TAXATION OF INDIVIDUALS

CLASSIFICATION OF INDIVIDUALS
1. Citizen
a. Resident
b. Non-Resident
2. Alien
a. Resident
b. Non-Resident
1. Engaged in trade or business in the Philippines
2. Not engaged in trade or business in the Philippines
3. Employed by
A. Regional or area headquarters and regional operating
headquarters of multinational entities in the Philippines that are
engaged in international trade with affiliates and subsidiary
branch offices in the Asia-Pacific region
B. Offshore banking units
C. Petroleum contractors and sub-contractors
CITIZEN
The following shall be considered citizens of the Philippines:
Those who are citizens of the Philippines at the time of the adoption of the February 2,
1987 Constitution;
Those whose fates or mothers are citizens of the Philippines
Those born before January 17, 1972, the date of the doption of the 1973 Constitution, of
Filipino mothes, who elect Philippine citizenship upon reaching the age of majority; and
Those who are naturalized in accordance with law.
A. Resident Citizen is a Filipino citizen who permanently resides in the Philippines.
B. Non-Resident Citizen means:
A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact
of his physical presence abroad with a definite intention to reside therein
A citizen of the Philippines who leaves the Philippines during the taxble year to reside
abroad, either as an immigrant or for employment on a permanent basis
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 is interpreted to mean presence abroad for at least
183 days during the taxable year.
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 in which he arrives
in the Philippines with respect to his income derived from sources abroad until the date of
his arrival in the Philippines.
The taxpayer shall submit proof to the Commissioner toshow his intention of leaving the
Philippines to reside permenently abroad or return to and reside in the Philippines, as the
case may be.
ALIEN
1. Resident Alien means an individual whose residence is within the Philippines and who is not a
citizen thereof. He is one who is actually present in the Philippines and who is not a mere
transient or sojourner.
2. Non-resident Alien (NRA) means an individual whose residence is not within the Philippines and
who is not a citizen thereof.
a. NRA engaged in trade or business (NRA-ETB)- means that the alien is carrying on a
business in the Philippines. It connotes more than a single act or isolated transactions. It
involves some continuity of action. The term trade, business or profession shall not
include performance of services by the taxpayer as an employee but it includes the
performance of the functions of a public office. A non-resident alient who has stayed in
the Philippines for more than 180 days during any calendar year shall be deemed doing
business in the Philippines.
b. NRA not doing business in the Philippines (NRA-NETB) is an alien who stayed in the
Philippines 180 days or less.

Offshore banking unit (obu)

A branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the BSP to
transact offshore banking business in the Philippines in accordance with the provisions of Presidential
Decree No. 1034 as implemnted by Central Bank (now BSP) circular No. 1389, as amended.

Terms to consider in the recognition of income of citizens and aliens

FOREIGN CURRENCY DEPOSIT SYSTEM(FCDS) shall refer to the conduct of banking transactions
whereby any person, whether natural or juridical, may deposit foreign currencies forming part of the
Philippine intenatinal reserves, in accordance with theprovisions of RA No. 6426 entitled An Act
Instituting a Foreign Currency Deposit System in the Philippines, and for Other Purposes.
FOREIGN CURRENCY DEPOSIT (FCD) UNIT shall refer to the unit of a local bank or a local branch of a
foreign bank authorized by the BSP to engage in foreign-denominated transactions, pursuant to the
provisions of RA No. 6426 as amended.
Terms to consider in the recognition of income of citizens and aliens (contd)
LOCAL BANK shall refer to a thrift bank or a commercial bank organized under the laws of the Republic
of the Philippines.
LOCAL BRANCH OF A FOREIGN BANK shall refer to a branch of a foreign bank doing business in the
Philippines, pursuant to the provisions of RA No. 337, as amended.
DEPOSIT IN OBU shall mean funds in foreign currencies which are accepted and held by an OBU or
Foreign currency Deposit Unit in the regular course of business, with the obligation to return an
equivalent amount to the owner thereof, with or without interest.
SOURCES OF INCOME
Source of income is not a place but the property, activity or service that produced the income. In the
case ofincome derived from labor, it is the place where the labor is performed; in the case of income
derived from the use of capital, it is the place where capital is employed; and in the case of profits from
the sale or exchange of capital assets, it is the place where the sale or transaction occurs.
RULES TO BE CONSIDERED WHETHER THE INCOME OF THE INDIVIDUAL IS TAXABLE
It is important to know the source of income of an individual taxpayer whether from within the
Philippines or without because not all individual taxpayers are taxed on all their income. The
following rules apply:
1. Resident citizens are taxable on all income derived from sources within and without.
2. Non-resident citizens and alien individuals resident and non-resident are taxable on income
derived from sources within the Philippines. An oveseas contract worker is taxable only on his
income from sources within.
RULES TO BE CONSIDERED WHETHER THE INCOME OF THE INDIVIDUAL IS TAXABLE

Allowable deductions are items or amounts, which the law allows to be deducted from gross income in
order to arrive at the taxable income.
1. From compensation income= All remuneration for services performed by an employee for his
employerr under an employer-employee relationship, unless specifically excluded by the Code.
a. Basic personal and/or additional exemptions; and

b. Premium payments on health and/or hospitalization insurance.

2. From business income = it arises from self-employment of practice of profession. This shall not
include income from performance of services by the taxpayer as an employer
a. Basic personal and/or additional exemptions; and
b. Premium payments on health and/or hospitalization insurance.
c. Itemized deductions under the Tax Code (Items A-J, Section 34); and
d. Optional standard deduction. In place of the itemized deductins, the individual taxpayer
may opt for the optional standard deduction (OSD) not to exceed 40% (before RA 9504,
OSD was 10% only) of his gross sales or gross receipts, as the case may be.
PERSONAL EXEMPTIONS
Personal Exemptions are arbitrary amounts allowed as deductions from gross income of the individual
taxpayer from compensation, business (self-employment) or practice of profession. Personal
exemptions in a sense represent the pesonal, living or family expenses of the taxpayer.
Kinds of Personal Exemptions
1. Basic personal exemption
2. Additional exemption. This exemption is further alloed to the taxpayer by reason of his qualified
dependent children.
PERSONAL EXEMPTIONS
Republic Act 9504, which amended Republic Act 8424 (NIRC) was signed into law on June 17, 2008. The
law allows for a basic personal exemption of FIFTY THOUSAND PESOS (P50,000) for each individual
taxpayer regadless of status. In the case of married individuals where only one of the spouses is
derivng gross income, only such spouse shall be allowed the personal exemption.
ADDITIONAL EXEMPTION
TWENTY-FIVE THOUSAND PESOS (P25,000) shall be allowed an additional exemption for each
dependent child not exceeding four (4) children. The additional exemption for dependents shall be
claimed by only one of the spouses in the case of married individuals.
A dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon
and living with the taxpayer if such dependent is not more than 21 years of age, unmarried and
not gainfully employed or if such dependent, regardless of age, is incapable of self-support
because of meantl or physical defect.
In the case of legally separated spouses, additional exemptions may be claimed only by the
spouse who has custody of the child or children. The total amount of additional exemptions that
may be claimed by both shall not exceed the maximum four (4) children.
The husband shall be deemed the proper claimant of the additional exemption unless he waives
his right in favor of his wife. But if the spouse of the employee is unemployed or is a nonresident citizen deriving income from foreign sources, the employed spouse within the
Philippines shall be automaticaly entitled to claim the additional exemptions.
In the case of married individuals where only one of the spouses is derivng gross income, only
such spouse shall be allowed the basic and additional exemptions.
RULES ON CHANGE OF STATUS
1. If the employee should have additional dependents during the taxable year, he may claim the
corresponding additional exemption in full for such year.
2. If the taxpayer dies during the taxable year, his death shall not affect the amount of personal
and additional exemptions his estate may claim. It is as if he died at the end of such year.
3. If the spouse dies or any of the dependent dies or if any such dependent marries, becomes
twenty-one years of age, or gets gainfully employed during the taxable year, the taxpayer may
still claim the same exemtpion as if the change occurred at the end of the year.
4.
HEAD OF THE FAMILY
- Is an individual who actually supports and maintains in one household one or more individuals,
who are closely connected with him by blood relationship, relationship by mariage, or by
adoption, and whose right to exercise family control and provide for these dependent individuals
is based upon some moral or legal obligation.

1.
2.
3.

Head of family means an unmarried or legally searated man or woman with:

one or both parents, or
One or more brothers or sisters whether of the whole or half blood, or
One or more legitimate or illegitimate, recognized natural or legally adopted children

Who meet the following qualifications:

HEAD OF THE FAMILY

Living with the person giving support does not necessarily mean actual and physical dwelling
together at all times and under all circumstances. Thus, the the additional exemption applies
even if a child or other dependent is away at school or on a visit. If, however, without necessity
the dependent continuously makes his home elsewhere, his benefactor is not the head of a
family irrespective of the question of support.
Chief support means principal or main support (such as paying for the rent and spending for the
food of the dependent). It is more than one half (50%) of the support required by the dependent.

Basic and personal exemption rate before july 6, 2008

INDIVIDUAL TAXPAYERS ALLOWED PERSONAL EXEMPTIONS

1. Citizens
2. Resident Alien
3. Non-Resident Alien
4. Estate and trusts, which are, for purposes of personal exemptions, treated as single individual.
PREMIUM PAYMENT ON HEALTH AND/OR HOSPITALIZATION INSURANCE
The following conditions must be met:
1. The insurance shall be taken by the individual taxpayer himself for his family;
2. The amount being claimed shall not exceed P2,400 a year or P200 a month per family;
3. The family has gross income of P250,000 or less for the taxable year.
Total family income includes primary income and other income from sources received by all members of the
nuclear family, ie. Father, mother, unmarried children living together as one household, or a single parent with
children. A single person living alone is considered as a nuclear family. For married taxpayers, only the spouse
entitled to claim for additional exemption is allowed this deduction .

TAXABLE INCOME AND TAX DUE

Taxable Income is defined as the pertinent items of gross income less the deductions and/or personal
and additional exemptions, if any, authorized for such types of income, by the Tax Code or other special
laws. The taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax
due.
1. Net Compensation Income the compensation income arrived at after subtracting from gross
compensation income derived by resident citizens or resident aliens, basic personal and additional
exemptions; and premium payments, if any, on health and hospitalization insurance under certain
conditions.
TAXABLE INCOME AND TAX DUE (contd)
For resident citizen and resident alien earning purely compensation income:
Gross compensation income
Less: Exemptions and Premium Payment
Basic Personal Exemption
xxx
Add: Additional Exemptions
Total Exemptions
xxx
Add: Premium Paid on
Health and/or Hospitalization Ins.
Total Exemptions and Premium Payment
Net Compensation Income
Tax Due (Sec. 24(A))

xxx
xxx
xxx
xxx
xxx
xxx

2. Gross compensation income. The gross compensation income derived by aliens including Filipinos
employed by regional and area headquarters and regional operating headquarters of multinational
companies, by offshore banking units, or by foreign petroleum service contractors and sub-contractors.
For non-resident alien employed by such firms earning purely compensation income:
Gross compensation income
xxx
Multiply by tax rate
15%
Tax Due
xxx
3.Net Income. The income arrived at after subtractng from the gross income (from business or
professional including compensation income) of a citizen, resident alien, and non-resident alien if the
latter is engaged in trade or business in the Philippines the deductions of the taxpayer, including the
basic personal and additional exemptions, if any.
For citizen, resident alien and non-resident alien engaged in trade or business in the Philippines:
a. Earning purely business or professional income
Gross Business income
Less: Allowable Deductions
Itemized Deductions or 40% OSD
Basic Personal Exemption
Add: Additional Exemption
Total Exemptions
xxx
Premium Paid on Health and/or
Hospitalization Insurance
Total Allowable Deductions

xxx
xxx
xxx
xxx
xxx
xxx

Net Income Subject to Tax

Tax Due (Sec. 24(A))

xxx
xxx

b. Earning both business/professional and compensation income

Gross Business income
Gross Compensation Income
Total Gross Income
Less: Allowable Deductions
Itemized Deductions or 40% OSD
Basic Personal Exemption
Add: Additional Exemption
Total Exemptions
xxx
Premium Paid on Health and/or
Hospitalization Insurance
Total Allowable Deductions
Net Income Subject to Tax
Tax Due (Sec. 24(A))

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

4. Entire or Gross Income. The entire or gross income (from business or profession including
compensation income) without any deduction with respect to non-resident aliens not engaged in
trade or business in the Philippines.
For non-resident alien not engaged in trade or business (NRANETB) in the Philippines earning
business or professional income, compensation income or combination of both:
Gross income
xxx
Multiply by final tax rate 25%
Tax Due
xxx
NOTES IN THE COMPUTATION
1. For married individuals, the husband and wife shall compute separately the tax due on their
respective taxable income. 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
btween the spouses for the purpose of determining their respective taxable income.
2. In computing for the taxable income, fraction of a pesos is disregarded. For the tax due, a
fraction amounting to fifty centavos or more is rounded off to a pesos while a fractiion amounting
to less than fifty centavos is disregarded.
3. Creditable withholding tax withheld from income and/or tax credit is deducted from the tax due;
penalties, if any, shall be added to the tax due.
CATEGORIES OF INCOME AND TAX RATES
1. Compensation income= All remuneration for services performed by an employee for his employerr
under an employer-employee relationship, unless specifically excluded by the Code.
a. Basic personal and/or additional exemptions; and
b. Premium payments on health and/or hospitalization insurance.
2. Business income = it arises from self-employment of practice of profession. This shall not include
income from performance of services by the taxpayer as an employer

3. Passive income these are subject to separate and final tax. These are taxed at fixed rates ranging
from 5% to 25%. Examples of passive income are interests, royalties, prizes, winnings and dividends.
FINAL TAX imposed on income or gain shall no longer be included as taxable income subject to the
graduated rates. The final tax is imposed witout any deduction and is withheld at source. The amount
received by passive income earner is net of the final tax. The final tax on passive income is remitted by
the payor who serves as the withholding agent to the BIR.

4.CAPITAL GAINS FROM SALE OF SHARES OF STOCK, NOT TRADED THROUGH THE LOCAL STOCK
EXCHANGE. Taxed at 5% and 10% final taxes on a per transaction basis.
On the Net Capital Gains:
Not over P100,000
5%
Amount in Excess of P100,000 10%
Illustration: For resident citizen
Selling Price
P160,000
Less: Cost
40,000
Capital Gains
P120,000
On P100,000 x 5%
P 5,000
On P20,000 x 10%
2,000
Capital Gains Tax
P 7,000
5.Capital gains from sale of real propety. Taxed at 6% final tax on the gross selling price or current fair
market value at the time of sale, whichever is higher.
Selling Price
P2,500,000
Tax Rate
6%
Final Tax
P 150,000
6. Fringe Benefits. 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)
under an employer-employee relationship.
Tax Rate:
32% of gross-up monetary value
Illustration:
Monetary Value of the FB
P198,000
Divide by
68%
Grossed-up Monetary Value
P291,176
Mulltiply by
32%
Fringe Benefit Tax
P 96,088
INDIVIDUALS EXEMPT FROM INCOME TAX
A. Non-resident citizen who:
1. physically presence abroad and has
intention to reside in other country
2. leaves the Phils. during the taxable year
to reside abroad as immigrant or
employment on permanent basis
3. employed abroad and derives income
therein and requires him to be there
most of the time.
4. a non-resident citizen who arrives during
the taxable year, however, will reside
permanently in the Phils. will still be
considered non-resident citizen on that
particular taxable year with respect to
his income derived from abroad.

INDIVIDUALS EXEMPT FROM INCOME TAX

B. Overseas Contract Worker, Including Overseas Seaman
Exempted from income derived from abroad, however, for income sourced from the Philippines, it
is already taxable.
B. Barangay Micro Business Enterprises (RA 9178 or BMBE Law)
C. Expanded Senior Citizen Act of 2010 (RA 9504)