of Withholding
filed by the respective employers, duly stamped
“Received” by the Bureau

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.

MODULE EXERCISES
Quarterly Income Tax Return