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FAR EASTERN UNIVERSITY

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE


Department of Accountancy & Internal Auditing

Income and Business Taxation


INDIVIDUAL TAXATION

General classifications of individual income taxpayers


1. RC Resident Citizen
A Filipino Citizen who permanently resides in the Philippines

2. NRC Non-resident Citizen


A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein.
A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either
as an immigrant or for employment on a permanent basis.
A citizen of the Philippines who works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable year. MOST OF THE
TIME is interpreted to mean presence abroad at least 183 days during the taxable year. (BIR Rulings
128-99, August 18, 1999)
A citizen who has been previously considered as non-resident 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 non-resident 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.
The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to
reside permanently abroad or to return to and reside in the Philippines, as the case may be.

3. RA Resident Alien
An individual whose residence is WITHIN the Philippines and WHO IS NOT a citizen thereof. He is one
who is actually present in the Philippines and who is not a mere transient not sojourner. But residence
does not mean mere physical presence. An alien is considered a resident or a non-resident alien
depending on his INTENTION with regard to the length and the nature of his stay.

4. NRAETB Non-resident Alien Engaged in Trade or Business


The alien is carrying on a business in the Philippines.
It connotes more than a single act or isolated transactions.
It involves continuity of action.
The term TRADE, BUSINESS or PROFESSION SHALL NOT include performance of services by the
taxpayer as an employee but it includes the performance of the functions of a public office.

5. NRANETB Non-resident Alien Not Engaged in Trade and Business


A non-resident alien who stayed in the Philippines for 180 days or less.

Notes:
Alien, whether resident or on-resident, are employed by:
(1) Regional or area headquarters (RHQs) and regional operating headquarters (ROHQs) of multinational
entities in the Philippines that are engaged in international trade with affiliated and subsidiary branch
offices in the Asia-Pacific Region.
(2) Offshore baking units (OBUs)
(3) Petroleum contractors and sub-contractors.

Sources of Income
1. Resident Citizens are taxable on all income derived from sources within and without the Philippines.
2. Non-resident citizens and alien individuals (resident and non-resident) are taxable only on income derived from
sources within the Philippines. An OCW (Overseas Contract workers) is taxable only on his income from sources
within the Philippines.

SOURCES OF INCOME
Individual Within the Philippines Without the Philippines

Resident Citizen Taxable Taxable


Non-resident citizen Taxable Non-taxable
Resident Alien Taxable Non-taxable
Non-resident Alien Taxable Non-taxable

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Categories of Income and Tax Rates
Income Category Tax Rates Category Tax rate range Examples

Compensation Income Graduated or Progressive 5% to 32% (Based on taxable


income

Business Income Graduated or Progressive 5% to 32% (based on taxable


income)

Passive Income Final Tax 5% to 25% Royalties (20% TR)


Interest (20% TR)
Prize (20% TR)
Dividends (10% TR)

Capital gains from sale of Final Tax On net capital gain:


shares of stocks, not (or Final Withholding 5% - not over P 100,000
traded through the local Taxes) 10% - in excess of P 100,000
stock exchange.

Capital gains from sale of Final Tax 6% based on gross selling


real property price or current FMV at the
time of sale

Fringe Benefits Final tax 32% based on the grossed up


monetary value granted to the
employee.
Other rates depending on the
taxpayer

PROGRESSIVE SCHEDULAR TAX RATE

GENERAL PROCEDURES IN DETERMINING INCOME TAX


1. Identify the taxpaying party or entity to which the tax computation formula applies.
Some legal entities are taxed; others are not.
Taxpaying entities individuals, corporations, private partnerships, and estates.
Unincorporated business (like sole proprietorships and general professional partnerships) are not taxed
directly, but taxed directly to the owners of the business.
Citizenship and residency are considered

2. Determine taxpayers gross income.


Appreciation in market value is not generally regarded as income for tax purposes unless realized
through a sale of exchange.
There are realized income that are excluded as gross income in accordance with the Tax Code.
The source of income is considered if :
o Within the Philippines, or
o Without the Philippines (outside the Philippines).

3. Determine expenses and certain other items that can be deducted in computing the taxpayers
taxable income.

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There are general criteria for DEDUCTIBLE BUSINESS EXPENSES based on tax laws.

4. Apply the appropriate tax rate to the taxpayers taxable income to find the TAX DUE.
Tax Due = Taxable income x Tax Rate
Notes:
a) The applicable tax rates depend on:
b) Type of taxpaying entity
c) Level of income
d) Marital status for individuals
e) Other aspects

5. Subtract any applicable tax credit/payments from the taxpayers tax due in finding the TAX
PAYABLE.
Tax payable = Tax Due Tax Credits/Payments
Notes:
Tax credits are direct offset to the tax itself.

6. Increase the tax by penalties and interests to obtain the TOTAL AMOUNT PAYABLE.
Tax amount payable = Tax Payable + Penalties and Interests.
Notes:
Tax credits are direct offset to the tax itself.

TAX STATUS
1. Single
2. Head of the Family
An individual who supports and maintains in one household one or more individuals, who are closely
connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to
exercise family control and provide for these dependent individuals is based upon some moral or legal
obligation.
Means unmarried or legally separated man or woman with:
a) (one or both parents, or
b) One or more brothers or sisters whether of the whole blood or half blood, or
c) One or more legitimate or illegitimate, recognized natural or legally adopted children who eet
the following qualifications:

Parent/s Brother/s or Child/re


Sister/s n

Living with the taxpayer YES YES YES


Depending upon the taxpayer for YES YES YES
chief support
Not more than 21 years of age YES YES
Unmarried YES YES
Not gainfully employed YES YES
Mentally or physically defective YES YES

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regardless of age

3. Married

ALLOWABLE DEDUCTIONS
These are items or amounts, which the laws allows to be deducted from gross income in order to arrive at the taxable
income.

A. From compensation income:


1) Basic personal and/or additional exemptions; and
2) Premium payments on health and/or hospitalization insurance

B. From business income:


a. Basic personal and/or additional exemptions; and
b. Premium payments on health and/or hospitalization insurance
c. Itemized deductions under the Tax Code (Items A-J, Section 34)
d. Optional standard deductions 9OSD)
o Not to exceed 40% of his gross sales or gross receipts, as the case may be.
o The cost of sales is not allowed to be deducted to determine the basis of OSD

PERSONAL EXEMPTIONS
These are arbitrary amounts allowed as deductions from gross income or the individual taxpayer from
compensation or practice of profession.
It represents the personal, living or family expenses of the taxpayer.

Kinds of Personal exemptions


1) Basic Personal exemption P 50,000 - in amount regardless of Tax status
2) Additional exemption for qualified dependent children (P 25,000)
Maximum of four dependent children
Shall be claimed only by only one of the spouses
The husband shall be deemed the proper claimant of the additional exemption.

Rule on Change of Status


1) If the employee should have additional dependents during the taxable year, he may claim the corresponding
additional exemption in full for such year.
2) If the taxpayer dies during the taxable year, his death shall not affect the amount of his personal and
additional exemptions his estate may claim. It is as if he died at the end of such year.
3) If the spouse dies or any of the dependent dies or if such dependent marries, becomes 21 years of age, or
gets employed during the taxable year, the taxpayer may still claim the same exemption as if the change
occurred at the end of the year.

CHANGE OF STATUS SUMMARY


(R.A. 9504)
EXEMPTION
No INDIVIDUAL TAXPAYER This year Next year
.
Change of Status:
1. Married 50,000 50,000
2. Dead 50,000
3. Widowed with one (1) qualified dependent child 75,000 75,000
4. Widowed with qualified dependent not his child 50,000 50,000
5. Widowed without dependents 50,000 50,000
6. Legally separated with one (1) qualified dependent child 75,000 75,000
7. Legally separated with qualified dependent not his child 50,000 50,000
8. Legally separated without dependents 50,000 50,000
9. Not legally separated 50,000 50,000

DEPENDENT CHILDREN
(Maximum of four)
ADDITIONAL EXEMPTION
No This year Next year
.
Change of Status:
1. Born 25,000 25,000
2. Reaches 21 years old normal child 25,000
3. Reaches 21 years old abnormal child and incapable to support 25,000 25,000
himself

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4. Marries 25,000
5. Gainfully employed 25,000
6. Dies 25,000

Source: Income Taxation by Valencia and Roxas (2016-2017 edition)


DEPENDENTS OTHER THAN CHILDREN
(Brother, sister, parents, and/or senior citizen) )
EXEMPTION
No INDIVIDUAL TAXPAYER Basic Additional
.
Change of Status:
1. Single, with dependent other than children 50,000 0
2. Head of the Family, with dependent other than children 50,000 0
3. Married, with dependent other than children 50,000 0

Requisites for additional exemption


The following requirements should be met by the dependents of the individual taxpayer to qualify as dependents and
be allowed with additional exemption:

The dependent must be:


1. A taxpayers child, whether legitimate, illegitimate or legally adopted.
2. Chiefly depending for support on the taxpayer.
3. Living with the taxpayer
4. Not married; not gainfully employed, and not more than 21 years old. [Sec. 35(b), NIRC]

TRIAL 1:
Compute the personal exemption of Mr. Weygan, a Filipino, legally separated, with the following dependents:

A. Children: A, 25 years old and jobless; B, 20 years old student but gainfully employed; C, 22 years old
mentally retarded.
B. 59 years old mother.
C. 13 years old illegitimate daughter
D. Supporting a 65 years old senior citizen.

TRIAL 2:
Using the same information in trial 1, assuming the income of Mr. Weygan consists of the following:
A. Compensation income, P 390,000 (including 13th month pay of P 30,000). Related withholding taxes is P
65,000.
B. Rental income, P 60,000
C. Interest income from bank deposit, P 2,000.
D. Dividend income from SMC shares, P 5,000.

Compute the following:


1. Income subject to income tax.
2. Income subject to final tax.
3. Allowable deductions for tax purposes.
4. Taxable income subject to income tax.
5. Tax due and payable
6. Total final taxes

TRIAL 3:
During the taxable year 2015, Mr. Dixon, a Filipino, married, reported the following dependents:

A. Children: A, 21 years old this taxable year; B, 20 years old; C, 18 years old; D, 16 years old; E, 15 years old.
B. 59 years old mother.
C. Supporting a 65 years old senior citizen.

His annual compensation income is P 480,000. He is married to Valerie who is also working in Makati City with
annual compensation income of P 350,000.

Compute the following:


1. The tax due and payable of Mr. Dixon in 2015.
2. The tax due and payable of Mr. Dixon in 2015 assuming the related tax credit is P 40,000.
3. The tax due and payable of Mr. Dixon in 2015 assuming the claimant of qualified dependent children is
Valerie.
4. In relation to number 4, the tax due and payable of Valerie in 2015 assuming a tax credit of P 20,000.
5. The tax due and payable of Mr. Dixon in 2016.
6. The tax due and payable of Mr. Dixon in 2017.

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