Module 2 Lesson 2:Taxable Income of Individuals: Gross or Net Income

Learning Objectives:
1. To identify the tax rules on individual income taxpayers according to the classification of taxpayers
and classification of income according to taxability.
2. To compute the basic income tax due

Classification of individual taxpayers:

Ordinary:
1. CLASSIFICATION OF INDIVIDUALS
1. Resident Citizens – A citizen of the Philippines residing therein. Under Sec. 1, Art. IV of the 1987
Constitution, the following are citizens of the Philippines.

(1) Those who are citizens of the Philippines at the time of the adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino Mothers, who elect Philippine citizenship upon
reaching the age of majority; and
(4) Those who are naturalized in accordance with law.

2. Non-resident citizen
a. A citizen of the Philippines whose physical presence abroad is with a definite intention to reside
therein – to the satisfaction of the Commissioner of Internal Revenue.
b. 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. A good example would be Overseas Contract
Workers (OCW) or Overseas Filipino Workers (OFW) who were issued an overseas employment permit.
For purposes of income tax, a seaman is considered an OCW.
c. 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 during the taxable year. “Most of
the time” meaning at least 183 days. (Sec. 2 of RR No. 1-79)
d. A citizen who has been previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be
treated as a non-resident citizen for the taxable year with respect to his income derived from sources
abroad until the date of his arrival in the Philippines. (Sec. 22[E] of the Tax Code)

So, if the taxpayer, who is previously considered a non-resident citizen arrived in the Philippines on July
1, 2018 with the intention of residing permanently in the Philippines, shall be considered a non-r resident
citizen for his income from January 1 to June 30, 2018 (prior to his date of arrival) and a resident citizen
for the rest of the year.

3. Resident Alien
a. An alien who lives in the Philippines with no definite intention as to his stay (floating intention);
b. One who comes to the Philippines for a definite purpose which in its nature would require an extended
stay and to that end makes his home temporarily in the Philippines;
c. An alien who has acquired residence in the Philippines and retains his status as such until he
abandons the same and actually departs from the Philippines.

4. Non-resident alien (NRA)

a. An alien who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished.
b. One who may either be a:
i. NRA engaged in trade or business (NRAETB) in the Philippines or
ii. NRA not engaged in trade or business (NRANETB) in the Philippines.

An NRA who shall come to the Philippines and stay for an aggregate of more than 180 days shall be
deemed a NRAETB.

Classification of Income according to Taxability

1. Income Items subject to Basic Income Tax
2. Income Items subject to Final Income Tax
3. Exempt Income
Summarized rules on Individual Income Taxation per TRAIN Law
Tax Base Tax Source Tax Rate
1. Resident Citizen (RC)
-Basic Income Tax (BIT) Taxable Net Income (Gross Income – World 0%-35%
Allowed Deductions)
-------------------------- ------------ ---------------
Gross Income World 8%
-Final Income Tax (FIT) Taxable Gross Income Philippines Single rates
-Exempt Income - - -

2. Resident Alien (RA), Non Resident Citizen (NRC) and Non Resident Alien Engaged in Business
in the Philippines (NRAEBP)
-Basic Income Tax (BIT) Taxable Net Income (Gross Income – Philippines 0%-35%
Allowed Deductions)
-------------------------- ------------- ------------
Taxable Gross Income Philippines or 8%
-Final Income Tax (FIT) Taxable Gross Income Philippines Single rates
-Exempt Income - - -

3. Non Resident Alien Not Engaged in Business in the Philippines (NRANEBP) *

-Basic Income Tax (BIT) Taxable Gross Income Philippines 25%
-Final Income Tax (FIT) Taxable Gross Income Philippines Single rates
-Exempt Income - - -

*Non-resident aliens NOT engaged in trade or business: Except for sale of capital assets (shares of
stock and real property) covered by Sec. 24 (C) and (D) of the Tax Code, the entire income received
from all sources within the Philippines by every non-resident alien NOT engaged in trade or business
within the Philippines such 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 income, and capital gains – the applicable tax rate is 25% (Sec.
25[B]
 APPLICATION:
a. Compute the Basic Income Tax
A. RC B. RA, NRC, C.
Given NRAEBP NRANEBP
(Bruno
Mars)
Gross Income Philippines P1,000,000 1,000,000 1,000,000 1,000,000
Gross Income Abroad 1,000,000 1,000,000 X X
Income Subject to Final Tax 10,000 X X X
Exempt Income 50,000 X X X
Gross Income P2,000,000 P1,000,000 P1,000,000
Allowed Deduction Philippines P400,000 -400,000
Allowed Deduction Abroad 300,000
Non-deductible Business Expenses P20,000
Total Allowed Deduction P700,000 P400,000 P0
Taxable Net Income (graduated rates) P1,300,000 P600,000 P1,000,000

Basic Income Tax Due- Graduated Tax Rates 102,500 + (25% P22,500 + ----------
x 500,000)= (20% x
P227,500 200,000)=
P62,500
Basic Income Tax Due-8% Tax Rate (P2,000,000- (P1,000,000- ----------
250,000)x 8%= 250,000) x
P140,000 8%)=
P60,000
Basic Income Tax Due- 25% P250,000
 ASSIGNMENT # 2

A. Answers only
1. What is the automatic basic income tax rate/s used for regular income taxpayers?
2. Why does non-resident alien not engaged in business in the Philippines not subject to graduated tax
rates or 8%?
3. Can a compensation income taxpayer opt to use 8% preferential income tax rate? Why or why not?
4. When shall a taxpayer has to signify his her intention to avail the 8% preferential income tax rate?

B. Compute the Basic Income Tax due of each taxpayer:(Solution* and answer)
*for your solution to be considered 100% correct, computational presentation must be with
support computations needed, correct arithmetic, complete data and in good form

1. Mrs. ZZZ is a Filipino residing in Cebu. For the year 2023, she earned P9,000,000 business income
and incurred P5,000,000 business expenses (10% of which is non deductible for income tax purposes).
She also gained P10,000 income subject to final tax. Compute her 2023 Philippine basic income tax
due.

2. A Finnish national, residing in AAA Condominium in Pasig City since year 2020, reported the
following: P2,000,000 business income from the Philippipnes, P500,000 business income from
Indonesia, P200,000 business income from Finland and incurred P800,000 business expenses from the
Philippines, P350,000 business expenses from Indonesia and P39,000 Businesse expenses from
Finland. She also gained P10,000 income subject to final tax. Compute his 2023 Philippine basic income
tax due.

3. Using number 2, assuming the taxpayer is a Non-resident alien engaged in business in the
Philippines, compute his 2023 Philippine Basic Income Tax Due.
Sources of Income Subject to regular/basic income tax rate (Graduated tax)
1. Compensation Income
2. Business or Professional Income
3. Mixed Income ------Compensation and Business or Professional Income

For Compensation Income Earner: (Graduated Tax Rates only)

Gross Compensation Income P1,000,000
Less: Non Taxable Compensation 90,000
Taxable Compensation Income P910,000
Add: Non Trade, Business, Professional Income, if any 10,000
Taxable Compensation Income P920,000

Basic Income Tax Due P132,500*

*P920,000-800,000= 120,000 x 0.25=30,000 + 102,500=P132,500

Compensation Income----all remuneration received for services performed by an employee for his
employer under an employee-employer relationship. (Section 2.78.1 (A) of RR No. 2-98) It includes
salaries, wages, emoluments and honoraria, allowances, commissions (e.g., transportation,
representation, entertainment and the like); fees including director's fees, if the director is, at the same
time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which
are subject to the fringe benefits tax under Sec. 33 of the NIRC; taxable pensions and retirement pay;
and other income of a similar nature.
For Business or Professional Income Earner:
Business or Professional Income – income earned by an individual from his sole proprietorship
business, from the practice of profession, or share in the income of a general professional partnership
subject to Income Tax and Expanded Withholding Tax,
whenever applicable.

“Professional” is a person the activities formally certified by a professional body to a specific profession
by virtue of having completed a required examination or course of studies and/or practice, whose
competence can usually be measured against an established set of standards, such as CPAs, Lawyers,
Doctors, etc.

It likewise includes a person who engages in some art or sport for money, as a means of livelihood,
rather than as a hobby, such as athletes, artists, bookkeeping agents, and other recipients of
professional, promotional or talent fees. (RR No. 8-2018)

Income owned in common with the spouse: if there is a disposal of an asset which is conjugally owned
by the spouses, the gain therefrom shall be divided equally to both the husband and the wife. Same is
true with expenses incurred conjugally, which are deductible, and it is not determinable who among the
spouses actually incurred the same, they shall share in such deduction equally.

Note that there are no other rules applicable to spouses with regards income tax, since they compute for
their own income tax liabilities; however, spouses can opt to report their income separately but in ONE
tax return, which provides for separate columns and sections for the spouse. In fact, it is encouraged by
the BIR that spouses file their income together in one return.

Self -employed individuals is either subject to any of the following business tax:
1. Percentage Tax- Regular(Section 109 of NIRC)
2. Percentage Tax- Like Common Carrier, Franchise grantees of radio/ tv, water,Gas, Bank, insurance
3. Value-added Tax- 12% (Annual Gross Income Threshold is exceeding 3 million & mandatory subject
to VAT)

Who are qualified to avail 8% Income Tax Rate? (ALL)

1. Must be either a single proprietor, professional or mixed INDIVIDUAL income earner,
2. Annual gross receipt does not exceed 3 Million pesos,
3. Registered ad subject to REGULAR percentage tax and
4. Have expressed the intention of availing the 8% option in its 1st Quarter filing of Percentage tax
return and/or Quarterly income tax return OR using BIR Form 1905 to update the registration (for
Existing taxpayers), BIR Form 1901 OR initial filing of quarterly percentage tax and/or quarterly income
tax return (for New Taxpayers)

Who are not qualified to avail the 8% option?

1. Corporation owning a business
2. Purely Compensation income earners
3. VAT registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating
income.
4. Exempted from VAT but exceeded the 3 million pesos VAT threshold
5. Taxpayers who are subject to percentage taxes other than the 3% OPT under Sec. 116 (e.g., those
subject to common carrier’s tax, amusement tax, gross receipts tax, etc.)
6. Partners of General Professional Partnership as to their share in the net income thereof (note,
however, that they can still claim the 8% flat rate of income tax as to their own business income,
provided the gross sales/receipts thereof do not exceed P3,000,000). This is because their share is
already net of applicable costs and expenses; and
7. Individuals enjoying income tax exemption such as those registered under the Barangay Micro
Business Enterprises (BMBEs), etc., since taxpayers are not allowed to avail of double or multiple tax
exemptions under different laws unless specifically provided by law. (Q&A 16, RMC No. 50-2018)
 Self-employed Exceeding 3 3 Million 3 Million and 3 Million and below and
Individuals Million and and below below and Subject to Regular Percentage
Subject to VAT and Subject Subject to Tax
to VAT OTHER
Percentage Tax
Business Income 5,000,000 2,500,000 2,500,000 2,500,000 2,500,000
Add: Other Income 50,000 50,000 50,000 50,000 50,000
Gross Income 5,050,000 2,550,000 2,550,000 2,550,000 2,550,000
Less: Allowed -2,000,000 -1,000,000 -1,000,000 -1,000,000 -
Deduction
Taxable Net Income 3,050,000 1,550,000 1,550,000 1,550,000 2,550,000

Basic Income Tax Due P717,500* P290,000 ** P290,000 ** P290,000 ** P184,000 ***

opted 8%
income tax
rate
*(3,050,000-2,000,000) x 0.30= 315,000 + 402,500= P717,500
** (1,550,000- 800,000) x 0.25= 187,500 + 102,500= P290,000
*** (2,550,000-250,000) x 8%= P184,000
 For Mixed Income Earner

Mixed Income Earners (from compensation and income from business or practice of profession) can be
taxable as follows:
a. COMPENSATION INCOME - is ALWAYS subject to the graduated rights.
b. INCOME FROM BUSINESS/PRACTICE OF PROFESSION:
i. If the taxpayer’s gross sales/receipts, together with other non-operating income, do not
exceed P3,000,000: either
a) 8% income tax rate without the first P250,000 exempt (since this will be
considered in the application of the graduated rates for income from
compensation); or
b) Graduated rates
ii. If the taxpayer’s gross sales/receipts, together with other non-operating income,
exceeds P3,000,000 – graduated rates.

Exceeding 3 Million 3 Million 3 Million and below and

3 Million and below and below Subject to Regular
and Subject and and Percentage Tax
to VAT Subject to Subject to
VAT OTHER
Percentage
Tax
Gross Compensation Income P1,000,000 P1,000,000 P1,000,000 P1,000,000 P1,000,000
Less: Non Taxable Compensation 80,000 80,000 80,000 80,000 80,000
Taxable Compensation Income P920,000 P920,000 P920,000 P920,000 P920,000
Add: Non Trade, Business, Professional 10,000 10,000 10,000 10,000 10,000
Income, if any
Taxable Compensation Income (A) P930,000 P930,000 P930,000 P930,000 P930,000

Business Income 5,000,000 2,500,000 2,500,000 2,500,000 2,500,000

Add: Other Income 50,000 50,000 50,000 50,000 50,000
Gross Business Income 5,050,000 2,550,000 2,550,000 2,550,000 2,550,000
Less: Allowed Deduction -2,000,000 -1,000,000 -1,000,000 -1,000,000 -
Taxable Net Income (B) 3,050,000 1,550,00 1,550,000 1,550,000 2,550,000

Total Taxable Net Income (A + B) P3,980,000 P2,480,000 P2,480,000 P2,480,000 P3,480,000

Basic Income Tax Due P996,500 * P546,500 P546,500 P546,500 P339,000

** ** ** ***
*(3,980,000-2,000,000) x 0.30=594,000 +402,500= P996,500
**(2,480,000-2,000,000) x 0.30= 144,000 + 402,500= P546,500
***For compensation income- P930,000= (930,000-800,000) x0.25=32,500+ 102,5000=P135,000
For business income= P2,550,000 x 8%= P204,000
135,000 + 204,000= P339,000
 ASSIGNMENT # 3

Compute the Basic Income Tax due of each taxpayer:(Solution* and answer)
*for your solution to be considered 100% correct, computational presentation must be with
support computations needed, correct arithmetic, complete data and in good form

1. AAA is an employee of BBB Corporation and received an annual basic compensation income of
P1,200,000 for the year 2023, Compute the Basic Income tax due of AAA for the year 2023._______
2. CCC is a Filipino CPA and owner of DDD Accounting Services. DDD Accounting Services is a VAT
registed company. During the year, he reported an annual business income Philippines of P2,000,000,
Business Income Abroad of P500,000 and allowed deduction Philippines, P400,000 Allowed deduction
Abroad of P100,000 and non deductible business expenses Philippines of P60,000. Compute the basic
income tax due. ________________
3. EEE is a Filipino CPA. She is an employee of ZZZ Corporation and owner of YYY Accounting
Services.

Her annual Gross Compensation income in ZZZ Corporation is P900,000, including a P100,000 non
taxable compensation income.

YYY Accounting Services is a VAT registed company. During the year, he reported an annual business
income Philippines of P4,000,000, Business Income Abroad of P1,000,000 and allowed deduction
Philippines, P1,000,000 Allowed deduction Abroad of P500,000 and non deductible business expenses
Philippines of P150,000. Compute the basic income tax due. _______________
4 FFF is a Filipino CPA. She is an employee of XXX Corporation and owner of WWW Accounting
Services.

Her annual Gross Compensation income in XXX Corporation is P900,000, including a P100,000 non
taxable compensation income.

WWW Accounting Services is a non- VAT registed company and express her intention to use 8%
optional income tax rate. During the year, he reported an annual business income Philippines of
P1,800,000, Business Income Abroad of P900,000 and allowed deduction Philippines, P800,000
Allowed deduction Abroad of P500,000 and non deductible business expenses Philippines of
P150,000. Compute the basic income tax due. ______________