TAXATION

MODULE 5-6 - INDIVIDUAL INCOME TAXATION

1. General Principles (Section 23 NIRC) (Classification of Taxpayer)
General Classification Rule
Intention and Length of Stay - shows the residency of the person
a. Individual - a type of person
Resident Citizen - Citizen of the Philippines and Residing in the Philippines
Article 4, Section 1 of the 1987 Constitution
Citizens of the Philippines at the time of adoption of Constitution
Fathers or mothers are citizens
Born before 1973 of Filipino mothers, who elect Philippines upon reaching the age of
majority
Naturalize Citizen

RESIDENCE AND DOMICILE

Animus Revetendi (Intent to Return) and Animus Manendi (Intent to Remain) needed
to establish domicile

Non-resident citizen
(1) A citizen the fact of his physical presence abroad with a definite intention to
reside

(2) A citizen who leaves the PH during the taxable year to reside abroad, as
immigrant or employment on a permanent basis (OFW or Overseas Contract
Workers OCW)

NRC considered RC from the start of the taxable year to the date of his departure
NRC only in a taxable year in which he departed from the Philippines
Hence an individual taxpayer may be NRC or RC in one taxable year
(3) A citizen of the Philippines who works and derives income from abroad and
whose employment requires him to be physically present abroad most of the time
during the taxable year

The worker must havebeen outside the PH for not > 183 days during the taxable
year
If the worker works outside the Philippines for a minimum of 183 days is still
considered RC if the employer is a Filipino

(4) A citizen who previously is a nonresident citizen and who arrives at any time
during the taxable year to reside permanently in the PH shall be treated as a
nonresident citizen for the taxable year in which he arrives in the Philippines with
respect to his income derived from sources abroad until the date of his arrival in the
Philippines.

Taxable as NRC from sources abroad until the date of his arrival

(5) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in
the Philippines as the case may be for purpose of this Section.

Overseas Contract Worker (OCW) - Filipino citizen employed in a foreign country

who is physically present in a foreign country as a consequence of his employment
To be considered as OCW:
Physically present in a foreign country
Registered with POEA and had OEC
Salary by employer abroad (foreign employer)
Income arising from overseas employment is tax exempted

Seaman
Considered as OCW:
Citizen of the Philippines
Receives compensation abroad as a member of the vessel
Vessel engaged exclusively in international trade
Registered with POEA
Has OEC

Resident Alien - an individual whose residence is within the Philippines but not a
citizen
CONSIDERED IF:
(1) Not a mere transient or sojourner
(2) No definite intention to his stay in the philippines
(3) Purpose is such that needs an extended stay such that he makes his home
temporarily in the Philippines

Mere intention to change his residence is not enough to change residency of an

alien.

Nonresident Alien - an individual whose resident is not in the Philippines and not a
citizen
NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-ETB)
A NRA who comes to the PH and stay for a period of more than 180 days during any
taxable year is considered NRA ETB

NON-RESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS (NRA NETB)

A NRA who comes to the PH and stay for a period of less than 180 days

b. Corporation - includes partnerships, joint-stock companies, joint accounts,

association, or insurance companies but does not include general professional
partnerships and a joint venture or consortsium
Domestic Corporation - created or organized in the Philippines
Foreign Corporation - corporation which is not domestic
Resident Foreign Corporation - foreign corporation engaged in business within the
Philippines
(1) If the foreign corporation has a an agent by which it conducts its business in the
Philippines, he is considered as a RFC
Nonresident Foreign Corporation - foreign corporation not engaged in trade or
business within the Philippines

c. Partnership - included in the term of corporation

Also included: joint stock companes, joint accounts, associations and insurance
companies

d. General Professional Partnership - NOT INCLUDED partnerships formed by persons

for the sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business. Including Joint Ventures
which are formed for the execution of a single transaction and temporary in nature.

e. Estates and Trusts (Sec 60 NIRC)

Trust - where a trustor transfer ownership to a trustee to hold and control the
property for the benefit of another person
Income tax should not apply to employee's trust.
Estate - is created by operation of law when an individual dies, leaving properties to
heirs, refers to the mass of properties left by the decedent
Judicial Administration and Not Judicial Administration
It is taxable upon death of person, for income tax and estate income tax if judicial.

f. Co-Ownerships - whenever the ownership of an undivided thing or right is from

different persons (Article 484, NCC)
Co-ownership is tax exempt

2. Source of Income (Section 42 NIRC) (Situs of Taxable Income)

Territoriality Principle
Taxation may only be exercised within the territorial jurisdiction of the taxing
authority.
Situs of Taxation
It is the place or authority that has the right to impose and collect tax
Congress Impose and BIR Collects
LGU Impose and Treasurer Collects
(1) Factors to Determine
Residence
Citizenship
Nature
Subject Matter
Source

Income From Sources Within the Philippines

(1) Interest - derived from Philippines
General Rule: The taxable income would be derived less from the deductions
Exceptions: No deductions if the interest to be paid by a loan is not used by the
business
(2) Dividends - received from DC and FC is atleast 50% gross income 3 years
preceeding the declaration was derived from sources in the Philippines
(3) Services - services performed in Philippines
(4) Rentals and Royalties - Location of property and where property is used
(5) Sale of Real Property - Location in PH
(6) Sale of Personal Property - Sold in PH
If the personal property is sold in another country, it is considered income from that
country
For shares of stock, it is always considered Philippines no matter what.

Income From Sources Without the Philippines

(1) Interest - from deposits outside Philippines, when the debtor is not a resident
(2) Dividends - received from FC less than 50% gross income 3 years preceeding the
declaration was derived from sources in the Philippines. received from NRFC
(3) Compensation for services performed outside Philippines - services performed
outside PH
(4) Rentals or royalties for property or use outside the Philippines - location of the
property and the use of the property is outside
(5) Sale of real and Personal Property - Located without the Philippines
For income from outside the Philippines, you can deduct part of the income that is
directly related in earning that income
General expenses that cannot be specified may also be deducted
Whatever is left is your taxable income from sources outside

Deduction From Earning + Unspecified Expenses = Taxable Income Outside

Income From Sources Partly Within and Partly Without

If it cannot be determine whether the income comes from within or without the
Philippines, then the income may be regarded as income from sources partly within
and partly without the Philippines
Sale of personal or real property
(1) If produced within the Philippines and sold outside the Philippines
(2) If produced outside the Philippines and sold within the Philippines

THEY ARE INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT

IF THEY ARE INCOME FROM THE PHILIPPINES DEDUCTIONS ARE ALLOWED

3. Taxable Income (Section 31 NIRC) (Taxable Income Defined)

The term ‘taxable income’ means the pertinent items of gross income specified in
this Code, less deductions, if any, authorized for such types of income by this Code
or other special laws."

TRAIN LAW removes the personal and additional exemptions.

Gross Income
Gross Income - means all income derived from whatever source (General Statutory
Definition)
Gross Income - means all items of income less exclusions

Gross Income - All income less exclusions

Net or Taxable Income - Gross income less allowable deductions
Income Tax Due - Taxable or Net Income multiplied by the tax rate
Income Tax Payable - Income Tax Due Less Creditable Witholding Tax or Tax Credit

Gross Income vs Net Income

Gross income no deductions, net income deductions are allowed
Gross income no exemptions, net income exemptions are granted
Gross income tax base, net income tax base

Basic Formula
Gross Income - Deductions (Itemized or OSD) = Taxable Income
Taxable Income x Tax Rate = Tax Due
Tax Due - Creditable Witholding Tax or Tax Credit - Tax Payable

Deductions:
Optional Standard Deductions (OSD)
Individuals (except NRA) can choose standard deduction of 40% of gross sales or
receipts.

If the taxpayer does not state the OSD then it is considered only as an itemized
deduction. If the standard deduction is chose it cannot be changed for that tax year.

An individual who chooses the standard deduction does not need to submit financial
statements with their return.

Lastly, both individuals and corporations must keep records of their gross sales,
receipts, or income for the year, as required by the rules set by the Secretary of
Finance and the Commissioner.

Personal and Additional Exemptions and Premium Payments on Health and

Hospitalization
No longer available repealed by the TRAIN Law
4. Exemption of Minimum Wage Earners
Section 22 (GG)
Statutory Minimum Wage - rate fixed by the Regional Tripartite Wage and
Productivity Board
Section 22 (HH)
Minimum Wage Earner - refer to a worker in the private sector paid the statutory
minimum wage or a public employee with compensation income of not more than
the statutory minimum wage in the non-agricultural sector where he is assigned

Minimum wage is determined by the Regional Tripartite Wage and Productivity

Board

They could be at the private sector or public sector

Senior Citizens, PWDs and National Athletes and Coaches

Senior Citizen
Resident of the Philippines
Atleast 60 years old

They are granted 20% discount to goods and services

Some establishments to senior citizens are exempt from VAT
Discounts are treated as tax deductions for businesses not tax credit anymore

Persons With Disability

Individuals suffering from restriction or different abilities
Result of mental, physical or sensory impairment to perform an activity in a manner
or within the range considered for human beings

5. Income Subject to Graduated Rates

Graduated Rates:
15%-35%

Less P250,000 - 0%
P250,000 - P400,000 - 0% - 15%
P400,000 - P800,000 - P22,500 - 20%
P800,000 - P2,000,000 - P102,500 - 25%
P2,000,000 - P8,000,000 - P402,500 - 30%
P8,000,000 - More - P2,202,500 - 35%

Income Subject to Graduated Rates - refer to income income other than capital
gains and passive income.

a. Compensation Income - all renumeration for services rendered under an EM-REL

INDIVIDUALS EARNING PURELY FROM COMPENSATION - Subject to Graduated Rates

What is not included is the non-tax benefits such as (1) 13th month pay, (2) de
minimis benefits (a form of employee perks that are tax-free and provided by
Philippine employers as a way to support the welfare of their employees) and (3)
employee's share in SSS, GSIS and PHIC.

b. Business and Professional Income

PURELY SELF EMPLOYED OR PROFESSIONAL INDIVIDUALS - Graduated Rates or 8%
Income Tax Rate in excess of P250,000 if not exceeding 3 million, if exceeding then
the graduated rates.
Self-Employed - sole proprietor or independent contractor reporting income earned
from self-employment
Professional - Formally certified by a professional body in a specific profession
EXAMPLES:
Lawyers or Doctors
A person who engaged in some art or sport for money (i.e. boxer or professional
artist)
Insurance Agent
Managmeent
Technical Consultant
Recipients of Professional and Talent Fees

RULES FOR 8% Income Tax Rate

First P250,000 is not subject to tax.
Second taxpayer must signify his intent to use the 8% tax rate in the first quarter of
the income tax return.

8% Tax Rate Not Available To:

Purely Compensation Earner
VAT Registered Taxpayer
Non-VAT Taxpayers whose gross sales exceed P3,000,000
Taxpayer subject to Other Percentage Taxes
Partners of a GPP
Individuals with Tax Exemption

MIXED INCOME EARNERS - Graduated Rates For Comepnsation Income and For Self-
Employment it depends whether or not the gross sales/receipts exceed the VAT
threshold. If it exceeds then it is graduated rates if not then it can either be (1)
graduated rates or (2) 8% Income Tax Based on Gross Sales/Receipts

c. Capital Gains NOT Subject to Final Tax

d. Passive Income NOT Subject to Final Tax

General Rule: Passive Income Is Usually Subject to Final Tax
They are not included in the gross income in order to compute where the individual
is bracketed
They are "witheld"

BUT WHAT ARE PASSIVE INCOMES SUBJECT TO INCOME TAX?

Tax Rate on Passive Income on Citizens and Resident Aliens
Interest under a Foreign Currency Deposit (15%)
Royalties from books, literary works and musical composition (10%)

e. Other Income

6. Rule of Passive Income Subject to Final Tax

a. Interest Income
From any currency bank deposit yield or any other monteray benefit from deposit
substitutes and from trust funds and similar arrangements in the Philippines.

Final Tax Rate: 20% or 25% (For NRA-NETB)

b. Royalties
c. Prizes and Winnings
d. Dividends
e. Capital Gains

7. Special Classes of Individual Employees

a. Regional or Area Headquarters or Regional Operating Headquarters of
Multinational Companies in the Philippines
b. Offshore Banking Unit in the Philippines Established in the Philippines
c. Foreign Foreign Service Contractor or subcontractor engaged in petroleum
operations