MODULE 2

Individual Taxpayers

INTRODUCTION
This module introduces the relevant laws governing individual income taxation. Topics
include classification of individual taxpayers under Tax Code of the Philippines, applicable taxes
and tax rates, graduated rates under TRAIN Law 2018-2022, final withholding tax, capital gains,
requisites of tax exemption, format in computing taxable income, benefits of senior citizens and
person with disability, minimum wage earner (MWE), filing of income tax returns, manner and
place of filing income tax return, persons required to file income tax returns, persons not
required to file income tax returns and substituted filing of income tax returns.

INTENDED LEARNING OUTCOMES

ILO 1 Define and discuss the different classifications of individual taxpayers.
ILO 2 Explain TRAIN LAW 2018-2022.
ILO 3 Execute skills in solving problems regarding individual taxation.

DEFINITION
INDIVIDUAL TAXPAYERS are natural persons with income derived from within the territorial
jurisdiction of taxing authority. They are classified as:
1. Resident Citizens(RC)
2. Nonresident Citizens (NRC)
3. Resident Aliens (RA)
4. Nonresident Aliens (NRA)
● Engaged in trade/business (NRA-ETB)
● Non-resident alien not engaged in trade or business (NRA-NETB

Importance of classification:
They differ as to:
● Situs of income
● Manner of computing tax
● Treatment of certain passive incomes
● Allowable deductions
● References in the tax choice

CITIZENS OF THE PHILIPPINES

1. Born with father and/or mother as Filipino citizens
2. Born before Jan. 17,1973 of Filipino mother who elects Philippine citizenship upon
reaching the age of maturity
3. Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine
 Laws

NON-RESIDENT CITIZEN OF THE PHILIPPINES

1. Establishes to the satisfaction of the Commissioner of Internal Revenue, the fact of his
physical presence abroad with a definite intention to reside therein
2. Leaves the Philippines during the taxable year to reside abroad:
● As an immigrant
● For employment on a permanent basis
● For work and derives income that requires him to be physically abroad most of the time
during the taxable year
3. A citizen of the Philippines who shall have stayed outside the Philippines for one hundred
eighty-three days (183) or more by the end of the year.
● A non-resident citizen who arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines shall be considered a non-resident
citizen for the taxable year in which he arrives in the Philippines with respect to
income derived from sources abroad until the date of his arrival in the Philippines.
ILLUSTRATION 1
Pedro left the Philippines on July 1, 2018 to go abroad and work there for two years. The
following data were provided for 2018 taxable year (assume 40% of gross income and
business expenses presented below were derived from abroad:

Gross Income Business Expenses

January 1 to June 30 ₱ 600,000 ₱ 280,000 July 1 to December 31 400,000 120,000

Question 1: His taxable income is

Answer: P488,000
Gross Income, Jan.-June ₱ 600,000 Gross Income, July-December
@60% 240,000 Business Expenses, Jan-June (280,000) Business
Expenses, July-December @60% ( 72,000) Taxable Income ₱ 488,000

Question 2: Assuming he arrived from abroad on July 1, 2018 to permanently resettle in

the Philippines, his taxable income for 2018 is:
Answer: ₱ 472,000
 Gross Income, Jan.-June @60% ₱ 360,000 Gross Income, July-
December 400,000 Business Expenses, Jan-June @60% (168,000)
Business Expenses, July-December @60% (120,000) Taxable Income ₱
472,000

OVERSEAS CONTRACT WORKER (OCW)/OVERSEAS FILIPINO WORKER (OFW)

Revenue regulation 1-2011 defines OCWs as Filipino citizens employed in foreign countries
commonly referred to as OFWs, who are physically present in a foreign country as a
consequence of their employment. Their salaries and wages are paid by an employer abroad and
are not borne by entities or persons in the Philippines. Hence, OFWs are classified as non-
residents citizens for tax purposes.

A seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in international
trade shall be treated as an overseas contract worker.

A Filipino citizen who was previously a nonresident citizen and who arrives and resides
permanently in the Philippines at any time during the taxable year shall likewise be treated as a
nonresident citizen for the same taxable year with respect to his income derived from sources
abroad until the date of his arrival to the Philippines.

● A Filipino citizen taxpayer not classified as nonresident citizen is considered a RESIDENT

CITIZEN for tax purposes.

● An ALIEN is a foreign-born person who is not qualified to acquire Philippine citizenship

by birth of after birth.

● Section 22(F) of the Tax Code defines RESIDENT ALIENS as an individual whose
residence is within the Philippines and who is not a citizen thereof.

● The term NONRESIDENT ALIEN under Section 22(G) of the Tax Code means an
individual whose residence is not in the Philippines and who is not a citizen thereof.

● Under Section 22(S) of the Tax Code, “trade or business” includes performance of the
functions of a public service or performance of personal service in the Philippines.

● A nonresident alien not engaged in trade or business is subject to 25% income tax based on
gross profit from all sources within the Philippines.
ILLUSTRATION
Determine the correct classification of the taxpayer from the independent cases provided
below: Case 1:
Allan is a natural born Filipino citizen. His family migrated to the U.S. fifteen years ago. For
personal reasons, he decided to return and reside permanently in the Philippines on March 1,
2018.
Answer: From Jan.-Feb. 2018: Allan is classified as NRC
From March 1, 2018 onwards: Allan is classified as RC

Case 2:
G.I. Joe is an American information technology expert. He was signed by Noypi Telecom (a
local telecommunication company) from January to March 2018 to improve its internet services.
Due to the anticipated entry of competitors from other countries, Noypi decided to extend
indefinitely the services of G.I.Joe.
Answer: He is a resident alien.
An alien who comes to the Philippines for the purpose that requires extended stay for its
accomplishment, so he makes his home temporarily in the Philippines, is a resident,
regardless of his intention to return to his residence abroad.

Case 3:
Greg Popovich, head coach of San Antonio Spurs in the NBA is in the Philippines for a month-
long NBA promotional tour. He also expressed his intention to regularly visit the Philippines.
Answer: Greg Popovich is classified as NRA-NETB.

Case 4:
Using the same data in Case 3, assume that Greg Popovich invested in shares of stock of various
domestic corporations during his recent stay in the Philippines.
Answer: Greg Popovich is NRA-NETB.
Passive income such as dividend income is not considered income derived from trade and
business.

Case 5:
Mika “The Iceman” Immonen, a Finnish cue artist and former world billiard champion is a
resident of Finland. He won the world 9-ball championships in 2005 in the Philippines. He is
also the owner of one of the disco pubs in Malate since then.
Answer: NRA-NETB
He is engaged in actual trade and business in the Philippines but is non-resident.
APPLICABLE TAXES AND TAX RATES
The applicable taxes for individuals depend on several factors such as but not limited
to: ❖ Classification of taxpayer
 ❖ Source of income
❖ Type of income

CLASSIFICATION OF TAXPAYER
It is important to properly classify the individual taxpayers because resident citizens are
taxable on their income derived from sources within and without the Philippines while other
taxpayers are taxable only on their income derived from the Philippine sources. Moreover,
individual taxpayers classified as non-resident aliens not engaged in trade and business (NRA-
NETB) are taxable based on the gross income while others are taxable based on their net income.

SOURCES OF INCOME
It is important to know the source of income for tax purposes (income derived from
within and without the Philippines) because as a resident citizens are taxable based on their
worldwide income while others are taxable only on their income derived from sources within the
Philippines.
Taxpayer Tax Base Source of taxable Income

RC Net Income Within and without

NRC, RA,NRA-ETB Net Income Within

NRA-NETB Gross Income Within

TYPES OF INCOME (APPLICABLE TAX)

a. Ordinary or regular income (GRADUATED RATE)
– refers to income such as compensation income, business income, and income from
practice of profession

b. Passive income (FINAL WITHHOLDING TAX)

– subject to final withholding taxes are certain passive incomes from sources within the
Philippines such as:
❖ Interest income
❖ Dividend Income
❖ Royalties
❖ Prizes
❖ Other winnings
 c. Capital gains subject to gains tax (CAPITAL GAIN TAX)
➢ Capital gains from sale of shares of stocks of a domestic corporation
➢ Capital gains from sale of real property in the Philippines

Summary of Income and Applicable Income Tax

Type of Income Applicable tax

Regular income Graduated rate Table 2-1

Passive income (Phils.) Final withholding tax Table 2-2

Capital gains subject to CGT Capital gains tax Table 2-3

ILLUSTRATION
Use the following data for Cases A-E
An individual taxpayer provided the following information for 2018:
Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

Determine the taxable income assuming:

Case A: The taxpayer is a resident citizen:
❖ Answer: ₱3,500,000
Solution:
Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines (3,000,000)
Business expenses, Canada (1,000,000)
Business expenses, Singapore (500,000)
Taxable income ₱3,500,000
Case B: The taxpayer is a non-resident citizen.
❖ Answer: ₱2,000,000
Solution:
Gross income, Philippines ₱5,000,000
Business expenses Philippines (3,000,000)
 Taxable income ₱2,000,000

Case C: The taxpayer is an alien.

❖ Answer: ₱2,000,000
Solution:
Gross income, Philippines ₱5,000,000
Business expenses Philippines (3,000,000)
Taxable income ₱2,000,000

Case D: The taxpayer is a non-resident alien engaged in trade or

business. ❖ Answer: ₱2,000,000
Solution:
Gross income, Philippines ₱5,000,000
Business expenses Philippines (3,000,000)
Taxable income ₱2,000,000

Case E: The taxpayer is a non-resident alien not engaged in trade or

business. ❖ Answer: ₱5,000,000
❏ NRA-NETB are taxable on their gross income

Case F:
The income and expenses of a Filipino citizen for 2018 were provided as follows:
January to June Philippines Canada

Gross Income ₱5,000,000 ₱2,000,000

Allowable Deductions 2,000,000 1,000,000

July to December

Gross Income 2,000,000 3,000,000

Allowable Deductions 1,000,000 1,200,000

Assume that the taxpayer is a resident who left the country in July of the current year to reside
permanently in Canada, how much is his taxable income?
❖ Answer: ₱5,000,000
Solution:
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross income, Canada (Jan-June) 2,000,000
 Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (Jan-June) (1,000,000)
Taxable income ₱5,000,000

Case G: Assume the same data in Case F except that the taxpayer is a non-resident who returned
and resided permanently in the country in July of the current year. His taxable income before
personal exemptions is
❖ Answer: ₱5,800,000
Solution:
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross income, Canada (Jan-June) 2,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (Jan-June) (1,200,000)
Taxable income ₱5,800,000

Table 2-1: GRADUATED TAX RATE

Income Tax (TRAIN Law 2018-2022) 2023 ONWARDS

Below 250,000 Exempt Exempt

250,000-400,000 20% excess of 250,000 15% excess of 250,000

400,000-800,000 30,000 + 25% excess of 400,000 22,500 + 20% excess of

400,000

800,000-2,000,000 130,000 + 30% excess of 800,000 102,500 + 25% excess of

800,000

2,000,000-8,000,000 490,000 + 32%excess of 2,000,000 402,500 + 30% excess of

2,000,000

Above 8,000,000 2,410,000 + 35% excess of 2,202,500 + 35% excess

8,000,000 of 8,000,000
ILLUSTRATION - COMPUTATION OF BASIC INCOME TAX DUE
Purely Compensation Income Earner
1. Determine the income tax due assuming the taxable compensation income for 2018 is
₱240,000.
❖ Answer: ₱0, tax exempt

2. Determine the income tax due assuming the taxable compensation income for 2018 is
₱300,000.
❖ Answer: ₱10,000
Solution: tax on first ₱250,000 ₱0
In excess of ₱250,000 10,000
50,000 x 20%
Tax due ₱10,000

3. Determine the income tax due assuming the net taxable compensation income for 2018 is
₱1,850,000.
❖ Answer: ₱445,000
Solution: tax on first ₱800,000 ₱130,000
In excess of ₱800,000 315,000
1,050,000 x 30%
Tax due ₱445,000

SELF EMPLOYED AND/OR PROFESSIONALS (SEP)

Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for Acceleration and
Inclusion Law (TRAIN LAW) , regular income of Self- Employed and Professionals (SEP)
amounting to more than P250,000 in a taxable year but with a gross sales/receipts and other non-
operating income not exceeding the revised vat threshold of P3,000,000 shall have the option to
avail of 8% tax on gross sales/receipts and other operating income in excess of P250,000 IN
LIEU of the graduated income tax rate and business tax.

Self Employed – is defined as a sole proprietor or an independent contractor who reports income
earned from self employment. He or she controls who he/she works for. It includes professionals
whose income is derived purely from the practice of profession and not under an employer-
employee relationship”
Professional- is a “person formally certified by a professional body belonging to a specific
profession by virtue of having completed a required course of studies and/or practice, whose
competence can usually be measured against an established set of standards. It also refers tto a
person engaged in some art or sport of money.

RULES OF SELF EMPLOYED AND/OR PROFESSIONALS (SEP)

Purely SEP with gross sales/receipts

₱3M and Below

Regular Income Tax OR 8% tax on Gross Sales/ Receipts and other operating income in excess
of 250,000 in LIEU of the graduated tax rate and SECTION 116

Above ₱3M-regular income tax

Mixed Income Earner
➔ Compensation - regular income tax
➔ Business Professional Income
₱3M and below
Regular Income Tax +Regular income tax OR 8% tax on Gross sales and other
operating income in LIEU of the graduated tax rate and Sec. 116

₱3M and above-regular income tax

ILLUSTRATION - SELF EMPLOYED AND/OR PROFESSIONALS (SEP) Case A -

PURELY SEP whose gross sales/receipts and other non-operating income does not exceed the
VAT threshold of ₱3,000,000.
1. Determine the income tax due assuming the gross sales/receipts and other non-operating
income for 2018 is ₱240,000.
❖ Answer: ₱0, exempt from income tax

2. Using the data below, calculate the income tax due for 2018:
Gross sales ₱2,800,000
Cost of sales (1,500,000)
Operating expenses ( 750,000 )
Net income ₱550,000
➔ answer : ₱67,500
First ₱400,000 income 30,000
Excess of 400,000 37,500
150,000 x 25% ₱67,500
PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-operating income
exceeds the VAT threshold of ₱3,000,000 during the year.

Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his 1st quarter
income tax return. However, his gross sales during the year exceeded the VAT threshold of ₱3M
as follows:
Q1 Q2 Q3 Q4/Annual
 8% 8% 8% Graduated

Sales ₱500,000 ₱500,000 ₱2,000,000 ₱3,500,000

Cost of sales (300,000) (300,000) (1,200,000) (1,200,000)

Gross income 200,000 200,000 800,000 2,300,000

Operating (120,000) (120,000) (480,000) (720,000)

expenses

Net taxable income ₱80,000 ₱80,000 ₱320,000 ₱1,580,000

Question: How much is Pedro’s annual income tax payable?

❖ Answer: ₱289,200
➢ Solution:
Sales ₱6,500,000
Cost of sales (3,000,000)
Gross income 3,500,000
Operating expenses (1,440,000)
Net taxable income ₱2,060,000

Income tax due using graduated rate ₱509,200

Less: quarterly payments (Q1-Q3) based
on 8% tax rate (₱3M-₱250,000) x 8% (220,000)
Annual income tax payable ₱289,200

Mixed Earner whose gross sales/ receipts and other non-operating income does not exceed the
VAT threshold of ₱3,000,000
Assume the following data for 2018:
Compensation income ₱900,000
Gross sales 2,800,000
Cost of sales (1,500,000)
operating expenses (750,000)
Total taxable net income ₱1,450,000
Determine the correct income tax due:
❖ Answer: ₱325,000
Tax on first ₱800,000 ₱130,000
Excess of 800,000 (650,000 x 30%) 195,000
Tax due ₱325,000

Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax due.
 ❖ Answer: ₱384,000
On his compensation income:
First ₱800,000 ₱130,000
In excess of 400,000 30,000 ₱160,000
₱100,000 x 30,000

On his business income 224,000

₱2.8M x 8%
Total tax due ₱384,000

Mixed income earner whose gross sales/receipts and other non-operating income exceeds the
VAT threshold of ₱3,000,000.

Determine the income tax due assuming the following data for 2018:
Compensation income ₱900,000
Gross sales 5,000,000
Cost of sales (2,250,000)
operating expenses (1,250,000)
Total taxable net income ₱2,400,000
❖ Answer: ₱618,000
Tax on first ₱2,000,000 income ₱490,000
In excess of 2M income (400,000 x 32%) 128,000
Tax due ₱618,000
FINAL WITHHOLDING TAX is a kind of tax, which is prescribed on “certain income”
derived from the Philippine sources.

Passive Income
Passive income is an income earned from allowing others to use one’s right, or game of chance
or investment, which the taxpayers merely waits for the income to come in. The law subjects
passive income to final tax. Once subjected to a final tax, it is no longer included in the taxable
income subject to normal (tabular) tax. Deductions and exemptions do not apply to items subject
to final tax.
Passive income is classified as follows:
a. Interest, prizes, royalties, etc.,
b. Cash or property dividends,
The applicable rates for passive income are shown in the Table above.

ILLUSTRATION
A resident citizen taxpayer provided the following information for 2018:
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

Interest income, BDO Philippines 100,000

Interest income, BDO Canada 50,000

Dividend income from a domestic corporation 125,000

Dividend income-resident foreign corporation 75,000

Dividend income-non resident foreign corporation 102,000

Interest income received from a depository bank under FCDS, 50,000

Philippines

Philippine lotto winnings 10,000

Philippine Charity Sweepstakes winnings 500,000

Singapore Sweepstakes winnings 200,000

Other winnings, Philippines 50,000

Raffle draw winnings-Robinson’s Manila 8,000

Raffle draw winnings-SM Manila 20,000

Raffle draw-SM Shanghai China 30,000

Determine the following:

1. Taxable income- Answer ₱2,015,000
Computation:
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)

Interest income, BDO Philippines 50,000

Dividend income from a domestic corporation 125,000

 Dividend income-resident foreign corporation 75,000

Dividend income-non resident foreign corporation 102,000

Singapore sweepstakes winnings 200,000

Raffle draw - Robinson’s Manila 8,000

Raffle draw- SM Shanghai, China 30,000

RR- 14-2012 defines DEPOSIT SUBSTITUTES as an alternative form of obtaining funds from
the public other than deposits.

GAIN ON SALE OF ASSETS

Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind
2. Property used in trade or business subject to depreciation
3. Real property held by the taxpayer primarily for sale to customers in the ordinary course
of business
4. Real property used in trade of the taxpayer

CAPITAL GAINS TAX

CAPITAL GAINS may be:
Subject to CAPITAL GAINS TAX (CGT) pertain to sale of:
a. Shares of stock of a domestic corporation sold directly to a buyer
Prior to 2018 – 5% to 100,000 ; 10% to excess
2018 – 15% of capital gain
b. Sale of real properties located in the Philippines
CGT = 6% of the higher of GSP (gross selling price) and FMV (fair market value)
OTHER PERCENTAGE TAX is not an income tax but a business tax. The applicable tax for this
is known as “stock transaction tax.”
Prior to 2018 – ½ of 1% of GSP
2018 – 6/10 of 1% of GSP

Subject to Basic Tax – examples:

a. Sale of Share of foreign corporations
b. Sale of real properties located abroad
c. Sale of other personal assets other than share of stock of domestic corporations

PRINCIPAL RESIDENCE is the family home of the individual taxpayer which refers to his
dwelling house including his family.

REQUISITES OF TAX EXEMPTION

1. The proceeds are fully utilized in acquiring or constructing a new principal residence
within 18 calendar months from the date of disposition.
2. The historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired.
3. The BIR shall have been duly notified by the taxpayer within 30 days from the date of sale
or disposition through a prescribed return of his intention to avail of the tax exemption.
4. The tax exemption can only be availed of once every 10 years.

FORMAT IN COMPUTING TAXABLE INCOME

a. Pure Compensation Income Earner
b. Pure Business Income Earner
c. Mixed Income Earner

Benefits for Senior Citizen and PWDs:

❖ 20% discount and exemption from VAT on their purchase of specified goods and services
❖ P500 monthly social pension, for indigent senior citizens
❖ Death benefit assistance
❖ 5% discount on utilities
❖ Income tax exemption for minimum wage earners of for SC/PWDs whose annual taxable
income is not more than 250,000

➔ The term “statutory minimum wage earner (SMW)” or “minimum wage earner (MWE)”
under RA 9504 shall refer to a worker in the private sector paid the statutory minimum
wage. The rate is fixed by the Regional Tripartite Wage and Productivity Board as
defined by the Bureau of Labor and Employment Statistics.

MWE are exempt from income tax on:

1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay

FILING OF INCOME TAX RETURNS

BASIC TAX
➔ For Purely Compensation Income Earners
 On or before April 15 of the succeeding year

➔ For Business Income Earners

The individual taxpayer is required to file a quarterly tax return ( May 15, Aug 15, Nov 15, and
April 15)
FINAL WITHHOLDING TAX ON PASSIVE INCOME
Prior to 2018 - January to November – 10th day of the month
December – January 15
2018 – not later than the last day of the month

CAPITAL GAINS TAX

a. Share of Stock
Ordinary Return – 30 days after each transaction
Final Consolidated Return – on or before April 15 of the
following year
b. Real Property – 30 days following each sale or other
disposition

MANNER OF FILING
a. Manual Filing
b. Electronic Filing and Payment System (EFPS)
c. eBIR Forms

1st installment: at the time of filing the annual ITR

2nd installment: on or before October 15 following the close of the calendar year
PLACE OF FILING INCOME TAX RETURN
1. Authorized Agent Banks
2. Revenue District Officer
3. Collection Agent
4. Duly Authorized City or Municipal Treasurer

PERSONS REQUIRED TO FILE INCOME TAX RETURN

1. Individuals engaged in business and/or practice of profession
2. Individuals deriving compensation from two or more employers concurrently at any time
during the taxable year
3. Employees deriving compensation income, the income tax of which has not been withheld
correctly
4. Individuals deriving other non-business, non-professional-related income in addition to
 compensation income not otherwise subject to final tax
5. Individuals receiving purely compensation income from a single employer 6. Non-resident
alien engaged in trade or business in the Philippines deriving purely compensation income

PERSONS NOT REQUIRED TO FILE INCOME TAX RETURN

1. An individual earning purely compensation income whose taxable income does not exceed
250,000.
2. An individual whose income tax has been correctly withheld by his employer 3. An
individual whose sole income has been subjected to final withholding tax 4. Minimum wage
earners, the Certificate of Withholding filed by the respective employers, duly stamped
“Received” by the Bureau

SUBSTITUTED FILING OF INCOME TAX RETURNS (ITR)

Under RA 9504 and RR 10-2008, individual taxpayers may no longer file income tax
return provided he has (all the requirements must be satisfied):
1. Receiving purely compensation income, regardless of amount
2. The amount of income tax withheld by the employer is correct (Tax due = Tax withheld)
3. Only one employer during taxable year
4. If married, the employee’s spouse also complies with all the three aforementioned
conditions, or otherwise receives no income.