CHAPTER 8.

TAXATION ON INDIVIDUALS

CLASSIFICATION OF Is s/he a resident of the Philippines?

INDIVIDUAL TAXPAYERS
Yes No

Is s/he a Filipino Yes RESIDENT CITIZEN NONRESIDENT CITIZEN **

citizen?
No RESIDENT ALIEN * NONRESIDENT ALIEN ***

1. Resident citizen. An individual whose residence is within the Philippines and who is a citizen thereof.

2. Resident alien means any individual whose residence is within the Philippines and who is not a citizen
thereof.

3. Non-resident citizen.- Is a citizen who:

a. Establishes to the satisfaction of the Commissioner the fact of his physical presence abroad, with a
definite intention to reside therein;

b, Leaves the Philippines during the taxable year to reside abroad. either as an immigrant or for
employment on a permanent basis;

c. Works and derives income from abroad and whose employment thereat requires him to be physically
present abroad most of the time (not less than 183 days) during the taxable year;

A citizen who has been previously considered as nonresident 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
nonresident 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

4. Nonresident alien means an individual whose residence is not within the Philippines and who is not a
citizen thereof. A nonresident alien is classified into:

Engaged in Trade or Business Not Engaged in Trade or

Business

Stay > 180 days <= 180 days

Assumptions
  Resident alien husband and wife with two dependent children.
 Salary and allowances of husband arising from employment: Salary of PHP 652,000, living
allowances of PHP 100,000, and housing benefits (100%) of PHP 300,000.
 Teaching salary of wife: PHP 68,000.
 Gross dividend income from investment in shares of stock of a domestic corporation of PHP
10,000.
 Interest of PHP 20,000 on peso bank account.
 Capital gain on sale of shares of PHP 5,000.
 Taxes withheld by employer of husband at PHP 118,000 and by employer of wife at nil.
 Husband is occupying a managerial position in the company.
Tax computation Husband (PHP) Wife (PHP)

Gross income

Salary (1) 652,000 68,000

Living allowances 100,000

Total taxable income 752,000 68,000

Tax due:

On first 400,000 30,000

On remainder of 352,000 at 88,000

25%

On first 250,000 0

Total tax 118,000 0 0

Less:

Tax withheld by employer per (118,000) 0

Form 2316 (2)

Net tax due 0 0

Notes:
The following items were not included in the income tax return because they are subject to final tax:

Interest on peso bank account 20,000

Capital gain on sale of shares 5,000

Dividend income 10,000

Housing benefit (3) 300,000

1. Philippine social tax contributions, if any, made by the resident alien and/or his wife to the
Philippine social security agencies shall be allowed as deductions from gross income in
calculating their tax liabilities for the year.
2. For individuals receiving salary and other allowances from one employer only, the tax due is
usually equal to tax withheld since the employer is required to compute and withhold the total
tax due on the employee's compensation earned during the year, using the annual graduated
income tax table, before paying the last payroll for the year.
3. As a managerial employee, the housing benefit provided to the husband shall be subject to FBT
rather than income tax.

The above individual tax calculation also applies to non-resident aliens engaged in trade or business in
the Philippines for their Philippine-source income.

GENERAL PRINCIPLES OF INCOME TAXATION ON INDIVIDUALS

SITUS OF TAXABLE INCOME OF INDIVIDUAL TAXPAYERS

● = included; ○ = excluded Income Within Income Without

Resident Citizen ● ●

Resident Alien ● ○

Nonresident Citizen ● ○

Nonresident Alien Engaged in Trade or Business ● ○

Nonresident Alien Not Engaged in Trade or Business ● ○

TAX ON INCOME EARNINGS AND MONEY REMITTANCES OF OVERSEAS CONTRACT WORKERS

(OCW)/OVERSEAS FILIPINO WORKERS (OFW)
Stay >= 183 days

Overseas Contract Workers or Overseas Filipino Filipino seafarers or seamen

Workers (OCWs / OFWs)

truly registered as such with Philippine Overseas a member of the complement of a vessel engaged
Employment Administration (POEA) exclusively in international trade
● valid Overseas Employment Certificate ● valid Seafarer's Identification Record
(OEW) Book (SIRB) issued by Maritime Industry
Authority (MARINA)

KINDS OF INCOME OF Subject to Included as How it is taxed? Allowable

INDIVIDUAL TAXPAYERS taxable deductions
income?

 Compensation withholding tax YES Based on graduated NO

income on rates
compensation
income

 Business income withholding tax YES gross receipts/sales YES, if graduated

at source: rates chosen
 Professional creditable <= Php 3M, options
income are: (a) 8% tax* or (b) options are: (a)
graduated rates OSD or (b)
itemized
> Php 3M, then based deductions **
on graduated rates

 Passive income withholding tax NO Based on passive NO

at source: final income rates

INCOME TAX RATES

 SECTION 24 (A) (2) of the Tax Code of 1997, as amended by R.A. 10963

Amount of Net Taxable Income Rate

Over But Not Over

- P 250,000 0%

P 250,000 P 400,000 20% of the excess over P250,000

P 400,000 P 800,000 P30,000 + 25% of the excess over P400,000

P 800,000 P 2,000,000 P130,000 + 30% of the excess over P800,000

P 2,000,000 P 8,000,000 P490,000 + 32% of the excess over P2,000,000

P 8,000,000 P2,410,000 + 35% of the excess over P8,000,000

Example:

Kristine, 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 graduated rates of tax.

Answer:

Salary P80,000
Allowances 6,000
Professional income as CPA 25,000
Business Income 200,000
Total 311,000
Less: Deductions
Expenses-practice of profession 5,600
Expenses- business 130,000 135,600
Taxable income 175,400

Tax on P175,000 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 occupies the time, attention and labor for the purpose of a livelihood
or profitt denotes habituality or sustained activity.

The term trade or business' includes the performance of the functions of a public office.

A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate
period of more tnan 180 days during any calendar year shall be deemed a nonresident alien doing
business in the Philippines.

In general, the income tax rates applicable to shall be the rates imposed on individual citizen and a
resident alien individual on the taxable income derived within the Philippines;

A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a resident alien individual, on taxable
income received from ali sources within the Philippines.

Example:

In 2019, David, married with one dependent child, a foreign citizen residing abroad but engaged in
business in the Philippines, derived an income abroad of U.S. $120,000 (U.S $1.00: P50) and P150,000 in
the Philippines.

His country grants a personal exemption of P30,000 on married individuals and P7,000 on every
dependent child.

Compute the income tax due on David.

Answer:

Gross income, Philippines P 150,000

Tax on P150,000 Exempt

1. Nonresident aliens are taxable only on income derived from sources within the Philippines.

2. Individual taxpayers are not entitled to claim personal exemptions.

INCOME EARNED BY ALIEN EMPLOYEES

All concerned employees of the regional or area headquarters and regional operating headquarters of
multinational companies, offshore banking units and petroleum service contractor and subcontractors
shall be subject to the regular income tax rates without prejudice to the application of preferential tax
rates under existing international tax treaties, if warranted.

Example:

Joven, an alien employed in ABC Corporation that is a Petroleum Service Contractor, received
compensation income of P4,000,000 for 2018, inclusive of P200,000 13th month pay and other benefits.
COMPUTE for the income tax due on Joven.

Answer:

Compensation income P4,000,000

Less: 13th month pay and other benefits 90,00O
Taxable compensation income 3,910,000
Tax on P2,000,000 P 490,000
1,910,000 x 32% 611,200
Income tax due 1,101,200

As a rule, employees of RHQS/ROHQS/OBUs, and Petroleun Service Contractors and Subcontractors

shall be subject to regular income tax rate.

PASSIVE INCOME

Tax on Individual Nonresident aliens

citizens and engaged in trade
resident aliens or business

In general - taxable income same manner

Passive Income

● Interest from currency deposits, trust funds and deposit 20% FWT
substitutes

● Royalties (on books, as well as literary & musical 10% FWT

compositions

● Royalties in general 20% FWT

● Prizes (P10,000 or less) graduated tax rates**

● Prizes (over P10,000) 20% FWT 20% FWT

● Winnings from PCSO and Lotto amounting P10,000 or exempted

less

● Winnings from PCSO amounting to more than P10,000 20% FWT exempted

● Winnings in general 20% FWT

● Interest income from depository bank under the 15% FWT* exempted
Expanded Foreign Currency Deposit System

● Cash and/or property dividends actually or 10% FWT 20%

constructively received from any of the following:
a. Domestic corporation
b. Joint stock company
c. Insurance or mutual fund companies
d. Regional operating headquarters or
multinational companies
e. on the share of an individual partner in the
distributive partner in the distributable net
income after tax of a partnership (except in
GPP)
f. on the share of an individual in the net income
after tax of an association, a joint account or a
joint venture or consortium of which he is a
member or a co-venturer

● Capital gains from sale, exchange or other disposition of 6% FWT

real property located in the Philippines, classified as
capital asset

● Interest income from long-term deposit or investment exempt

in banks evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) with
maturity of 5 years or more

Holding Period

4 years to less than 5 years 5% FWT

3 years to less than 4 years 12% FWT

less than 3 years 20% FWT

● Net capital gains from sale of shares of stock not traded 15% FWT
 on the Stock Exchange

*(OFW / OCW / Filipino seafarers or seamen - exempted)

**added to taxable income

 Mutual funds - 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, money
market instruments and similar assets.
 Deposit substitutes - an alternative form of obtaining funds from the public, other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the
borrower's own account, for the purpose of relending or purchasing of receivables and
other obligations.
 Trust funds - are arrangements that allow individuals to create sustained benefitsfor
another individual or entity.

Example:

Kevin, single, supporting his brother, 30 years old, mentally defective, had the following data in 2019:

Income from profession P450,000

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

REQUIRED: Compute for the following:

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

2. Final withholding taxes on the passive incomes of Kevin.

Answer:
1. Professional income P 450,000
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 P 400,00 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

2. Final taxes on passive income of Kevin.

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

Rate of tax 20%
Final withholding tax 1,000

(b) Winnings in raffle 100,000

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 NONRESIDENT ALIEN NOT ENGAGED IN TRADE OR BUSINESS (NRA NETB)

Tax on NRA NETB

 Gross income from all sources within Philippines 25% final withholding tax

 Capital gains from the exchange or other disposition of real 6% final withholding tax
property located in the Philippines in general

 Capital gains from the exchange or other disposition of real graduated tax rates or 6%
property located in the Philippines to government or any of its final withholding tax (on
political subdivisions gross selling price or fair
market value whichever is
higher)

 Net capital gains from sale of shares of stock not traded in 15% final withholding tax
domestic corporation on the Stock Exchange
ALLOWABLE DEDUCTIONS FROM INCOME OF INDIVIDUAL TAXPAYERS

Itemized Deductions Optional Standard Deduction (OSD)

 Expenses an amount not exceeding 40% of the gross

 Interest sales/receipts
 Taxes not allowed to NRA
 Losses
 Bad debts
 Depreciation
 Depletion of oil and gas wells and mines
 Charitable contributions and other
contributions
 Research and development
 Pension trusts

8% INCOME TAX on gross receipts or sales and other non-operating income in excess of Php 250,000
in lieu of the graduated rates and the percentage tax*

Who are self-employed or professional that cannot avail such?

Those who are subject to Other Percentage Taxes in Title V of NIRC cannot avail 8% INCOME tax. The
taxes are as follows:

 Percentage tax on domestic common carriers and keepers of garages

 Percentage tax on international carriers
 Tax on franchises
 Tax on overseas dispatch, message or conversation originating from the Philippines
 Tax on banks and non-bank financial institutions performing quasi-judicial functions
 Tax on other non-bank intermediaries
 Tax on insurance companies
 Tax on agents of foreign insurance companies
 Amusement taxes
 Tax on winnings
 Tax on sale, barter or exchanges of shares of stock listed in the local stock exchange
 MIXED INCOME EARNER

 Compensation Income graduated tax rates

 Business Income and/or Professional 8% income tax (not entitled to P250,000

Income exemption if such availed in compensation
income), or

graduated tax rates

References:

http://taxsummaries.pwc.com/ID/Philippines-Individual-Sample-personal-income-tax-calculation
http://taxsummaries.pwc.com/ID/Philippines-Individual-Taxes-on-personal-income
Semple vs. Guenther, 96 N.w. 895, 896
Sec. 22, op. cit
Sec. 22/E, NIRC