Taxation of Individuals

Chapter 2
 Progressive tax system

Schedular Treatment is no longer used

(income tax varies depending on kind of
taxable income)

Global Treatment tax treatment views

differently the tax base and generally treats in
common all categories of taxable income of
taxpayers
 Classification of Individual
Taxpayers
CITIZEN
Resident
Non-Resident
ALIEN
Resident
Non-Resident
Engaged in trade or business
Not engaged in trade or business
Employed by RHQs/Offshore banking units
or petroleum contractors
 Classification of Individual
Taxpayers
Citizen
citizens of the Phil as of 1987 Constitution
those whose mothers or fathers are citizens of the Phil
those born before 1/17/1973 of Filipino mothers who elect Phil
citizenship upon reaching the age of majority
those who are naturalized in accordance with law
a) Resident - one who permanently resides in the Philippines
b) Non-Resident a citizen of the Phil who is physically present abroad
with intention to reside there / a citizen who leaves the Phil during the
taxable year to reside abroad, as an immigrant or for employment on
permanent basis (183 days abroad)
 Classification of Individual
Taxpayers
Alien - not a citizen of the Phil
a) Resident Alien an individual who is residence
is within the Phil and who is not a citizen thereof -
intention with regard to length and nature of his stay
b) Non-Resident Alien an individual whose
residence is not in the Phil and who is not a citizen
thereof
 Classification of Individual
Taxpayers
OCWs or OFWs - refer to Filipino citizens
employed in foreign countries who are
physically present in a foreign country as a
consequence of their employment thereat.
Seafarers or Seamen Filipino citizens who
receive compensation for services rendered
abroad as a member of the complement of a
vessel engaged exclusively in international
trade
 Types of Non-Resident Alien
NRA Engaged in trade and business an alien
who is carrying business in the Phil
and who stays in the Phil for more than 180 days
NRA Not Engaged in trade and business one
who stays in the Phil for less than 180 days
Those employed by
a) RHQs or ROHQs of multinational entities in the Phil
that are engaged in international trade
b) Offshore banking units
c) Petroleum contractors and sub-contractos
 Sources of Income
Refers to the property, activity or service that
produced the income.
a) Labor - where labor is performed
b) Income from use of capital it is the
place where the capital is employed
c) Profits from sale or exchange of capital
assets it is the place where the sale of
transaction occurs.
Rules on Taxing Income as to Source

Individual Source of Income

w/in the Phil w/out the Phil
1) Resident Citizen x x
2) Non-Resident Citizen x
3) Resident Alien x
4) Non-Resident Alien x
 Categories of Income and Income
Tax Rates
Compensation Income remuneration for
services performed by an employee for his employer
under an employer-employee relationship; Tax-
graduated from 5%-32%
Business Income arises from self-employment
or the practice of profession; Tax- graduated from
5%-32%
Passive Income subject to separate and final tax
at fixed rates ranging from 5% to 25%; the final tax
shall no longer be included as taxable income subject
to the graduated tax rates
 Categories of Income and Income
Tax Rates
Capital Gains from sale of shares of stocks
not traded through the local stock exchange
- Tax 5% and 10% final taxes on a per
transaction basis
Capital Gains from Sale of Real Property -
taxed at 6% final tax on the Gross Selling Price or
Current FMV (BIR Zonal Value) at the time of sale,
whichever is higher
 Categories of Income and Income
Tax Rates
Fringe Benefits means any good, service or
other benefit furnished or granted by an employer in
cash or in kind in addition to basic salaries, to an
individual employee, except the rank and file under
an employer-employee relationship; Tax 32% final
tax based on grossed up monetary value
 Categories of Income and Income Tax Rates
Resident Non-Resident Resident
Income Citizen Citizen Alien Non-Resident Alien
Not
Engaged Engaged
1) On taxable
Income 5-32% 5-32% 5-32% 5-32% FT-25%

2) Passive Income 20% 20% 20% 20% FT-25%

Interests, Royalties,
Prizes, Winnings
3) Passive Income - 10% 10% 10% 20% FT-25%
Cash or prop
dividends
4) Cap Gains -
shares 5-10% 5-10% 5-10% 5-10% 5-10%
of stock
5) Cap Gain -share of 6% 6% 6% 6% 6%
real prop
 Allowable Deductions
Items or amounts, which the law allows to be
deducted from gross income in order to arrive
at the taxable income.
1) From compensation Income -
a) Basic Personal and/or additional exemption
b) Premium payments on health and/or
hospitalization insurance
 Allowable Deductions
2) From Business Income
a) Basic Personal and or additional exemption
b) Premium payments on health and/or
hospitalization insurance
c) Itemized Deductions
d) Optional Standard Deduction not to exceed
40% of gross sales (accrual basis accounting) and
gross receipts (cash basis accounting)
 Allowable Deductions
Basic Personal Exemption
RA 9504 P50,000 for each individual taxpayer regardless
of status
Additional Exemption - P25,000 for each dependent
child not exceeding four (4) to be claimed by only one of the
spouses (for married individuals)
A senior citizen dependent on the taxpayer for support (Sr.
Citizens Act of 2010)

Dependent child legitimate, illegitimate or legally adopted, not more

than 21 years old, unmarried and not gainfully employed or regardless of
age, is incapable of self support due to mental or physical defect; For
legally separated spouse who has custody; Husband to claim, unless
waived, and spouse who is in the Phil
 Rules on Change of Status
If the employee should have additional dependents
during the taxable year, he may claim the additional
exemption in full for such year
If the taxpayer dies during the taxable year, his death
shall not affect the amount of personal and additional
exemptions his estate may claim
If the spouse dies or any of the dependents dies or
marries, becomes 21 yrs old, becomes gainfully
employed during the taxable year, the taxpayer may
still claim the same exemption
 Individual Taxpayers Allowed
Personal Exemptions
Citizens
Resident Alien
Non-resident Alien (P50,000 basic exemption
or that allowed by the tax law of the aliens
country, whichever is lower)
Estates and Trusts
 Conditions for Health Premium
Payment Allowed as a Deduction
The insurance shall be taken by the individual
taxpayer himself for his family

The amount being claimed shall not exceed P2,400 /

year or P200 per month per family

The family has gross income of P250,000 or less for

the taxable year
Income = primary income + other income from
sources received by all members of the nuclear family
 Exclusions from Gross Income
GSIS/SSS, PHIC, Pag-ibig (basic at 2%)

13th month pay, PIB, Christmas bonus and the

not like, not exceeding P30,000

Holiday pay, overtime pay, night shift

differential pay and hazard of MWE
 Taxable Income and Tax Due
Taxable Income pertinent items of gross
income less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income;

it is the amount or tax base upon which the tax

rate is based to arrive at the tax due
Graduated Income Tax Schedule

If taxable income Of the excess

is over But not over Tax due is Plus 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

Computation of Tax Due on Purely
Compensation Income
Gross Compensation Income
Less: Exclusions
Total
Less: Basic and Additional
Exemptions
Taxable Income
Computation of Tax Due on Business
Income
Gross Sales
Less: Sales Ret and Allowances
Net Sales
Less: Cost of Sales
Total
Less: Itemized Deductions/OSD
Less: Exclusions
Basic and Personal Deductions
Taxable Income
Computation of Tax Due on Mixed
Income
Gross Compensation Income
Add: Net Income from Business or
Profession (Gross less Itemized or
OSD)
Total
Less: Exclusions
Total
Less: Basic and Personal Exemptions
Taxable Income
Computation of Income Tax of Husband
and Wife with Joint Income
In case only one of the spouses is deriving gross income, only
such spouse shall be allowed personal exemptions
Joint income and cannot be identified as exclusive to one
spouse, thus, related deductions shall be divided equally
Each is entitled to a basic personal exemption
Only one spouse shall claim the additional exemptions,
generally the husband, or one who is a compensation earner
and in the Phil.
The husband may waive the claim to additional compensation,
in writing, in favor of the wife.
When both are self-employed, either may claim the additional
exemption
Computation of Income Tax of Husband
and Wife with Joint Income
Husband/Wife
Gross Income
Deductions
Husband Wife
of Gross Income of Joint Income
Own Income Own Income
Less: of Joint Deductions Less: of Joint Deductions
Own Deductions Own Deductions
Less: Personal and Additional Less: Personal and
Exemptions Additional Exemptions
Taxable Income Taxable Income
Income Tax Income Tax
 Declaration of Income Tax for
Individuals
For self-employed and professionals - to be paid in 4
installments:
First - April 15
Second - August 15
Third - November 15
Fourth/final - April 15 following
calendar year, computed on cumulative
basis w/ personal exemption allowed in the
final return only
Estimated Tax - the amount which the individual declared as income tax in
his final adjusted and annual return for the preceding year minus credits
allowed. An amended return maybe filed within the year if the taxpayer
expects to pay a higher income tax during any interval of installment
 Individuals Exempt from Income
Tax
Non-resident citizen who is:
a) A citizen of the Phil who establishes his physical
presence abroad with a definite intention to reside therein
b) A citizen of the Phil who leaves the Phil during the
taxable year to reside abroad, either as immigrant or
employment on a permanent basis
c) A citizen of the Phil who works and derives income from
abroad and whose employment thereat requires him to be
present abroad most of the time in a taxable year
d) A citizen who was previously considered as a non-
resident citizen and who arrives in the Phil at any time during
the year, with respect to income derived from abroad
 Individuals Exempt from Income
Tax
Overseas Contract Worker taxable only on income
form sources within the Phil; a seaman is considered an OCW;
a Filipino employed as consulate service personnel is not to be
treated as a non-resident citizen
Brgy Micro Business Enterprises (RA 9170) -
BMBEs with assets, except land where business is situated,
does not exceed P3M.
Expanded Senior Citizens Act of 2010 Senior
citizens who are considered minimum wage earners are
exempt from payment of individual income taxes
 Passive Income
Passive Income are subject to a separate and
final tax ranging from 5% to 25%
Final tax imposed on income or gain and
shall be withheld at source (deducted and
remitted by the payor)
 Capital Gain
On shares of stock not traded in the local stock
exchange
P100,000O - 5% FT
Amount in excess of P100,000 10%

On sale of real property in the Phil held as

capital asset 6% FT
Holding Period for Capital Gains on
Sale of Shares of Stocks
Short Term -the shares of stocks was held by
the taxpayer for less than 1 year
% of gain or loss to be taken into account
100%

Long term the shares of stocks was held by

the taxpayer for more than 1 year
% of gain or loss to be taken into account -
50%
 Ordinary vs. Capital Asset
Ordinary Asset
- held for sale
- subject to depreciation
- real property used in business
Capital Asset
- any other business asset (A/Rec)
- any asset (business or non-business)
held as investment
 Computation on Capital Gain on Sale of
Shares of Stock Not Traded in the Stock
Exchange
On sale of shares of stock:
Selling Price - xx
Less: Expenses - xx
Net Selling Price xx
Less: Purchase Price - xx
Add: Exp of Acquisition xx
Adjusted Cost xx
Capital Gain xxx
Computation on Capital Gain on Sale of
Real Property
Capital Gain on sale of real property
Gross SP or FMV, whichever is higher x 6%
The tax shall is on each transaction, with its own tax
return
The tax is withheld by the buyer (deducted by from
the agreed consideration) and directly remitted to the
BIR
It is a final tax that does not go into the final return
for the year subject to the graduated tax table
Title to the property cannot be transferred to the
buyer without the CAR from the BIR to assure that
the tax has been paid
 Other Final Taxes
Interest on currency bank deposit, yield , trust fund or
other similar arrangement FT of 20%
Royalty from books, literary works and musical
compositions - FT of 10%
Royalty other than above / Prizes exceeding P10,000
and Other winnings (except PCSO winnings) FT of
20%
Dividend from domestic or from a joint stock
company and regional operating HQs of multi-
national companies - FT of 10%
 Other Final Taxes
Share in distributive net income after tax of a
partnership (except a GPP), joint stock, or joint
venture or consortium taxable as a corporation
FT of 10%
Interest on LT deposit or investment in banks
(with maturity of 5 years or more) - Exempt
Interest on LT deposit or investment in banks
with maturity of less than five years FT of
20%