Income Taxes on Individuals

Table 2-2: APPLICABLE TAXES BASED ON THE NATURE OF INCOME

Regular Passive income Capital gains Capital gains
Taxpayer Income (Section 24B) (Section 24C) (Section 24D)

RC Basic Tax Final Tax Final Tax Final Tax
(Table 2-3) (Table2-4) (Table 2-4) (Table 2-4)


NRC, RA, Basic Tax Final tax Final Tax Final Tax
NRA-ETB (Table2-3) (Table 2-4) (Table2-4) (Table 2-4)


NRA-NETB 25% Final 25% Final tax Final Tax Final Tax
Tax based based on gross (Table 2-4) (Table 2-4)
on gross income
income


Table 2-3: GRADUATED OR SCHEDULAR (SECTION 24A)
Over But not over Tax Plus Of excess
over

10,000 - 5% -
10,000 30,000 500 10% 10,000
30,000 70,000 2,500 15% 30,000
70,000 140,000 8,500 20% 70,000
140,000 250,000 22,500 25% 140,000
250,000 500,000 50,000 30% 250,000
500,000 - 125,000 32% 500,000




Illustration. Determine the tax due assuming the taxable income is:
Case A. P200,000
Tax on
First 140,000 P 22,500
In excess of P140,000 15,000
(P60,000 x 25%)
Tax Due P 37,500

Case B. P300,000
Tax on
First 250,000 P 50,000
In excess of P250,000 15,000
(P50,000 x 30%)
Tax Due P 65,000

Case B. P800,000
Tax on
First 500,000 P 125,000
In excess of P500,000 96,000
(P300,000 x 33%)
Tax Due P 221,000


TABLE 2-4: INCOME SUBJECT TO FINAL TAXES
Section 24(B). Final Tax Rates on Certain Passive Income from Phil. Sources

(1) INTEREST, ROYALTIES, PRIZES AND OTHER WINNINGS Citizens, NRA - NRA
Residents, & ETB NETB
Special Individuals
a. Interest from any currency bank deposit 20% 20% 25%
b. Yield or any other monetary benefit from deposit
substitute 20% 20% 25%
c. Yield or any other monetary benefit from trust funds and
similar arrangements 20% 20% 25%
d. Royalties, in general (other than royalties described in lettere) 20% 20% 25%
e. Royalties on books, as well as other literary works and musical
compositions 10% 10% 25%
f. Prizes exceeding P10,000 20% 20% 25%
g. Other winnings(other than PCS and Lotto winnings 20% 20% 25%
h. Interest incomes received from a depository bank under
expanded foreign currency deposit system 7- % Exempt Exempt
Note:
NRC-Exempt
(RR 1-2011)
i.Interest income from long-term deposit or investment evidenced
by certificates prescribed by BSP. If predetermined before Exempt Exempt 25%
fifth year, a final tax shall be imposed base on remaining
maturity:
* 4 years to less than 5 years 5% 5% 25%
* 3 years to less than 4 years 12% 12% 25%
* less than three years 20% 20% 25%


(2) CASH AND/OR PROPERTY DIVIDENDS Citizens, NRA - NRA
Residents, & ETB NETB
Special Individuals

a.Cash and/or property dividends actually or cons-
tructively received from a domestic corporation
or from a joint stock co., insurance or mutual fund
companies and regional operating headquarters of
multinational companies, beginning January 1, 2000 10% 20% 25%
b. Share of an individual in the distributable net income
after tax of a Partnership(other than a general
professional partnership) Beginning Jan. 1, 2000 10% 20% 25%
c. Share of an individual in the net income after tax of an
Association, a Joint Account, or a Joint Venture or
Consortium taxable as a corporation, which he is a
member or a co-venturer Beginning Jan.1, 2000 10% 20% 25%

SECTION 24C. Capital Gains from Sale of Shares of Stock of a domestic corp.
Not Traded in the Stock Exchange
RES/ CIT NRA- NRA-
ETB NETB
Tax base:Net Capital gain
Tax rate: Not over P100,000 5% 5% 5%
Amount in excess of P100,000 10% 10% 10%

SECTION 24D. Capital Gains from Sale of Real property classified as Capital Asset.

RES/ CIT NRA- NRA-
ETB NETB
Tax base: Gross selling price or current
fair market value whichever is higher
Tax rate: 6% 6% 6%


Deposit substitutes - RR 14-2012 defines deposits substitutes as an alternative form
of obtaining funds from the public other than deposits, through the issuance,
endorsement of acceptance of debt instruments for the borrowers own
account, for the purpose of re-lending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer.


Creditable withholding tax vs Final Tax
Certain regular income are subject to creditable withholding tax. The term
Creditable means the taxes withheld are deductible from tax due computed using the
graduated tax table under Section 24(a) of the tax code. Ex: tax withheld by an
employer from the compensation income of an employee.






Illustration:
Case A.
A resident citizen employee provided the following data for the current taxable
Year:
Compensation income(gross of deduction below) P450,000
Deductions made by the employer
SSS premiums contributions 6,000
Philhealth contributions 8,400
Pag-ibig contributions 2,400
union dues 1,200
income tax withheld 89,600
Question: How much is the income tax payable of the employee?
Answer:
Compensation income(gross of deduction below) P450,000
Less: Deductions made by the employer
SSS premiums contributions ( 6,000)
Philhealth contributions ( 8,400 )
Pag-ibig contributions ( 2,400 )
union dues ( 1,200 )

*** Basic personal exemptions (50,000)
Taxable income P382,000
Tax Due
Tax on 1
st
P250,000 P50,000
Tax in excess of P250,000 @30% 39,600
total tax due P89,600
Less: Tax withheld by the employer ( 89,600 )
Income tax payable P 0

Case B.
A resident citizen taxpayer (single) provided the following information:
compensation income P1,000,000
Gross business income, Philippines 2,000,000
Gross business income, Canada 3,000,000
Business expenses, Philippines 1,400,000
Business expenses, Canada 2,050,000
Income tax withheld by the individual taxpayers
employer on his compensation income 285,000
Income tax withheld by certain payors on
business income in the Philippines(Taxes
withheld at source) 100,000
Income tax payments to the BIR for the first three
(3) quarters of the year 300,000

Question: Determine income tax payable of the taxpayer.
Answer:
compensation income P 1,000,000
Gross business income, Philippines 2,000,000
Gross business income, Canada 3,000,000
Business expense, Philippines ( 1,400,000)
Business expense, Canada (2,050,000)
*** Basic exemption (50,000 )
Taxable income P2,500,000
Tax due:
Tax on 1
st
P500,000 P 125,000
On excess of P500,000
(P2,000,000 x 32%) 640,000 P765,000


Less:
Tax withheld by the employer P285,000
Tax withheld at source 100,000
Income tax paid 300,000 (685,000)

Income tax payable P80,000




Final Withholding tax
Taxable income under section 24B, 24C and 24D are subject to final taxes
(Table 2-4) instead of basic tax or the tabular/graduated tax rates. This kind of with-
holding tax which is prescribed on certain income payments and is not creditable
against the income tax due of the payee on other income subject to regular rates of
tax for the taxable year. The payee is not required to file an income tax return for the
particular income. However, the payor is required to issue final withholding tax certi-
icate.
Capital gains realized by a nonresident alien individual not engaged in trade
or business in the Philippines from the sale of of shares of stock in any domestic
Corporation and real property shall be subject to the income tax prescribed under
Subsections(C ) and (D) of section 24.
Illustration. A resident citizen taxpayer provided the following information:
Gross business income, Philippines P2,000,000
Gross business income, Canada 3,000,000
Business expenses, Philippines 1,400,000
Business expenses, Canada 2,050,000
Interest income BDO Philippines 100,000
Interest income - BDO in Canada 50,000
Dividend income from a domestic corp. 125,000
Dividend income from a resident foreign
corporation 75,000
Interest income received from a depository bank
under the Expanded Foreign Currency
Deposit System (FCDU), Philippines 50,000
Philippine Charity sweepstakes winnings 500,000
Singapore sweepstake winnings 200,000
Winnings Robinson manila raffle promo 8,000
Winnings SM Manila raffle promo 20,000
Winnings SM China raffle promo 30,000
Capital gains on sale of shares of a domestic
corp. sold directly to a buyer( Sales Price-
P1,110,000; Cost P1,000,000) 110,000

Gain on sale of shares of a domestic corp. sold in a local
stock exchange (Sales Price-P115,000;
cost; P90,000) 25,000
Gain on sale of real property classified as capital
asset in the Philippines (Sales Price-P2,000,000;
FMV-P3,000,000; acquisition cost when acquired
3 years ago P1,500,000) 500,000
Gain on sale of real property abroad not used in
business(Sales Price- P3,000,000; FMV-P2,500,000;
Acquisition cost when acquired 3 years ago-
P2,700,000) 300,000

Determine the following:

Case A. Taxable income (subject to basic or normal tax)
Gross business income, Philippines P2,000,000
Gross business income, Canada 3,000,000
Business expenses, Philippines ( 1,400,000 )
Business expenses, Canada ( 2,050,000 )
Interest income BDO in Canada 50,000
Dividend income from a resident foreign corp. 75,000


Singapore sweepstakes winnings 200,000
Winnings- Robinsons manila raffle promo 8,000
Winnings- SM China raffle promo 30,000
Gain on sale of property abroad 300,000
Personal exemption ( 50,000 )
Taxable income P2,163,000

Note: Interest income on bank deposits from sources
outside of the Philippines are subject to basic tax
Dividend income from resident foreign corporation subject to basic tax
PCSO winnings are tax-exempt
Sweepstakes winnings and other winnings/prizes from sourcesoutside of
the Philippines are subject to basic tax.
Winnings and prizes not higher than P10,000 are subject to basic tax. On the
other hand, winnings more than P10,000 are subject to final tax on
passive income from sources within the Philippines.
Gain on sale on real property classified as capital assets are subject to 6% final
withholding tax, provided the property is located within the Philippines
(Table 2-4). Real properties sold abroad, regardless of classification is
subject to basic tax.
Refer to Table 2-4 for final tax rates.



Case B. The amount of final taxes on passive income
Interest income BDO Philippines P 20,000
( P100,000 x 20%)
Dividend income from a domestic corp. 12,500
(P125,000 x 20%)
Interest income received from FCDU deposit 3,750
(P50,000 x 7.5%)
Winnings SM Manila raffle promo 4,000
( P20,000 x 20%)
Total final tax on passive income from the Phil. P 40,250

Case C. The amount of capital gain tax
Sale of shares of a domestic corporation sold
directly to buyer
On the first P100,000 at 5% P 5,000
In excess of P100,000 at 10%
(P10,000 x 10%) 1,000
Capital gain on sale of real property in the
(Philippines (P3,000,000 x 6%) 180,000
Total capital gain tax P 186,000

Case D.The total amount of final taxes
P226,250 computed by adding the answers in Case B and C.