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INCOME TAXATION

FUNDAMENTAL PRINCIPLES

Taxation
 It is the process or means by which the sovereign (independent state), through the
lawmaking body (the legislature), imposes burdens upon subjects and objects within its
jurisdiction for the purpose of raising revenues to carry out the legitimate objects of
government.
 It is the act of levying a tax to apportion the cost of government among those who, in
some measure, are privileged to enjoy its benefits and must, therefore, bear its burdens.
 It is a power inherent in every sovereign state being essential to the existence of every
government.

Taxes
 Are the enforced proportional contributions or charges from persons and property
levied by the lawmaking body of the state by virtue of its sovereignty for the support of
the government and all public needs.

Purposes of Taxation
 Primary – is to raise revenue to support the existence of the government.

 Secondary – is often employed as a devise for regulation or control by means of which

certain effects or conditions envisioned by the government may be achieved (such as:
Promotion of General Welfare {Sin Taxes}, Reduction of Social Inequality, Economic
Growth {Grant of Tax Incentives})

Theory and Basis of Taxation

 Necessity Theory – the power of taxation proceeds upon the theory that the existence
of government is a necessity. It is a necessary burden to preserve the State’s
sovereignty and a means to give the citizenry an army to resist aggression, a navy to
defend its shores from invasion, a corps of civil servants to serve, public improvements
for the enjoyment of the citizenry, and protection which a government is supposed to
provide.

 Lifeblood Theory – the government can neither exist nor endure without taxation.
Taxes are the lifeblood of the government and their prompt and certain availability is
an imperious need. {Note: Consider the deadline for the payment of taxes}. The
government cannot continue to perform its basic functions of serving its people without
means to pay its expenses. Consequently, the state has the right to compel all its
citizens and property within its limits to contribute. {What is meant by “Taxes could
not be the subject of compensation or set-off”?}

 Benefits Received or Reciprocity Theory – the basis is the reciprocal duties of

protection and support between the state and its inhabitants. The state collects taxes
from the subjects of taxation in order that it may be able to perform the functions of
government. The citizens, on the other hand, pays taxes in order that they may be
secured in the enjoyment of the benefits of organized society. This theory spawned the
Doctrine of Symbiotic Relationship which means that taxes are what we pay for a
civilized society. {Note: Consider what is known as “Revolutionary Tax”}

Essential Elements of a Tax

a) It is an enforced proportional contribution (Not voluntary payment or donation);
b) It is generally payable in money;
c) It is proportionate in character (Based on one’s ability to pay);
d) It is levied on persons, property, or the existence of a right or privilege;
e) It is levied by the lawmaking body of the state (Purely legislative function);
f) It is levied for public purpose (This is synonymous with “governmental purpose”. A tax must
always be imposed for a public purpose; otherwise, it will be declared as invalid. {Consider the
principle of Separation of the State and the Church}).

Exemption of Government Entities, Agencies and Instrumentalities

 Immunity is necessary in order that government functions will not be impeded.
Otherwise, the government will be taxing itself to raise money for itself. The following

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rule shall apply in determining whether or not a government entity or agency is subject
to tax:
a) Agencies performing governmental functions are exempt from tax unless expressly taxed;
b) Agencies performing proprietary functions are subject to tax unless expressly exempted;
however, the following Government Owned and/or Controlled Corporations (GOCCs)
performing proprietary functions are granted tax exemptions, namely:
 Government Service Insurance System (GSIS);
 Social Security System (SSS);
 Philippine Health Insurance Corporation (PHIC);
 Philippine Charity Sweepstakes Office (PCSO); and
 Local Water Districts (RA 10026).

Classification of Taxes
1. As to Scope:
a) National – imposed by the National Government (e.g. Income Tax, Estate Tax, Donor’s
Tax, VAT and other percentage taxes, Documentary Stamp Tax);
b) Local – imposed by local government units (LGUs) (e.g. Real Estate Tax and
Professional Tax Receipt).
2. As to Subject Matter:
a) Personal, Poll or Capitation – tax of a fixed amount imposed upon an individual,
whether citizens or not, residing within a specified territory without regard to their
property or the occupation in which he may be engaged (e.g. Community Tax);
b) Property – tax imposed on property, whether real or personal, in proportion either to its
value or in accordance with some other reasonable method of apportionment (e.g. Real
Estate Tax);
c) Excise – any tax which does not fall within the classification of a poll tax or a property
tax. This is a tax on the exercises of certain rights and privileges (e.g. Income Tax, Estate
Tax, Donor’s Tax).
3. As to Determination of Amount:
a) Specific – tax of fixed amount imposed by the head or number or by some standard of
weight or measurement (e.g. Excise Tax on cigars and liquors);
b) Ad Valorem – tax of a fixed proportion of the value of the property with respect to
which the tax is assessed (e.g. VAT, Income Tax, Donor’s Tax and Estate Tax).
4. As to Graduation or Rate:
a) Proportional – tax based on a fixed percentages of amount of the property, receipts or
other basis to be taxed (e.g. VAT);
b) Progressive or Graduated – tax the rate of which increases as the tax base or bracket
increase (e.g. Income Tax on Individual Taxpayers);
c) Regressive – tax the rate of which decreases as the tax base or bracket increases.

Tax Evasion
 It is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a
tax. It is also known as “tax dodging”. It connotes fraud through the use of pretenses or
forbidden devices to lessen or defeat taxes (e.g. Deliberate failure to report a taxable income or
property or deliberate reduction of income).

Tax Avoidance
 It is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability. It is politely called
“tax minimization” and is not punishable by law.

Sources of Tax Laws in the Philippines:

1. Constitution;
2. National Internal Revenue Code (RA No. 8424 “National Internal Revenue Code of
1997” as amended by RA 10963 “Tax Reform for Acceleration and Inclusion Act” or
TRAIN LAW);
3. Tariff and Customs Code;
4. Local Government Code;
5. Local Tax Ordinance;
6. Tax Treaties and international agreements (The Philippine Government usually enters
into tax treaties in order to avoid or minimize the effects of double taxation);
7. Special Laws;
8. Decisions of the Supreme Court and the Court of Tax Appeals; and
9. Revenue Rules and Regulations and Administrative Rulings and Opionions.

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Rule when there is doubt in statute or law

 No person or property is subject to taxation unless it is within the terms or plain import of a
taxing statute. In every case of doubt, tax statutes are construed strictly against the government
and liberally in favor of the taxpayer. Taxes, being burdens, are not to be presumed beyond
what the statute expressly and clearly declares.

Provisions granting tax exemptions

 Such provisions are construed strictly against the taxpayer claiming tax exemption. When a tax
is unquestionably imposed, a claim of exemption from tax payments must be clearly shown and
based on the language in the law too plain to be mistaken.

Income Tax
 It is a tax on all yearly profits arising from property, profession, trade or business,
or as a tax on a person’s income, emoluments, profits and the like.
 It is generally regarded as an excise tax. It is not levied upon persons, property,
funds or profits but upon the right of a person to receive income or profits.

Income
 In its broad sense, means all wealth which flows into the taxpayer other than as a
mere return on capital. [Section 36, Revenue Regulations 2]
 Income means accession to wealth, gain or flow of wealth.
 Conwi vs. CTA [213 SCRA 83]: Income may be defined as an amount of money
coming to a person or corporation within a specified time, whether as payment for
services, interest, or profit from investment.
 Commissioner vs. BOAC [149 SCRA 395]: Income means “cash received or its
equivalent.” It is the amount of money coming to a person within a specific time. It
is distinct from capital for, while the latter is a fund, income is a flow. As used in
our laws, income is flow of wealth. The source of an income is the property,
activity or service that produces the income. For the source of income to be
considered as coming from the Philippines, it is sufficient that income is derived
from activity within the Philippines. In BOAC’s case, the sale of tickets in the
Philippines is the activity that produces the income.
 Fisher vs. Trinidad [43 Phil 973]: Stock dividend is not an income. It merely
evidences the interest of the stockholder in the increased capital of the
corporation. An income may be defined as the amount of money coming to a
person or corporation within a specified time, whether as payment for services,
interest, or profit for investment. A mere advance in the value of property of a
person or corporation in no sense constitutes the “income” specified in the
revenue law. Such advance constitutes and can be treated merely as an increase of
capital. An income means cash received or its equivalent. It does not mean choses
in action or unrealized increments in the value of the property.

Income vs. capital

 Capital is a fund or property existing at one distinct point of time while income
denotes a flow of wealth during a definite period of time.
 The essential difference between capital and income is that capital is a fund or
property existing at one distinct point of time; income is a flow of services
rendered by that capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a period of time.
Capital is wealth, income is the service of wealth. [Madrigal v. Rafferty, 38 Phil
414].
 Capital is the tree while income is the fruit.

Sources of income:
1. Sources within the Philippines;
2. Sources without the Philippines;
3. Sources partly within and partly without the Philippines.

Taxable income
 The term “taxable income” means the pertinent items of gross income specified
in the NIRC, less the deductions and/or personal and additional exemptions, if
any, authorized by such types of income by the NIRC or other special laws.

Requisites for income to be taxable

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1. There must be a gain or profit.
2. The gain must be realized or received.
3. The gain must not be excluded by law or treaty from taxation.

Gain must be realized or received

 This implies that not all economic gains constitute taxable income.
Thus, a mere increase in the value of property is not income but merely
an unrealized increase in capital.

When is income considered received?

1. Actual receipt.
2. Constructive receipt.

Income constructively received

• Income which is credited to the account of or set apart for a
taxpayer and which may be drawn upon by him at any time is subject
to tax for the year during which so credited or set apart, although not
then actually reduced to possession.
To constitute receipt in such a case, the income must be credited
to the taxpayer without any substantial limitation or restriction as to
the time or manner of payment or condition upon which payment is to
be made. [Section 52, Revenue Regulations 2]
• Limpan Investment Company deemed to have constructively received
rental payments in 1957 when they were deposited in court due to its
refusal to receive them. [Limpan vs. CIR, 17 SCRA 703]

Example of constructive receipt

 Partner’s distributive share in the profits of a general professional
partnership is regarded as received by the partner, although not yet
distributed.

Are the following items income?

 Found treasure – YES.
 Punitive damages – YES.
 Damages for breach of promise or alienation of affection – YES.
 Worthless debts subsequently collected – YES.
 Tax refund – NO (but yes if the tax was previously allowed as a deduction and
subsequently refunded or credited, as benefit accrued to the taxpayer.
 Non-cash benefits – YES.
 Income from illegal sources – YES.
 Psychological benefits of work – NO.
 Giveaway prizes – YES.
 Scholarships/fellowships – YES.
 Stock dividends – NO.

Tests to determine realization of income

1. Severance test.
2. Substantial alteration of interest test.
3. Flow of wealth test.

Severance test
 As capital or investment is not income subject to tax, the gain or profit
derived from the exchange or transaction of said capital by the taxpayer
for his separate use, benefit and disposal is income subject to tax.

Substantial alteration of interest test

 Income is earned when there is a substantial alteration of the interest of
a taxpayer; i.e., increase in proportionate share of a stockholder in a
corporation.
 Income to be returnable for taxation must be fully and completely
realized. Where there is no separation of gain or profit, or separation of
increase in value from capital, there is no income subject to tax.
 Thus, stock dividends are not income subject to tax on the part of the
shareholder for he had the same proportionate interest in the assets of
the corporation as he had before, and the stockholder was no richer and

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the corporation no poorer after the declaration of the dividend.
However, if the pre-existing proportionate interest of the
stockholder is substantially altered, the income is considered derived to
the extent of the benefit received.
 Moreover, if as a result of an exchange of stocks, the person received
something of value which are essentially and fundamentally different
from what he had before the exchange, income is realized within the
meaning of the revenue law.

Flow of wealth test

 The essential difference between capital and income is that capital is a fund
whereas income is the flow of wealth coming from such fund; capital is the tree,
income is the fruit. Income is the flow of wealth other than as a mere return of
capital.

CLASSES OF INCOME

Kinds of taxable income or gain

1. capital gain
2. ordinary gain:
a. business income;
b. compensation income;
c. passive income;
d. other income from whatever source derived; i.e., found treasure.

Capital gains
 Capital gains are gains or income from the sale or exchange of capital assets.
These include:
1. Income from dealings in shares of stock of domestic corporation whether
or not through the stock exchange;
2. Income from dealings in real property located in the Philippines; and
3. Income from dealings in other capital assets other than (a) and (b).

Ordinary gains
 Ordinary gains are gains or income from the sale or exchange of
property which are not capital assets.

Business income
1. Income from trading, merchandising, manufacturing or mining.
2. Income from practice of profession.
Note: The term “trade or business” includes the performance of the functions of
a public office. [Section 22(S), NIRC]

Passive income
1. Passive income from Philippine sources subject to final tax.
2. Passive income from Philippine sources not subject to final tax.
3. Passive income from sources outside the Philippines.

Passive income or gain

1. Interest income;
2. Rentals/Leases;
3. Royalties;
4. Dividends;
5. Annuities and proceeds of life insurance/other types of insurance;
6. Prizes and winnings, awards, and rewards;
7. Gifts, bequests, and devises;
8. Other types of passive income.

APPROACHES IN INCOME RECOGNITION

Approaches in income recognition

1. schedular system
2. global system

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Schedular system
 The schedular system is one where the income tax treatment varies and is made to
depend on the kind or category of taxable income of the taxpayer.

Global system
 The global system is one where the tax treatment views indifferently the tax base
and generally treats in common all categories of taxable income of the taxpayer.

Schedular system vs. global system

1. Under the schedular treatment, there are different tax rates, while under the
global treatment, there is a unitary or single tax rate.
2. Under the schedular treatment, there are different categories of taxable income,
while under the global treatment, there is no need for classification as all
taxpayers are subjected to a single rate.
3. The schedular treatment is usually used in the income taxation of individuals
while the global treatment is usually applied to corporations.

Approach used in the Philippines

 Partly schedular and partly global. The schedular approach is used in
the taxation of individuals while the global approach is used in the
taxation of corporations.

CLASSES OF INCOME TAXPAYERS

Basis of classification of taxpayers

1. corporations vs. individuals;
2. nationality;
3. residence.

Classes of income taxpayers

1. Individuals
a. Resident citizens (RC);
b. Non-resident citizens (NRC);
c. Resident aliens (RA);
d. Non-resident aliens (NRA):
i) engaged in trade or business in the Philippines (ETB); or
ii) not engaged in trade or business in the Philippines (NETB).
Note: A non-resident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a non-resident
alien doing business in the Philippines. [Section 25(A) (1), NIRC]

2. Corporations
a. Domestic corporations (DC);
b. Resident foreign corporations (RFC);
c. Non-resident foreign corporations (NRFC).

Who is a non-resident citizen?

 The term “non-resident citizen” means:
1. A citizen of the Philippines who established to the satisfaction of the
Commissioner 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 during the taxable year;
4. A citizen of the Philippines who shall have stayed outside of the Philippines for One
Hundred Eighty Three (183) days or more by the end of the year (aggregate); and
5. A non-resident citizen who arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines shall be considered a non-resident citizen
for the taxable year in which he arrives in the Philippines with respect to income

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derived from sources abroad until the date of his arrival in the Philippines.

Who is a resident alien?

 Is an individual whose residence is within the Philippines and who is not a citizen thereof.

Non-resident alien
 Is an individual whose residence is not in the Philippines and who is not a citizen thereof. They
are aliens who are mere transients.
 Aliens who stays 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 non-
resident aliens engaged in trade or business.
 If an alien stays in the Philippines for only 180 days or less, or he is not deriving income in the
Philippines, he is considered as a non-resident alien not engaged in trade or business.

Corporation
 A corporation, as used in income taxation, includes partnerships, no
matter how created or organized, joint stock companies, joint accounts
(cuentas en participacion), and associations or insurance companies.
 However, it does not include:
1. a general professional partnership; and
2. a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations pursuant to
an operating or consortium agreement under a service contract
with the government.

Resident foreign corporation

 The term applies to a foreign corporation engaged in trade or business
within the Philippines.

Non-resident foreign corporation

 The term applies to a foreign corporation not engaged in trade of
business in the Philippines.

GENERAL PROFESSIONAL PARTNERSHIP VS. ORDINARY

BUSINESS PARTNERSHIP

General professional partnerships

 General professional partnerships are 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. [Section 22(B), NIRC]
 Persons engaging in business as partners in a general professional partnership
shall be liable for income tax only in their separate and individual capacities.
[Section 26, NIRC]
 For purposes of computing the distributive share of the partners, the net income of
the partnership shall be computed in the same manner as a corporation. [Section
26, NIRC]
 Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership. [Section 26, NIRC]
 Income of a general professional partnership is deemed constructively received by
the partners. [Section 73(D), NIRC]

Ordinary business partnership

 An ordinary business partnership is considered as a corporation and is, thus,
subject to tax as such.
 Partners are considered stockholders and, therefore, profits distributed to them by
the partnership are considered as dividends.

Oña vs. Commissioner, 45 SCRA 74 (1972): Unregistered partnership

Although the CFI already approved the project of partition of the estate of Julia
Buñales among her surviving spouse, Lorenzo Ona, and her five children, no attempt was
made to divide the properties left by the decedent. Instead, the properties remained under
the management of Lorenzo Ona who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceeds from the sales
thereof in real property and securities. The said incomes are recorded in the books of

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account kept by Lorenzo Ona where the corresponding shares of the heirs in the net
income for the year are known.
Based on these facts, the Commissioner ruled that the heirs formed an
unregistered partnership which is thus subject to corporate income tax. The Court of Tax
Appeals and the Supreme Court affirmed.
For tax purposes, the co- ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shares in the inheritance as
determined in a project partition either duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or intestate proceeding.
The reason is simple. From the moment of such partition, the heirs are entitled
already to their respective definite shares of the estate and the incomes thereof, for each
of them to manage and dispose of as exclusively his own without the intervention of the
other heirs, and, accordingly, he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in
proportion to his share, there can be no doubt that, even if no document or instrument
were executed, for the purpose, for tax purposes, at least, an unregistered partnership is
formed.
For purposes of the tax on corporations, the NIRC, includes partnerships – except
general professional partnerships – within the purview of the term “corporation.”
Note: The income derived from inherited properties may be considered as individual
income of the respective heirs only so long as the inheritance or estate is not
distributed or, at least, partitioned, but the moment their respective known shares
are used as part of the common assets of the heirs to be used in making profits, it
is but proper that the income of such shares be considered as part of the taxable
income of an unregistered partnership.

Gatchalian vs. Collector, 102 Phil 140

Plaintiffs contributed money to buy a sweepstakes ticket which subsequently won.
The Supreme Court held that they formed an unregistered partnership. Plaintiffs formed a
partnership of a civil nature since each of them contributed money to a common fund for
the sole purpose of dividing equally the prize which they win.

Pascual v. Commissioner
Petitioners bought two parcels of land in 1965, however, they did not sell the
same nor make any improvements thereon. In 1966, they bought another three parcels of
land. It was only in 1968 that they sold the two parcels of land after which they did not
make any additional or new purchase. The remaining three parcels of land were sold in
1970. Commissioner assessed them corporate income taxes on the ground that
petitioners established an unregistered partnership engaged in real estate transactions.
The Supreme Court ruled that no unregistered partnership was formed. The
sharing of returns does not itself establish a partnership whether or not the persons
therein have a joint or common right or interest in the property. There must be a clear
intent to form a partnership, the existence of which has the juridical personality different
from the individual partners and the freedom of each party to transfer or assign the whole
property.
In this case, there was no showing of intent to form a partnership. The transactions
were isolated; therefore, the character of habituality peculiar to business transactions
engaged for the purpose of gain was not present.
The essential elements of a partnership are: (1) an agreement to contribute money,
property, or industry to a common fund; and (2) an intent to divide the profits among the
contracting parties.

Unregistered partnership vs. co-ownership for tax purposes

 If the activities of co-owners are limited to the preservation of the
property and the collection of the income therefrom, in which case,
each co-owner is taxed individually on his distributive share in the
income of the co- ownership.
 If the co-owners invest the income in business for profit, they would be
constituting themselves into a partnership taxable as a corporation.

Joint venture, how created

 A joint venture is created when two corporations, while registered and operating
separately, were placed under one sole management which operated the business

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affairs of said companies as though they constituted a single entity thereby
obtaining substantial economy and profits in the operation.
 As stated, a joint venture is not taxed as a corporation, just like a general
professional partnership.

GENERAL PRINCIPLES OF INCOME TAXATION IN THE PHILIPPINES

General principles of income taxation in the Philippines

1. A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.
2. A non-resident citizen is taxable only on income derived from sources within the
Philippines.
3. An individual citizen of the Philippines who is working and deriving income from
abroad as an overseas contract worker is taxable only on income from sources
within the Philippines. Provided, that 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.
4. An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within and
without the Philippines.
6. A foreign corporation, whether engaged or not in trade or business in the
Philippines, is taxable only on income derived from sources within the
Philippines.

SOME RULES ON TAXATION OF THE VARIOUS TAXPAYERS

Who are taxed on their global income?

1. Resident citizens
2. Domestic corporations

Who are taxed only on their income from sources within the Philippines?
1. Non-resident citizen
2. Overseas contract workers
3. Alien individual, whether a resident or not of the Philippines
4. Foreign corporation, whether engaged or not in trade or business in the
Philippines

Who are taxed based only on their net income?

1. Resident and non-resident citizens
2. Resident alien and non-resident alien engaged in trade or business in
the Philippines
3. Domestic corporation
4. Resident foreign corporation

Who are taxed based on their gross income?

1. Non-resident alien not engaged in trade or business in the Philippines
2. Non-resident foreign corporation

TREATMENT OF SOME SPECIAL ITEMS

Forgiveness of indebtedness
The cancellation and forgiveness of indebtedness may, dependening upon the
circumstances, amounts to:
1. a payment of income;
2. a gift; or
3. a capital transaction.
 If, for example, an individual performs services for a creditor who, in
consideration thereof cancels the debt, income to that amount is realized by the
debtor as compensation for his service.

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 If, however, a creditor merely desires to benefit a debtor and without any
consideration thereof cancels the debt, the amount of the debt is a gift from the
creditor to the debtor and need not be included in the latter’s gross income.
 If a corporation to which a stockholder is indebted forgives the debt, the
transaction has the effect of payment of a dividend. [Section 50, Revenue
Regulations 2]

Recovery of amounts previously written of considered as income

GUIDE QUESTIONS IN DETERMINING TAXABLE INCOME

1. Is there a gain or income?
2. Is the gain or income taxable? Is it excluded or exempt?
3. What type of income is it: income includible in the gross income,
passive income, capital gains, income derived from other sources?
4. To what class does the taxpayer belong: individual or corporate, citizen
or not or domestic or foreign, resident or not, engaged in trade or
business or not?

TAX ON INDIVIDUALS

PRELIMINARY POINTS ON TAXATION OF INDIVIDUALS

How taxed?
 An individual citizen, both resident and non-resident, and an individual
resident alien are taxed similarly.
 A non-resident alien engaged in trade or business shall be subject to the
same income tax rates as a citizen and a resident alien.
 Thus, only a non-resident alien who is not engaged in trade or business
is taxed differently from the other individual taxpayers.

On what income taxed?

 A resident citizen is taxed on all income from sources within and outside the
Philippines. The tax base is net income.
 A non-resident citizen is taxed only on income from sources within the
Philippines. The tax base is net income.
 An alien, whether resident or not, is taxed only on income from sources within the
Philippines. However, the tax base for a resident alien and non-resident alien
engaged in trade or business is net income while the tax base for a non-resident
alien not engaged in trade or business is gross income.

Types of income taxed

1. Items of income included in the gross income.
2. Passive income.
3. Capital gains from sale of shares of stock not traded in the stock exchange.
4. Capital gains from the sale or exchange of real property.

Applicable taxes and tax rates

 The applicable taxes for individuals depend on several factors such as but not limited to:
1. Classification of taxpayer;
 RC, NRC, RA, NRA, NRA-ETB, & NRA-NETB.
2. Source of income;
 Within/inside the Philippines, Without/outside the Philippines, Partly
Within/inside and/or Without/outside the Philippines.
3. Type of Income.
 (A) Ordinary or regular income; (B) Passive income derived from Philippine
sources; and (C) Capital gains subject to capital gains tax.
 Ordinary or regular income refers to income such as compensation income
(salaries or wages), business income, income from practice of profession,
income from sale and/or dealings of property and miscellaneous income and
passive income other than those subject to final tax or capital gains tax.
Regular income is subject to graduated tax rate.
 Passive income subject to final withholding tax are income form sources
within the Philippines, namely:
o Interest income;
o Dividend income;

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o Royalties;
o Prizes; and
o Winnings.
 Capital gains subject to capital gains tax (CGT) are the following:
o Capital gains from sale of shares of stocks of a domestic corporation
not traded in the local stock exchange; and
o Capital gains from sale of real property in the Philippines.

GRADUATED TAX RATE FOR INDIVIDUAL CITIZEN (RC & NRC) AND
INDIVIDUAL ALIEN (RA & NRA-ETB)

Prior to 2018 TRAIN LAW – Taxable Year 2018- 2023 onwards

2022
INCOME TAX INCOME TAX TAX
Not over P10,000 5% Not over P250,000 Exempt Exempt
Over P10,000 but P500 + 10% in Over P250,000 but 20% of excess of 15% of excess over
not over P30,000 excess of P10,000 not over P400,000 P250,000 P250,000
Over P30,000 but P2,500 + 15% in Over P400,000 but P30,000 + 25% in P22,500 + 20% in
not over P70,000 excess of P30,000 not over P800,000 excess of P400,000 excess of P400,000
Over P70,000 but P8,500 + 20% in Over P800,000 but P130,000 + 30% in P102,500 + 25% in
not over P140,000 excess of P70,000 not over excess of P800,000 excess of P800,000
P2,000,000
Over P140,000 but P22,500 + 25% in Over P2,000,000 P490,000 + 32% in P402,500 + 30% in
not over P250,000 excess of but not over excess of excess of
P140,000 P8,000,000 P2,000,000 P2,000,000
Over P250,000 but P50,000 + 30% in Over P8,000,000 P2,410,000 + 35 in P2,202,500 + 35%
not over P500,000 excess of excess of in excess of
P250,000 P8,000,000 P8,000,000
Over P500,000 P125,000 + 35%
in excess of
P500,000

Rates of tax on passive income derived from Philippine Sources subject to Final
Withholding Tax (FWT)

RC, NRC NRA- NRA-

& RA ETB NETB

(1) INTEREST

A. Interest from any currency bank deposit in the 20% 20% 25%
Philippines
B. Interest income received from a depositary bank 15%
under the Expanded Foreign Currency Deposit NRC = Exempt Exempt
System (EFCDS) Exempt
C. Interest income from long-term deposit or
investment.
However, in case of pre-termination before the fifth Exempt Exempt 25%
year, a final tax shall be imposed based on the
remaining maturity as follows:
 4 years to less than 5 years 5% 5%
 3 years to less than 4 years 12% 12%
 Less than 3 years 20% 20%

(2) ROYALTIES

A. Royalties in general 20% 20% 25%

B. Royalties on books, as well as other literary works 10% 10% 25%
and musical compositions

(3) PRIZES

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Prizes exceeding P10,000
Note: Prizes ≤ P10,000 are subject to basic tax 20% 20% 25%
except those received by NRA-NETB.

(4) OTHER WINNINGS

Prior to 2018:
Regardless of the amount 20% 20% 25%
(Except PCSO and/or Lotto winnings which are inclu-
tax exempt.) ding
PCSO/
Beginning 2018: Lotto
Regardless of amount 20% 20%

PCSO/Lotto winnings:
 Amount is ≤ P10,000 Exempt Exempt
 Amount is > P10,000 20% Exempt

(5) CASH and/or PROPERTY DIVIDEND

A. Cash and/or property dividends actually/construc-

tively received from a domestic corporation or 10% 20% 25%
from a joint stock co., insurance or mutual fund
companies beginning January 1, 2000
B. Share of an individual in the distributable net
Income after tax of a Parnership (Other than a 10% 20% 25%
GPP) beginning January 1, 2000
C. Share of an individual in the net income after tax of
an Association, a Joint Account, or a Joint Venture 10% 20% 25%
or Consortium taxable as a corporation, which he
is a member or a co-venturer beginning Jan. 1, 2000

NOTE: Under the final withholding tax system, payee received the income net of
the applicable tax. The amount of tax withheld by the withholding agent (payor) is
“constituted as a full and final payment” of the income tax due from the payee on
the said income. The payee is not anymore required to file an income tax return for
these types of income. Likewise, these incomes will no longer form part of the
payee’s taxable income.

CAPITAL GAINS TAX (Uniform for all kinds of individual taxpayers)

 Capital gains from the sale of shares of stock not traded in the stock
exchange
15% of the Capital Gain (Note: There is no Capital Gains Tax if the transaction
resulted to a capital loss)

 Capital gains from the sale of real property located in the Philippines

General rule: A final tax of six percent (6%) is imposed on the gross selling
price or current fair market value, whichever is higher.

 Optional: If the sale is made to the government or any of its political

subdivisions or agencies or to government-owned or controlled
corporations, the taxpayer has the option to choose from the final tax of
six percent (6%) of gross selling price or fair market value, whichever
is higher, or the schedular tax rate.
 Exception: The sale or disposition of the principal residence of natural
persons is exempt from capital gains tax if certain conditions are met.

Conditions for exemption of gain from sale or exchange of principal

residence:
1. Proceeds are fully utilized in acquiring or constructing a new
principal residence within 18 months from the date of sale or

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disposition;
2. Historical cost or adjusted basis of the real property sold or
disposed shall be carried over to the new principal residence
built or acquired;
3. Notice to the Commissioner of Internal Revenue shall be given
within thirty (30) days from the date of sale or disposition; and
4. This exemption can only be availed of once every ten years.
If the proceeds of the sale were not fully utilized, the portion of the gain
presumed to have been realized from the sale or disposition shall be subject to
capital gains tax.

GSP or FMV, whichever is higher x Unutilized proceeds/GSP = Taxable Portion

 Under the tax code, the following are ordinary assets:

a) Stock in trade of the taxpayer or other 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) Property used in trade or business subject to depreciation;
c) Real property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business.
d) Real property used in trade or business of the taxpayer.
On the other hand, capital assets include all other property held by the taxpayer (whether or not
Connected with his trade or business) not included in the definition assets above.

General professional partnerships

 General professional partnerships are 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.
 Persons engaging in business as partners in a general professional
partnership shall be liable for income tax only in their separate and
individual capacities.
 Each partner shall report as gross income his distributive share, actually
or constructively received, in the net income of the partnership.
 The net income of the general professional partnership shall be
computed in the same manner as a corporation for purposes of
computing the distributive shares of the partners.

FORMAT IN COMPUTING TAXABLE INCOME

 For Pure Compensation Income Earner:

Gross Taxable Income (net of exclusions) P xxx

Income Tax Due (Schedular tax rate) P xxx

Less: Creditable Withholding Tax on compensation income (xxx)
Income Tax Payable Pxxx

NOTE: Under RA10963 (TRAIN Law), NO DEDUCTION is allowed for pure

compensation income earners.

 For Pure Business Income Earner:

Gross Sales/Receipts P xxx

Less: Cost of Sales/Cost of Direct Services (xxx)
Gross Business/Professional Income xxx
Less: Allowable Business Expenses (xxx)
Net Taxable Income Pxxx

Income Tax Due (Schedular tax rate) P xxx

Less: Creditable Withholding Taxes
Prior year excess credit (xxx)
Tax Payment for the previous quarter(s) (xxx)
Tax Withheld at Source (xxx)
Foreign Income Tax Credit (xxx) (xxx)
Income Tax Payable Pxxx

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 For Mixed Income Earner (Business and Compensation Income):

Gross Compensation Income Pxxx

Gross Sales/Receipts Pxxx
Less: Cost of Sales/Cost of Direct Services (xxx)
Gross Business/Professional Income xxx
Less: Allowable Business Expenses (xxx) xxx
Net Taxable Income Pxxx

Income Tax Due (Schedular tax rate) P xxx

Less: Creditable Withholding Taxes
Creditable withholding tax on compensation income (xxx)
Prior year excess credit (xxx)
Tax Payment for the previous quarter(s) (xxx)
Tax Withheld at Source (xxx)
Foreign Income Tax Credit (xxx) (xxx)
Income Tax Payable Pxxx

Creditable Withholding Tax vs. Final Withholding Tax

 Creditable Withholding Tax (CWT) is not a kind of tax but a method of collecting income
tax in advance from the recipient of income through the payor thereof, which is constituted by
law as the withholding agent of government. The term “creditable” means the taxes withheld
are deductible from tax due at the time of filing the corresponding Income Tax Return. The
most common example of creditable withholding tax for an individual taxpayer is the tax
withheld by an employer from the compensation income of an employee. The amount of tax
withheld will be remitted by the employer to the BIR. (Note: In accounting, you use the
account title “Taxes Payable” to record the withholding of the said CWT, as well as to remit
or pay the same to the BIR.)
 Final Withholding Tax (FWT) is a kind of tax which is prescribed on certain income
(interest income, dividends, royalties, prizes and winnings) derived from the Philippine
sources. Under the final withholding tax system, the payee received the income net of the

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applicable tax. The amount of tax withheld by the withholding agent (payor) is “constituted
as a full and final payment” of the income tax due from the payee on the said income.

INCOME TAX DUE TO MARRIED TAXPAYERS

 Under RA 10963, husband and wife shall compute separately their individual income tax
based on their respective total taxable income: Provided that if any income cannot be
definitely attributed to or identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the purpose of determining
their respective taxable income.

FILING OF INCOME TAX RETURNS (ITRs)

 BASIC TAX (Ordinary/Regular Income)

o For Purely Compensation Income Earners
On or before April 15 of the succeeding year.
o For Business Income Earners (including income from practice of profession)
Income tax returns for income derived from business and/or practice of
profession are required to be filed on a quarterly basis (regardless of the results of
the operations either there is gain or loss) as follows:
1st quarter - on or before May 15 of the same year;
2nd quarter - on or before August 15 of the same year;
3rd quarter - on or before November 15 of the same year;
Final adjusted/annual return - on or before April 15 of the succeeding year.

QUARTERLY TAX RETURNS (FORMULA)

Q1 Q2 Q3 Q4
Gross income (cumulative amounts) Pxxx Pxxx Pxxx Pxxx
Less: Business expenses (cumulative amounts) (xxx) (xxx) (xxx) (xxx)

Basic income tax due Pxxx Pxxx Pxxx Pxxx

Less: Creditable Withholding Taxes (CWT):
Prior year’s excess credit (xxx) (xxx) (xxx) (xxx)
Quarterly withholding taxes (xxx) (xxx) (xxx) (xxx)
Quarterly tax payments - (xxx) (xxx) (xxx)
Foreign tax credit (xxx) (xxx) (xxx) (xxx)

Income tax payable(refundable) Pxxx Pxxx Pxxx Pxxx

 FINAL WITHHOLDING TAX ON PASSIVE INCOME

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

 CAPITAL GAINS TAX

o For Shares of stocks:
a) Ordinary Return - 30 days after each transaction;
b) Final Consolidated Return – on or before April 15 of the succeeding year.
o For Real Property – 30 days following each sale or other disposition

MANNER OF FILING THE INCOME TAX RETURNS (ITRs)

 Filing of Income Tax Return (ITR) shall be made through:
a) Manual Filing;
b) Electronic Filing an Payment System (EFPS); or
c) eBIR Forms.

PLACE OF FILING INCOME TAX RETURNS (ITRs)

 The Income Tax Returns (ITRs) shall be filed and paid with any of the following:
a) Authorized Agent Bank (AAB);
b) Revenue District Officer;
c) Collection Agent;
d) Duly authorized city or municipal treasurer in which the taxpayer has his legal
residence or principal place of business in the Philippines;
e) Office of the Commissioner of Internal Revenue if the taxpayer has ho legal residence
of place of business in the Philippines.

PERSONS REQUIRED TO FILE INCOME TAX RETURNS (ITRs)

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1. Individuals engaged in business and/or practice of profession, regardless of the results of
operations;
2. Individuals deriving income from two or more employers concurrently or successively at any
time during the taxable year;
3. Employees deriving 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 (i.e., tax due is not equal to the tax withheld) resulting to collectible or refundable
return;
4. Individual deriving other non-business, non-profession related income in addition to
compensation income not otherwise subject to final tax;
5. Individuals receiving purely compensation income form a single employer, although the
income tax of which has been correctly withheld, but whose spouse is required to file income
tax return; and
6. Non-resident alien engaged in trade or business in the Philippines deriving purely
compensation income, or compensation income and other non-business, non-profession
related income.

PERSONS NOT REQUIRED TO FILE INCOME TAX RETURNS (ITRs)

1. An individual earning purely compensation income whose taxable income does not exceed
P250,000.
2. An individual whose income tax has been correctly withheld by the employer, provided that
such individual has only one employer for the taxable year.
3. Minimum wage earners.
NOTE: For items 1, 2 and 3 above, the “CERTIFICATE OF WITHHOLDING – BIR Form
2316” filed by the respective employers, duly stamped “Received” by the BIR, shall be
tantamount to substituted filing of income tax returns by said employees.
4. An individual whose sole income has been subjected to Final Withholding Tax (FWT).

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