Lecture 2 Income Taxation Individual
Lecture 2 Income Taxation Individual
Lecture 2 Income Taxation Individual
I. Pro-Forma Computation
1. For INDIVIDUALS whose gross income solely includes compensation, allowances and other
remunerations arising from the employer-employee relationship, passive income and capital gains not
subjected to final tax and CGT:
Compensation income xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Gross Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net income from business or profession xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
3. For INDIVIDUALS whose income includes both compensation, business income and passive incomes
and capital gains not subjected to final tax and CGT:
Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Income, not subjected to FT xx
Capital Gains, not subjected to CGT xx
Total Gross Income before compensation income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
NCLCO, if there is any (xx)
NOLCO, if there is any (xx)
Net Income from Business or Profession xx
Add: Compensation Income xx
Total Income xx
Less: Deductions for:
PHHI (xx)
Personal Exemptions (xx)
Taxable Income xx
2. Non-resident Citizen (NRC) – taxable for incomes derived within the Philippines only
a. Who establishes to the satisfaction of the CIR the fact of their physical presence abroad with a definite
intention to reside therein;
b. Who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis;
c. Who stays outside the Philippines for more than 183 days
d. A citizen who has been previously considered as non-resident citizen and who arrives 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.
Lecture 2: INCOME TAXATION – INDIVIDUAL
e. Overseas Contract Workers (OCWs). They are Filipino citizens employed in foreign countries who are
physically present in a foreign country as a consequence of their employment thereat. To be considered
as an OCW or OFW, he or she must be duly registered as such with the Philippine Overseas
Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC).
3. Resident Alien (RA) – taxable for incomes derived within the Philippines only
a. We generally consider as residents those whose length of assignments are indefinite or exceeding two (2)
years (BIR Rulings Nos. 051-81 and 052-81).
4. Non-resident Alien Engaged in Trade or Business (NRAETB) – taxable for incomes derived within the
Philippines only.
a. The term trade or business shall not include performance of services by the taxpayer as an employee.
b. A nonresident alien individual who shall come in the Philippines and stay herein for an aggregate period
of more than 180 days during any calendar year shall be deemed as doing business in the Philippines
5. Non-resident Alien Not Engaged in Trade or Business (NRANETB) – taxable for incomes derived within
the Philippines only
1. Compensation Income
All remunerations paid to the employee arising from an employer-employee relationship which include,
but not limited to:
a. Salaries and wages
b. Bonuses and allowances
c. Holiday pay, Overtime pay, Night shift differential, and Hazard Pay received by persons other than
an MWE.
d. De minimis and other fringe benefits not subjected to fringe benefit tax (given to rank-and-file),
subject to P90,000 limit
e. Separation Pay, Retirement pay, and similar remunerations which do not meet the requirements.
f. De Minimis and other Fringe Benefits (See discussions on Fringe Benefits)
g. Fees, honoraria, emoluments, commissions, etc.
Remember:
Every income is generally taxable, unless, specifically exempted by the law and the requirements to be
exempted are met.
Situs of Compensation Income: place where the services are rendered regardless of the residence of
payor (Sec. 155, RR 02-40)
3. Passive Income
General Rule: Passive income earned within the Philippines are taxable unless specifically exempted by law.
Exception: If the passive income is not subjected to final tax, such is added to the gross income subject to
normal tax.
Lecture 2: INCOME TAXATION – INDIVIDUAL
INDIVIDUALS
i. Interest on currency bank deposits, yield and other monetary benefit from deposit substitute,
trust and similar arrangement within the Philippines; Royalty from patents and franchises,
prizes exceeding P10,000 and winnings regardless of the amount (PCS0 not exceeding
10,000 is tax exempt): 20% final tax
ii. Royalty from books, literary works and musical compositions, and cash and property
dividend from domestic corporation: 10% final tax
iii. Franchise, Other sources 20% final tax
iv. Interest on FCD under the expanded FCDS: 15%, except non-residents (NRC and NRAs)
CORPORATION
i. Interest on FCD under the expanded FCDS: 15%, except non-resident foreign corporation
ii. Interest on currency bank deposits, yield and other monetary benefit from deposit substitute,
trust and similar arrangement; Royalty from patents and franchises, prizes exceeding
P10,000 and winnings regardless of the amount: 20% final tax.
iii. Dividend from domestic corporation: exempt, intercorporate principle
b. Not Subject to Final Withholding Tax – those which are not subjected to final tax like those which are
earned abroad, prizes not exceeding P10,000, and interest from loans, trade and accounts receivables
and those which are earned outside the Philippines shall be included in the computation of gross income.
4. Capital Gains
Capital gains arising from the sale of capital assets (real or personal assets) are taxable as follows:
a. If REAL property not used in business, subject to capital gains tax of 6% of the selling price, or FMV,
or Zonal Value, whichever is the highest.
b. If shares of stocks not traded in the local stock exchange, subject to 5-10% capital gains tax.
c. All other capital gains, which are not subject to CGT, are subject to normal tax (5-32%), subject to the
pertinent rules in property. (See discussions on Dealings in Property.)
Exceptions:
1. Married Individuals (Sec. 51(D),Tax Code)
a. May compute for their taxes separately, but shall file a single return for a taxable year;
b. If impracticable to file a single return, separate returns may be filed. The BIR will consolidate the filed
returns for purposes of verification for the taxable year.
2. Those who qualified under the substituted filing method (for purely compensation income earners).
a. It is when the employer’s annual return (BIR Form 1604 CF – Annual Information Return of Income
Taxes Withheld on Compensation) may be considered as the substitute income tax return of
employee in as much as the information provided in his income tax return (BIR Form 1700) would
exactly the same information contained in the employer’s annual return. [RMC No. 1-03].
b. BIR Form 2316 is a statement signed by both teh employee and the employer and serves as the
same purpose as if the BIR Form 1700 had been filed. This, however, is not submitted or filed with
the BIR if the employee is qualified for substituted filing.
c. Requirements:
i. The employee is a purely compensation income earner;
ii. The empolyee receives income only from one employer in the Philippines during the
calendar year;
iii. The amount of tax due from the employee at the end of year equals the amount tax
withheld by the employer;
iv. In case of married individuals, the employee’s spouse also complies with all the three
stated conditions above;
v. The employer files the annual information return (BIR Form 1604 CF); and
vi. The employer issues BIR Form 2316 (Oct 2002 ENCS) version to each employee.
d. NRAETB are expressly prohibited from using the substituted filing method [RMC No. 01-03].
e. Individuals deriving income from two or more employees, concurrently or successively at any time
during the year are also disqualified from substituted filing method [RMC No. 01-03].
f. Individuals under the split-pay scheme (portion of the salary is paid outside the Philippines) is also not
allowed to substituted filing method.
3. Those whose sole income has been subjected to final withholding tax.
The due date for filing the return (with no extension allowed)
a. On or before the 15th day of April each year covering income for the preceding taxable year (Sec. 51
(CX1), Tax Code)
b. Extensions are not allowed, except in meritorious cases, as determined by the Commissioner of the
Bureau of Internal Revenue (Sec. 53, Tax Code)
Penalties for failure to file the return, and/or pay the tax on time:
i. Civil Liabilities
a. Surcharge, amounting to 25% of the tax due; 50% in case of willful neglect to file a return, or in case
of filing a false or fraudulent return;
b. Interest at 20% per annum;
c. Compromise penalties for failure to file the return, and/or failure to pay the tax, at an amount not
exceeding P 50,000 [Sec. 255, Tax Code; RMO 19-2007]
Example:
Lecture 2: INCOME TAXATION – INDIVIDUAL
The attempt to evade or defeat tax is punished, upon conviction, by a fine of not less than P
30,000 but not exceeding P 100,000, and imprisonment of not less two (2) years, but not more than
four (4) years. Conviction or acquittal does not bar the filing of civil suit for collection of taxes. [Sec.
254, Tax Code]
Attachments:
1. BIR Form 2316 – Certificate of Compensation Payment/ Tax Withheld for Compensation Payment with or
without Tax Withheld
2. BIR Form 2306 – Certificate of Final Income Tax Withheld
3. BIR Form 2307 – Certificate of Creditable Tax Withheld at Source
Where to FILE?
1. The return shall be filed with:
a. An authorized agent bank (AAB);
b. Revenue District Officer;
c. Collection Agent; or
d. Duly authorized Treasurer of the City or municipality
2. Filing with the incorrect RDO renders the taxpayer liable for a penalty
3. RR 5-2015 dated March 17, 2015, amending RR 6-2014
a. Mandatory for taxpayers enumerated under RR 6-2014 to use eBIR forms and must be filed online
through the eBIR Forms System
b. Penalty of P1,000 will be imposed for each return not filed electronically
c. Liable for surcharge amounting to 25% of the tax due to be paid.