Income Tax of

Individuals
Classification of Taxpayers
Individual Taxpayers
Corporations Others
(Citizens ans Aliens)

A. Resident Citizen A. Domestic A. Partnership

B. Non Resident Citizen Corporation 1. GPP
B. Resident 2. GCoP
C. Aliens Foreign B. Joint Venture
1.Resident Alien C. Non-resident C. Co-Ownership
2.Non Resident Alien foreign D. Estates
a. NRAETB E. Trusts
b. NRANETB
Sources of Income

Taxpayers
Sources of Income
RC/DC NRC/Aliens/FC

Earned:

Within Taxable Taxable

Without Taxable Nontaxable

Partly Within and Without Taxable Partly taxable

Classification of Income

 Compensation Income
 Profession or Business Income
 Passive Income
 Capital Gains/Ordinary Gains
Income Tax Return (ITR)
 Is a formal statment of the taxpayer’s taxable income and deductions,
reported in the BIR prescribed form, to be filed and paid using the
normal/regular tax rates.

 For the final Quarter, Annual ITR is prepared.

 All tax exempt income and other income subject to final tax (passive and
capital gains) shall not form part of the gross income to be reported in the
ITR subject to normal tax.
Normal Tax VS Final Tax
Normal tax a.k.a “regular tax”
• Is imposed on earnings such as compensation, professional/business income;
and all other income not subject to final tax in the PH.
Final Tax
• Used to describe the tax on earnings that have been subjected to complete
withholding tax payment at source.
• These earnings are no longer included in the determination of taxable income
subject to normal tax.
• Final taxes withheld by the witholding agent constitute as a full and final
payment of the income tax due. The liability for the payment of the tax rests
primarily on the withholding agent (payor).
• The payee is not required to file an income tax return for the particular
income.
Normal Tax for Individual

Normal (Schedular) Tax Rate on Individual Taxpayers

Not over P10,000 5%
Over P10,000 but not over P30,000 P500 + 10% of the excess over P10,000
Over P30,000 but not over P70,000 P2,500 + 15% of the excess over P30,000
Over P70,000 but not over P140,000 P8,500 + 20% of the excess over P70,000

Over P140,000 but not over P250,000 P22,500 + 25% of the excess over P140,000

Over P250,000 but not over P500,000 P50,000 + 30% of the excess over P250,000
Over P500,000 P125,000 + 32% of the excess over P500,000

*proposed new tax rate: 5% to 25% from 5% to 32%

Normal Tax for Corporation
Taxable Corporate Income
Classification
Domestic Resident Foreign Non-Resident Foreign
In General
Taxable Income Taxable Income Gross Income
Tax Base
Normal Tax Rate Normal Tax Rate Final Tax Rate
30% (effective Jan 01, 30% (effective Jan 01, 30% (effective Jan 01,
Tax Rate
2009) 2009) 2009)

OR OR

Tax Base Gross Income Gross Income not applicable

MCIT MCIT
Tax Rate 2% 2% not applicable

*proposed new tax rate :NCIT = 25% from 30% MCIT 5% from 2%
Normal Tax VS Final Tax
Subject to Normal Tax
Report in the year-end ITR
• Compensation Income
• Business Income
No
• Professional Income
• Other income not subject to
final taxes
Is the income subject
to final tax?

For suplemental disclosure

only, no need for ITR
• Interest, dividends, royalty,
Yes etc
• Sale of real property and
shares classified as capital
assets
Income Tax for Individuals

*Gross Income
a. Compensation Income
b. Professional/Business Income
c. Gains from dealings in property
d. Interest
Gross Income Pxxx e. Rents
f. Royalties
less: Allowable Deductions xxx
g. Dividends
Taxable Income b4 PE Pxxx h. Annuities
Personal Exemptions xxx__ i. Prizes and winnings
j. Pensions
Taxable Income Pxxx
k. Share from net income of a GPP

*except income exempted from income tax and income subject to final taxes
Income Tax for Individuals
Allowable Itemized Deductions
a. General Business Expenses
b. Interest
c. Taxes
d. Losses
e. Bad debts
f. Depreciation
Gross Income Pxxx g. Depletion
less: Allowable Deductions xxx h. Charitable contributions
i. R&D
Taxable Income b4 PE Pxxx j. Pension Trust
Personal Exemptions xxx__ k. Premium Payments on HHIP

Net Taxable Income Pxxx

Format to compute the net taxable
income (employed & self-employed)

Compensation Income PXXX

less: Personal Exemptions XXX
Compensation Income after PE PXXX

Gross income from Business PXXX

less: allowable itemized deductions XXX
Net Business Income PXXX
Net Taxable Income PXXX
Gross Compensation Income
 Any remunaration for rendering personal services.
 Generally obtained from a employer-employee relationship
 In general, every form of compensation income is taxable regardless
of how it is earned
 Exception: compensation income including overtime pay, holiday
pay, night shift deferential pay, and hazerd pay by Minimum Wage
Earners (MWE)
Classification of Compensation Income
1. Basic Salary / Wages
1. Salary

2. Wages

2. Honoraria
3. Fixed or Variable Allowances
4. Commission
5. Fees
6. Tips and Gratuties
7. Hazard or Emergency Pay
Classification of Compensation Income
8. Retirement Pay
9. Separation Pay
10. Pension
11. Vacation and Sick Leave
12. 13th month pay and other benefits
13. Fringe Benefits and De minimis benefits
14. Overtime Pay
15. Awards for special Services
16. Beneficial Payments
Classification of Compensation Income
1. Basic Salary / Wages
1. Salary – earnings received periodically for a regular work
2. Wages – specified intervals of work (by hour, by day, by week)
Classification of Compensation Income
• Honoraria
• Payments given in recognition of services performed
• Ex. Honorarium of a guest resource speaker or lecturer

• Fixed or Variable Allowances

• F or V transportation, representation, COLA and other allowances in addition to
the regular compensation fixed for the position of the employee
• Note: Any allowances received or expenses incurred/reasonably expected by the
employee in the performance of his duties are not subject to witholding tax
• ordinary and necessary travelling and representation and entertainment expense
paid or incurred in the pursuit of employer’s trade/ business.
• Excess of actual expenses over advances made shall constitute taxable income
Allowances
Latest Rulings on Allowances
a. Transporation and cell phone allowances given to call center employees are not taxable
compensation.
a. Fixed monthly transpo allowances of P1,500 for rank and file employees and P3,000
for supervisoy employees.
b. Mobile Phone allowance of P1,200 for supervisors, managers and directors who are
expected to be on call for 24 hours a day.

b. Transporatation and Night Shift allowances; and Out-of-town allowances foe employees
to conduct field work are not subject to income tax.
c. Taxi/transpo allowances of P100 per day given to BPO Company servicing 24hrs a day to
employees who worked overtime beyond 10 P.M. Is tax exempt.
Commission

 Usually a percetage of total sales

 Quata of sales volume
Fees

 Fees are received by an employee for the service rendered in

the performance of their official duties over and above their
regular salaries
Hazard or Emergency Pay

 This is an additional payments received due to worker’s

exposure to danger or harm while working.
 Normally added to the basic salary together with the
overtime pay and night differential pay to arrive at gross
salary.
Tips and Gratuities

 Tips or gratuities paid directly to an employee (by a

customer of the employer) which are not accounted for by
the employee to the employer are considered taxable
income, but not subject to withholding tax.
Retirement Pay
 Lump sum received by an employee who has served a company for
a considerable period of time and decided to withdraw from work
into privacy.
 Taxable in general except:
 SSS or GSIS retirement pays
 Retirement pay due to old age provided the following requisites:
 Retirement program is approved by BIR
 The retiree should have been employed for the 10 years in the said company
 The retiree should have been 50 years old at the time of the retirement
 It should have been availed at the first time
Separation Pay
 Separation pay is taxable if voluntarily availed of. It shall not be
taxable if involuntary
 Death
 Sickness
 Disability
 Reorganization/merger of the company
 Company at the brink of bankruptcy
 BIR
 Employee
 Creditors
Separation Pay
 As a rule, any amount received by an official or employee or by his
heirs from the employer due to death, sickness or other physical
disability or for any cause beyond the control of the said official or
employee are excepted from tax.
Pension

 Stated allowance paid regularly to a person on his retirement or to his

dependents on his death in consideration of the past services,
meritorious work, age, loss or injury.
 Pension pay is taxable unless the law states otherwise, or unless the
BIR approves the pension plan of a private company (see retirement)
Vacation and Sick Leave
 A. If paid or availed of as salary of an employee who is on a vacation or
on sick leave notwithstanding his absence from work, it constitutes
taxable compensation income.
 B. Monetized value of unutilized vacation leave credits of ten (10) days
or less which were paid to private employees are not subject to tax and
to withholding tax
 C. Monetized value of unutilized vacation leave credits which were paid
to govt employees and officials are not subject to tax and to
withholding tax
13th Month Pay
 13th month pay and other benefits in the amount of P82,000 or
less are not taxable.
Fringe benefits
 As any good, service, or other benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries of an individual employee under an
employee-employer relationship.
 Housing
 Vehicles of any kind
 Household personnel, such as maid, driver and others
 Interest on loan less than market rate
 Membership fees, dues and other expenses borne by the employer
 Expenses for foreign travel
 Holiday and vacation expenses
 Educational Assistance to the employee or his dependents
 Life and Health insurance and other non-life insurance premiums or similar amounts
Fringe benefits
Classification
1. Fringe Benefits to rank and file employees are taxable as
compensation Income subject to normal tax rate, except:
a. De minimis benefits, and
b. Benefits provided for the convenience of the employer
2. Fringe Benefit to managerial employees are taxable with
fringe benefit tax of 32%, except:
a. De minimis benefits,
b. Benefits provided for the convenience of the employer
3. Allowances which are fixed in amounts and are regularly
received by the employee as part of his monthly compnesation
Fringe Benefit Tax (FBT 30%)
 Monetary burden imposed by the sovereignty on 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 other than rank and file employee.
 The employer (individual, professional partnership, or corporation) are liable to
remit fringe benefit tax to the BIR once fringe benefit is given to a managerial or
supervisory employee.
 FBT is a Final Tax on the employee’s income to be withheld and remitted by the
employer on a quarterly basis
 The tax base of FBs is based on grossed-up monetary value (GUMV)of the FB
granted.
 The GUMV of the FB shall be determined by dividing the monetary value of the
FB by 60% effective January 1, 2000.
Fringe Benefits (Illustration)
 During the Taxable year, Pina Bayaan, an employee of san Miguel
Corporation, received a total salary of P180,000. In addition, she
received cash fringe benefits amounting to P136,000 for personal
expenses during the year.
 Assuming that Pina is a rank and file employee of the company, how
much of her FB would be subject to FBT?
 Assuming that Pina is a manager of the company. How much is the
Final Tax on Fringe Benefits?
Fringe Benefits (Illustration)
 During the Taxable year, Pina Bayaan, an employee of san Miguel
Corporation, received a total salary of P180,000. In addition, she
received cash fringe benefits amounting to P136,000 for personal
expenses during the year.
 1.Assuming that Pina is a rank and file employee of the company,
how much of her FB would be subject to FBT?
 2. Assuming that Pina is a manager of the company. How much is the
Final Tax on Fringe Benefits?
Fringe Benefits (Illustration)
 1.Assuming that Pina is a rank and file employee of the company,
how much of her FB would be subject to FBT?
 FB are not subject to FBT. It shall be included as part of her Gross
compensation income (Sec 24A)
 2. Assuming that Pina is a manager of the company. How much is the
Final Tax on Fringe Benefits?
Value Receives as FB P 136,000
Divided by GUMV rate 68%
GUMV/Taxable Amount of FB P 200,000
Multiplied by FBT rate 32%
Fringe Benefit Tax P 64,000
 Subject to Fringe
Fringe Benefits Benefit Tax
Supervisor/Manager

Compensation Subject to
Normal Tax

Subject to
Fringe Benefits
Normal Tax
Rank and File
Compensation Subject to
Normal Tax
Overtime Pay

 Premium payment received for working beyond the

regular hours of work which is included in the
computation of gross salary of employee.
Other forms of Compensation Income
 Profits Sharing
 Awards for special services
 Beneficial Payments
 Such as where an employer pays the income tax owed by an employee
 Others
 Compensation Paid in Kind
 Insurance premium paid the employer for insurance coverage where the
heirs of employee are the beneficiaries is the employee’s income.
Illustration
 Miss Sina Wee, single, reported the following income for the taxable year 200A:
Salary for the year P384,000
13th month pay 33,000
Honorarium as a speaker 2,000
Commissions 5,000
Fees as a Director 50,000
Availed vacation leave pay (included in salary 12,000
COLA 9,000
Interest income from time deposit in BPI 3,000
Royalty from mining, net of final tax 70,000

Miss Sina retired at the age of 45 as of December 31, 200, receiving a retirement pay of P1,000,000.
What is the gross taxable income of Miss Sina Wee for 200A?
Illustration
 Miss Sina Wee, single, a resident citizen of the PH reported the following income for
the taxable year 200A:
Salary for the year P384,000
Honorarium as a speaker 2,000
Commissions 5,000
Fees as a Director 50,000
COLA 9,000
Retirement Pay 1,000,000
Gross Taxable income P 1,450,000
Illustration
 Computation of Taxable income
Gross Taxable income P 1,450,000
less: personal exemptions (single) (50,000)
Net Taxable Income P 1, 400,000

Over P500,000 P125,000 + 32% of the excess over P500,000

Tax Due
= P125,000 + (1,400,000 – 500,000)*32%
= P 413,000
Shares of stock received as
Compensation
 FMV of shares of stock at the time of the service is rendered
Cancelation of Debt
 Miss Madam I. Utang, a computer encoder borrowed P10,000 payable
withing two months from Mr. Lakie Chan, her employer. Miss Utang was
not able to settle her debts on the stipulated time payment. Mr. Chan
cancelled her indebtedness in lieu of her 2 months services.

 The cancelled indebtedness of P10,000 shall be considered

compensation income subject to normal/regular income tax of miss
Utang
Insurance Premiums as Compensation
 These are premiums paid by the employer on life insurance coverage
of the employee wherein the beneficiary is the employee’s family.
These constitute taxable income on the basis of the amount of
premium paid and a deductible expense of the employer.

Beneficiary
Employee Employer
Taxable Compensation of the employee Yes No
Deductible Operating Expense of the Employer Yes No
Income tax paid as a compensation
 Mang Kanor Inc. pays the income tax of Miss Love Lee, being the vice
president for operations. Assuming that the amount of miss Lee’s salary
is P300,00 and income tax paid is P50,000, the gross income of Miss Lee
is P350,000.
Gross Income from Business and Professions
 In case of manufacturing, merchandising or Mining Business:
Gross Sales Pxxx
less: sales return/discounts/allowances xxx
Cost of Good Sold xxx
Gross Income Pxxx

In case of taxpayers engaged in the sale of service:

Gross Receipts Pxxx
Less: Returns/allowances/discounts xxx
Cost of services xxx
Gross Income Pxxx
Rental Income
 Refers to earnings derived from leasing real estate as well as personal property. Aside from
the regular amount of payment using the property, rental income includes all other obligations
assumed to be paid by the lessee to the third party in behalf of the lessor (interest, taxes,
loans, insurance premiums and others).
Example: Antoinne Bauza leases a portion of its coomercial space to Mr. Eric Lang with the
agreement that Mr. Lang should responsible to play the following:
 Advanced rental of P100,000
 Monthly Rental of P25,000
 Annual Insurance Premium of P5,000
 Annual Interest expense of P3,000
 Real Estate tax of P2,000
Rental Income
 1. Without Restrictions. If the advanced payment received is a prepaid rent received
without restrictions as to its use, the entire amount is taxable in the year it is
received regardless of the accounting method used.

Advanced rental Received P100,000

Rent Income (25,000x12) P300,000
Annual Insurance Premium P5,000
Annual Interest expense P3,000
Real Estate tax P2,000
Annual Rent Income P410,000
Rental Income
 2. Security Deposit with Restriction. If the advance payment is a security deposit
which restricts the lessor as to its use, then such amount should be excluded in the
determination of rental income.

Rent Income (25,000x12) P300,000

Annual Insurance Premium P5,000
Annual Interest expense P3,000
Real Estate tax P2,000
Rental Income to be Reported P310,000
Rental Income
 2. Security Deposit with an Acceleration Clause. If the advanced
payment is a loan deposit, or option money for the property, or a
security deposit for the faithful compliance of the lessee, such
advance payment, such advance payment is not an income to the
lessor. The income to the lessor inures when the lessee violates the
term of the contract.
Assume that the contract of lease between Bauza and Lang constains
an acceleration clause stipulating that the lease contract will be
terminated for nonpayment of rental income in any month during the
year and the security deposit shall be forfeited in favor of the lessor.
Rental Income
Assume further that Mr. Lang was unable to pay monthly rental for
the last quarter of the year, including all other assumed obligations.
The reportable rental income would be:
Rent Income (25,000x9) P225,000
Security Deposit Forfeited P100,000
Rent Income to be reported P325,000
Income from leasehold improvement
 When the lessee erected or built permanent improvements on the
leased property which will be come the property of the lessor upon the
expiration of the lease, the value of the improvements should be
reported as income of the lessor using “outright method” or “spread out
method.
Outright method – leasehold improvement
 Under this method, the income from leasehold improvement shall be
recognized when the improvement is completed at its FMV.
 Example: Al leased his lot to Fred for a term of 10 years at an annual
rental of P120,000. A building was erected by Fred on the lot with a
cost of P1,000,000, with an estimated life of 25 years. At the end of the
contract, the building will belong to Al.
 Kay should report the income of P____________________.
FMV of the building in the year completed P1,000,000
Annual rent Income 120,000
Total Income to be reported P 1,120,000
Spread out method – leasehold improvement
 Under this method, the estimated book value of the leasehold improvement at
the end of the contract is spread over the term of the lease and is reported as
income for each year of the lease.
Cost of the building P1,000,000
Less: Accumulated Depreciation at the end of the lease
(1,000,000 / 25 yrs) x 10 yrs 400,000
Book Value of the depreciated building
(Al’s total income on the building) P 600,000

Annual Income on the Building (P600,000/10 yrs) P60,000

Add: Annual Rental 120,000
Rental Income to be reported P180,000
Spread out method – leasehold improvement
 Assuming that the lease was terminated on the 9th year for the failure of
Fred to pay the annual rental of P120,000 for that year, the computation will
be:
Cost of the building P1,000,000
Less: Accumulated Depreciation at the termination
of lease 320,000
Book Value at the termination of lease P 680,000
less Income already reported by AL (8yrs x P60,000) 480,000
Income for the year in which lease is terminated P200,000
Spread out method – leasehold improvement
 If the same building for which no insurance was taken, was destroyed by
fire on Jan. 1 of 6th year and its salvage value is P100,000, the loss of
all will be:
Income already reported by AL (5yrs x P60,000) P300,000
salvage value (100,000)
Loss P 200,000
Passive Income
 Interest Income
 Royalty Income
 Dividend Income
 Prizes and Winnings
Interest Income
 For individuals, except NRANETB, income from long term depsoit or
investment (e.i., savings, trust fund, deposit substitute, investment
management accounts and other investments) shall be exempt from
income tax, provided that the following conditions are met:

1. The deposit or investment must be evidenced by certificates

conforming to the Banko Sentral ng Pilipinas (BSP).
2. The same must have a maturity period not less than five years and in
denominations of P10,000 or other denominations as may be approve
by the BSP issued by banks (not by non-bank finacial intermediaries or
finance companies)
Interest Income
 However, should the holder of the certificate pre terminate the deposit
or investment before the 5th year a tax shall be imposed on the entire
income (final tax).
 Final tax of 5% 4 years to less than 5 years
 Final tax of 12% 3 years to less than 4 years
 Final tax of 20% less than 3 years
Classification of Interest Income
 Exempt from income tax
 Subject to final Witholding tax
 Subject to normal tax
Classification of Interest Income
 Interest earned is exempted from income tax if received from:
 1. By members from duly-registered coopertive.
 2. BSP prescribed form of investments maturing more than 5 years.
 3. Expanded foreign currenct deposit system by nonresident citizen/aliens

Ex: Mr. Matipid put his retirement in the following investments:

12% BSP Deposits substitutes (more than 5 years) P200,000
24% Baguio-Benguet Cooperative 200,000
7% time deposit – China Bank ( 2.5 yr maturity) 100,000
Interes Income Subject to Final Witholding tax
 Interest income on deposits made in banking institutions which is subject
to 20% final witholding tax.

 On April 30 200X, Mr. Gaga M. Ba placed his retirement pay amounting

to P1,000,000 in BPI as time deposit with 18% ineterest per annum.

Gross Interest Income (P1,000,000 x 18% x 8/12) P120,000

Less: Final WT on Interest Income (20%) 24,000
Interest Income of Gaga, net of FWT P96,000
Interest Income Subject to Normal Tax
 These are earnings derived from lending money, goods or credits from
one person to another without any witholding tax made.
 Interest received from:
• Cooperatives
• BSP Prescribed form investments (>5yrs) Tax Exempt
• Expanded foreign currency deosits by Non residents
Passive Income

Interest eraned from:

• Financial Companies (20% FWT) Subject to
• Not BSP prescribed form investments (5% 12%,20% Final
FWT) Witholding Tax
• Expanded foreign deposit earned by residents (7.5%
FWT)

Interest Earned as: Subject to

• Principal business activity NormalTax
Royalty Income
 Is a payment or portion of proceeds paid to the owner of the rights.
Such as an oil right or the patent for the use of it, or a portion of
proceeds from the work of an author or composer.
Classification of Royalty Income

 In general, royalty income include those which are derived from

natural resources of pruducts such as coal, gas, oil, copper silver, gold
and other similar products. These king of royalty income are subject
to 20% Final Tax; and
 Royalties on books, literary works and musical composition are loyalty
income subject to 10% Final Tax.
Royalty Income

 Good Godin received the following royalties:

On sale of Goods Hamburger (franchise) P200,000
On sale of books authored by Godin (Copyrights) 300,000
TOTal P 500,000

Tax due on Royalties would be:

Royalty tax on Hamburger Franchise P40,000
Royalty tax on sale of Books 30,000
Total Royalty Tax Due P70,000
Dividends are Tax exempt if:
1. Received from domestic corporation by:
a. Another domestic corporation
b. Resident foreign corporation Tax Exempt
2. Received from cooperatives
3. Pure stock dividend
4. Pure Liquidating Dividend

Dividends are subject to final tax if received from a domestic

corporation by a: Subject to
1. Citizen or Resident Alien (10% Final Tax) Final Tax
2. NRAETB (20% Final Tax)
3. NARENTB (25% Final Tax)
4. Nonresident Foreign Corporation (15% Final Tax)

Diviedends are subject to normal tax if: Subject to

1. Not included as tax exempt NormalTax
2. Not subjected to final tax
3. Distributive shares of partner in GPP
Prizes and Winnings
 A reward for a contest or a competition.
 Represents remuneration for an effort reflecting one’s superiority, like prize
money in a boxing contest.
 In general, prizes are subject to final tax of 20% except if the amount of the
prize is less than ten thousand (P10,000) or less which shall be subject to
normal tax.
 Winnings are subject to final tax of 20%
 Prizes and Winnings are generally taxable except when the law provides for
their exemption.
Tax Exempt Prizes and Winnings
• Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement are not taxable, provided that
the recipient was/is:
1. Selected without any action on his part to enter the contest.
2. Not required to render substantial future services as a condition to received the
prize or award.
• Prizes and Awards in Sports Competition
• All prizes and awards granted to athletes in local and international sports competitions
and tournaments, whether held in the Philippines or aborad sanctioned by their
respective national sports associations, shall not be included in gross income and shall be
tax exempt.
•Prizes and Awards granted by association not accredited by Philippine Olympic
Sports Committee (POSC) are subject to income tax (20% final tax).
• Winnings in PSCO even the amount is less than P10,000 is tax exempt.
Other sources of Income
 Bad Debt Recovery
 Tax Refund or Credit
 Damages Recovery
 Annuities
 Illegally Obtained