INDIVIDUAL TAXPAYER

Classification of Individua
l Taxpayers
1. Resident citizen- An individual whose residence is wi
thin the Philippines.
2. Non-Resident citizen – is a citizen who
a)Establish to the satisfaction of the Commissioner the fct
of his physical presence abroad, with a definite to reside t
herein;
b) Leaves the Philippines during the taxable years to resid
e abroad;
c)Works and derive income from abroad and whose empl
oyment requires him to be physically present abroad most
of the time(not less than 83 days) during the taxable years
.
 Classification of Individual Taxpayers
3. Resident Alien – means any individual whose residen
ce is within the Philippines and who is not a citizen thereo
f
1
4. Nonresident Alien – means an individual whose resid
ence is not within the Philippines and who is not a citizen
thereof. A nonresident alien is classified thereof
a)Engaged in trade or business in the Philippines (ETB) –
refers to a non resident alien who shall come to the Philip
pines and stay for an aggregate period of more than 180 da
ys during calendar years;
b) Not engaged in trade or business in the Philippines (NE
TB) - refers to a non resident alien who shall come to the P
hilippines and stay for an aggregate period of 180 days or l
ess during any calendar years
General Principles of Income Taxation on individuals
1. A resident citizen is taxable on income derived from so
urces within and without the Philippines
2. A nonresident citizen is taxable only on income derive
d from sources within the Philippines
3. A citizen of the Philippines who is working and derivin
g income from abroad as overseas contract worker is ta
xable only on income from sources within the Philippin
es.
4. An alien individual, whether a resident or not in the Ph
ilippines is taxable only on income derived from source
s within the Philippines
Situs of Taxable Income of Individual Taxpayers
Individual Taxpayer Income within Income without
1. Resident citizen Taxable Taxable

2. Resident Alien Taxable Non Taxable

3. Nonresident Citizen Taxable Non Taxable

4. Nonresident alien (ETB) Taxable Non Taxable

5. Nonresident alien(NETB Taxable Non Taxable

)
Tax on income earnings and money remittance of Overseas C
ontract Worker (OCW)/ Overseas Filipino Worker (OFW)

OCW refers to Filipino citizens employed in foreign co

untries , commonly referred to as OFW's, who are physi
cally present in foreign country as a consequence of the
ir employment thereat.
 Their salaries and wages are paid by an employer abro
ad and is not borne by entity or person in the Philippi
nes. To be considered as an OCW or OFW,they must b
e truly registered as such Philippine Overseas Emp
loyment Administration ,( POEA) with a valid Ov
erseas Employment Certificate (OEC) . Seafarers I
dentification Record Book (SIRB) or seamN's boo
k, issued by Maritime Industry Authority (MARIN
Kinds of Income of Individual Taxpayer
1. Compensation Income – in general, means all remuneration for
services performed by an employee to his employer under an emplo
yer-employee relationship, unless specifically excluded from Code.
2. Business Income – earned by a sole proprietor or an independe
nt contractor who reports income earned from self-employment. S/
he controls for, how the work is done and when it is done. It include
s those hired under a contract of service or job order.
3. Professional Income – earned by professionals whose income d
erived purely from the practice of profession and not under an empl
oyer-employee relationship.
4. Passive Income – Income earned without working actively; they
are subject to different final with holding tax rates
Income Tax Rates
Effective January 1, 2018 until December 31, 2022, if the t
axable income is:
OVER NOT OVER TAX PLUS OF EXCESS OVE
R
P250,000 0%

P250,000 400,000 20% - P250,000

400,000 800,000 P30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 2,410,000 35% 8,000,000
Effective January 1, 2023 and onwards

OVER NOT OVER TAX PLUS OF EXCESS OVER

P250,000 0%

P250,000 400,000 15% - P250,000

400,000 800,000 P22,500 20% 400,000

800,000 2,000,000 102,500 25% 800,000

2,000,000 8,000,000 402,500 30% 2,000,000

8,000,000 2,202,500 35% 8,000,000

Illustration 8.1
Ana, married, supporting her mother and two minor children, has the following
income and expenses

Salary P80,000
Allowances 6,000
Professional Income as CPA 25,000
Gross Income from business 200,000
Expenses – practice of profession 5,600
Expenses – business 130,000

Required: Compute for the income tax due using the gra
duated rates of tax.
Answer 8.1
Salary P80,000
Allowances 6,000
Professional Income as CPA 25,000
Gross Income from business 200,000
Total 311,000
Less: Deduction
Expenses – practice of profession 5,600
Expenses – business 130,000 135,600
Taxable Income 175,400
Tax on P175,400 Exempt
Tax on nonresident alien engaged in trade or business
(NRA ETB)
 To engage in trade or business within the Philippines is construed
as signifying to follow the employment or occupation which occu
pies the time attention and labor for the purpose of a livelihood o
r profit.
 It denotes habituality or sustained activity.
 The term “trade or business” includes the performance of the fu
nctions of the public office.
 A nonresident alien individual who shall come to the Philippines
and stay therein for an aggregate period of more than 180 days du
ring any calendar year shall ne deemed a nonresident alien doing
business in the Phil.
 In general, the income tax rates applicable to shall be the rates im
posed on individual citizen and a resident individual on the taxa
ble income derived within the Philippines.
Illustration 8.2
In 2018,, Bryant, married with one dependent child,
a foreign citizen residing abroad but engaged in busines
s in the Philippines, derived an income abroad of U.S $1
20,000 (U.S $1.00 =P50) and 150,000 in the Philippines.
His country grants a personal exemption of P30,00
0 on married individuals and P7,000 on every depende
nt child.

Ans. Gross income, Phil. P150,000(Exem

pt)
Income earned by alien employees
Illustration 8.3
Don Hump, an alien employed in Far-In Corporation that is a Petr
oleum Service Contractor, received compensation income of
P4,000,000 for 2018, inclusive of P200,00013th month pay and other benefit
s.
Answer
Compensation P4,000,000
Less: 13th month pay and other benefit 90,000
Taxable Compensation income 3,910,000

tax on P2,000,000 P490,000

1,910,000 x32% 611,200
Income Tax Due 1,101,200
Passive Income
 Passive income are income subject to final withholding tax and shal
l not be included in the gross income of the taxpayer.

 Under the final withholding tax system, the amount of income with
held by the withholding agent is constituted as a full an final paym
ent of the income tax due form the payee on the said income.

 The liability for payment of the tax rests primarily on the payor as a
withholding agent. The payee is not required to file an income tax r
eturn for the particular income.
The following forms of income payments shall be subject to final wi
thholding tax rates herein specified.
A. Income payments to an individual subject to final taxes
Resident or Ci NRA ETB
Passive Income tizen
Interest form any currency bank deposit 20% 20%
Yield or any other monetary benefit form depo 20% 20%
sit substitutes and from trust funds and similar
arrangements`
Royalties 20% 20%
Royalties on books and other literary works an 10% 10%
d musical compositions
Prizes (except prizes amounting to P10,000 or l 20% 20%
ess which shall be subject to regular tax)
Winnings 20% 20%
Philippine Charity Sweepstakes winning and L Not Taxable Not Taxable
otto winnings in the Philippines amounting to
more than P10,000
Interest income received from an depository b 15% Exempt
ank under the Expanded Foreign Currency De
posit System (OCW/OFW -exempt)
 Resident or Citize NRA ETB
Passive Income n
Cash and/or property dividends actually or constructiv 10% 20%
ely received from any of the following
a.Domestic corporation
b.Joint stock company
c.Insurance or mutual fun companies
d.Regional operating headquarters of multinational co
mpanies
e.On the share of an individual partner in the distribute
d net of income after tax of a partnership (except a gene
ral profession), or
f.On the share of an individual in the net income after t
ax of an association, a joint account or a joint venture or
consortium of which he is member or a co-venturer.

Income within on interest on long term deposit o Exempt Exempt

r investment in banks with a maturity of five(5) y
ears or more
Interest income from long term deposit or investment i
n the form of savings, common or individual trust funds
, deposit substitutes, investment management accounts
and other investments evidenced by certificates which
was pre-terminated by the holder before the 5th year at t
he rates herein prescribed:

Holding Period Rate

4 years to less than 5 years 5%
3 years to less than 4years 12%
Less than 3 years 20%
 MUTUAL FUND
Refers to an investment vehicle that is made up of a pool of funds collected from
many investors for the purpose of investing in securities such as stocks, bonds, m
 Refers to an investment vehicle that is made up of a pool
oney market instruments and similar assets.
A mutual funds portfolio is structured and maintained to match the investment obje
of funds collected from many investors for the purpose of
ctives stated in prospectus.

investing in securities such as stocks, bonds, money

market instruments and similar assets.

 A mutual funds portfolio is structured and maintained to

match the investment objectives stated in prospectus.
The term “deposit substitutes” is defined as an
 alternative form of obtaining funds from the public, other
than deposits, through issuance, account, for the purpose of
relending or purchasing or receives and other
 obligations.

These instrument may include but need not to be

 limited to, bankers’ acceptances, promissory notes,
 participations, certificate of assignment and similar
 instruments with recourse, and purchased agreements.
TRUST FUNDS
 are arrangements that allow individuals to create
sustained benefits for another individual or entity.

 A trust can include a wide range of assets, In addition to cash, a t

rust fund may include resource such as property, stocks, bonds or
any other type of financial instrument.
 The trust fund may be managed by a single
trustee, or be structured to allow for more than one trustee.

 It is responsibility of the trustee to see that the resources include

d in the trust fund are used in the best interest of the recipient of
the trust.
Illustration 8-3.
Bernard, single, supporting his brother, 30 yrs. Old, mentally defective, had the follow
wing data in 2018:

Income for profession Php 450,000.00

Interest on bank deposit (net of 20% final tax) 4,000
Winnings in raffle 100,000
Prize won in a contest 5,000
Dividend received from the C Corp., a domestic company 6,000
salary as part-time accounting teacher(net of SSS contribution and P2,400 credi
table witholding tax) 17,600
Retail income, net creditable WT of 5% 38,000
Expenses incurred 60,000

REQUIRED : Compute the ff.

1. Income tax payable based on the graduated rates of tax

2. Final witholding taxes on the passive in come of Bernard.
ANSWER

Professional income P450,000

Prizes in a contest 5,000
Salary (17,600+2,400) 20,000
Rent Income(38,000/95%) 40,000
Gross income 515,000
Less: Rent Expense 60,000
Taxable income 455,000
Tax on P400,000 30,000
55,000X 25% 13,750
Income tax due 43,750
Less: Tax credit
WT on Salary 2,400
WT on rent 2,000 4,400
Income tax payable 39,350
Answer 2.
Final Taxes on passive income of Bernard

(a) Interest on bank deposit (4,000/80%) 5,000

Rate of Tax 20%

Final withholding Tax 1,000

(b) Winnings in Raffle 100,00

Rate of Tax 20%

Final withholding Tax 20,000

(c) Dividend income from C Corporation 6,000

Rate of Tax 10%

Final withholding Tax 600

TAX ON NON-RESIDENTIAL ALIENS NOT ENGAGED IN
TRADE OR BUSINESS (NRA NETB)
Non-residential aliens not engaged in trade or business in the
Philippines are normally subject to final withholding tax or twenty
five percent (25%) from all sources within the Philippines.

The following forms of income derived from sources within shall be subject to tax
at the following prescribed rates.
1. 25% final withholding tax on the gross amount of the ff. income:
 1.Interest
 2. Cash and/or property dividends
 3. Salaries, wages
 4. Premium
 5. Annuities
 6. Compensation, remuneration, emoluments
 7. Capital gains, or
 8. Other fixed or determinable annual or periodic or casual gains, profits and income.
2. 6% on capital gains presumed to have been realized from
the sale, exchange or other disposition of real property located in
the Philippines, classified as capital assets, including Pacto de
retro sales and other form of conditional sales.
 The Tax base shall be whichever is higher between:
1.The gross selling price, and
2.The higher between the fair market value as determined by
the Commissioner of Internal Revenue (CIR) and the fair market
value as determined by the provincial or City Assessors.
3. In case of disposition of real property classified as capital
assets to government or any of its political subdivisions or
agencies or to government-owned or controlled corporations, the
tax to be imposed shall be determined in either of the following,
at the opinion of the taxpayer.
In accordance with the graduated rates established in table
2 and 3 of this chapter, or 6% final tax based on the gross
selling price or fair market value, whichever is higher.

4. 15% Final tax is hereby imposed upon the net capital

gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of
through the stock exchange.

TAX ON NON-RESIDENTIAL ALIENS NOT ENGAGED IN TRADE OR
BUSINESS (NRA NETB)
Allowable deductions from income of individual tax
payers

The deductions allowed shall depend on the nature of in

come earned by taxpayer, viz:

Compensation income and passive income

 No deductions are allowed
Business/Professional
 Either itemized deductions or optional standard ded
uction.
Illustration8.5 Pepe and Pilar, husband and wife, with 5 qualified
dependent children had the ff income in 2018
Answer: Illustration 8.5
 OPTIONAL STANDARD DEDUCTION (OSD)

 In lieu of itemized deductions an individual taxpayer

(except a nonresident alien) may elect a standard deduction in an a
mount not exceed (40%) of his high gross sales or receipts, as the ca
se may be however, the following conditions must be satisfied.
a.)That he signified his intention to elect optional standard deducti
on by checking the appropriate box in income tax return filed for t
he first quarter or the initial quarter of the taxable year after the co
mmencement of a new
business practice of profession.
b.)Once the elections is made, it must be consistently applied to all t
he succeeding quarterly returns and in the final income tax return fo
r the taxable year.
 The purpose of the standard deduction is to facilitate the auditor or review of
tax returns because there is no need on the part of administrative taxing
personnel to determine which items are allowed to be deducted or not.
 If the individual is on the accrual basis of accounting for income and
deductions, the optional standard deduction shall be based on the gross sales
during the taxable year.
 On the other hand, if the individual employs the cash basis of accounting for
his income and deductions, the optional standard deduction shall be based
on his gross receipts during the taxable year.
 For other individual taxpayers allowed by law to report their income and
deductions under a different method of accounting(ex. Percentage of
completion basis) other than cash and accrual method of accounting the
“gross sales” or “gross receipts” shall be determined in accordance with
acceptable method of accounting.
Illustration 8.6
Jun Castro,married ,with five (5) children, had the ff.
Income and expenses during the year
Ans. Illustration 8.6
Ans. Illustration 8.6
Illustratio8.8
Illustration8.8
  INDIVIDUAL EARNIG INCOME FROM SELF
EMPLOYMENT OR PRACTICE OF PROFESSION

Individual earning income from self-employment and/or

practice of profession whose gross sales/receipts and other non-oper
ating income does not exceed P3,000,000 shall
have the option to avail of:

1. The graduated rates in Table 2(or 3) above; or

2. An 8% tax on gross sales or receipts and other

non-operating income in excess of P250,000 in lieu of the graduate
d income tax rates and the percentage tax
(3% Non-Vat)
 Illustration 8-9
 Miss Tess operates a small grocery store while she is
practicing her accounting profession. In 2018, her gross
sales amounted to P1,200,000 in addition to her receipts
from accounting practice of P500,000. The cost of sales,
and operating expenses incurred on the grocery were
P700,000 and P150,000, respectively.
 The cost of services on the profession was P90,000.
 Required;
 COMPUTE the tax due if Miss Tess availed of:
 1. Graduated rates of tax
 2. 8% income tax
  The 8% income tax on gross sales or receipts

The 8% income tax is in lieu of the graduated rate of

tax and the percentage tax of 3% Non-VAT.
The individual taxpayer who decides to choose this
option shall no longer be subject to the business tax of
3% Non-VAT.

The taxpayer cannot avail of the 8% tax if:

1. His business and/or profession is Vat registered; or

2. He is liable to other percentage tax which is 3% Non-vat
Ex: amusement tax, common carrier’s tax and franchise tax
3. He is a partner of a general professional partnership
(GPP) by virtue of their distributive share from GPP which
is already net of cost and expenses.

The taxpayer shall be considered as having availed of the

graduated rates of tax.

• Such election shall be irrevocable and no amendment

of option shall be made for the said taxable year.
• The financial statement is not required to be attached
in filling bookkeeping and invoicing/receipting shall
still apply.
• Even if the flat 8% income tax rate option is initially
selected, the taxpayer shall automatically be subject
to the graduated rates of tax, when his gross sales/re
ceipts and other non-operating income exceeded the
P3,000,000 during the taxable year.

• In such case, his income tax shall be computed under

the graduated income tax rates and shall be allowed
a tax credit for the previous quarter/s income tax
payment under 8% income tax rate option.
  Taxpayer is a mixed income earner
If the taxpayer is a compensation income earner and at the
same time self-employed, the compensation income shall be
subject to the graduated rates of tax while the self-employed
income maybe subject to either 8% income tax or graduated
rates.

Illiustration 8-10
Agnes, a company supervisor, earned annual compensation. In 2018, of
P300,000, inclusive of 13th month pay and other benefits in the amount of
P25,000 but net of mandatory, contributions to SSS, Pag-ibig and
Philhealth.
Aside from employment, she is practicing her profession as a real estate
broker and appraiser, with gross receipts of
P2,400,000. Her cost of services and operating expenses were P600,000
and P60,000, respectively.
During the year, she had a non-operating income of P100,000.
A mixed income earner is not entitled to the P250,000 exemption on
self-employment income because such amount is already
incorporated in the first tier of the graduated income tax rates
applicable to compensation income
Are taxpayers who availed of 8% Income tax option
entitled to claim the Optional Standard Deduction?
 The 8% income tax option is in lieu of the itemized
deductions and the graduated income tax rates.

 Thus, taxpayers who opted to be taxed at the 8% rate on

their income from business/ practice of profession shall
not be entitled to avail of the optional standard deduction.

 OSD shall not be allowed to individual taxpayers earning

compensation income arising feom personal services
rendered under an employer- employee relationship
Illustration 8-11
 Rachel owns a small carenderia. During the year, the
business earned gross receipt of P2,000,000.
 Is she entitled to the 40% optional standard deduction if
she availed of the 8% income tax rate?

 Answer:
No, she can either avail of the 8% income tax rate or of
the optional standard deduction, but not both.
 if Rachel availed of the 8%, no deductions shall be
allowed (whether itemized or optional deduction),
because the tax shall be based on the gross receipts.
 The END
Jardeniano, Reemar
Salazar, Heidelyn
Sare, Syra
BSBA 3B