Income Taxation Individual Taxpayer

Unit ii Individual Taxpayer

INDIVIDUAL INCOME TAXPAYERS

Individual Taxpayers are natural persons with income derived from within the territorial
jurisdiction of a taxing authority. Under the Tax Code, citizens are classified as:
- Resident Citizen (RC)
- Nonresident Citizen (NRC)
- Resident Alien (RA)
- Non-resident Alien (NRA)
a. Engaged in trade or business (ETB)
b. Not engaged in trade or business (NETB)
Prior to TRAIN Law, individual taxpayers may also be classified as "Special Employees”:

▪ Special Alien Employees (SAES)

▪ Special Filipino Employees (SFES)

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 code

CLASSIFICATION OF TAXPAYERS
A. Citizens of the Philippines
Under the Constitution, citizens are:
✓ Those who are citizens of the Philippines at the time of adoption of the Constitution on
February 2, 1987
✓ Those whose fathers or mothers are citizens of the Philippines
✓ Those born before January 27, 1973 of Filipino mothers who elected Filipino
citizenship upon reaching the age of majority
✓ Those who are naturalized in accordance with the law.

1. Resident Citizen of the Philippines

A Filipino citizen taxpayer not classified as nonresident citizen and residing in the
Philippines is considered a resident citizen for tax purposes.

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Income Taxation Individual Taxpayer

2. Nonresident Citizens of the Philippines

The following are considered nonresident citizens (Section 22 (E), RA 8424):
1. A citizen of the Philippines who establishes to the satisfaction of the Commissioner of
the fact of his physical presence abroad with a definite intention to reside therein.
2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis;
3. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time [for
one hundred eighty-three days [(183) or more] during the taxable year;
4. A citizen who has been previously considered as nonresident citizen who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines
shall be considered a nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to income derived from sources abroad until the date of his
arrival in the Philippines.

ILLUSTRATION 1:

Ana, a resident citizen, leaves the Philippines in July 1, 2019 to

reside permanently in the U.S. together with her family.

She shall be classified for the 2019 taxable year as follows:

January to June 2019 – Resident Citizen

From July 2019 onwards – Nonresident Citizen

ILLUSTRATION 2:

Pedro, an OFW, returned in the Philippines for good on May 2019.

He shall be classified for 2019 taxable year as follows:

January to April 2019 – Nonresident Citizen

From May 2019 onwards – Resident Citizen

 Filipinos working in the Philippines Embassies or Philippine consulate offices are not
considered non-resident citizens.

OVERSEAS CONTRACT WORKER

▪ Overseas Contract Workers (OCW's) refer to Filipino citizens employed in foreign
countries, commonly referred to as Overseas Filipino Workers (OFW), who are physically
present in a foreign country as a consequence of their employment thereat.
▪ Their salaries and wages are paid by an employer abroad and is not borne by any entity
or person in the Philippines.

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Income Taxation Individual Taxpayer

▪ 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). (RR No. 1-2011)
▪ A seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an overseas contract worker. (Section 23 (C), RA
8424)
▪ In order for seafarers or seamen to be considered as OCW's or OFW's they must be duly
registered as such with the Philippine Overseas Employment Administration (POEA) with
a valid Overseas Employment Certificate (OEC) with a valid Seafarer's Identification
Record Book (SIRB) or Seaman's Book issued by the Maritime Industry Authority
(MARINA).

 For taxation purposes, OCWS are classified as nonresident citizens

B. Alien
An alien is a foreign-born person who is not qualified to acquire Philippine citizenship by
birth or after birth.

1. Resident Alien
Resident Alien means an individual whose residence is within the Philippines and who is
not a citizen thereof (Section 22 (F), RA 8424).

The following are considered as resident alien:

1. An alien actually present in the Philippines who is not a An alien who has
mere transient or sojourner. A person who comes to the acquired residence in
Philippines for a definite purpose which in its nature may be the Philippines retains
promptly accomplished is a transient. his status as a resident
until he abandons the
2. An alien, who comes to the Philippines for a definite same and actually
purpose, which, by its nature, would require an extended depart from the
stay making his home temporarily in the Philippines; Philippines.
3. An alien who shall come to the Philippines with no definite
intention as to his stay.

2. Non-Resident Alien

The term "non-resident" under Section 22(G) of the Tax code means an individual
whose residence is not in the Philippines and who is not a citizen thereof. They are
aliens who come to the Philippines for definite purpose, which in its nature may be
promptly accomplished. They are alien who are mere transients or non-residents,
hence, classified as non-resident alien.

Alien who stayed in the Philippines for an aggregate period of more than 180 days
during the taxable year and/or aliens who have business income in the Philippines are
considered as nonresident aliens engaged in trade or business. Under Section 22 (S)
of the Tax Code, "trade or business" include performance of the functions of a public

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Income Taxation Individual Taxpayer

office or performance of personal services in the Philippines (except performance of

services by the taxpayer as an employee). If an alien stay in the Philippines, he is
considered to as a nonresident alien not engaged in trade or business.

A nonresident alien not engaged in trade or business is subject to 25% income tax
based on gross income from all sources within the Philippines (ordinary income or
passive income except for income subject to capital gains) as interest, cash and/or
property dividends, rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable annual or periodic or casual
gains, profits, and capital gains.

1. Engaged in trade or business (Section 25 (A), RA 8424)

▪ An alien individual actually engaged in trade or business in the Philippines; and
▪ An alien who comes in the Philippines for an aggregate period of more than 180
days during the calendar year during any calendar year shall be deemed a non-
resident alien doing business in the Philippines.

2. Not engaged in trade or business - those NRAs not included above.

ILLUSTRATION 3:

Determine the correct classification of the taxpayer from the independent cases provided
below:

CASE 1:

Allan is a natural born Filipino citizen. His family migrated in U.S. fifteen (15) years ago. For
personal reasons, he decided to return and reside permanently in the Philippines on March
1, 2018.

From January to February 2018: Allan is classified as Non Resident Citizen

From March 1, 2018 onwards: Allan is classified as Resident Citizen

CASE 2:

Trump is an American information technology expert. He was signed by Digong telecom (a

local telecommunication company) from January to March of 2018 to improve its internet
services. Due to the anticipated entry of competitors from the other countries, Digong
decided to extend indefinitely the service of Trump.

He is a resident alien.

❖ An alien who comes to the Philippines for the purpose that requires extended
stay for its accomplishment, so he makes his home temporarily in the
Philippines, is a resident, regardless of his intention to return to his residence
abroad.

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Income Taxation Individual Taxpayer

APPLICABLE TAX AND TAX RATES

The applicable taxes for individuals depend on several factors such as but not limited to:
✓ Classification of the taxpayer
✓ Source of income
✓ Type of income

A. Classification of the Taxpayer

It is important to properly classify individual taxpayers because resident citizens are taxable
on their income derived from sources within and without the Philippines while other taxpayers
are taxable only on their income derived from Philippine sources. Moreover, individual
taxpayers classified as nonresident aliens not engaged in trade or business (NRANETB) are
taxable based on their "gross income" while others are taxable based on "net income".

B. Source of Income
It is important to know the source of income for tax purposes (income derived from within or
outside the Philippines) because resident citizens are taxable based on their worldwide
income while others are taxable only on their income derived from sources within the
Philippines.

TAXPAYER TAXABLE SOURCES

❖ RC = within and without the Philippines
❖ NRC, RA, OCW, NRA-ETB, NRA-NETB = within the Philippines only

For income taxation purposes, OFWs are classified as non-resident citizens. Hence, income
earned by an OCW or OFW as defined in RR 1-2011 that is earned out of the country is
exempted from Philippine Income tax. However, the earnings of an OFW from a business
venture or any other property in the Philippines are subject to income tax in the Philippines.

ILLUSTRATION 4:

An individual taxpayer provided the following information in 2018:

Gross business income, Philippines P 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

Determine the taxable income assuming:

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Income Taxation Individual Taxpayer

Case A: The taxpayer is a resident citizen

Answer: P 3,500,000

Solution:

Gross business income, Philippines P 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 P 3,500,000

❖ A resident citizen is taxable on income within and without the Philippines. Basis
of taxable income is net income

Case B: The taxpayer is nonresident citizen:

Answer: P2,000,000

Solution:

Gross business income, Philippines P 5,000,000

Business expenses, Philippines ( 3,000,000)
Taxable Income P 2,000,000

❖ A nonresident citizen is taxable on income derived from within Philippine sources

only. Basis of taxable income is Net Income.

Case C. The taxpayer is a resident alien

Answer: P 2,000,000

Solution:

Gross business income, Philippines P 5,000,000

Business expenses, Philippines ( 3,000,000)
Taxable Income P 2,000,000

❖ Same solution in B. A resident alien is taxable on income derived from within

Philippine sources only.

Case D. The taxpayer is a non-resident alien engaged in trade or business

Answer: P 2,000,000

Gross business income, Philippines P 5,000,000

Business expenses, Philippines ( 3,000,000)
Taxable Income P 2,000,000

❖ Same solution in B. A Non-resident alien is taxable on income derived from

within Philippine sources only.

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Income Taxation Individual Taxpayer

Case E. The taxpayer is a non-resident alien not engaged in trade or business

Answer: P 5,000,000

❖ NRA-NETB are taxable on their “Gross Income”.

C. Types of Income:
For purposes of income taxation, there are three types of incomes subject to income taxes as
follows:
✓ Regular or ordinary income.
✓ Passive income derived from Philippine sources.
✓ Capital gains subject to Capital Gains Tax

TYPE OF INCOME Income to be included APPLICABLE TAX

Regular Income • Compensation Income from being an Graduated Rate
employee
• Income from trade, business, or practice of
profession
• Gain from sale of ordinary assets
• Net Capital Gain from sale of “other capital
assets”
• Other taxable income not subject to FIT or
CGT
Passive Income, Phil • Earned without any active action on the Final Withholding
part of the taxpayer Tax (FWT)
Capital Gains Arise from the sale of capital assets, namely: Capital Gains Tax
(Subject to CGT) • Real property in the Philippines classified (CGT)
as capital assets; and
• Shares of domestic corporations (provided
the seller or taxpayer is not a dealer of
securities

Steps on How to Compute the Tax of an Individual

Step 1: Type of Ordinary or Regular

Passive Income Capital Gains
Income Income

Generally subject to Net

Step 2: Type of Income Taxation Subject to Final Subject to Capital
Tax Tax (FWT) Gains Tax (CGT)
Exception: NRANETB

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Gross Income Pxx

Less: Deductions (xx)
Net Taxable Income xx
Step 3: Actual Passive Income x Capital Gains x
Then compute tax (using
Computation FT rate CGT rate
graduated table) or 8%
tax rate on gross
sales/receipts plus non-
operating income

ORDINARY OR REGULAR INCOME

It refers to income such as compensation income (salaries or wages), business income,
income from practice or profession, income from sale and/or dealings of property and
miscellaneous income and passive income other than those subject to final taxes under
Section 24(B) and capital gains tax under Sections 24(C) and (D) of the Tax Code. Regular
incomes are subject to graduated tax table (also known as basic or normal tax) as provided
for under Section 24(A).

GRADUATED TAX RATE

PRIOR to 2018 TRAIN LAW – TAXABLE YEAR 2018-2022 2023 onwards
INCOME TAX INCOME TAX TAX
Not over P 10,000 5% Not over P 250,000 Exempt Exempt

Over P 10,000 but P 500 + 10% in Over P 250,000 but 20% of excess over P 15% of excess over P
not over P 30,000 excess of P 10,000 not over P 400,000 250,000 250,000

Over P 30,000 but P 2,500 + 15% in Over P 400,000 but P 30,000 + 25% in P22,500 + 20% in
not over P 70,000 excess of P 30,000 not over P 800,000 excess of P 400,000 excess of P 400,000

Over P 70,000 but P 8,500 + 20% in Over P 800,000 but P 130,000 + 30% in P 102,500 + 25% in
not over P 140,000 excess of p 70,000 not over P 2,000,000 excess of P 800,000 excess of P 800,000

Over P 140,000 but P 22,500 + 25% in Over P 2,000,000 but P 490,000 + 32% in P 402,500 + 30% in
not over P250,000 excess of P 140,000 not over P 8,000,000 excess of P 2,000,000 excess of P
2,000,000
Over P 250,000 but P 50,000 + 30% in Over P 8,000,000 P 2,410,000 + 35% in P 2,202,500 + 35% in
not over P 500,000 excess of P 250,000 excess of P 8,000,000 excess of P 8,000,000

Over 500,000 P 125,000 + 32% in

excess of P 500,000

 Provided that after 2020, the taxable income tax levels in the above schedules shall be adjusted
once every five (5) years, through rules and regulations issued by the Department of Finance,
upon recommendation of the Commissioner, after considering among others, the effect of the
same of the 5-year cumulative inflation rate.

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ILLUSTRATION 5: COMPUTATION OF BASIC INCOME TAX DUE

PURELY COMPENSATION INCOME EARNER

1. Determine the income tax due assuming the “taxable compensation income” for 2018 is
P240,000.

Answer: P 0 , tax exempt

2. Determine the income tax due assuming the “taxable compensation income” for 2018 is
P350,000.

Answer: P 10,000

Tax on:
First P250,000 P0
In Excess of P250,000 (P50,000 x 20%) 10,000
P 10,000

3. Determine the income tax due assuming the “net taxable compensation income” for
2018 is P1,850,000.

Answer: P 445,000

Tax on:
First P800,000 P 130,000
In Excess of P800,000 (P1,050,000 x 30%) 315,000
P 445,000

Self-employed &/or Professionals (SEP)

Self-Employed is defined under RA 10963 (TRAIN Law) as “a sole proprietor or an
independent contractor who reports income earned from self-employment. He/She controls
who he/she works for, how the work is done and when it is done. It includes professionals
whose income is derived purely from the practice of profession and not under an employer-
employee relationship
Professional is a “person formally certified by a professional body belonging to a specific
competence can usually be measured against an established set of standards. It also refers
to a person who engages in some art or sport for money, as a means of livelihood, rather than
as a hobby. It includes but is not limited to professional entertainers, professional athletes,
directors, producers, insurance agents, insurance adjusters, management and technical
consultants, bookkeeping agents, and other recipients of professional, promotional; and talent
fees”
Self-Employed. A sole proprietor or an independent contractor who reports income earned
from self-employment. It includes professionals whose income is derived purely from the
practice of profession and not under an employer-employee relationship.

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Income Taxation Individual Taxpayer

Beginning 2018 or upon the effectivity of RA, 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
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 under
Section 116 of the Tax Code.

Self – Employed and/or Professionals (SEP)

Sec. 24(A)(2)(B) of the Tax Code as amended by RA10963 (TRAIN Law) provides the
following rules for SEP:

PURELY SEP MIXED INCOME EARNER

With gross sales/receipts

Business/Professional Income

P 3M and below Above P 3M Compensation P 3M and below Above P 3M

Regular Income Tax Regular Regular + Regular Income Tax Regular
OR 8%** tax on Income Tax Income Tax OR 8%** tax on Income Tax
Gross Sales/Receipts Gross Sales/Receipts
and other operating and other operating
income in excess of income in excess of
P250,000 IN LIEU of P250,000 IN LIEU of
the graduated tax the graduated tax
rate and Section 116 rate and Section 116

**Provided, the SEP is:

1) non-vat registered.
2) not engaged in vat exempt-sales/transaction(s); and
3) not subject to other OPT other than Sec. 116.

NOTE

▪ Sec. 116 is a business tax. not an income tax. It is computed as 3% of gross

sales/receipts and other operating income.

▪ The option to be taxed at 8% ** is available only to taxpayers who are (a) non-VAT
registered and (b) liable for 3% percentage tax under Section 116 of the NIRC. As
such, (a) VAT-registered taxpayers or (b) those liable for Percentage Taxes under Title
V of the NIRC (except for Sec. 116) have no other option than to be taxed using the
graduated rates.

▪ Unless the taxpayer signifies in the 1st Quarter Return of the taxable year the intention
to elect the 8% income tax, the taxpayer shall be considered as having availed of the
graduated rates under Section 24(A) of the Tax Code, as amended, and such election
shall be irrevocable.
PROVIDED, that at any time during a given taxable year, a taxpayer's gross sales or
receipts exceeded the VAT Threshold (P3,000,000, as amended; previously
P1,919,500), he/she shall automatically be subjected to the graduated rates under
Section 24(A)(2)(a) of the Tax Code, as amended, with the following rules/guidelines:

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Income Taxation Individual Taxpayer

⧫ The taxpayer shall be allowed an income tax credit of quarterly payments initially made
under the 8% income tax option.
⧫ Taxpayer is likewise liable for business tax(es), in addition to income tax. A percentage tax
pursuant to Section 116 of the Tax Code, as amended, shall be imposed on the first
P3.000,000. The excess of the threshold shall be subject to VAT.
⧫ Percentage tax due on the P3,000,000 shall be collected without penalty, if timely paid on
the due date immediately following the month the threshold was breached.

However, this option is not available to the following individual taxpayers:

1. VAT-registered taxpayers;
2. Taxpayer subject to OPT other than the 3% OPT under Section 116;
3. Partners of general professional partnerships (GPPs);
4. Individuals enjoying income tax exemption (e.g. those registered as BMBEs);
5. Taxpayers who fail to signify their intention to avail of the 8% income tax rate in the First
(1st) Quarter Income Tax Return, or in the First (1st) Quarter Percentage Tax Return, or
the initial quarterly return of the taxable year upon the commencement of a new business
or practice of profession.

Net of P250,000 if individual taxpayer is a self-employed individual earning income purely from
self-employment or practice of profession. Mixed income earners are not allowed this
P250,000 deduction.

ILLUSTRATION 6: Self-Employed and/or Professional (SEP)

Case 1: PURELY SEP whose gross sales/receipts and other non-operating income does
not exceed the VAT threshold of P3,000,000.

1. Determine the income tax due assuming the gross sales/receipts an other non-operating
income for 2018 is P240,000.

Answer: P 0, exempt from income tax

2. Using the data below, determine the income tax due for 2018:
Gross Sales P 2,800,000
Cost of Sales ( 1,500,000)
Operating Expenses ( 750,000)
Net Income P 550,000

Answer: P 67,500
Tax on:
First P400,000 income P 30,000
In excess of P400,000 income
(P150,000 x 25%) 37,500
Income Tax Due P 67,500

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Income Taxation Individual Taxpayer

PASSIVE INCOME
▪ Applicable only to passive income from sources within the Philippines. Passive incomes
derived from outside of the Philippines are subject to basic income tax under section 24(A)
of the tax code.
▪ It is a tax deducted from the income to be paid to the payee or seller.
▪ It is constituted as full and final payment of the income tax liability. Hence, the income
subjected to this tax is no longer included in the income tax return of the individual taxpayer
subject to basic income tax under Section 24A of the tax code.
▪ It cannot be credited/deducted against the basic income tax due.
▪ The liability for the payment of the tax is primarily on the payor as the withholding agent.

❖ PASSIVE INCOME derived from Philippine sources SUBJECT TO FWT:

1. Interest Income
2. Royalties
3. Dividends
4. Prizes
5. Other winnings

PASSIVE INCOME DERIVED FROM PHILIPPINE SOURCES SUBJECT TO FWT:

❖ INTEREST INCOME

TAXPAYER
RC, RA NRC, NRANETB
NRAETB
a) Interest from any currency bank deposit; and Yield or
any other monetary benefit from: 20% 20% 25%
i. Deposit substitute
ii. Trust funds
iii. Similar arrangements as above

DEPOSIT SUBSTITUTE-an alternative form of obtaining

funds from the PUBLI** other than deposits, through the
issuance, endorsement, or acceptance of "debt
instruments” for the borrower's own account, for the
purpose of re-lending or purchasing of receivables and
other obligations, or financing their own needs of the
needs of their agent or dealer (RR 14-2012).
**Public is defined as borrowing from twenty (20) or more
individual or corporate lenders at any one time.

b) Interest from a depositary bank under the expanded

foreign currency deposit system
▪ Prior to 2018 7½% Exempt Exempt
▪ Under TRAIN Law (beginning Jan. 1, 2018) 15% Exempt Exempt

Exempt Exempt 25%

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Income Taxation Individual Taxpayer

c) Interest income from LONG TERM bank deposit or

bank investment (at least 5-year maturity)

In case of pre-termination of the long-term deposit or

investment, depending on the holding period:
▪ 5 years or more Exempt
▪ 4 years to less than 5 years 5%
▪ 3 years to less than 4 years 12%
▪ Less than 3 years 20%

Interest from any currency bank deposits are short-term deposits with a period of less than
five years. This is limited to banks and shall not be applied with time and savings accounts
maintained by members with cooperatives.
Deposit substitutes is an alternative form of obtaining funds from the public other than
deposits, through the issuance, indorsement, or acceptance of debt instruments for the
borrower’s own account, for the purpose for re-lending or purchasing receivables and other
obligations or financing their own needs or the needed of the agent of dealer. “Public’’ is
defined as borrowing from twenty (20) or more individual or corporate leaders at any one time.
The mere issuance of government debt instruments or securities is deemed as falling within
the coverage of deposit substitutes irrespective of the number of lenders at the time of
organization, and therefore interest income derived therefrom shall be subject to applicable
final tax rate. Government debt instruments and securities including Bureau of Treasury issued
instruments and securities such as Treasury bonds (T-bonds), Treasury bills (T-bills) and
Treasury notes are classified as deposit substitutes if such instruments or securities are to
traded or exchanged in the secondary market.
1. If the debt instrument is not a deposit substitute, interest income shall not be
subject to final withholding tax. Instead, the interest income shall be included in the
taxpayer’s ITR, and the same shall be subject to CWT.

The reduced final tax rate for foreign currency deposits are intended to encourage the
deposit of foreign currencies in our banks that will be used in the financing of our international
trades.

Long-term deposits or investment certificates are in the form of savings, common, or

individual trust funds, deposit substitutes, investment management accounts, and other
investment have maturity of not less than five (5) years, the form which shall be prescribed
by BSP and issued by banks only to individuals in denominations of P10,000 and other
denominations prescribed by BSP. It is not subject to final tax since this is anchored to the
fact that long-term deposits are used for long-term projects that are deemed essentials to the
development of the country. The exemption only covers interest income. Any gain from
trading such certificates is not covered by the exemption.

Requisites/ Conditions for exemption:

1. The depositor or investor is an individual citizen, RA, or NRAETB in the Philippines.

2. Should be under the name of the individual and not under the name of corporation or the
bank or the trust department/ unit of the bank.

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Income Taxation Individual Taxpayer

3. Must be in form of savings, common or individual trust funds, deposit substitutes,

investment management accounts and other investments prescribed by Bangko Sentral
ng Pilipinas.
4. Must be issued by banks only.
5. Must have a maturity period of not less than five (5) years.
6. Must be held for at least 5 years for the interest income to be exempt.
7. Must be in denominations of P10,000 and other denominations as may be prescribed by
BSP.
8. Except those specifically exempted by law or regulations, any other income such as gains
from trading, foreign exchange gain shall not be covered by income tax exemption.

Interest income derived by individuals investing in common or individual trust funds or

investment management accounts to be exempt from income tax, the following additional
conditions must ALL be present:

1. Must be actually held/managed by the bank for the named individual at least five years
without interruption.
2. Must comply with the requirements of Section 22(FF) of the NIRC of 1997, as amended,
as well as the requirements mentioned above;
3. Must hold on to such underlying investment in continuous and uninterrupted period for at
least five years.

Pre-termination of long-term deposits (RR 14-2012). Interest income from the long-term
deposit or investment that is pre-terminated by the depositor or investor before the 5” years
shall be subject graduated rates of final withholding tax on the entire income and shall be
withheld by the depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity (holding period).

• Less than 3 years 20%

• 3 years to less than 4 years 12%
• 4 years to less than 5 years 5%

Interest on foreign currency bank deposits

Interest on foreign currency deposit is taxable if received by an individual taxpayer, except a

non-resident individual, who may be a non-resident citizen or a non-resident alien.

An OCW shall be exempt from the 15% final tax on interest income from a foreign currency
bank deposit in the Philippines. However, if the deposit account is jointly in the name of an
OCW and another individual who is a Philippine resident, only 50% of the interest income shall
be exempt, while the other 50% shall be subject to the 15% FWT.

Interest income from savings and time deposits of members with their credit
cooperative -- exempt from the 20% FWT

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Income Taxation Individual Taxpayer

❖ ROYALTIES

TAXPAYER
RC, RA
NRAETB NRANETB
NRC
▪ Royalties from:
⧫ Literary Works
⧫ Books 10% 10% 25%
⧫ Musical Compositions

▪ Other Royalties
20% 20% 25%

These are royalties of a passive nature such as royalties of claim owners or land owners of
mining properties, royalties of investors from companies that manufacture and sell their
invention and royalty from licensing agreement that transfers the use of trademark or
technology.

❖ DIVIDENDS

TAXPAYER
RC, RA
NRAETB NRANETB
NRC
a) Dividends actually or constructively received from:
i. Domestic Corporation
ii. Joint Stock Company
iii. Insurance or Mutual fund company; and 10% 20% 25%
iv. Regional operating headquarters of a
multinational company

b) Share in the distributable net income after tax of a

partnership (except GPP)** 10% 20% 25%

c) Share in the net income after tax of:

1. Association
2. Joint Account 10% 20% 25%
3. Taxable Joint Venture or Consortium***

Dividends is any distribution made by a corporation to its shareholders out of its earnings or
profits payable to its shareholders, whether in money or in other property. Cash dividends are
paid in cash while property dividends are paid in non-cash properties including stocks or
securities of another corporation.
**
SHARE IN THE NET INCOME OF A PARTNERSHIP
General Partnership General “Professional” Partnership
Treated as dividend income, generally Not treated as dividend income. Subject
subject to 10% final withholding tax. to basic tax under section 24(A).

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Income Taxation Individual Taxpayer

***
SHARE IN THE NET INCOME OF A JOINT VENTURE
CO-VENTURER TAXABLE JV ****NON-TAXABLE JV
Individual Treated as dividend income, Not treated as dividend
generally subject to 10% final income. Subject to basic tax
withholding tax. under section 24(A).
Corporation Treated as inter-corporate Subject to basic corporate tax
dividend income, hence, tax- (not as dividend income)
exempt.

****NON-TAXABLE JV
Joint ventures or consortium organized for the following purposes:
1) Construction projects;
2) Engaged in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.

❖ PRIZES

TAXPAYER
RC, RA
NRAETB NRANETB
NRC
▪ Amount is more than P 10,000 20% 20% 25%
▪ Amount is not more than P 10,000 Basic Tax Basic Tax 25%

These are prizes earned and received during events or competitions. However, prizes
received by a recipient without effort on his part to join a contest are exempt.

❖ WINNINGS

TAXPAYER
RC, RA
NRAETB NRANETB
NRC
▪ OTHER Winnings (regardless of amount)* 20% 20% 25%
▪ PCSO/Lotto Winnings
⧫ Prior to 2018 Exempt Exempt 25%
⧫ TRAIN Law (beginning Jan. 1, 2018)
o Not more than P 10,000 Exempt Exempt 25%
o More than P 10,000 20% Exempt** 25%

*NOT INCLUDED are winnings exempt from income tax such as but not limited to:
▪ Winnings under Sec. 126 of the Tax Code [Winnings from horse racing - subject only to
OPT 4% or 10% as the case may be]

▪ Prizes and awards made primarily in recognition of religious, charitable, scientific,

educational, artistic, literary, or civic achievement but only if:
⧫ The recipient was selected without any action on this part to enter the contest or
proceeding;
⧫ The recipient is not required to render substantial future services as a condition to
receiving the prize or award.

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Income Taxation Individual Taxpayer

▪ All prizes and awards granted to athletes in local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national
sports associations.

**One of the obvious errors/inconsistencies under the TRAIN Law

Informer’s Reward

Informer – person (except a BIR employee, or other public employee, or his relative within the
6th degree of consanguinity) who gives information that leads to the discovery of frauds or
violations of tax laws, which results in the recovery of taxes, or in the conviction of the tax
evader, or in a compromise agreement with the BIR. informer’s reward is subject to 10% final
tax.

Requisites of Tax Informer’s Reward:

1. Definite sworn information which is not yet in the possession of the BIR.
2. The information furnished lead to the discovery of fraud upon internal revenue laws or
provisions thereof.
3. Enforcement results in recovery of revenues, surcharges and fees and/or conviction of the
guilty party or imposition of any fine or penalty.
4. The informer must not be a:
a. BIR public or employee.
b. Other public official or employee.
c. Relative within the 6th degree of consanguinity of those officials or employee in a. and
b.

Amount of Cash Reward – whichever is the lower of the following per case:
a. (a.1) In case of violations of the National Internal Code - 10% of revenues,
surcharges or fees recovered and or fine or penalty imposed and collected or
(a.2) In case of discovery and seizure of smuggled goods - 10% of the fair market
value of smuggled and confiscated good or
b.P1,000,000

The amount of cash reward is subject to 10% final withholding tax which shall be withheld by
the government.

The provisions of the foregoing Subsections notwithstanding, all public officials, whether
incumbent or retired, who acquired the information in the course of the performance of their
duties during their incumbency, are prohibited from claiming informer’s reward.

ILLUSTRATION 9

Ms. Ana provided information on the BIR leading to the recovery of P12,000,000 unpaid
taxes. The cash reward shall be computed as:

10% cash reward (P12,000,000 x 10%s) P1,200,000

Cash reward limit P1,000,000

Cash reward (whichever is lower) P1,000,000

Less: 10% final withholding tax 100,000
Net amount to be released to the tax informer P 900,000

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Income Taxation Individual Taxpayer

Final Withholding Tax

Final Withholding Tax is a tax prescribed on ‘certain income” derived from Philippine sources
which is not credited against the income tax due of a taxpayer on income subject to regular
rates of the tax for the taxable year. It imposes the entity who is making income payments the
responsibility to withhold the tax. The taxpayer receives the income net of tax and there would
be no need for him to file an income tax return to report the same. This is applied only to
certain passive income earned from sources within the Philippines.

Under the final withholding tax system, payee received the income net of the applicable tax.
The amount of tax withheld by the withholding agent (payer) is “constituted as a full and final
payment ‘’ of the income tax due from the payee on the said income.

For instance, if a resident citizen taxpayer earned P20,000 interest income from his bank
deposit, the amount to the credited to his bank account shall only be P16,000, net of the 20%
final tax on interest income from the bank deposit. The applicable tax is withheld by the payor
(bank) and shall remit the corresponding tax to the BIR. In case of the payer failure to withhold
the tax or in case under withholding, the deficiency tax shall be collected from the
payer/withholding agent.

CAPITAL GAINS

Capital gains are incomes derived from the sale of capital assets such as shares of stocks of
a domestic corporation not traded in the local stock exchange and sale of real property in the
Philippines.

Property classification is important because the special tax rules on gains and losses from
sales or exchanges of capital assets do not apply to gains and losses from sales or exchanges
of ordinary assets. Gain on sale of ordinary assets are known as ordinary or regular income
and subject to graduated income tax rate.

Assets are classified as either ordinary or capital. The classification of assets or properties as
ordinary assets or capital assets depends upon the nature of the taxpayer’s business.

Classification of Taxpayer’s Properties

1. Ordinary Assets - assets used in business, such as:

a. Stock in trade of a taxpayer or other real property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close of the taxable year.

b. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business.

c. Real property used in trade or business such as buildings and/or improvements of a

character which is a subject to the allowance for depreciation.

d. Real property used in trade or business of the taxpayer.

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Income Taxation Individual Taxpayer

2. Capital Assets – all other property held by taxpayer not included in the definition
ofordinary assets. These are assets not used in business or not held for sale in the ordinary
course. Gain on sale of capital assets are known as capital gains.

CAPITAL GAINS TAX (CGT) and STOCK TRANSACTION TAX (STT) ON SALE OF SHARES
OF DC

TAX RATE
▪ Not Through the local exchange (sold
directly to a buyer)
⧫ Prior to 2018 CGT 1st P 100,000 gain = 5%
In excess of P 100,000 = 10%

⧫ Beginning 2018 (TRAIN Law) CGT 15% of capital gain

▪ Through the local stock exchange

⧫ Prior to 2018 STT ½ of 1% of GSP
⧫ Beginning 2018 (TRAIN Law) STT 6/10 of 1 % of GSP

 Sale of shares of a domestic corporation NOT Through the local stock exchange
(directly to the buyer) is subject to CGT.

FORMULA in computing the capital gain:

Selling Price Pxx

Acquisition Cost (xx)
Net Capital Gain Pxx
Rate %
CGT Pxx

o Under RR 6-2013, the value of the shares of stock at the time of

sale shall be the fair market value. In determining the value of the
shares, the Adjusted Net Asset Method shall be used whereby all
assets and liabilities are adjusted to market values. For purposes of
discussion in this review material, the selling price is assumed to be
the market value computed using the aforementioned method,
assuming the latter is not provided.

o All individual taxpayers are subject to CGT on shares of stock of

domestic corporations.

 Sale of shares of a domestic corporation THROUGH THE LOCAL STOCK

EXCHANGE is not subject to income tax but to a "business tax under Section
127(A) of the Tax Code as follows:
⧫ Prior to 2018: STT of ½ of 1% of Gross Selling Price
⧫ Beginning Jan. 1, 2018 (TRAIN Law): STT of 6/10 of 1% of Gross Selling
Price

 Sale of shares of stock of a foreign corporation is subject to basic income tax

 The CGT and STT are applicable only to shareholders/investors because for
income taxation purposes, sale of shares of stock by a dealer in securities

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Income Taxation Individual Taxpayer

regardless of whether the shares were sold directly to a buyer or through the local
stock exchange, is subject to basic income tax. Moreover, issuance of shares by
the issuing corporation is not subject to tax except DST and Stock Transaction Tax
on Initial Public Offering under Section 127(B) of the Tax Code.

CAPITAL GAINS TAX (CGT) ON SALE OF REAL PROPERTY

REQUISITES:
1) The real property must be a capital asset; and
2) It must be located in the Philippines.

FORMULA: Capital Gains Tax = TAX BASE * 6%

TAX BASE:

Highest
1. Selling Price
2. Fair Market Value
3. Zonal Value

OPTIONS OF THE SELLER IN CASE OF SALE TO GOVERNMENT OR ANY

POLITICAL SUBDIVISIONS OR AGENCIES OR GOCC'S:
1. Pay 6% CGT; or
2. Pay Basic Income Tax

EXEMPTION ON SALE OF PRINCIPAL RESIDENCE

Requisites for Exemption:
1. The property sold must be the principal residence of the seller;
2. Proceeds is fully utilized in acquiring or constructing a new principal
residence;
3. Utilization must be made within 18 calendar months from the date of sale
or disposition;
4. Notify the BIR Commissioner within 30 days from the date of sale or
disposition of the intention to avail the exemption;
5. The said exemption can only be availed once every 10 years.

PARTIAL EXEMPTION/TAXABLE PORTION:

If there is no full utilization of the proceeds of sale or disposition, the portion of the gain
presumed to have been realized from the sale or disposition shall be subject to capital
gains tax as follows:

Taxable = Unutilized Portion . x SP

Amount Gross Selling Price FMV
ZONAL

CGT = Taxable Amount * 6%

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Income Taxation Individual Taxpayer

TAXATION OF NRA-NETB

NRA-NETB is subject to
1. 25% FWT on ALL
a. Ordinary income
b. Passive income derived from sources within the Philippines (including interest
income from long-term bank deposit or investment and PCSO/Lotto winnings
except interest income on bank deposit under PCDU)
2. CGT on sale of shares of a domestic corporation directly to a buyer
3. CGT on sale of a real property classified as capital asset located in the Philippines

Minimum Wage Earners

The term "statutory minimum wage (SMW)" earner shall refer to a worker in the private sector
paid the statutory minimum wage, or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned (RR 10-2008). MWES are exempt from income tax on:
1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay

APPLICABLE TAXES OF MWEs (RR 10-2008; Soriano vs. Sec of Finance with GR No. 184450)
▪ Purely MWE Exempt from Income Tax

▪ MWE with additional “compensation” income exceeding Still considered MWE

Tax-exempt thresholds of: (Soriano vs. Secretary of Finance with
⧫ Prior to 2018: P 82,000 GR. No. 184450 dated Jan. 24, 2017)
⧫ Beginning 2018 (TRAIN Law): P 90,000

▪ MWE with additional “business” income Income as MWE = Exempt

Business Income = Taxable

Basic Income Tax of Married Individuals

▪ Married individuals (i.e., husband and wife) are required by law to file a consolidated
income tax return, but they shall compute separately their individual income tax.
▪ Income which cannot be definitely attributed to or identified as income exclusively earned
or realized by either of the spouses, the same shall be equally divided between the
spouses for purposes of determining their taxable income.
▪ If the spouses are only physically separated and there is no legal separation, they are still
required by law to file consolidated or joint returns for which they are considered as jointly
and severally liable to the tax.

Income Tax of Senior Citizens (SC) and Persons with Disability (PWDs)

▪ SCs and PWDS deriving returnable income are required to file their income tax returns
and pay the tax as they file the return.
▪ SCs/PWDs as MWE - Exempt from income tax on the said compensation income

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Income Taxation Individual Taxpayer

▪ Aggregate gross income (prior to TRAIN Law) does not exceed the amount of his personal
exemptions (BPE and APE), he shall be exempt from income tax and shall not be required
to file income tax return.

Fringe Benefits (FBT) and De Minimis Benefits

FBT is a final withholding tax imposed on the grossed-up monetary value of the fringe
benefit furnished, granted or paid by the employer to managerial or supervisory employees,
whether such employer is an individual, professional partnership or corporation, regardless of
whether the corporation is taxable or not, or the government and its instrumentalities. (Section
33, RA 8424, RR No. 3-98)

The term "Fringe Benefit means any good, service, or other benefit furnished or
granted by an employer in cash or in kind, in addition to basic salaries, to an individual
employee (except rank and file employee) such as but not limited to the following:
a. Housing;
b. Expense Account
c. Vehicle of any kind
d. Household personnel, such as maid, driver and others
e. Interest on loan at less than market rate to the extent of the difference between the
market rate and the actual rate granted
f. Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations
g. Holiday and vacation expenses
h. Educational assistance to the employee or his dependents
i. Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows; and
j. Expenses for foreign travel

THE FOLLOWING FRINGE BENEFITS ARE NOT SUBJECT TO FBT:

1) Fringe benefits given to rank and file employees (not subject to FBT but subject to
basic income tax)

2) Housing benefits/privilege:
a. Of military officials of the Armed Forces of the Philippines (AFP).
b. Which is situated inside or adjacent (within 50 meters from the perimeter of the
business premises) to the premises of a business or factory.
c. Which are "temporary" for an employee or for a temporary housing unit of three
(3) months or less.

3) Expenses incurred by the employee which are paid by the employer and expenses
paid for by the employee but reimbursed by his employer, provided.
a. The expenditures are duly receipted for and in the name of the employer;
b. It does not partake the nature of a personal expense attributable to the
employee;

4) Allowances subject to liquidation (tax exempt allowances)

▪ Allowances not subject to liquidation are taxable.
▪ Representation and transportation allowances which are fixed in amounts and are
regularly received by the employees as part of their monthly compensation (exempt
from FBT but subject to basic income tax).

5) Reasonable business travel expenses:

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Income Taxation Individual Taxpayer

▪ Inland travel expenses (such as expenses for food, beverages and local
transportation) during foreign travel.
▪ Lodging cost in a hotel (or similar establishments) amounting to an average of
US$300 or less per day during foreign travel.
▪ Cost of economy and business class airplane ticket for "foreign" travel.
▪ 70% of the cost of first class airplane ticket for foreign travel.
 BUSINESS travel expenses "within the Philippines are generally assumed to
be reasonable in amount.

6) Educational assistance
 TO THE EMPLOYEE, provided:
a. The education or study is directly connected with the employer's trade,
business or profession; and
b. There is a written contract between them that the employee is under
obligation to remain in the employ of the employer for a period of time they
have mutually agreed upon

 TO THE DEPENDENTS OF THE EMPLOYEE, provided that the assistance

was provided through a competitive scheme under the scholarship program of
the Company.

7) Contributions of the employer for the benefit of the employee on the following:
a. Pursuant to the provisions of existing law, such as under SSS and GSIS
b. Similar contributions arising from provisions of any other existing law
c. To retirement, insurance and hospitalization benefit plans

8) The cost of premiums borne by the employer for the group insurance of his employees.

9) Fringe benefits which are/if:

▪ authorized and exempted from income tax under the Tax Code or under any
special law
▪ The fringe benefit is required by the nature of or necessary to the trade, business
or profession of the employer.
▪ For the convenience or advantage of the employer

De Minimis Benefits

The following are de minimis benefits under RR 10-2008 as amended by RA 10963

(TRAIN Law); RR 8-2018, RR 11-2018, RR 8-2012; RA 10653, RR 1-2015/RR 3-2015:
a. Monetized unused vacation leave credits of private employees not exceeding ten (10)
days during the year and the monetized value of leave credits paid to government
officials and employees;
b. Medical cash allowance to dependents of employees not exceeding P1,500 per
employee per semester or P250 per month (RR 11-2018; TRAIN Law);
c. Rice subsidy of P2,000 or one (1) sack of 50-kg. Rice per month amounting to not
more than P2,000 (RR 11-2018; TRAIN Law);
d. Uniform and clothing allowance not exceeding P 6,000 per annum (RR 11-2018;
TRAIN Law);
e. Actual yearly medical benefits exceeding P10,000 per annum;
f. Laundry allowance not exceeding P 300 per month;
g. Employees achievement awards, e.g. length of service or safety achievement, which
must be in the form of a tangible personal property other than cash or gift certificate,
with an annual monetary value not exceeding P 10,000 received by the employee

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Income Taxation Individual Taxpayer

under an established written plan which does discriminate in favor of highly paid
employees;
h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000
employee per annum;
i. Daily meal allowance for overtime work and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic minimum wage.
j. Starting January 1, 2015, benefits received employee by virtue of a collective
bargaining agreement (CBA) and Productivity incentive schemes, provided, that the
total annual monetary value received from the two (2) items combined, exceed
P10,000 per employee per taxable year (RR 1-2015).

13th Month Pay and "Other Benefits"

13th month pay and Other Benefits received by officials and employees of public and
private entities not exceeding P 90,000 beginning January 1, 2018 under the TRAIN Law
(P82,000 from 2015 2017; P30,000 before 2015) are exempt from income tax and creditable
withholding on compensation income. Amount "in excess of P 90,000” (as amended) should
form part of an individual's gross income and would subject income tax and applicable
creditable withholding taxes.

"OTHER BENEFITS" under RR 2-98 amended by RR 3-2015 include:

✓ Christmas bonus
✓ Productivity incentive bonus
✓ Loyalty awards
✓ Gifts in cash or in kind and other benefits of similar nature actually received
by officials and employees of both government and offices

 Gifts given during Christmas and major anniversary celebrations not exceeding P
5,000 per employee per annum shall be treated “de minimis” benefits. Any excess shall
be included as part of "other benefits" [RR 10-2008 as amended by RR 5-2011, RR 8-
2012 and RR 1-2015].

EXCESS OF DE MINIMIS OVER THE CEILINGS & 13TH MONTH PAY

▪ De minimis benefits ‘conforming” to the Tax Exempt; Excluded in determining the
“ceiling” P 90,000 ceiling of “other benefits”.

▪ “Excess” of the de minimis benefits Included in determining the P 90,000

over their respective ceilings ceiling of “other benefits”
Amount in excess of P 90,000 is subject
to basic income tax.

FORMULA IN COMPUTING THE FRINGE BENEFITS TAX and MONETARY VALUE

Beginning January 1, 2018 under the TRAIN Law

EMPLOYEE
RC, NRC, RA,
NRANETB
NRAETB
Monetary Value Pxx Pxx
Divided by GUMVF 65% 75%
Grossed-up monetary value (GUMV) Pxx Pxx
x FBT Rate 35% 25%
Fringe benefit tax Pxx Pxx

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Income Taxation Individual Taxpayer

MONETARY VALUE: In General, the valuation of fringe benefits shall be as follows

BENEFIT MONETARY VALUE
▪ Money = Amount of money
▪ Non-cash property with transfer of ownership = Higher of FMV vs. ZV, if applicable
▪ Non-cash property; ownership is not transferred = Depreciation value
▪ Employer lends money free of interest = Principal x 12%
▪ Employer lends money at a rate lower than 12% = Principal x (12% - Actual Rate)

EXCEPTIONS: Monetary Value of Housing and Motor Vehicle as shown below:

HOUSING BENEFIT VALUATION
1. Employer leases a residential property for the use Rental paid x 50%
of the employee

2. Employer owns a residential property for the use Higher of FMV in the Real property declaration or
of the employee Zonal value x 5% x 50%

3. Employer purchases residential property in Acquisition cost, exclusive of interest x 5% x 50%

installment for the use of the employee

4. Employer purchases residential property and Higher of Acquisition cost or Zonal value ad
transfers ownership to the employee determined by the CIR.

5. Employer purchases residential property and Higher of FMV in the Real property declaration or
transfers ownership to the employee on a lesser Zonal value as determined by the CIR less cost to
amount the employee

MOTOR VEHICLE VALUATION

1. Employer owns and maintains a fleet of motor Acquisition cost of vehicle not normally used for
vehicles for the use of the business and business divided by 5 years x 50%
employees

2. Employer leases/maintains a fleet of motor Amount of rental payments not normally used for
vehicles for the use of the business and business purposes x 50%
employees

3. Employer purchases vehicle in the name of the Acquisition cost

employee

4. Employer provides employee with cash for the Cash received

purchase of the vehicle, and ownership is placed
in the name of the employee

5. Employer purchases the vehicle on installment Acquisition cost exclusive of interest divided by 5
and ownership is placed in the name of the years
employee

6. Employer shoulders a portion of the amount of the Amount shouldered by the employer
purchase price of vehicle and ownership is placed
in the name of the employee

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Income Taxation Individual Taxpayer

FORMULA IN COMPUTING THE FRINGE BENEFITS TAX PRIOR to 2018

EMPLOYEE
RC, NRC, RA,
NRANETB SAE/SFEs***
NRAETB
Monetary Value Pxx Pxx Pxx
Divided by GUMVF 68% 75% 85%
Grossed-up monetary value Pxx Pxx Pxx
(GUMV)
x FBT Rate 32% 25% 15%
Fringe benefit tax Pxx Pxx Pxx

**PRIOR to 2018, SFES employed by ROHQS/RHQs not qualified for the 15% income tax on
compensation income shall still be subject to 15% FBT if such SFE is holding managerial
position.

The coverage of 15% fringe benefit tax and 15% tax on compensation income are independent
to each other. Thus, there would be instances where a Filipino employee shall enjoy 15%
preferential tax rate but may not be covered by fringe benefit tax for not being a
supervisory/managerial employee.

FILING OF INCOME TAX RETURNS

1. Basic Tax

a. For purely compensation income earners - on or before April 15 of the succeeding

year.

b. For business income earners including income from practice of profession -the
individual taxpayer is required to file a quarterly tax return (regardless of the results of
operation) as follows:

1st Quarter May 15

2nd Quarter Aug. 15 (45 days after end of Quarter)
3rd Quarter Nov. 15 (45 days after end of Quarter)
Final adjusted/annual April 15 of the succeeding year return

2. Final Withholding Tax on Passive Income

The return shall be filed and paid not later than the last day of the month following the
close of taxable quarter during withholding was made.

3. Capital Gains Tax

a. Shares 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

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Income Taxation Individual Taxpayer

TAX REPORTING

Types of Tax Returns to Government

1. Income tax returns – provides details of the taxpayer’s income, expense, tax due, tax
credit and tax still due to the government.

2. Withholding tax returns – provides reports of income payments subjected to withholding

tax by the taxpayer-withholding agent.

3. Information returns

- Certain taxpayers are also required to file information returns. Information returns do
not involve any payment or withholding of tax but are essential to government in its tax
mapping efforts and in its evaluation of tax compliance

- The non-filing of income tax returns, withholding tax returns, or information returns is
subject to penalties, fines, and/or imprisonment

MODE OF FILING INCOME TAX RETURNS

1. Manual filing System – the traditional manual system of filing income tax return is by
paper documents where taxpayers fill up BIR forms to report to income, expenses, or any
declaration required to be filed with the BIR

Under the NIRC, the income tax return shall be files to the following, in descending order
of priority, within the revenue district office where the taxpayer is registered or required to
register:

a. An authorized agent bank (AAB)

b. Revenue Collection Officer
c. Duly authorized city or municipal treasurer, if there is no BIR office in the locality

2. e- BIR Forms – the BIR introduced the e-BIR Forms with an offline or online version.
Taxpayer fill up their income tax returns in electronic spreadsheets without the need of
writing on paper returns. The system ensures completeness of data on the returns and is
capable of online submission. If there are no penalties that require BIR assessments,
taxpayers would have to print a hard copy of the filled tax returns and proceed directly to
the bank for payment.

3. Electronic Filing and Payment System (eFPS)- the Efps is a paperless tax filing system
developed and maintained by the BIR Taxpayers file returns including attachments in
electronic format and pay tax through the Internet.

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Income Taxation Individual Taxpayer

Payment

Generally, the income tax payable shall be paid at the time the return is filed (also known as
“Pay as you file system”). However, RA 10963 (TRAIN Law) provides, that, when the tax due
is in excess of P2,000, the individual taxpayer may elect to pay the tax in two equal
installments as follows:

1st installment: at the time of filing the annual ITR

2nd installment: on or before October 15 following the close of calendar year.

Place of Filing Income Tax Return

The ITR shall be filed and paid with any of the following:

1. Authorized agent banks

2. Revenue district officer
3. Collection agent
4. Duly authorized city or municipal Treasurer in which the taxpayer has his legal residence
or principal place of business in the Philippines or if there be no legal residence or place
of business in the Philippines, with the Office of the CIR

Required to File:

1. Resident citizens receiving income from sources within or outside the Philippines.
2. Employees deriving purely compensation income from 2 or more employers, concurrently
or successively at anytime during the taxable year.
3. Employees deriving purely compensation income regardless of the amount, whether from
a single or several employers during the calendar year, the income tax of which has not
been withheld correctly (1.e. tax due is not equal to the tax withheld) resulting to collectible
or refundable return.
4. Self-employed individuals receiving income from the conduct of trade or business and/or
practice of profession.
5. Individuals deriving mixed income, i.e., compensation income and income from the
conduct of trade or business and/or practice of profession.
6. Individuals deriving other non-business, non-professional related income in addition to
compensation income not otherwise subject to a final tax.
7. Individuals receiving purely compensation income from a single employer, although the
income of which has been correctly withheld, but whose spouse is not entitled to
substituted filing
8. Marginal income earners
9. Non-resident citizens receiving income from sources within the Philippines
10. Aliens, whether resident or not, receiving income from sources within the Philippines

NOT Required to File:

1. An individual who is a minimum wage earner.

2. An individual whose gross income does not exceed his total personal and additional
exemptions (for incomes earned prior to TRAIN Law).
3. An individual whose income has been subjected to final withholding tax [alien employee
as well as Filipino employee occupying the same position as that of the alien employee of
regional headquarters and regional operating headquarters of multinational companies,

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Income Taxation Individual Taxpayer

petroleum service contractors and sub-contractors and offshore-banking units (Prior to

TRAIN Law) as well non-resident aliens not engaged in trade or business].
4. Those who are qualified under "substituted filing" of income tax returns.

However, substituted filing applies only if all of the following requirements are present:
a. the employee received purely compensation income (regardless of amount) during the
taxable year
b. the employee received the income from only one employer in the Philippines during
the taxable year
c. the amount of tax due from the employee at the end of the year equals the amount of
tax withheld by the employer
d. the employee's spouse also complies with all 3 conditions stated above
e. the employer files the annual information return (BIR Form No. 1604-CF) the employer
issues BIR Form No. 2316 (Oct 2002 ENCS version) to each employee.

Substituted filing of income tax returns (ITR)

Under RA 9504 and RR 10-2008 individual taxpayers may no longer file income tax return on
or before April 15 of the following taxable year provided the taxpayer is/ 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 the taxable year.
4. If married, the employee’s spouse also complies with all three aforementioned conditions,
or otherwise receives no income.

 ACTIVITY No. 2 – 1

Instruction: Answer or provide what is required for each of the following:

1. What are the classification of individual taxpayers?

2. Explain the sources of income of individual taxpayers.

3. What are the types of income of individual taxpayers?

4. What are the Passive Incomes Subject to Final Tax?

5. What are the types of Capital Gains Subject to Capital Gains Tax?

6. What are modes of filing Income tax returns?

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