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INCOME TAXATION OF INDIVIDUAL TAXPAYERS IN THE PHILIPPINES

 Outline of Individual Income Taxation (based on R.A. No. 8424)

R.A. No. 8424


- The 197 Comprehensive Tax Reform Program (CTRP)

Individual Income Taxpayers


1. Employee
2. Self-employed
3. Partner in a general professional partnership
4. Estates and trust

Gross Income xxx


Less: Allowable Deductions xxx
Optional Standard Deduction or xxx
Itemized Deduction xxx xxx
Net Income xxx
Less: Personal Exemption xxx
Additional Exemption xxx
Health Insurance Premiums xxx xxx
Net Taxable Income xxx
Multiply by: Apply Tax Rates 0-32%
Tax Due xxx
Less: Tax Credits xxx
Quarterly Income Tax Payments xxx
Creditable Withholding Tax xxx xxx
Tax Payable or (Refundable) xxx

Partner in a
general
Individual Income Taxpayers Employee Self-employed Estates and trust
professional
partnership
Gross Income xxx xxx xxx xxx
Less: Allowable Deductions
Optional Standard Deduction or xxx xxx xxx
Itemized Deduction xxx xxx xxx xxx xxx xxx
Net Income xxx xxx xxx
Less: Personal Exemption 50K 50K 50K 20k
Additional Exemption 25k/child 25k/child 25k/child
Health Insurance Premiums 2400 xxx 2400 xxx 2400 xxx
Net Taxable Income xxx xxx xxx
Multiply by: Apply Tax Rates 02-32% 02-32% 02-32% 02-32%
Tax Due xxx xxx xxx xxx
Less: Tax Credits
Quarterly Income Tax Payments Xxx Xxx Xxx
Creditable Withholding Tax xxx xxx xxx xxx xxx xxx xxx
Tax Payable or (Refundable) xxx xxx xxx xxx
 General Principles of Income Taxation in the Philippines
R. A. No, 8424, Sec 23.
- General Principles of Income Taxation in the Philippines
Exception of R.A. No. 8424
1. Filipino citizen residing here in the Philippines
- All income derived within or without the Philippine are TAXABLE.
2. A non-resident citizen
- Income derived within the Philippines are the ONLY TAXABLE.
3. A citizen of the Philippines who are overseas contract worker (OFW, Seaman, etc.)
- Income derived within the Philippines are ONLY TAXABLE.
4. An alien individual (Resident or not of the Philippines)
- Income derived within the country are the ONLY TAXABLE.

 Classification of Individual Taxpayer


1. Citizen
a. Resident
b. Non-Resident
2. Alien
a. Resident
b. Non-resident
b.1. Engaged in Trade/Business
b.2. Not Engaged in Trade/Business
b.2.1. Special Aliens
1. Foreign Petroleum Service Contractor or Sub-Contractor
2. Offshore Banking Units
- branch, subsidiary or affiliate of a foreign banking corporation
3. Regional Operating Headquarters
- a branch of a multinational companies which are established here in the
Philippines, engaged in operational services.
4. Regional Area Headquarters
- a branch of a multinational companies which are established here in the
Philippines which do not earn or derived income from the Philippines. NOT
subject to INCOME TAX.
b.2.2. Ordinary Aliens

 Who are the Citizen of the Philippines?


Section 1, Article IV of 1987 Constitution:
1. Citizens of the Philippines at the time of the adaptation of this constitution.
2. Fathers and mothers are citizen of the Philippines.
3. Born before January 17, 1973 of Filipino mothers, who elect Philippine citizenship upon reaching the age of
majority.
4. Naturalized in accordance with law.

 Who are Residents?


Residents of the Philippines
- A person who is living or dwelling in a certain place permanently or for a considerable length of time.

 Who are Non-Resident Citizens?


1. A citizen of the Philippines who works and derives income from abroad.
2. Overseas Contract Worker, Filipino Seaman.
a. Overseas Contract Worker
- Filipino Citizen employed outside the Philippines and is physically present in that country or territory in
order to perform work. Must registered with the POEA and possess valid OEC (Revenue regulations No. 1-2011).
b. Seamen Considered as OFW/OCW
- Filipino citizens who received compensation for services rendered abroad. Must be registered to POEA
with valid OEC and valid SIRB or Seaman’s Book issued by MARINA.
3. A citizen who has been previously considered as a nonresident citizen and who arrives in the Philippines at any time
during the taxable year to reside permanently in the Philippines is considered non-resident in which the year he
arrives.

 Who are aliens?


Aliens
- are persons who are not citizens of the country where they live.

 Who is a Non-Resident Alien engaged in Trade or Business?


Non-Resident Alien
- individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days
during any calendar year.

 The General Formula for the Computation of Income Tax.

GROSS INCOME = ALL INCOME, from whatever source legal or illegal – EXCLUSIONS from Gross Income

 How are Illegal Income Taxed when they are not filed with the BIR?
Illegal Income
- taxed using Net Worth Method.

 What is Net Worth Method?


Net Worth Method
- In the net worth method, the taxpayer’s net worth is determined both at the beginning and at the end of the
same taxable year. The increase or decrease in net worth is adjusted by adding all non-deductible expenses and
subtracting therefrom non-taxable receipts, as determined under the prevailing tax rules. The resultant figure is the BIR’s
computed taxable income before allowable personal and additional exemptions for individual taxpayer.
- The computed taxable income will be compared to the taxpayer’s declared income as per based on the Income
Tax Return filed for that year. If it appears that the declared income is lower than the BIR’s computed amount based on
the net worth method, then the taxpayer should explain the difference to the BIR. Any unexplained increase in net worth
will be presumed to be derived from taxable sources, and hence, will be assessed for deficiency taxes.

Net worth, End. xxx


Net Worth, Beg. (xxx)
Increase/(Decrease) xxx
Add: All Non-Deductible Expenses xxx
Determined under the prevailing tax rules
Less: Non-Taxable Receipts (xxx)
BIR’s computed Taxable Income before
allowable personal and additional xxx
exemptions for individual taxpayer

 What is the Legal Basis for the use of the Net Worth in computing the Taxable Income of the Individual Taxpayer?
Net Worth Method
- its use is founded on the 1997 Tax Code, under Section 43.
 What is an exclusion from gross income?
Deduction
- is a subtraction from gross income to arrive at taxable income.
Exclusion
- not the same as deduction, does not even count as gross income. Exclusion may seem increases wealth.

 What are the Exclusions from Gross Income?


1. Life Insurance
- not included in gross income but if it is earning interest payments. The INTEREST PAYMENTS shall be INCLUDED
in Gross Income.
2. Amount Received by Insured as Return of Premium
- received by the insured as a return of premiums paid by him under life insurance, endowment, or annuity
contracts.
3. Gifts, Bequests, and Devises
- the value of property acquired by gift, bequest, devise, or descent are not included in Gross Income but the
Income from such property, gift, bequest, devise, or descent in case of transfers of divided interest, shall be included
in gross income.
4. Compensation for Injuries or Sickness
- amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or
agreement, on account of such injuries or sickness.
5. Income Exempt under Treaty
- Income of any kind, to the extent required by any treaty obligation binding upon the Government of the
Philippines.
6. Retirement Benefits, Pensions, Gratuities, etc.
a. Retirement benefits received under R.A. No. 7641 and those received in accordance with a reasonable private
benefit plan.
b. Amount received from consequence of separation of such official or employee because of death sickness or
other physical disability or any cause beyond the control of the said official or employee.
c. The provision of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities,
pensions and other benefits received by resident or non-resident of the Philippines.
d. Payments of benefits due or to become due to any person residing in the Philippines under the laws of U.S.
administered by the U.S. Veterans Administration.
e. Benefits received from or enjoyed under the SSS in accordance with the provisions of R.A. No. 8282.
f. Benefits received from the GSIS under R.A. No. 8291.
7. Miscellaneous Items
a. Income Derived by Foreign Government
- income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities,
or from interests on deposits in banks in the Philippines by:
i. Foreign Government
ii. Financing Institutions owned, controlled, or enjoying refinancing from foreign governments
iii. International or Regional Financial Institutions established by foreign governments.
b. Income derived by the government of its Political Subdivisions
- income derived from any public utility or from the exercise of any essential governmental function
accruing to the Government of the Philippines or to any political Subdivision.
c. Prizes and Awards
- prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
i. The recipient was selected without any action on his part to enter the contest or proceeding.
ii. the recipient is not required to render substantial future services.
d. Prizes and Awards in sports Competition
- All prizes and awards granted to athletes in local and international sports competitions and tournaments
and sanctioned by their national sports associations.
e. 13th Month Pay and Other Benefits
- gross benefits received by officials and employees and employees of public and private entities, (as long
as does not exceed PhP 82 000).
i. Benefits received by officials and employees of the national and local government pursuant to R. A. No.
6686.
ii. Benefits received by employees pursuant to P.D. No. 851, as amended by M.O. No. 28, dated August
13, 1986.
f. GSIS, SSS, Medicare (PhilHealth) and Other Contributions
- GSIS, SSS, Medicare and Pag-Ibig contributions, and Union dues of Individuals.
g. Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness
- gains realized from the same exchange or retirement of bonds, debentures or other certificate of
indebtedness with maturity of more than 5 years.
f. Gains from Redemption of Shares in Mutual Funds
- gains realized by the investor upon redemption of shares of stocks in a mutual fund company.
8. Fringe Benefits Not Taxble
- the Following fringe benefits are not taxable under this Section:
a. Authorized and exempted from tax under special laws.
b. Contributions of the employer for the benefit of the employee.
c. Benefits given to the rank and file employees.
d. De Minimis Benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance.
De Minimis Benefits
- Are those benefits of relatively small values given by employers to their employee on the top of
the compensation.
i. Monetized unused vacation leave credits of employees not exceeding 10 days during the year
(RR No. 5-2011).
ii. Monetized value of vacation and sick leave credits paid to government officials and employees
(RR No. 5-2011 → E.O 291 (Pres. Estrada, exemption from income tax of monetized leave credits of
government officials and employees).
iii. Uniform and Clothing allowance not exceeding PhP 5 000 per annum (RR No. 8-2012).
iv. Laundry allowance not exceeding PhP 300 per Month (RR No. 5-2011).
v. Medical cash allowance to dependents of employees, not exceeding PhP 750 per employee per
semester of PhP 125 per month (RR No. 5-2011).
vi. Rice subsidy of PhP 1 500 or 50 kg, rice per month not more than PhP 1 500 (RR No. 5-2011).
vii. Annual medical Assistance not exceeding PhP 10 000 per annum.
viii. Employees achievement awards (in form of tangible personal property other than cash or gift
certificate) with annual monetary value not exceeding PhP 10 000 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees (RR No. 5-2011).
ix. Gifts given during Christmas and major anniversary celebrations not exceeding PhP 5 000 per
employee per annum (RR No. 5-2011).
x. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the
basic minimum wage on a per region basis (RR No. 5-2011).
xi. Benefits received by an employee by virtue of a Collective Bargaining Agreement (CBA) and
Productivity Incentive Schemes (PIS) that the total monetary value received from both CBA and PIS
combined do not exceed PhP 10 000 per employee per taxable year (RR No. 1-2015).

 Gross Income
- means all income derived from whatever source. It includes, but is not limited to, Compensation for services, in
whatever form paid.
- derived from the conduct of trade or business or the exercise of profession.
a. Gains derived from dealings in property.
b. Interests
c. Rent
d. Royalties
e. Dividends
f. Annuities
g. Prizes and winnings
h. Pensions
i. Partner’s distributive share from the net income of the general professional partnerships.

 Classification of Income
1. Compensation Income
- refers to all kinds of items of remunerations/emoluments earned or received in return for services
rendered in an employer-employee relationship.
2. Business Income
- these earnings resulting or derived from its main line of commercial business activity, such as gross profit
from sales of goods or services.
- this refers to the income, profit or gain earned and derived from the conduct or pursuit of trade, business
or the exercise of a profession.
3. Passive Income
- means, gains or income items obtained from activities in which the taxpayer does not participate on a
regular and continuing basis.

 Computation of Income Tax

Computation of Tax Payable or Refundable Compensation Income Business Income Passive Income

Gross Income xxx xxx xxx


Less: Allowable Deductions
Optional Standard Deduction or xxx
Itemized Deduction xxx xxx
Net Income xxx
Less: Personal Exemption xxx xxx
Additional Exemption xxx xxx
Health Insurance Premiums xxx xxx xxx xxx
Net Taxable Income xxx xxx xxx
Multiply by: Apply Tax Rates 0-32% 0-32% 0-20%
Tax Due xxx xxx
Less: Tax Credits
Quarterly Income Tax Payments Xxx
Creditable Withholding Tax xxx xxx xxx
Tax Payable or (Refundable) xxx xxx xxx

 Computation of Income Tax from Compensation Income


Computation of Tax Payable or Refundable
Compensation Income
(Compensation Income)
Gross Income xxx
Less: Personal Exemption 50 000
Additional Exemption 100 000
Health Insurance Premiums 2 400 152 400
Net Taxable Income xxx
Multiply by: Apply Tax Rates 0-32%
Tax Due xxx
Less: Tax Credits
Withholding Tax (Form 2306) xxx
Tax Payable or (Refundable) xxx
 What is Gross Compensation Income?
Gross Compensation
- is the amount an employee receives before any deductions or adjustments.
Gross Salary
- earned in hourly or annual wages before deductions.
Total gross Compensation
- includes tips, bonuses and other benefits employers give employees during the period being reported. This
information gives government agencies an accurate picture of the employee’s taxable income.

 Exemptions and Other Deductions from Compensation Income


Rules on Personal Exemption
In general, each individual taxpayer shall be permitted to claim the basic allowed personal exemption amounting
to PhP 50 000, regardless, of his civil status whether single, married or legally separated, whether a resident citizen,
resident alien, non-resident alien engaged in business* in the Philippines.
Each individual taxpayer shall be permitted to claim the additional allowed personal exemption amounting to PhP
25 000, for each QUALIFIED DEPENDENT CHILD, but not to exceed 4 children, whether such taxpayer is a head of a family,
married or legally separated, whether a resident citizen or resident alien, non-resident alien engaged in business* in the
Philippines.
* non-resident alien engaged in trade or business however receives exemption benefits subject to the reciprocity
rule.

 What is a Qualified Dependent Child?


Qualified Dependent Child
- is a legitimate, illegitimate, acknowledged natural or legally adopted, child below 21 years old*, unmarried, not
gainfully employed, living with and wholly dependent upon taxpayer for chief support.
* Still qualified if more than 21 years old but incapable self-support because of mental or physical defect.

 Rules on Health Hospitalization Insurance Premium (HHIP)


The taxpayer is allowed to claim an exemption for health hospitalization insurance premium subject to the
following conditions and limitations.
a. Said family (the husband and wife, in case of married couple) has a gross income of not more than PhP 250 000
for the taxable year.
b. There must be an actual health hospitalization insurance premium payment during the month/year.