Tax 301 – Income Tax Tax 301 – Income Tax

Prepared by: Mark Paul I. Ramos Prepared by: Mark Paul I. Ramos

MODULE 3
INDIVIDUAL TAXPAYERS 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

INTRODUCTION 2. Leaves the Philippines during the taxable year to reside abroad:
This module introduces the relevant laws governing individual income taxation. Topics a. As an immigrant
include classification of individual taxpayers under Tax Code of the Philippines, applicable b. For employment on a permanent basis
taxes and tax rates, graduated rates under TRAIN Law 2018-2022, and 2023 onwards, final c. For work and derives income that requires him to be physically abroad
withholding tax, capital gains, requisites of tax exemption, format in computing taxable income, most of the time during the taxable year
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 3. A citizen of the Philippines who shall have stayed outside the Philippines for
income tax returns, persons not required to file income tax returns and substituted filing of one hundred eighty-three days (183) or more by the end of the year.
income tax returns. This module will also cover amendments in the National Internal Revenue a. A non-resident citizen who arrives in the Philippines at any time during
Code based on the Ease of Paying Taxes Act. the taxable year to reside permanently in the Philippines shall be
considered a non-resident citizen for the taxable year in which he
DEFINITION arrives in the Philippines with respect to income derived from sources
INDIVIDUAL TAXPAYERS are natural persons with income derived from within the abroad until the date of his arrival in the Philippines.
territorial jurisdiction of taxing authority. They are classified as:
1. Resident Citizens (RC) ILLUSTRATION
2. Nonresident Citizens (NRC) Alice left the Philippines on July 1, 2024, to go abroad and work there
3. Resident Aliens (RA) for two years. The following data were provided for 2024 taxable year (assume
4. Nonresident Aliens (NRA) 40% of gross income and business expenses presented below were derived
a. Engaged in trade/business (NRA-ETB) from abroad:
b. Non-resident alien not engaged in trade or business (NRA-NETB)
c. Alien individuals employed by POGOs and/or OGLs Gross Income Business
Expenses
Importance of classification January 1 to June 30 ₱ 600,000 ₱ 280,000
They differ as to: July 1 to December 31 400,000 120,000
1. Situs of income
2. Manner of computing tax
3. Treatment of certain passive incomes
4. Allowable deductions Question 1: Her taxable income is
5. References in the Tax Code

Classification of Taxpayers for purposes of Responsive Tax Administration under

Section 21(b) of the Tax Code as amended by RA 11976 of the Ease of Paying Taxes
Act (EOPTA)
1. Micro
2. Small Question 2: Assuming she arrived from abroad on July 1, 2024, to
3. Medium permanently resettle in the Philippines, his taxable income for 2024 is:
4. Large

CITIZENS OF THE PHILIPPINES

Under Sect 1, Article IV of the Philippine Constitution, the following are citizens of the
Philippines:
1. Those who are citizens of the Philippines at the time of the adoption of the 1987
Philippine Constitution
2. Those born with father and/or mother as Filipino citizens
3. Those born before Jan. 17,1973 of Filipino mother who elects Philippine OVERSEAS CONTRACT WORKER (OCW)/OVERSEAS FILIPINO WORKER (OFW)
citizenship upon reaching the age of maturity Revenue Regulation 1-2011 defines OCWs as Filipino citizens employed in foreign
4. Those who acquired Philippine citizenship after birth (naturalized) in countries, commonly referred to as OFWs, who are physically present in a foreign country as
accordance with Philippine Laws a consequence of their employment thereat. 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
NON-RESIDENT CITIZEN OF THE PHILIPPINES as nonresident citizens for tax purposes. To be considered as an OCW or OFW, they must be
Sec 22 (E) of the NIRC describes a nonresident citizen as a citizen who:

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 Tax 301 – Income Tax Tax 301 – Income Tax
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duly registered as such with the Philippine Overseas Employment Administration (POEA) with ILLUSTRATION
a valid Overseas Employment Certificate (OEC). Determine the correct classification of the taxpayer from the independent cases
provided below:
Seafarers or seamen are Filipino citizens who receive compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively for Case 1
international trade. To be considered as an OCW or OFW, they must be duly registered as Apollo is a natural born Filipino citizen. His family migrated to the U.S.
such with the Philippine Overseas Employment Administration (POEA) with a valid Overseas fifteen years ago. For personal reasons, he decided to return and reside
Employment Certificate (OEC) with Seafarers Identification Record Book (SIRB) or Seaman's permanently in the Philippines on March 1, 2024.
Book issued by the Maritime Industry Authority (MARINA). ➢ Answer: From Jan.-Feb. 2024: Apollo is classified as NRC
From March 1, 2024 onwards: Apollo is classified as RC
For income taxation purposes, OCWs/OFWs are classified as nonresident citizens.
Case 2
RESIDENT CITIZEN OF THE PHILIPPINES Joe is an American information technology expert. He was signed by KOJC
A Filipino citizen taxpayer not classified as nonresident citizen is considered a resident Telecom (a local telecommunication company) from January to March 2024 to
citizen for tax purposes. improve its internet services. Due to the anticipated entry of competitors from other
countries, KOJC decided to extend indefinitely the services of Joe.
ALIEN ➢ Answer: He is a resident alien.
An alien is a foreign-born person who is not qualified to acquire Philippine citizenship An alien who comes to the Philippines for the purpose
by birth or after birth. that requires extended stay for its accomplishment, so he makes
his home temporarily in the Philippines, is a resident, regardless
Resident aliens of his intention to return to his residence abroad.
Section 22(F) of the Tax Code defines resident alien as an individual whose residence
is within the Philippines and who is not a citizen thereof. Aliens who are actually present in the Case 3
Philippines and who are not mere transients or sojourners are classified as Marco Leta, head coach of Orlando Magic in the NBA is in the Philippines
resident aliens. Whether an alien for a month-long NBA promotional tour. He also expressed his intention to regularly
is a transient or
not is determined
visit the Philippines.
An alien who lives in the Philippines with no definite intention as to by his intentions ➢ Answer: Marco Leta is classified as NRA-NETB.
his stay is also a resident alien. Likewise, an alien who comes to the with regard to the
Philippines for the purpose that requires extended stay for its length and nature Case 4
accomplishment, so he makes his home temporarily in the Philippines, is a of his stay. Using the same data in Case 3, assume that Marco Leta invested in shares
resident, regardless of his intention to return to his residence abroad. of stock of various domestic corporations during his recent stay in the Philippines.
➢ Answer: Marco Leta is NRA-NETB.
Non-resident alien Passive income such as dividend income is not considered
The term “nonresident alien” under Section 22(G) of the Tax Code means an individual income derived from trade and business.
whose residence is not in the Philippines and who is not a citizen thereof. They are aliens who
come to the Philippines for a definite purpose, which in its nature may be promptly Case 5
accomplished. They are alien who are mere transients or non-residents, hence, classified as Guo “Kaibigan” Hua Ping, a Chinese cue artist and former world billiard
nonresident alien. champion is a resident of China. He won the world 9-ball championships in 2019
in the Philippines. He is also the owner of one of the POGOs in Tarlac since then.
Aliens who stayed in the Philippines for an aggregate period of more than 180 days ➢ Answer: NRA-ETB
during the taxable year and/or aliens who have business income in the Philippines are He is engaged in actual trade and business in the Philippines
considered as nonresident aliens engaged in trade or business (NRAET). Under Section 22(S) but is non-resident.
of the Tax Code, "Trade or Business" include performance of the functions of a public office
or performance of personal services in the Philippines (except performance of services by the APPLICABLE TAXES AND TAX RATES
taxpayer as an employee). If an alien stays in the Philippines for only 180 days or less, or he The applicable taxes for individuals depend on several factors such as but not limited
is not deriving business income in the Philippines, he is considered as a nonresident alien not to:
engaged in trade or business. 1. Classification of taxpayer
2. Source of income
A nonresident alien not engaged in trade or business (NRA-NETB) is subject to 25% 3. Type of income
income tax based on gross income from all sources within the Philippines (ordinary income or
passive income except for income subject to capital gains tax) as interest, cash and/or CLASSIFICATION OF TAXPAYER
property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, It is important to properly classify the individual taxpayers because resident citizens
emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and are taxable on their income derived from sources within and without the Philippines while other
capital gains. 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

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(NRA-NETB) are taxable based on the gross income while others are taxable based on their Gross business income, Singapore 1,000,000
net income. Business expenses, Philippines (3,000,000)
Business expenses, Canada (1,000,000)
SOURCES OF INCOME Business expenses, Singapore (500,000)
It is important to know the source of income for tax purposes (income derived from Taxable income ₱3,500,000
within and without the Philippines) because as resident citizens are taxable based on their
worldwide income while others are taxable only on their income derived from sources within CASE B: The taxpayer is a non-resident citizen
the Philippines. Gross business income, Philippines ₱5,000,000
Business expenses, Philippines (3,000,000)
Taxpayer Tax Base Source of taxable Taxable income ₱2,000,000
Income
RC Net Income Within and without CASE C: The taxpayer is an alien
NRC, RA, NRA-ETB Net Income Within Gross business income, Philippines ₱5,000,000
NRA-NETB Gross Income Within Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000
TYPES OF INCOME (APPLICABLE TAX)
1. Ordinary or regular income (GRADUATED RATE) - refers to income such as CASE D: The taxpayer is a non-resident alien engaged in trade or business
compensation income, business income, and income from practice of Gross business income, Philippines ₱5,000,000
profession Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000
2. Passive income (FINAL WITHHOLDING TAX) - subject to final withholding
taxes are certain passive incomes from sources within the Philippines such as:
1. Interest income CASE E: The taxpayer is a non-resident alien not engaged in trade or business
2. Dividend Income Gross business income, Philippines ₱5,000,000
3. Royalties Taxable income ₱5,000,000
4. Prizes **NRA-NETB are taxable on their gross income**
5. Other winnings
CASE F:
3. Capital gains subject to gains tax (CAPITAL GAINS TAX) The income and expenses of a Filipino citizen for 2024 were provided as follows:
a. Capital gains from sale of shares of stocks of a domestic corporation January to June Philippines Canada
b. Capital gains from sale of real property in the Philippines Gross Income ₱5,000,000 ₱2,000,000
Allowable Deductions 2,000,000 1,000,000
Type of Income Applicable tax
July to December
Regular income Graduated rate
Gross Income 2,000,000 3,000,000
Passive income (Phils.) Final withholding tax
Allowable Deductions 1,000,000 1,200,000
Capital gains subject to CGT Capital gains tax
Assume that the taxpayer is a resident who left the country in July of 2024
ILLUSTRATION (Cases A-G)
reside permanently in Canada, how much is his taxable income?
Use the following data for Cases A-E
An individual taxpayer provided the following information for 2024:
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross business income, Philippines ₱5,000,000
Gross income, Canada (Jan-June) 2,000,000
Gross business income, Canada 2,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Gross business income, Singapore 1,000,000
Allowable deductions, Canada (Jan-June) (1,000,000)
Business expenses, Philippines 3,000,000
Taxable income ₱5,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000
CASE G:
Determine the taxable income assuming: 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 2024. His taxable
CASE A: The taxpayer is a resident citizen income before personal exemptions is
Gross business income, Philippines ₱5,000,000 Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross business income, Canada 2,000,000
Gross income, Canada (July-Dec) 3,000,000

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Allowable deductions, Philippines (Jan-Dec) (3,000,000) CASE C: Determine the income tax due assuming the net taxable compensation income for
Allowable deductions, Canada (July-Dec) (1,200,000) 2021 is ₱1,850,000.
Taxable income ₱5,800,000 Answer:

**Note: Personal exemptions will not be considered in computing

taxable income starting January 1, 2018, effect of the TRAIN Law.

INCOME TAX TABLE FOR INDIVIDUAL TAXPAYERS

CASE D: Determine the income tax due assuming the net taxable compensation income for
2023 is ₱1,850,000.
Answer:
Taxable Income 1,850,000.00
Tax bracket threshold (800,000.00)
Net 1,050,000.00
Multiply by Tax Rate based on tax bracket 25.00%
basic 262,500.00
additional as per bracket 102,500.00
Income Tax 365,000.00

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 Individual - 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 individual - 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
ILLUSTRATION – Computation of Basic Income Tax Due
established set of standards. It also refers to a person engaged in some art or sport of
money.
PURELY COMPENSATION INCOME EARNER
TAX RULES OF SELF EMPLOYED AND/OR PROFESSIONALS (SEP)
CASE A: Determine the income tax due assuming the taxable compensation income for 2021
Purely SEP with gross sales/receipts
is ₱240,000.
• If income is ₱3M and Below
Answer: Zero, Taxable income do not exceed P250,000
− Regular Income Tax (graduated tax table) OR 8% tax on Gross
CASE B: Determine the income tax due assuming the taxable compensation income for 2021 Sales/ Receipts and other operating income in excess of
is ₱300,000. 250,000 in LIEU of the graduated tax rate and SECTION 116
Answer: • Above ₱3M - regular income tax (graduated tax table)

Mixed Income Earner

• Compensation - regular income tax (graduated tax table)
• Business Professional Income

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− If income is ₱3M and below Election of 8% Preferential Tax is irrevocable during the year
o Regular income tax OR 8% tax on Gross sales and other RR 8-2018 provides that unless the taxpayer signifies in his/her 1st Quarter return of
operating income in LIEU of the graduated tax rate and the taxable year the intention to elect the 8% income tax, s/he shall be considered as having
Sec. 116 availed of the graduated rates under Section 24(A) of the Tax Code, as amended, and such
− Above ₱3M – regular income tax (graduated tax table) election shall be irrevocable for the taxable year.

Requisites to Avail the 8% Preferential Rate SEP's GROSS SALES and/or RECEIPTS EXCEEDED THE VAT THRESHOLD DURING
In order to avail the 8% preferential tax, the SEP shall satisfy all the following conditions: THE YEAR
1. The gross sales/receipts and other non-operating income does not exceed the vat RR 8-2018 provides that, if at any time during a given taxable year, a taxpayer's gross
threshold of P3,000,000; sales and/or receipts exceeded the VAT Threshold of P3,000,000.00, s/he shall automatically
2. The SEP shall be non-vat registered; be subjected to the graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended,
3. The gross sales/receipts were not derived from vat-exempt sales and transactions; with the following rules/guidelines:
4. The SEP is not subject to Percentage Tax other than under Section 116 of the Tax • The taxpayer shall be allowed an income tax credit of quarterly payments
Code, as amended; and initially made under the 8% income tax option.
5. The SEP signifies his/her intention to elect the 8% income tax. • Taxpayer is likewise liable for business taxes), in addition to income tax.
• For this purpose, the taxpayer is required to update his registration from non-
BASIS FOR THE P3M VALUE ADDED TAX (VAT) THRESHOLD: vat to vat taxpayer, within the 30 days from the close of the month the vat
• Prior to the effectivity of RA 11976 or the Ease of Paying Taxes Act (EOPTA): threshold was breached.
o If the taxpayer is a seller of goods: Gross Sales • Percentage tax under Sec. 116 shall still be imposed from the beginning of the
o If the taxpayer is a seller of service/s: Gross Receipts year until taxpayer is liable to vat. The Percentage tax pursuant to Section 116
of the Tax Code, as amended, shall be imposed on the first P3,000,000.00.
• After the effectivity of RA 11976 or the Ease of Paying Taxes Act (EOPTA) and its The excess of the threshold shall be subject to VAT. Thus, for this purpose, vat
related implementing rules and regulations: shall be imposed prospectively.
o Seller of goods or services (same basis): Gross Sales • Percentage tax due on the P3,000,000.00 shall be collected without penalty, if
timely paid on the due date immediately following the month the threshold was
breached.
GROSS SALES under the EOPTA refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the ILLUSTRATION
amount charged for materials supplied with the services during the taxable period for the CASE A: PURELY SEP whose gross sales/receipts and other non-operating income does not
services performed for another person, which the purchaser pays or is obligated to pay to the exceed the VAT threshold of ₱3,000,000.
seller in consideration of the sale, barter, or exchange of services that has already been
rendered by the seller and the use or lease of properties that have already been supplied by 1. Determine the income tax due assuming the gross sales/receipts and other non-
the seller, excluding VAT and those amounts earmarked for payment to third (3rd) party or operating income for 2021 is ₱240,000.
received as reimbursement for payment on behalf of another which do not redound to the Answer: Zero, Taxable income do not exceed P250,000
benefit of the seller as provided under relevant laws, rules or regulations: Provided, that for
long-term contracts for a period of one (1) year or more, the invoice shall be issued on the 2. Using the data below, calculate the income tax due for 2021:
month in which the service, or use or lease of properties is rendered or supplied."

Answer:

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3. Using the data below, calculate the income tax due for 2024:
Answer:
Annual Income Tax Due 420,500.00
Less: Tax Payments
1st quarter 20,000.00
2nd quarter 40,000.00
3rd quarter 160,000.00
Answer: Annual Income Tax Payable 200,500.00
Taxable Income 550,000.00
Tax bracket threshold (400,000.00)
Net 150,000.00 CASE C: Mixed Earner whose gross sales/ receipts and other non-operating income does not
Multiply by Tax Rate based on tax bracket 20.00% exceed the VAT threshold of ₱3,000,000
basic 30,000.00
additional as per bracket 22,500.00 Assume the following data for 2023:
Income Tax 52,500.00

CASE B: 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.

Harry 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 1. Determine the correct income tax due:
threshold of ₱3M as follows: Answer:
Taxable Income 1,450,000.00
Tax bracket threshold (800,000.00)
Net 650,000.00
Multiply by Tax Rate based on tax bracket 25.00%
basic 162,500.00
additional as per bracket 102,500.00
Income Tax 265,000.00

1. How much is Harry’s annual income tax due? 2. Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax
due.
Answer:
On his compensation income:
Taxable Income 900,000.00
Tax bracket threshold (800,000.00)
Answer: Net 100,000.00
Taxable Income 2,060,000.00 Multiply by Tax Rate based on tax bracket 25.00%
Tax bracket threshold (2,000,000.00) basic 25,000.00
Net 60,000.00 additional as per bracket 102,500.00
Multiply by Tax Rate based on tax bracket 30.00% Income Tax on compensation 127,500.00
basic 18,000.00
additional as per bracket 402,500.00 On his business income:
Income Tax 420,500.00 Taxable Income (Gross Sales) 2,800,000.00
Multiply by Tax Rate 8.00%
2. How much is Harry’s annual income tax payable? Income Tax on business 224,000.00
Taxable Income 2,060,000.00
Tax bracket threshold (2,000,000.00) Total Income Tax Due 351,500.00
Net 60,000.00
Multiply by Tax Rate based on tax bracket 30.00% CASE D: Mixed income earner whose gross sales/receipts and other non-operating income
basic 18,000.00 exceeds the VAT threshold of ₱3,000,000.
additional as per bracket 402,500.00
Income Tax 420,500.00

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1. Determine the income tax due assuming the following data for 2023: RECEIVED BY
Citizens & NRA-
NRA-ETB
Residents NETB
2. ROYALTIES
a. Royalties, in general (other than royalties described in letter B) 20% 20% 25%
b. Royalties on books, as well as other literary works and musical
10% 10% 25%
compositions
3. PRIZES
a. Prizes exceeding P10,000 20% 20% 25%
Answer: Exempt, Exempt,
Taxable Income 2,400,000.00 b. Prizes not exceeding P10,000 subject to subject to 25%
Basic Tax Basic Tax
Tax bracket threshold (2,000,000.00)
4. OTHER WINNINGS
Net 400,000.00 Under CREATE ACT:
Multiply by Tax Rate based on tax bracket 30.00% a. Other Winnings, regardless of amount 20% 20% 25%
basic 120,000.00 b. PCSO Winnings, not exceeding P10,000 Exempt Exempt 25%
additional as per bracket 402,500.00 c. PCSO Winnings exceeding P10,000 20% 20% 25%
Income Tax 522,500.00 5. CASH and/or PROPERTY DIVIDEND
a. Cash and/or property dividends actually/constructively
received from a domestic corporation or from a joint stock
10% 20% 25%
company, insurance or mutual fund companies and ROHQ of
PASSIVE INCOME multinational companies
Passive income is the income earned from allowing others to use one’s right, or game b. Share of an individual in the distributable net income after tax
10% 20% 25%
of chance or investment, in which the taxpayers merely wait for the income to come in. The of a Partnership (other than a GPP)
law subjects passive income to final tax. Once subjected to a final tax, it is no longer included c. Share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium
in the taxable income subject to normal (tabular) tax. Deductions and exemptions do not apply taxable as a corporation, which he is a member or a co-
10% 20% 25%
to items subject to final tax. venturer

Passive income is classified as follows:

Unless exempt, other passive
a. Interest income income derived from Philippines CAPITAL GAINS TAX
b. Dividend income but not in the list (if any) as well as Income from sale of capital assets, specifically from sale of shares of stocks of a closely
c. Royalties passive income derived abroad are held corporation (shares of domestic corporation not listed in the local stock exchange) and
d. Prizes, and subject to basic tax. real properties located in the Philippines are subject to capital gains tax (CGT).
e. Other winnings
ORDINARY ASSET vs. CAPITAL ASSET
Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind which would properly
FINAL WITHHOLDING TAXES be included in the inventory of the taxpayer if on hand at the close of the taxable
Final withholding taxes is a kind of tax, which is prescribed on “certain income” derived year
from the Philippine sources. 2. Property used in trade or business subject to depreciation
3. Real property held by the taxpayer primarily for sale to customers in the
RECEIVED BY ordinary course of trade or business
Citizens & NRA-
Residents
NRA-ETB
NETB
4. Real property used in trade of the taxpayer
1. INTEREST
a. Interest from any currency bank deposit 20% 20% 25% Capital assets include all other property held by the taxpayer (whether or not
b. Yield or any other monetary benefit from deposit substitutes 20% 20% 25% connected with his trade or business) not included in the definition of ordinary assets above.
c. Yield or any other monetary benefit from trust funds and Generally, assets not used or held for sale in the ordinary course of business (i.e., personal
20% 20% 25%
similar arrangements
assets) are classified as capital assets.
d. Interest income received from a depositary bank under
expanded foreign currency deposit system RC = 15%
Classification of an asset, either as capital or ordinary is important because of the
Exempt Exempt
Note: Only residents are subject to this type of tax. NRC = special tax rules on gains and losses from sale or exchanges of capital assets which do not
Nonresident taxpayers are exempt from tax on this particular exempt apply to gains and losses from sale or exchanges of ordinary assets.
income.
e. Interest income from long-term deposit or investment Exempt Exempt 25%
Gain on sale of ordinary assets are commonly known as ordinary or regular income
If pre-terminated before fifth year, a final tax shall be imposed that are subject to basic income tax or graduated tax rate as provided for under Section 124(A)
based on remaining maturity as follows: of the Tax Code. On the other hand, gain on sale of capital assets are classified as capital
- 4 years to less than 5 years 5% 5% 25% gains subject to the following taxes:
- 3 years to less than 4 years 12% 12% 25%
- Less than 3 years 20% 20% 25%

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1. Capital Gains Tax (CGT) if pertaining to the following: Sale of Real Property to the Government
a) Capital gain on sale of shares of stocks of a closely-held domestic If a real property classified as capital asset located in the Philippines is sold to
corporation is subject to a capital gains tax of 15%. the government or any of its political subdivisions or agencies or to government
owned or controlled corporations (GOCCs), the individual taxpayer shall have
REQUISITES: the option to be taxed at 6% CGT or basic income tax using the graduated tax
• The shares of stock sold, bartered or exchanged must be from a domestic rate.
corporation.
• The transaction must be not through the local stock exchange (the shares Summary of Capital Gains Subject to CGT
Citizens &
NRA-ETB
NRA-
are not listed and traded in the local stock exchange). Hence, the sale is Residents NETB
1. Capital gain from sale of shares of stock of a domestic corporation
made directly to the buyer. not traded in the local stock exchange (Beginning Jan. 1, 2018)
15% 15% 15%
• The seller should not be a dealer in securities (the shares are held as capital 2. Sale of real property located in the Philippines. 6% 6% 6%
asset)
• The transaction should result to a capital gain based on computation shown
below: SALE OF PRINCIPAL RESIDENCE
Under certain conditions, sale of real property located in the Philippines classified as
TAX BASE: principal residence is exempt from capital gains tax.
• Capital gain computed as follows:
Selling price xxx "Principal Residence” is the family home of the individual taxpayer. It refers to the
Cost (xx) dwelling house, including the land on which it is situated, wherein an individual including his
Capital Gain xx family resides as a permanent dwelling, or whenever absent, wherein the said individual
Rate (beginning Jan 1, 2018) 15% intends to return (RR 14-2000). It should be certified by the Barangay Chairman over the
Capital Gains Tax xx place, or the Building Administrator if the residence is a condominium or the individual
taxpayer's address as indicated in his latest tax return.

b) Sale of real properties classified as capital asset located in the The residential address shown in the latest income tax return filed by the
Philippines is subject to six percent (6%) capital gains tax (CGT) imposed vendor/transferor immediately preceding the date of sale of said real property shall be treated
under Section 124(D) of the Tax Code, as amended. as a conclusive presumption about his true residential address, the certification of the
Barangay Chairman, or Building Administrator (in case of condominium unit), to the contrary
Section 24(D)(1) of the Tax Code provides that sale, exchange, or other notwithstanding, in accordance with the doctrine of admission against interest or the principle
disposition of real property subject to capital gains tax shall include pacto de of estoppel.
retro sales and other forms of conditional sales, by individuals, including
estates and trusts. The seller/transferor's compliance with the preliminary conditions for exemption from
the 6% capital gains tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for
REQUISITES: the RDO to approve and issue the Certificate Authorizing Registration (CAR) or Tax Clearance
(regardless of whether the transaction resulted to a gain or loss) Certificate (TCC) of the principal residence sold, exchanged or disposed by the aforesaid
• The land and/or building must be a capital asset; and taxpayer. Said CAR or TCC shall state that the said sale, exchange or disposition of the
• It must be located in the Philippines. taxpayer's principal residence is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of
the Tax Code, but subject to compliance with the post-reporting requirements imposed under
FORMULA: Sec. 3(3) of the Regulations.
Tax Base xxx
Rate 6% REQUISITES FOR TAX EXEMPTION
Capital Gains Tax xx As a rule, sale of principal residence is subject to 6% capital gain tax based on the
selling price or fair market value, whichever is higher, except, when the proceeds are fully
TAX BASE: utilized in acquiring or constructing a new principal residence subject to the following
• Selling price or fair market value (FMV), whichever is higher conditions:

Fair market value (FMV) of real property shall refer to the higher between: 1. The proceeds are fully utilized in acquiring or constructing a new principal
- Fair market value as provided by City or Provincial assessors (also residence within eighteen (18) calendar months from the date of disposition.
known as assessed value or FMV for real property tax declaration
purposes); and "Fully utilized" shall mean that the taxpayer has actually commenced with the
- Zonal value as provided by the Commissioner of Internal Revenue construction of his new principal residence or has actually entered into a
(CIR). contract for the purchased his new principal residence or has act within
eighteen (18) calendar months from the date of sale, exchange or disposition
thereof, with the intention of using the entire proceeds of sale for the acquisition

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or construction of his new principal residence. Any expense paid for by the - Reduced compromise penalty rate to 50% on violations invoicing/printing of
seller in effecting the sale (i.e. documentary stamp tax, transfer fees, broker's invoices)
commission) shall be considered as part of the amount utilized. - Income Tax Return (ITR) was reduced to two (2) pages only

If there is no full utilization of the proceeds of sale or disposition, the portion of NOTE:
the gain presumed to have been realized from the sale or disposition shall be - Civil penalties and interest are discussed Tax Remedies.
subject to capital gains tax as follows: - Micro and small taxpayers are still required to withhold taxes as mandated by
law and regulations (exemption from withholding tax obligation was vetoed by
the President).

TAXATION OF ALIEN INDIVIDUALS EMPLOYED BY POGOs or OGLs

TAXATION OF ALIEN INDIVIDUALS EMPLOYED BY AN OFFSHORE GAMING LICENSEE
(OGL) OR PHILIPPINE OFFSHORE GAMING OPERATIN (POGO) AND ITS SERVICE
2. The historical cost or adjusted basis of the real property sold or disposed shall be
PROVIDERS under RA 11590 and RR 20-2021, regardless of residency and term and class
carried over to the new principal residence built or acquired.
of working permit or visa.
3. The BIR shall have been duly notified by the taxpayer within 30 days from the date
Section 3 of RA 11590, also known as "An Act Taxing Philippine Offshore Gaming Operations
of sale or disposition through a prescribed return of his intention to avail of the tax
(POGOs)", added a new paragraph of Section 25 of the Tax Code, paragraph "G", as follows:
exemption.
Sec. 25(G) Tax on Nonresident Alien Individuals.
"(A) xxx
4. The tax exemption can only be availed of once every 10 years.
"(B) xxx
xxx …
"(G) Alien Individuals Employed by an Offshore Gaming Licensee and Service
OTHER CLASSIFICATION (GROUPINGS) of Taxpayers under RA 11976 or the EASE OF
Providers. -
PAYING TAXES ACT (EOPTA)
Alien individuals regardless of residency and who are employed and assigned
Under RA 11976, paragraph "B" of Section 21 of the Tax Code was "added" as follows:
in the Philippines, regardless of term and class of working or employment
Section 21 (b): Classification of Taxpayers. - For purposes of responsive tax administration,
permit or visa, by an offshore gaming licensee or its service provider as defined
taxpayers shall be classified as follows:
in Section 22(II) and Section 27(G) of the Tax Code, as amended.
Group** Gross Sales***
Micro Less than P3M Applicable Income Tax
Small P3M to less than P20M
Medium P20M too less than P1B
Large P1B and above

**These categories shall apply to all types of taxpayers (individuals, estates, trusts,
corporations, partnership, joint ventures, etc.).
***Gross Sales under these categories shall refer to:
- Total sales revenue, net of vat, if applicable, during the taxable year, without
any other deductions; and
- Business income, excluding compensation income earned under employer- **Gross Income (whether in cash or in kind):
employee relationship, passive income under Sections 24, 25, 27 and 28, and • Basic salary/wages, annuities, compensation, remuneration and other emoluments,
income excluded under Section 32(B), all of the Tax Code, as amended. such as honoraria and allowances, received from such service provider or offshore
Business income shall include income from the conduct of trade or business or gaming licensee.
the exercise of a profession. • OGLs and Service Providers shall submit to the Bureau of Internal Revenue (BIR) the
original copy of notarized contract of employment clearly stating therein the annual
PURPOSE of GROUPING Taxpayers as Micro, Small, Medium and Large: salary and other benefits and entitlements of the concerned alien.
1. For purposes of responsive tax administration.
2. Provide certain tax concessions to Micro and Small taxpayers, such as the following The FWT shall be withheld and remitted monthly by the employer, including corresponding
civil penalties and other concessions: penalties, interests and surcharges, if any, in accordance with RR 2-98, as amended.
- Reduced surcharge rate to 10% surcharge;
- Reduced interest rate to 6% interest; All foreign employees of OGLs and their Service Providers, regardless of nature of
- Reduced to P500 the penalty for failure to file certain information returns; employment, shall have a Tax Identification Number (TIN). All OGLs and service providers
that employ or engage a foreign national without the foregoing shall be liable for a fine of
Twenty thousand pesos (P20,000.00) for every foreign national without such TIN and, in

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proper instances, revocation of their primary and other licenses obtained from government 2. MODE OF FILING RETURN AND PAYMENT OF THE TAX DUE (RR 4-2024)
agencies and/or perpetual or temporary ban in employing or engaging foreign nationals for
their operations: Provided, That the foreign national concerned shall still pay, and the employer
shall remit, any corresponding taxes, penalties, interests, and surcharges due in accordance
with the Tax Code, as amended.

FILING OF INCOME TAX RETURNS (ITR) AND PAYMENT OF TAX DUE (RR 4-2024)
Under RA 11976 or the EOPTA, the filing of tax returns shall be done electronically in any of
the available electronic platforms. However, in case of unavailability of the electronic
platforms, manual filing of tax returns may be allowed. For tax payments, the same shall be
made either electronically in any of the available electronic platforms or manually to any
Authorized Agent Banks (AABs) and Revenue Collection Officers (RCOs).

1. PLACE OR VENUE OF FILING TAX RETURN AND PAYMENT OF THE TAX DUE:

3. WHEN TO FILE AND PAY INCOME TAX RETURN?

a. FOR PURELY COMPENSATION INCOME EARNER.
Once a year only, on or before April 15 of the following year using BIR Form No. 1700,

b. FOR BUSINES AND/OR MIXED INCOME EARNERS Including those earning income
from practice of profession are required to file quarterly and annual income tax
returns, as follows:

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• Quarterly using BIR Form 1701Q spouse is required to file income tax return (this is no longer a requirement
o 1st Quarter – May 15 upon the effectivity of EOPT).
o 2nd Quarter – August 15
o 3rd Quarter – November 15 3. Individuals deriving other non-business, non-profession-related income in addition to
• Annually on or before April 15 of the following year using BIR Form No. 1701 compensation income not otherwise subject to final tax.
or BIR Form No. 1701A, as the case may be
4. Non-resident alien engaged in trade or business in the Philippines deriving purely
c. BIR FORMS compensation income, or business income and other non-business, non-profession-
➢ BIR Form 1700 related income from sources within the Philippines.
- This form shall be filed annually by Individuals earning Purely
Compensation Income (income arising from employer-employee 5. INDIVIDUAL TAXPAYERS NOT REQUIRED TO FILE ITR (EOPTA; RR 4-2024):
relationship) including those individual taxpayers with non-business- 1. An individual earning purely compensation income whose taxable income does not
related income. exceed P250,000. The Certified List of Employees Qualified for Substituted Filing of
Income Tax Return, reflecting the amount of income payment, the tax due and tax
➢ BIR Form 1701 withheld, if any, filed by the respective employers, duly stamped "Received" by the
- This form shall. be filed annually by individuals who are engaged in Bureau, shall be tantamount to the substituted filing of income tax returns by said
trade/business or the practice of profession including those with mixed employees;
income (i.e., those engaged in the trade/business or profession who are
also earning compensation income) in accordance with Sec. 51 of the 2. An individual whose income tax has been correctly withheld by his employer, provided
Code, as amended. that such individual has only one employer for the taxable year- the Certified List of
Employees Qualified for Substituted Filing of Income Tax Return, reflecting the
➢ BIR Form 1701A amount of income payment, the tax due and tax withheld, if any, filed by the respective
- This form shall be filed annually by individuals earning PURELY from employers, duly stamped "Received" by the Bureau shall be tantamount to the
business/profession subject to graduated income tax rates with Optional substituted filing of income tax returns by said employees;
Standard Deduction (OSD) as mode of deduction; and
3. An individual whose sole income has been subjected to final withholding tax.
- Those who opted to avail of the 8% income tax rate
4. A minimum wage earner. The Certified List of Employees Qualified for Substituted
➢ BIR Form 1701Q Filing of Income Tax Return reflecting the amount of income payment, the tax due
- This form shall be filed quarterly by the following: and tax withheld, if any, filed by the respective employers, duly stamped "Received"
• Resident citizens engaged in trade, business, or practice of by the Bureau shall be tantamount to the substituted filing of income tax returns by
profession within and without the Philippines; said employees; and
• A resident alien, nonresident citizen or nonresident allen
individual engaged in trade, business. or practice of profession 5. An individual citizen of the Philippines who is working and deriving income solely from
within the Philippines, abroad as an "Overseas Contract Worker (OCW)" or "Overseas Filipino Worker
• A trustee of a trust, guardian of a minor, executor/administrator (OFW)" as defined under Section 3(G) of RA No. 11641, or the "Department of
of an estate, or any person acting in any fiduciary capacity for Migrant Workers Act".
any person, where such trust, estate, minor, or a person is
engaged in trade or business. In all cases, all individuals deriving compensation income, regardless of the amount,
from two (2) or more concurrent or successive employers at any time during the
4. INDIVIDUAL TAXPAYERS REQUIRED TO FILE ITR: taxable year, are not qualified for substituted filing. Thus, they are still required to file
1. Individuals engaged in business and/or practice of profession, regardless of the a return."
results of operations.

2. Individuals not qualified under Substituted Filing of ITR such as: 6. FRINGE BENEFIT TAX (FBT)
• Individuals/employees deriving compensation from two or more employers, Due Date and BIR Form:
concurrently or successively, at any time during the taxable year. ➢ Shall be filed and the tax paid/remitted on a quarterly basis not later than the last
• Individuals/employees deriving compensation income, regardless of the day of the month following the close of the quarter during which withholding was
amount, whether from a single or several employers during the calendar year, made using BIR Form 1603Q (RR 11-2018).
the income tax of which has not been withheld correctly (i.e. tax due is not equal
to the tax withheld) resulting to collectible or refundable return. 7. FINAL WITHHOLDING TAX (FWT) ON PASSIVE INCOME
• Individuals receiving purely compensation income from a single employer, Due Date and BIR Form:
although the income tax of which has been correctly withheld, but whose ➢ Shall be filed and the tax paid/remitted on a quarterly basis not later than the last
day of the month following the close of the quarter during which withholding was
made using BIR Forms 1601-FQ and 1602Q.

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8. CAPITAL GAINS TAX CERTIFICATE OF WITHHOLDING BY THE EMPLOYER (BIR FORM 2316)
a. Shares of Stock of a Domestic Corporation not listed in the Local Stock Exchange Under Section 2.83 of RR2-98, as amended, every employer is required to furnish its
(LSE) employees (including minimum wage earners) BIR Form 2316 on or before January 31 of the
Due Date and BIR Form: succeeding calendar year, or if employment is terminated before the close of such calendar
➢ Filed and paid within 30 days following each sale or other disposition using BIR year, on the day on which last payment of compensation is made. Failure to furnish BIR Form
Form1707 2316 shall be grounds for the mandatory audit of payor's income tax liabilities (including
➢ Annual: On or before April 15 of the following year covering all stock transactions withholding tax) upon verified complaint of the payee.
of the preceding taxable year.
FINAL WITHHOLDING TAX ON PASSIVE INCOME
b. Real Property classified as capital asset and located within the Philippines. For Final and Creditable Withholding taxes, the return shall be filed and paid not later
Due Date and BIR Form: than the last day of the month following the close of the taxable quarter during which the
➢ Filed and paid within 30 days following each sale, exchange or disposition of real withholding was made. The power of the Secretary of Finance to require withholding agents
property using BIR Form1706. to pay or deposit taxes deducted or withheld at more frequent intervals is repealed under
➢ In case of installment sale, the return shall be filed within 30 days following receipt RA10963.
of the 1s down payment and within 30 days following each subsequent installment
payment. CAPITAL GAINS TAX
➢ One return is filed for every transfer document regardless if the number of each a) Shares of stock
property sold, exchange or disposed of. • Ordinary Return - within 30 days after each transaction
• Final Consolidated Return - on or before April 15 of the following year
9. DEFINITION OF TERMS
➢ Person - the term "person" means an individual, a trust, estate or corporation. b) Real Property - within 30 days following each sale or other disposition

➢ Filing of Return - shall refer to the act of accomplishing and submitting the
prescribed tax return, electronically or manually, to the Bureau of Internal OTHER CONSIDERATIONS
Revenue (BIR), or through any Authorized Agent Bank (AAB) or Authorized Tax
Software Provider (ATSP) for specific tax returns as approved by BIR. Minimum Wage
The term “statutory minimum wage earner (SMW)” or “minimum wage earner (MWE)”
➢ Payment of Tax or Remittance of Tax - shall refer to the act of delivering the under RA 9504 shall refer to a worker in the private sector paid the statutory minimum wage.
amount of tax due or withheld, either electronically or manually, to the BIR, or The rate is fixed by the Regional Tripartite Wage and Productivity Board as defined by the
through any AAB or ATSP for specific tax returns as approved by BIR. Bureau of Labor and Employment Statistics. MWE are exempt from income tax on:
1. Minimum wage
➢ Authorized Agent Banks (AABs) - shall refer to financial institutions that are 2. Holiday pay
accredited to collect the payment of internal revenue taxes on BIR's behalf. 3. Overtime pay
4. Night shift differential
➢ Revenue Collection Officers (RCOs) - shall refer to the BIR officers tasked to 5. Hazard pay
accept tax payments from taxpayers under certain limitations and remit the tax
collected within the prescribed period.
Substituted Filing of Income Tax Returns (ITR)
➢ Authorized Tax Software Provider (ATSP) - shall refer to an individual or Under RA 9504 and RR 10-2008, individual taxpayers may no longer file income tax
organization whose business is to render electronic tax filing and/or tax payment return provided he has (all the requirements must be satisfied):
services to taxpayer-clients by offering third-party solutions tested and certified by
BIR, that is, an electronic tax return filing and/or payment solution. 1. Receiving purely compensation income, regardless of amount
2. The amount of income tax withheld by the employer is correct (Tax due = Tax withheld)
➢ Overseas Filipino Worker (OFW) - refers to a Filipino who is to be engaged, is 3. Only one employer during taxable year
engaged, or has been engaged in remunerated activity in a country of which he 4. If married, the employee’s spouse also complies with all the three aforementioned
or she is not an immigrant, citizen or permanent resident or is not awaiting conditions, or otherwise receives no income.
naturalization, recognition or admission, whether land- based or sea-based
regardless of status; excluding a Filipino engaged under a government-
recognized exchange visitor program for cultural and educational purposes. For
purposes of this provision, a person engaged in remunerated activity covers a
person who has been contracted for overseas employment but has yet to leave
the Philippines, regardless of status and includes "Overseas Contract Workers"
(OCWs). The term OFW is synonymous to the term "Migrant Worker" pursuant to
Section 3[G] of RA No. 11641 or the "Department of Migrant Workers Act".

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MODULE EXERCISES
Quarterly Income Tax Return
The following cumulative balances during the year on income and expenses were
provided by Juan Dela Cruz, a resident citizen:

1st Q 2nd Q 3rd Q 4th Q

Gross Profit from Sales P300,000 P650,000 P910,000 P1,200,000
Business expenses 120,000 262,000 405,890 426,000
Dividends-domestic corp. 20,000 20,000 30,000 30,000
Interest income from,
BPI 4,000 8,000 12,000 16,000
UCPB 8,000 12,000 16,000 18,000
Metro Bank 5,000 10,000 15,000 30,000
Capital gain on sale of Land: 150,000 150,000 150,000 150,000
Selling price: P600,000; Cost: P450,000

REQUIRED: Using the above information, compute the following:

i. Income tax payable, first quarter
ii. Income tax payable, second quarter
iii. Income tax payable, third quarter
iv. Income tax payable, fourth quarter
v. Total final taxes (for the year) on passive income
vi. Total capital gain tax

Reference:

Tabag, E.D., Garcia, E.J.R., (2024 Edition), Income taxation

Banggawan, R. B. (2023-2024 Edition), Income Taxation Laws, Principles and Applications

Bureau of Internal Revenue, [Link]

[Link]

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