INTRODUCTION TO REGULAR

INCOME TAX
Lesson 7
CHARACTERISTICS OF THE REGULAR INCOME TAX
1. General in coverage
2. A net income tax
3. An annual tax
4. Creditable withholding tax
5. Progressive or proportional tax
General coverage
The regular income tax applies to all items of income except those that are subject to final tax,
capital gains tax, and special tax regimes.
Net income taxation
The regular tax is an imposition on residual profits or gains after deductions for expenses and
personal exemptions allowable by law
Annual income tax
The regular income tax applies on yearly profits or gains. The gross income and expenses of the
taxpayer are measured using the accounting methods adopted by the taxpayer and are reported to
the government over the accounting period selected by the taxpayer.
Creditable withholding tax
Most items of regular tax are subject to creditable withholding tax (CWT). These creditable
withholding taxes are advanced taxes that must be deducted against regular tax due in computing
the tax still due to the government.
Progressive or proportional tax
The NIRC imposes a progressive tax on the taxable income of individuals while it imposes a flat or
proportional tax of 30% upon the taxable income of corporations. Note that the revision of the
corporate income tax in the second package of the TRAIN Law proposes a 25% corporate income
tax.
THE REGULAR INCOME TAX MODEL
Gross income XXX
Less: Allowable deductions XXX
Taxable income XXX
Gross income consists of the major topics :
1. Exclusions of gross income
2. Inclusions in gross income
3. Special topics
a. Fringe benefits
b. Dealings in property

GROSS INCOME
Gross income constitutes all items of income that are neither excluded in gross
income nor subjected to final tax or capital gains tax.
Exclusions from Gross Income
These pertain to items of income that are excluded; hence, exempt from income
taxation.
Excluded income vs. exempt income
Excluded income are also exempt income. Excluded income are those listed by the NIRC as exempt
income from regular tax. The term exempt income includes all income exempt from income tax
whether final tax, capital gains tax, or regular income tax.

ALLOWABLE DEDUCTIONS
Allowable deductions, or simply “deductions,” are expenses in the conduct of business or exercise of
profession. They are commonly known as business expenses.

Individual taxpayers are classified as follows:

1. Pure compensation income earner
2. Pure business or professional income earner
3. Mixed income earner – an individual earning both compensation and business or professional
income
Note on Personal Exemption
Personal exemption is repealed effective January 1, 2018.
In an effort to simplify the tax system, the TRAIN Law simply exempts P250,000 annual income of
the individual income taxpayer from regular income tax.

DETERMINATION OF TAXABLE INCOME

Taxable Income of Individual Income Taxpayers
The taxable income of individual taxpayers is computed using the Classification and Globalization
rule.
Classification Rule
Gross income is first classified into:
a. Compensation income
b. Business or professional income
Compensation income vs. Business income
“Compensation income” generally comprises all remunerations under an employer-employee
relationship, such as the regular pay of employees every payroll period and other benefits or
incentives other than the basic pay which are commonly known as fringe benefits.
Business income arises from selling of goods or rendering of services for a profit.
Treatment of other income
Income that are neither compensation income nor business income such as passive income are
simply classified as “other taxable income” and are added to gross income from business and
profession or taxable compensation income.
Allowable deductions
Business expenses are deducted against gross income from business or profession. No deduction is
allowed against compensation income since personal expenses of individuals for coat of living are
deemed to be included in the P250,000 blanket exemption in the income tax table.
TAX REPORTING OF COMPENSATION INCOME
Gross compensation income PXXX
Less: Non-taxable compensation XXX
Taxable compensation income PXXX

BUSINESS INCOME/
Gross income from business /profession PXXX
Add: Non-operating income XXX
Total Gross income PXXX
Less: Allowable deductions XXX
Taxable net income PXXX
PROFESSIONAL INCOME
Revenues or gross receipts PXXX
Less: Cost of services XXX
Gross income PXXX

TAX REPORTING OF BUSINESS OR PROFESSIONAL INCOME

Tax Reporting by Individual Taxpayers

Net Sales/Revenues/Receipts/Fees PXXX

Add: Other taxable income from operation not subject to final tax XXX
Total sales/revenues/receipts/fees PXXX
Less: Cost of sales or services XXX
Gross income from business/profession PXXX
Add: Non-operating income XXX
Total Gross income PXXX
Less: Allowable deductions XXX
Net income PXXX
Reporting Format for Corporate Taxpayers
Net Sales/Revenues/Receipts/Fees PXXX
Less: Cost of sales/services XXX
Gross income from operations PXXX
Add: Other taxable income not subject to final tax XXX
Total gross income PXXX
Less: Allowable deductions XXX
Net income PXXX
TYPES OF REGULAR INCOME TAX
1. Individual income tax
2. Corporate income tax
INDIVIDUAL INCOME TAX
The individual income tax is determined by reference to a tax table
The Income Tax Table for Individual Taxpayers (Year 2018-2022)

Taxable Income per year Income Tax Rate

P250,000 and below
Above P250,000 to P400,000
Above P400,000 to P800,000
Above P800,000 to P2,000,000
Above P2,000,000 to P8,000,000
Above P8,000,000
0%
20% of the excess over P250,000
P30,000 + 25% of the excess over P400,000
P130,000 + 30% of the excess over P800,000
P490,000 + 32% of the excess over P2,000,000
P2,410,000 + 35% of the excess over P8,000,000
Scope of the progressive tax
The progressive tax covers all individuals including taxable estates and trusts except NRA-NETB
which is subject to 25% final tax on gross income.
The Optional 8% Income Tax
The TRAIN Law introduced an optional income tax for self-employed and or professionals (SEP)
wherein they can opt to be taxed at 8% of sales or receipts and other non-operating income.
The 8% income tax shall be in lieu of the:
a. Progressive income tax, computed under individual tax table; and
b. 3% percentage business tax on sales or receipts.
The 8% income tax is a form of a bundled tax which enables one-time compliance for two taxes
which would otherwise require separate filing and payments.
Corporate income tax
The corporate income tax, commonly referred to as the regular corporate income tax (RCIT), is a
proportional or flat tax at a rate of 30% on taxable income. The RCIT applies to any corporation
other than those:
a. Subject to final tax such as non-resident foreign corporation and FCDU interest income not
subject to final tax
b. Special corporations or those subject to preferential (i.e. lower) tax rates or special tax regimes
c. Exempt corporations
The Minimum Corporate Income Tax (MCIT)
Corporate taxpayers are subject to a minimum tax, computed as 2% of total gross income subject to
regular tax. Even if corporations are losing in business, they are subject to the minimum tax.
Special Corporations
Special corporations are those enjoying lower tax rates but not 0%, such as private schools, non-
profit hospitals and PEZA or TIEZA-registered enterprises.
Exempt Corporations
Exempt corporations are those enjoying 0% tax rate with no tax dues such as government agencies,
non-profit organizations with no taxable income, cooperatives, and those registered with the Board
of Investments (BOI) enjoying income tax holiday or ITH.
INCOME TAX RETURNS
Individual Income Tax Returns
Tax Return Form Individual Taxpayers

Form 1700 Purely employed taxpayer

Form 1701A Purely in business or profession, using itemized , OSD or opting to the 8%
optional income tax
Form 1701 Mixed income earners, Estates and Trusts
Corporate income taxpayers
Form 1702-RT Corporations subject only to the 30% regular income tax
Form 1702-MX Corporations subject to special or a combination of tax rates
Form 1702-EX Corporations that is exempt with no tax due
DEADLINE FOR FILING INCOME TAX RETURN
The annual income tax return is due for filing on the 15th of the fourth month following the taxable
year of the taxpayer. Income tax shall be paid upon filing.
Rounding rules in the income tax returns
The requirement for entering centavos in the latest version of the income tax return (June 2013
version) has been eliminated. If the amount of centavos is 49 or less, the centavos are dropped
down. If the amount is 50 or more, it is rounded up to the next peso.
REQUIRED ATTACHEMENT IN THE ANNUAL INCOME TAX RETURN
1. Certificate of Independent CPA – if annual sales, earnings, receipts or output exceed P3,000,000).
2. Supplemental form for taxpayers with multiple activities per tax regime.
3. Account information form and financial statements (FS) showing:
a. Sales/receipts/fees
b. Cost of sales/services
c. Non-operating and other taxable income
d. Itemized deductions (if taxpayer did not avail of OSD)
e. Taxes and licenses
f. Other information prescribed to be disclosed in the FS
4. Statement of management responsibility (SMR)
5. Certificate of income payments not subjected to Withholding Tax (BIR Form 2304)
6. Certificate of creditable withheld at source (BIR Form 2307)
7. Duly approved Tax debit memo, if applicable
8. Proof of prior year’s excess credits, if applicable
9. Proof of foreign tax credits, if applicable
10. For amended return, proof of tax payment and the return previously filed
11. Certificate of tax treaty relief/Entitlement issued by the concerned Investment Promotion Agency (IPA)
QUARTERLY FILING OF INCOME TAX RETURN
For individuals BIR Form 1701Q
For corporations BIR Form 1702Q

Deadline of Quarterly Income Tax Returns

Taxpayers
Income Tax Returns Individuals Corporations
1st Quarter ITR May 15, same year 60 days end of 1st Qtr
2nd Quarter ITR Aug 15, same year 60 days end of 2nd Qtr
3rd Quarter ITR Nov 15, same year 60 days end of 3rd Qtr

Quarterly income tax returns of individuals engaged in business or profession are due 45 days from
the end of the first three quarters whereas the quarterly income tax returns of corporate taxpayers
are due 60 days from the end of the quarter.
Frequency of Reporting Per Taxpayer Type

Taxpayer Frequency of Tax Reporting

Individuals

Pure Compensation income earner Annual

Pure engaged in business or profession Quarterly and annual

Mixed income earner Quarterly and annual

Corporations Quarterly and annual

The substituted filing system for employees