Module

INCOME TAXES FOR INDIVIDUALS

2
Learning Objectives:

After completing this module, you will be able to:

1) Identify the different classifications of taxpayers;
2) Determine the types of income;
3) Compute income tax of purely compensation income earner, self-employed
and professionals;
4) Identify and compute final tax on passive income;
5) Determine and compute capital gains tax; and
6) Full out different types of income tax returns

Read and Learn

Definition

I ndividual Taxpayers are natural persons with income derived from within the
territorial jurisdiction of a taxing authority. Under the Tax Code (NIRC), individual
taxpayers 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)
▪ Nonresident aliens 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 income
▪ Allowable deductions
▪ References in the tax code

Citizens of the Philippines

Under Section I, Article Ill of the Philippine Constitution, a Filipino citizen is

a natural person who is/has

1. Born (by birth) with father and/or mother as Filipino Citizens;

2. Born before January 17, 1973 of Filipino mother who elects Philippine
citizenship upon reaching the age of majority
3. Acquired Philippine citizenship after birth (naturalized) in accordance with
Philippine Laws.
Nonresident Citizen of the Philippines

Sec. 22(E) of the NIRC describes a nonresident citizen as a citizen who:

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; or

▪ For employment on a permanent basis; or

▪ For work and derives income from abroad and whose employment
thereat 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
(aggregate).

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
nonresident 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 [Section NIRC].

ILLUSTRATION 1:
Pedro, an OFW, returned in the Philippines for good on May 2020. He shall be
classified for 2020 taxable year as follows:
January to April 2020 - nonresident citizen
From Ma 2020 onwards - resident citizen

The same rule shall apply to a resident citizen who leaves the
Philippines anytime during the for the following reasons:
▪ As an immigrant abroad; or
▪ For employment abroad on a permanent basis

ILLUSTRATION 2:
Ana, a resident citizen, left the Philippines on July 1, 2020 to reside permanently
in U.S. together with her family. She shall be classified for 2020 taxable year as
follows:
January to June 2020 - resident citizen
From Jul 2020 onwards - nonresident citizen

Overseas Contract Workers(OCW)/ Overseas Filipino Workers (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 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 as nonresident citizens for tax
 purposes. To be considered as an OCW or OFW, they must be duly
registered as such with the Philippine Overseas Employment Administration
(POEA) with a valid Overseas Employment Certificate (OEC).

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 international trade. To be considered as an OCW or OFW, they
must be duly registered as such with the Philippine Overseas Employment
Administration (POEA) with a valid Overseas Employment Certificate (OEC) with
Seafarers Identification Record Book (SIRB) or Seaman's Book issued by the
Maritime Industry Authority (MARINA).

For income taxation purposes, OFWs are classified as nonresident citizens.

Resident citizen of the Philippines

A Filipino citizen taxpayer not classified as nonresident citizen is considered

a resident citizen for tax purposes.

Alien

An alien is a foreign-born person who is not qualified to acquire Philippine

citizenship by birth or after birth.

Resident aliens

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 Philippines and who are not mere transients or sojourners
are classified length nab.re as resident aliens. An alien who lives in the Philippines
with no definite intention as to his stay is also a resident alien. Likewise, 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.

Non-resident aliens

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. They are aliens who come to the Philippines for a definite purpose, which
in its nature may be promptly accomplished. They are alien who are mere
transients or non-residents, hence, classified as nonresident alien.

Aliens who stayed in the Philippines for an aggregate period of more than
180 days during the taxable year and/or aliens who have business income in the
Philippines are considered as nonresident aliens engaged in trade or business.
Under Section 22(S) 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 taxpayer as an employee). If
an alien stay in the Philippines for only 180 days or less, or he is not deriving
business income in the Philippines, he is considered as a nonresident alien not
engaged in trade or business.
 A nonresident alien not engaged in trade or business is subject to 25%
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 property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed or
determinable annual or periodic or casual gains, profits, and capital gains.

ILLUSTRATION 3:

Determine the correct classification of the taxpayer cases provided below:

Case 1:
Allan is a natural born Filipino citizen. His family migrated in US fifteen (15) years ago. For
personal reasons, he decided permanently in the Philippines on March 1, 2020.
 Answer: From Jan. to Feb. 2020: Allan is classified as NRC.
From March 1, 2020 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 of 2020 to improve its
internet services. Due to the competitors from other countries, NoyPi decided to extend
services of G.l. Joe.
 Answer. He is a resident alien
An alien who comes to the Philippines for the 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 the 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 stocks
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 derived from trade or 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 Championship in 2005 in the Philippines. He
is also the owner of one of the disco pubs in Malate since then.
 Answer. NRA-ETB.
He is engaged in actual conduct of trade or business is nonresident.

Applicable Taxes and Tax Rates

The applicable taxes for individuals depend on several factors such as but not
limited to:

▪ Classification of the taxpayer

▪ Source of income
▪ Type of income
Classification of the taxpayer

It is important to properly classify 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
Philippine sources. Moreover, individual taxpayers classified as nonresident aliens
not engaged in trade or business (NRANETB) are taxable based on their "gross
income" while others are taxable based on "net income" (Refer to Table 2-1):

Source of Income

It is important to know the source of income for tax purposes (income

derived from within or 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 the Philippines.

For income taxation purposes, as discussed in the preceding pages, OFWs

are classified as nonresident citizens. Hence, income earned by an OFW or OCW,
as defined in RR 1-2011 that is earned out of the country is exempted from
Philippine income tax. However, the earnings of an OFW from a business venture
or any other property in the Philippines are subject to income tax in the Philippines.

ILLUSTRATION 4:

Use the following data for Cases A-E

An individual taxpayer provided the following information for 2020:
Gross business income, Philippines P5,000,000

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: P3,500,000
Gross business income, Philippines P5,000,000
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 P3,500,000

 A resident citizen is taxable on income within and without the Philippines. Basis of taxable
income as described in Table 2-1 is net income.
Case B: The taxpayer is a nonresident citizen
 Answer: P2,000,000
Gross business income, Philippines P5,000,000
Business expenses, Philippines (3,000,000)
Taxable income P2,000,000
 A nonresident citizen is taxable on income derived from within Philippine sources only.
Basis of taxable income as described in Table 2-1 is "net income"

Case C: The taxpayer is a resident alien

 Answer: P2,000,000
Gross business income, Philippines P5,000,000
Business expenses, Philippines (3,000,000)
Taxable income P2,000,000

 Same solution with Case B. A resident alien is taxable on income derived from within
Philippine sources only.

Case D: The taxpayer is a nonresident alien engaged in trade or business

 Answer: P2,000,000
Gross business income, Philippines P5,000,000
Business expenses, Philippines (3,000,000)
Taxable income P2,000,000
 Same solution with Case A and B. A nonresident alien engaged in trade or business is
taxable on income derived from within Philippine sources only.
Case E: The taxpayer is a nonresident alien not engaged in trade or business (assume
further that the data pertaining to gross income is other than business income).
 Answer: P5,000,000
 NRA-NETBs are taxable on their "gross income"

Case F:
The income and expenses of a Filipino citizen for 2020 were provided as follows:
January to June: Philippines Canada
Gross income P5,000,000 P2,000,000
Allowable deductions 2,000,000 1,000,000

July to December:
Gross income P2,000,000 P3,000,000
Allowable deductions 1,000,000 1,200,000

Assume 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: P5,000,000
Gross income, Philippines (Jan.-Dec.) P7,000,000
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 P5,000,000

Case. G: Assume the same data in case F except that the taxpayer is a nonresident citizen
who returned and reside permanently in the country in July of the current year. His taxable
income is:
 Answer: P5,800,000
Gross income, Philippines (Jan.-Dec.) P7,000,000
Gross income, Canada (July-Dec.) 3,000,000
Deductions, Philippines (Jan.-Dec.) (3,000,000)
Deductions, Canada (July-Dec.) (1,200,000)
Taxable income P5,800,000
TYPES OF INCOME

For purposes of income taxation, there are three types of incomes subject to
income tax as follows:
 Ordinary or regular income
 Passive income derived from Philippine sources; and
 Capital gains subject to capital gains tax

Ordinary or regular income refers to income such as compensation

income (salaries or wages), business income, income from practice of profession,
income from sale and/or dealings of property and miscellaneous income and
passive income other than those subject to final taxes under Section 24(B) and
capital gains tax under Sections 24[Cl and [D] of the Tax Code. Regular incomes
are subject to graduated tax table (also known as basic or normal tax) as provided
for under Section 24(A) of the Tax Code.

Passive incomes subject to final withholding taxes are certain passive

incomes from sources within the Philippines as enumerated under Section 24(B)
of the Tax Code. These passive incomes are not subject to graduated tax rate or
basic tax presented in Table 2-2 but to specific final withholding tax rates as
summarized in Table 2-3.

The specific passive incomes derived from Philippine sources subject to

final withholding taxes are as follows:
1) Interest income
2) Dividend Income
3) Royalties
4) Prizes; and
5) Other winnings

Unless exempt, other passive income derived from Philippines but not in the list (if any) as
well as passive income derived abroad are subject to basic tax.

Incomes from sale of capital assets subject to capital gains tax (CGT):

1) Capital gains from sale of shares of stocks of a domestic corporation not

traded in the local stock exchange [Sec. 24(C) NIRC]; and
2) Capital gains from sale of real property in the Philippines [Section 24(D)
NIRC]

Capital gains not subject to CGT are subject to basic tax.

Summary of INCOME and the Applicable INCOME TAX

GUIDE:
**Unless exempt under the law, income not subject to final withholding tax and
capital gains tax are classified as ordinary income and are subject to graduated
rate.

Interest income from bank deposit abroad, for instance, is not included in the list
of income subject to FWT nor CGT as illustrated in Tables 2-3 and 2-4. Hence,
such income is subject to basic tax or graduated tax rate.

 Provided, that after 2020, the taxable income tax levels in the above schedules shall be
adjusted once every five (5) years, through rules and regulations issued by the
Department of Finance, upon recommendation of the Commissioner, after considering
among others, the effect of the same of the 5-year cumulative inflation rate.

ILLUSTRATION 4 - COMPUTATION OF BASIC INCOME TAX DUE

PURELY COMPENSATION (salaries/wages) INCOME EARNER:

Determine the income tax due assuming the "taxable compensation

1.
income" for the year is P240,000.
 Answer: P0; tax exempt based on the graduated tax rate

Determine the income due assuming the “taxable compensation income”

2.
for the year is P300,000.
 Answer: P10,000
Tax on
First P250,000 P0
In excess of P250,000; (P50,000x20%) 10,000
Tax Due P10,000
 3. Determine the income tax due assuming the “net taxable compensation
income” for the year is P1,850,000.

 Answer: P445,000.
Tax on
First P250,000 P130,000
In excess of P800,000; (P1,050,000x30%) 315,000
Tax Due P445,000

SELF-EMPLOYED and PROFESSIONALS (SEP)

Self-Employed is defined under RA10963 (TRAIN Law) as "a sole proprietor

or an independent contractor who reports income earned from self-employment.
S/he controls who he/she works for, how the work is done and when it is done. It
includes professionals whose income is derived purely from the practice of
profession and not under an employer-employee relationship".

Professional is defined as 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 to a person who engages in some
art or sport for money, as a means of livelihood, rather than as a hobby. It includes
but is not limited to professional entertainers, professional athletes, directors,
producers, insurance agents, insurance adjusters, management and technical
consultants, bookkeeping agents, and other recipients of professional, promotional
and talent fees"

Income derived from self-employment is considered income

derived from the conduct of trade or business, hence, classified as regular or
ordinary income. As such, it is subject to the graduated tax rate as shown in Table
2-2. Consequently, the sample computation of basic income tax due provided in
illustration #4 shall likewise apply to SEP.

However, unlike compensation income or salaries/wages where it is only

subject to basic tax (refer to illustration #4), income derived from the conduct of
trade or business such as that of SEP is generally subject to two types of taxes,
the income tax (using the graduated tax rate) and business tax (generally either
VAT or 3% percentage tax unless exempt under the law). Business taxes are
discussed in a separate tax subject and in other textbook entitled "Transfer and
Business Taxation”.

Beginning 2018 or upon the effectivity of RA 10963 [Tax Reform for

Acceleration and Inclusion Law (TRAIN Law)], regular income of 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 non-
operating income in excess of P250,000 in LIEU of the graduated income tax rate
and business tax under Section 116 of the Tax Code.

Self-Employed and Professionals (SEP)

Sec. 24(A)(2)(B) of the Tax Code provides the following rules for SEP:
  PURELY SEP
The taxpayer is considered purely SEP if s/he is not earning income from
employment. There is not income arising from employer employee
relationship. The applicable taxes of purely SEP are as follows:

GS &/or GR* Income Tax Business Tax**

Graduated tax rate 3% Percentage Tax
under Sec. 116 NIRC

OR
Not more than P3M At the option of SEP
8% *** of Gross Sales/Receipts and other non-
operating income
in excess of P250,000 IN LIEU of the graduated
income tax rate and Sec. 116
More than P3M Graduated tax rate Value Added Tax
Unless engaged in VAT
exempt sales and
transactions under Sec.
109 of the Tax Code
*GS/GR = Gross Sales/ Gross Receipts
**Business Tax in addition to income tax. Business taxes are discussed in a
separate subject, Tax 2 (Transfer and Business Taxation)
***allowed only if qualified.

In order to avail the 8% preferential tax, the SEP shall satisfy all the following
conditions:
1. The gross sales/receipts and other non-operating income does not exceed
the vat threshold of P3,000,000.
2. The SEP shall be non-VAT registered;
3. The gross sales/receipts were not derived from vat-exempt sales and
transactions;
4. The SEP is not subject to Percentage Tax other than Section 116; and
5. The SEP signifies his/her intention to elect the 8% income tax.

RR 8-2018 provides, unless the taxpayer signifies in the 1st Quarter Return
of the taxable year the intention to elect the 8% income tax, the taxpayer shall be
considered as having availed of the graduated rates under Section 24(A) of the
Tax Code, as amended, and such election shall be irrevocable for the taxable year.

ILLUSTRATION 5 - 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 P3,000,000.

1. Determine the income tax due assuming the gross sales/receipts and other non-
operating income was P240,000
 Answer: PO; exempt from income tax
2. Using the data below, determine the income tax due:
Gross sales P2,800,000
Cost of sales (1,500,000)
 Operating expenses (750,000)
Net income P550,000

 Answer: P67,500

Solution:
Tax on
First P400,000 income P30,000
In excess of P400,000 (P150,000 x 25%) 37,500
Income tax due P67,500

In addition to the income tax computed above, the SEP is still subject to business tax.
Business taxes are discussed in Volume 2 entitled "Transfer and Business Taxation”. For
purposes of illustration, assume the taxpayer in this particular case is subject to Percentage
Tax under Sec. 116 (being a non-VAT registered taxpayer and the gross sales did not
exceed the revised vat threshold of P3M) the business tax is computed as follows; OPT =
P2,800,000 x 3% = P84,000. Consequently, the total tax expense (income and business
tax) of the SEP is P151,500. This tax shall likewise apply in the preceding number
(assumption #1) irrespective of its exemption from income tax. The basis of business tax
is not the “income” but gross sales/receipts and other non-operating income (exclude
compensation income).

3. Assume the SEP in number “2” opted to avail 8% tax under the TRAIN Law.

 Answer: (P2,800,000 – P250,000) x 8% = P204,000.

The 8% tax is computed based on gross sales/receipts and other non-operating income in
excess of P250,000. This is in LIEU of the income tax using graduated rate and business
tax under Sec. 116 of the tax code. Comparing total taxes in item # 2 and #3 above,
separate computation of income tax (using graduated rate) and the business tax will result
to a lower total taxes due. Hence, the SEP shall compare the total taxes using the two
methods and may choose the method, which will result to lower taxes.

CASE B: PURELY SEP whose gross sales/receipts and other non-operating income
EXCEEDS the VAT threshold of P3,000,000.

Determine the income tax due assuming the following data:

Gross sales P5,000,000
Cost of sales (2,250,000)
Operating expenses (1,250,000)
Net taxable income P1,500,000

 Answer: P340,000

Solution:
Tax on
First P800,000 income P130,000
In excess of P800,000 income (P700,000 x 30%) 210,000
Tax due P340,000

In addition to the income tax computed above, the SEP in this particular case is still subject to a
business tax. Since the gross sales/receipts and other non-operating income exceeds the VAT
threshold, the applicable business tax is 12% VAT computed as follows:
VAT = P5,000,000 x 12% = P600,000

The 8% tax is not applicable if (a) the gross sales/receipts and other non-operating income
exceeds the VAT threshold; or (b) the SEP is VAT registered.
CASE C: PURELY SEP + GS or GR ≤ P3M + the SEP is VAT registered

Assume the same data in Case A (2) and the SEP opted to use the 8% tax, compute the
total tax due of the taxpayer.

 Answer: P403,500
Income Tax:
First P400,000 income P30,000
In excess of P400,000 income (P150,000 x 25%) 37,500
P67,500

Business Tax:
12% VAT = P2.8M x 12% 336,000
Total Tax Due P403,500

 The 8% tax is not applicable in this particular case.

 The following are not allowed to avail the 8% tax:
a) VAT-registered taxpayers (regardless of gross sales/receipts)
b) Those liable for percentage taxes other than Sec. 116 under Title V of NIRC.

CASE D: PURELY SEP + GS or GR ≤ P3M + the SEP is subject to other type of OPT

Pedro is a taxi operator. The following data were provided for taxable year:
Gross receipts P2,800,000
Cost of direct services (1,500,000)
Operating expenses (750,000)
Net income P550,000

Determine the total tax due of Pedro assuming he opted to use the 8% tax:
 Answer: P151,500

Solution:
Income Tax:
First P400,000 income P30,000
In excess of P400,000 income (P150,000 x 25%) 37,500
P67,500

Business Tax:
3% CCT = P2.8M x 3% 84,000
Total Tax Due P151,500

 The 8% tax is not applicable in this particular case.

 The following are not allowed to avail the 8% tax:
a) VAT-registered taxpayers (regardless of gross sales/receipts)
b) Those liable for percentage taxes other than Sec. 116 under Title V of NIRC.
 Under the Tax Code, a domestic common carrier’s tax engaged in transport of passengers
by land is subject to a “business tax” of common carrier’s tax under Section 117 of the Tax
Code. Business Taxes are one of the topics discussed in a separate tax subject, Transfer
and Business Taxation.

CASE E: PURELY SEP using 8% tax rate but whose GS/GR and other non-operating
income EXCEEEDs the VAT threshold of P3,000,000 during the year.

Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his 1 st
quarter income tax return. However, his gross sales during the taxable year exceeded the
VAT threshold of P3M as provided in his “quarterly” records as follows:
 Q1 Q2 Q3 Q4/ Annual
(8% tax (8% tax) (8% tax) (Graduated)
Sales P500,000 P500,000 P2,000,000 P3,500,000
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 expenses (120,000) (120,000) (480,000) (720,000)
Net taxable income P80,000 P80,000 P320,000 P1,580,000

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

 Answer: P289,200

Solution:
Sales (total for the year) P6,500,000
Cost of sales (total for the year) (3,000,000)
Gross income (total for the year) 3,500,000
Operating expenses (total for the year) (1,440,000)
Net taxable income for the year P2,060,000

Income tax due using graduated rate P509,200**

Less: Quarterly tax payments (Q1-Q3) (220,000)
Based on 8% tax rate [(P3M – 250k) x 8%] P289,200

**The cumulative gross sales and/or receipts for the entire taxable year exceeded the
P3,000,000 VAT threshold. Therefore, the 8% preferential income tax rate shall no longer
be applicable. The correct income tax due shall be computed based on the graduated tax
table. However, the 8% tax rate paid for the first three quarters shall be deducted to arrive
at the income tax payable for the year.

SEP's Gross Sales/Receipts exceeded the VAT threshold during the year

RR 8-2018 provides, that, if at any time during a given taxable year, a

taxpayer's gross sales or receipts exceeded the VAT Threshold (P3,000,000.00),
he/she shall automatically be subjected to the graduated rates under Section
24(A)(2)(a) of the Tax Code, as amended, with the following rules/guidelines:

 The taxpayer shall be allowed an income tax credit of quarterly payments

initially made under the 8% income tax option.

 Taxpayer is likewise liable for business tax(es), in addition to income tax.

 For this purpose, the taxpayer is required to update his registration from
non-VAT to VAT taxpayer, within the 30 days from the close of the month
the VAT threshold was breached.

 Percentage tax under Sec. 116 shall be imposed from the beginning of the
year until taxpayer is liable to VAT.

 VAT shall be imposed prospectively

 A percentage tax pursuant to Section 116 of the Tax Code, as amended,

shall be imposed on the first P3,000,000. The excess of the threshold shall
be subject to VAT.

 Percentage tax due on the P3,000,000 shall be collected without penalty,

if timely paid on the due date immediately following the month the threshold
was breached.
MIXED INCOME EARNER/SEP

The taxpayer is considered mixed income earner if s/he is deriving income

from both from self-employment and from compensation income arising from the
presence of employer-employee relationship

The applicable taxes of a mixed income earner are as follows:

GS &/or GR* Income Tax Business Tax**

Graduated tax rate on 3% Percentage Tax
compensation income under Sec. 116 of the
and income from self- Tax Code on income
employment: derived from self-
employment only.

OR at the option of SEP:

Not more than P3M  Compensation income – Graduated rate
(exclude  From self-employment:
compensation income) 8% *** of Gross Sales/Receipts and other non-
operating income
IN LIEU of the graduated tax rate and Section 116

NOTE: The 8% tax is applicable only to income arising from

self-employment and/or practice of profession. It is not
applicable to compensation income. If the SEP is mixed
income earner, the 8% tax rate is based on gross
sales/receipts without deducting P250,000.
More than P3M Graduated tax rate from Value Added Tax
(exclude both compensation and unless engaged in VAT
compensation income) self-employment. exempt sales and
transactions under Sec.
Note: The option to be tax at 109 of the Tax Code
8% is not applicable.

Sec. 116 is a business tax, not an income tax. It is computed as 3% of

gross sales/receipts and other operating income.
ILLUSTRATION 6
CASE A: MIXED Income Earner whose gross sales/receipts and other non-operating
income does not exceed the VAT threshold of P3,000,000.

Assume the following data the year:

Compensation income P900,000
Gross sales 2,800,000
Cost of Sales (1,500,000)
Operating expenses (750,000)
Total taxable income P1,450,000

1) Determine the correct income tax due.

 Answer: P325,000
 Tax on
First P800,000 income P130,000
In excess of P800,000 income (P1,450,000 – P800,000 x 30%) 195,000
Tax Due P325,000

 As discussed in illustration 4, CASE A(#2), in addition to the income tax computed

above, the SEP in this particular case is still subject to a business tax (on his
business income only; exclude compensation income) computed as follows:

OPT = P84,000 [Same computation/explanation with illustration 4, Case A(#2)].

This topic is extensively covered in Tax 2 subject (Transfer and Business
Taxation).

2) Assume the SEP opted to avail the 8% tax under the TRAIN Law, determine the
income tax due.
 Answer: P384,000

On his compensation income:

Tax on
First P800,000 P130,000
In excess of P400,000 (P100,000 x 30%) 30,000
P160,000

On his business income **(P2.8M x 8%) 224,000

TOTAL Tax Due P384,000

o The 8% tax shall not be applied to compensation income.

o **For mixed income earners, the P250,000 deduction is not allowed
o The P384,000 represents two taxes, income and business taxes

CASE B: MIXED Income Earner whose gross sales/receipts and other non-operating
income EXCEEDs the VAT threshold of P3,000,000.

Determine the income tax due assuming the following data:

Compensation income P900,000
Gross sales 5,000,000
Cost of sales (2,250,000)
Operating expenses (1,250,000)
Total taxable net income P2,400,000

 Answer: P618,000

Solution:
Tax on
First P2,000,000 income P490,000
In excess of P2,000,000 income (P2.4M - P2M x 32%) 128,000
Tax Due P618,000

 In addition to the income tax computed above, the SEP in this particular case is
still subject to a business tax. Since the gross sales/receipts and other non-
operating income exceeds the VAT threshold, the applicable business tax is 12%
vat (on his business income only) instead of Section 116 of the Tax Code.

The vat is computed as follows:

VAT = P5,000,000 x 12% = P600,000
 VAT and Percentage taxes are some of the topics covered in a separate tax
subject, Transfer and Business Taxation.

The 8% tax in LIEU of the graduated tax rate and Section 116 is applicable if the
gross sales/receipts and other non-operating income exceeds the vat threshold of
P3M.

PASSIVE INCOME subject to Final Withholding Tax (FWT)

As discussed in previous pages, the applicable tax on an income will

depend on various factors such as the type of the income, the classification of
the taxpayer, source and type of income.

The three (3) types of income for income taxation purposes (ordinary or
regular income, passive income and capital gains).

Passive incomes subject to final withholding taxes are certain passive

incomes from sources within the Philippines as enumerated under the Tax Code
(summarized in Table 2-3). These passive incomes are not subject to graduated
tax rate or basic tax presented in Table 2-2 but to specific final withholding tax
rates as summarized in Table 2-3.

The specific passive incomes derived from Philippine sources subject to

final withholding taxes are as follows:
1) interest income;
2) dividend income;
3) royalties;
4) prizes; and
5) other winnings.

Unless exempt, other passive income derived from Philippines but not in the list (if any) as well as
passive income derived abroad are subject to basic tax.
FINAL WITHHOLDING TAX
(On "Certain" income, not subject to basic tax)

Passive incomes derived from Philippine sources as summarized in Table

2-3 above are subject to final taxes instead of basic tax or graduated tax rates.
Final withholding tax is a kind of tax which is prescribed on "certain income"
(interest income, dividends, royalties, prizes and winnings) derived from Philippine
sources and is not creditable against the income tax due of the payee on income
subject to regular rates of tax for the taxable year.
 Under the final withholding tax system, payee received the income net of
the applicable tax. The amount of tax withheld by the withholding agent (payor) is
"constituted as a full and final payment" of the income tax due from the payee on
the said income. For instance, if a resident citizen taxpayer earned P10,000
interest income from his bank deposit, the amount to be credited to his bank
account shall only be P8,000, net of the 20% final tax on interest income from bank
deposit. The applicable tax is withheld by the payor (bank) and shall remit the
corresponding tax to the BIR. Consequently, the liability for payment of the tax
rests primarily on the payor as a withholding agent. Thus, in case of his failure to
withhold the tax or in case of under withholding, the deficiency tax shall be
collected from the payor/withholding agent.

The payor is required to issue final withholding tax certificate to the payee.
The payee, on the other hand, is not required anymore to file an income tax return
for these types of income. Likewise, these incomes will no longer form part of the
payee's "taxable income".

Passive incomes derived abroad are subject to basic income tax, therefore,
included in the income tax return of resident citizen taxpayers.

ILLUSTRATION 7:

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 corporation 125,000
Dividend income- resident foreign corporation 75,000
Dividend income – nonresident foreign corporation 102,000
Interest income received from a depository bank
under FCDS, Philippines 50,000
Philippine lotto winnings 10,000
Philippine charity sweepstakes winnings 500,000
Singapore sweepstakes winnings 200,000
Other winnings – Philippines 50,000
Prizes – Robinsons Manila 8,000
Prize – SM Manila 20,000
Prizes – SM “Shanghai, China” 30,000

Determine the following:

1) Taxable income
 Answer: P2,015,000 computed as follows:
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 – resident foreign corporation 75,000
Dividend income – nonresident foreign corporation 102,000
Singapore sweepstakes winnings 200,000
 Prizes – Robinsons Manila 8,000
Prizes – SM “Shanghai China” 30,000
Taxable income P2,015,000

NOTE:
 Taxable income means ordinary income subject to graduated tax rates under
Section 24(A) of the Tax Code as summarized in Table 2-2 of this chapter.
 Interest incomes in bank deposits from sources “outside” of the Philippines and
Dividend income from “foreign corporations” are subject to basic tax
 PCSO/Philippine Lotto winnings:
Under TRAIN Law: Exempt if not exceeding P10,000; subject to 20% FWT if the
amount exceeds P10,000.
 Prizes not exceeding P10,000 from sources within the Philippines are subject to
basic tax. On the other hand, prizes more than P10,000 from sources “within the
Philippines” are subject to 20% final tax as shown in Table 2-3.
 Prizes derived from sources outside the Philippines is subject to basic tax
(graduated tax rate).

2) The amount of final taxes on “passive income”.

 Answer: P154,000 computed as follows:

Interest income – BDO Philippines (20%) P20,000

Dividend income from a domestic corporation (10%) 12,500
Interest income received from FCDU deposit (15%) 7,500
PCSO Winnings (P500,000 x 20%) 100,000
Other winnings – Philippines (P50,000 x 20%) 10,000
Prizes – SM Manila (P20,000 x 20%) 4,000
Total final tax on passive income P154,000

DEPOSIT SUBSTITUTES
(Tax Treatment of Interest income derived from government debt instruments and
securities)

RR 14-2012 defines "deposit substitutes" as an alternative form of obtaining

funds from the public other than deposits, through the issuance, endorsement, or
acceptance of debt instruments for the borrower's 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. "Public" is defined as borrowing
from twenty (20) or more individual or corporate lenders at any one time. The mere
issuance of government debt instruments or securities is deemed as falling within
the coverage of &deposit substitutes irrespective of the number of lenders at the
time of origination, and therefore interest income derived therefrom shall be
subject to applicable final tax rate. Government debt instruments and securities
including Bureau of Treasury issued instruments and securities such as Treasury
bonds (T-bonds), Treasury bills (T-bills) and Treasury notes are classified as
deposit substitutes if such instruments or securities are to be traded or exchanged
in the secondary market.

INTEREST INCOME FROM LONG-TERM DEPOSIT OR INVESTMENT

CERTIFICATES (Evidenced by certificates prescribed by BSP (Based on RR 14-
2012, RMC 7-2015)
 Long-term deposit or Investment certificate refers to certificate of time
deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments with
a maturity period of not less than five (5) years, the form of which shall be
prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only
to individuals (should not be under the name of a corporation or a bank or a trust
department of a bank) in denominations of P10,000 and other denominations as
prescribed by BSP (RR 14-2012).

Requisites/Conditions for exemption:

1) The depositor or investor is an individual citizen, a resident alien or a

nonresident alien engaged in trade or business in the Philippines.

2) The long-term deposits or investment certificates should be under the name

of the individual and not under the name of the corporation or the bank or
the trust department/unit of the bank.

3) The long-term deposits or investments must be in the form of savings

common or individual trust funds, deposit substitutes, investment,
management accounts and other investments evidenced by certificates in
such form prescribed by the Bangko Sentral ng Pilipinas (BSP).

4) The long-term deposits or investments must be issued by banks only and

not by other financial institutions.
5) The long-term deposits or investments must have a maturity period of not
less than five (5) years.
6) The long-term deposits or investments must be in denominations of Ten
thousand pesos (P 10,000) and other denominations as may be prescribed
by the BSP.

7) The long-term deposits or investments should not be terminated by the

original investor before the fifth (5th) year, otherwise they shall be subjected
to final tax rates of 5%, 12% or 20% on interest income earnings as
shown in Table 2-3

8) Except those specifically exempted by law or regulations, any other

income such as gains from trading, foreign exchange gain shall not be
covered by income tax exemption.

RMC 7-2015 dated March 6, 2015 provides that, for interest income
derived by individuals investing in common or individual trust funds or investment
management accounts to be exempt from income tax, the following additional
characteristics/conditions must ALL be present:

1) The investment of the individual investor in the common or individual trust

fund or investment management account must be actually held/managed
by the bank for the named individual at least five (5) years without
interruption. The term "bank" referred to herein are banks duly licensed as
such by the Bangko Sentral ng Pilipinas;

2) The underlying investments of the common or individual trust account or

investment management accounts must comply with the requirements of
 Section 22(FF) of the NIRC of 1997, as amended' as well as the
requirements mentioned above;

3) The common or individual trust account or investment management

account must hold on to such Underlying investment in continuous and
uninterrupted period for at least five (5) years

For nonresident alien not engaged in trade or business in the Philippines,

interest income received from long-term deposit or investment shall be subject to
a Final Withholding Tax at the rate of twenty five percent (25%).

For nonresident foreign corporation, interest income received from long-

term deposit or investment shall be subject to a Final Withholding Tax (FWT) at
the rate of thirty percent (30%) pursuant to Section 28 (B) (1) of the NIRC of 1997,
as amended. However, interest income from long-term deposit or investment shall
be subject to regular income tax at the rate of thirty percent (30%) if received by a
domestic corporation and resident foreign corporation (RMC 7-2015).

PRE-TERMINATION OF LONG-TERM DEPOSIT (RR 14-2012)

Interest income from long-term deposit or investment that is preterminated

by the depositor or the investor before the 5th year shall be subject to the following
graduated rates of final withholding tax on the entire income and shall be withheld
by the depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity (holding period) thereof as follows:

Four (4) years to less than five (5) years 5%

Three (3) years to less than four (4) years 12%
Less than three (3) years 20%

ILLUSTRATION 8:
(As illustrated under RR 14-2012 and RMC 7-2015)

Case A. An instrument with a maturity period of ten (10) years was held by Juan (resident
citizen) for two (2) years and was transferred to Smith (resident alien), who, in turn, held
it for eight (8) years. The final withholding tax are as follows:

Juan 20% final tax

Smith Exempt

Case B. An instrument with a maturity period of ten (10) years was held by Juan
(nonresident citizen) for three (3) years and transferred it to Smith, a resident alien. Smith
held it for two 2 years before subsequently transferrin it to Pedro (resident citizen) who
held it until the day of maturity or for a period years. The final withholding tax are as follows:
Juan 12% final tax
Smith 20% final tax
Pedro Exempt

Case C. An instrument with a maturity period of ten (10) years was held by Smith
(nonresident alien engage in trade or business) for three (3) years and transferred it to
Juan, a resident citizen. Juan held it for two (2) years before subsequently transferring it
to James (resident alien) who pre-terminated it after four (4) years. The final withholding
tax are as follows:
 Smith 12% final tax
Juan 20% final tax
James 5% final tax

Case D: Mr. X (a resident citizen) appoints Bank A —Trust Department to manage his
money created through a trust agreement. Bank A —Trust Department then invests said
money in a 5-year corporate bond.

 Even if Mr. X does not withdraw his money from such trust agreement five
(5) years, his interest income from the trust agreement will NOT the final withholding tax
as the underlying investment is a corporate bond, even if such corporate bond has a
maturity period of five (5) years. The underlying instrument needs to comply with the
requirements of Section 22 (FF) of the tax code. A bond, promissory note or any other type
of debt instrument issued by a non-bank corporation as an underlying instrument will not
meet the requirements of Section 22 (FF) as it is not issued by a bank.

Case E:

(Refer to Case "D"). If Bank A —Trust Department in its own name without mentioning the
particular individual for whom the investment is being made invests the fund instead in a
10-year long-term deposit or investment certificate, the long-term deposits and
investments made in the name of a trust department of a bank are not exempted from the
twenty percent (20%) final withholding tax. Only those made specifically "in trust for the
name of specific individual investors" may be exempted from income tax, provided they
comply with Section 22(FF) of the tax code.

Case F:

(Refer to Case "D"). If Bank A —Trust Department in the name of Mr. X invests the fund
instead in a 10-year long-term deposit or investment certificate as defined under Section
22(FF) of the NIRC of 1997, as amended, Mr. X's interest income derived from the trust
agreement shall be exempt from income tax provided that Bank A – Trust Department in
behalf of Mr. X will hold such deposit of investment in continuous and uninterrupted period
for at least five (5) years. The holding period for both the individual investor in the trust
agreement and the trust in the underlying instrument must both be at least five (5) years.

Bank A – Trust Department in behalf of Mr. X will hold such deposit or investment in
continuous and uninterrupted period for at least five (5) years. The holding period for both
the individual investor in the trust agreement and the trust in the underlying instrument
must be both at least five (5) years.

INFORMER'S REWARD
(Informer's Reward to Persons instrumental in the discovery of violation of the
NIRC and the discovery and seizure of smuggled goods)

Section 282 of the Tax Code provides:

(A) For Violations of the National Internal Revenue Code. Any person,
except an internal revenue official or employee, or other public official or employee,
or his relative within the sixth degree of consanguinity, who voluntarily gives
definite and sworn information, not yet in the possession of the Bureau of Internal
Revenue, leading to the discovery of frauds upon the internal revenue laws or
violations of any of the provisions thereof, thereby resulting in the recovery of
revenues, surcharges and fees and/or the conviction of the guilty party and/or the
imposition of any of the fine or penalty, shall be rewarded in a sum equivalent to
ten percent (10%) of the revenues, surcharges or fees recovered and/or fine or
penalty imposed and collected or one million pesos (P1,000,000) per case,
whichever is lower. The same amount of reward shall also be given to an informer
where the offender has offered to compromise the violation of law committed by
him and his offer has been accepted by the Commissioner and collected from the
offender: Provided, That should no revenue, surcharges or fees be actually
recovered or collected, such person shall not be entitled to a reward: Provided,
further, That the information mentioned herein shall not refer to a case already
pending or previously investigated or examined by the Commissioner or any of his
deputies, agents or examiners, or the Secretary of Finance or any of his deputies
or agents: Provided, finally, That the reward provided herein shall be paid under
rules and regulations issued by the Secretary of Finance, upon recommendation
of the Commissioner.

(B) For Discovery and Seizure of Smuggled Goods. - To encourage the

public to extend full cooperation in eradicating smuggling, a cash reward
equivalent to ten percent (10%) of the fair market value of the smuggled and
confiscated goods or One million pesos (P 1,000,000) per case, whichever is
lower, shall be given to persons instrumental in the discovery and seizure of such
smuggled goods. The cash rewards of informers shall be subject to income tax,
collected as a final withholding tax, at the rate of ten percent (10%).

The provisions of the foregoing subsections notwithstanding, all public

officials, whether incumbent or retired, who acquired the information in the course
of the performance of their duties during their incumbency are prohibited from
claiming informer's reward.

CAPITAL GAINS TAX

Income from sale of capital assets, specifically from sale of shares of stocks
of a closely held corporation (shares of Domestic Corporation not listed in the local
stock exchange) and real properties located in the Philippines are subject to capital
gains tax (CGT) summarized as follows.

NOTE:

 The assets sold in the table above must refer to capital assets. Capital assets are assets
not used in business nor for sale in the ordinary course of trade or business.
  Capital gains arising from sale of capital assets other than those described in Table 2-4
are subject basic/regular tax or graduated tax rate.

 **The fair market value (FMV) above of real property shall refer to the higher between:
o Fair market value as provided by City or Provincial assessors (also known
as assessed value or FMV for real property tax declaration purposes); and

o Zonal value as provided by the Commissioner of Internal Revenue (CIR)

Summary of INCOME and the Applicable INCOME TAX

TYPE OF INCOME APPLICABLE TAX
Regular Income Graduated rate ** Table 2-2
Passive income Final withholding tax (FWT) Table 2-3
Capital gains Capital gains tax (CGT) Table 2.4

GUIDE:

**Unless exempt under the law, incomes not subject to final withholding tax and capital gains
tax are classified as ordinary income and are subject to graduated tax rates Interest income from
bank deposit abroad, for instance, is not included in the list Of income subject to FWT nor CGT as
illustrated in Tables 2-3 and 2-4. Hence, such income is subject to basic tax or graduated tax rate.

GAIN ON SALE OF ASSETS: Capital Gain vs. Ordinary Gain

Property classification of an asset as capital or ordinary is important because of

the special tax rules on gains and losses from sales or exchanges of capital assets
which do not apply to gains and losses from sale or exchanges of ordinary assets.
For income taxation purposes, assets are classified either as ordinary or capital
assets. Under the tax code, the following are ordinary assets:

1. Stock in trade of the taxpayer or other property of a kind, which would

properly be included in the inventory of the taxpayer if on hand at the
close of taxable year.

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 trade or business.

4. Real property used in trade or business of the taxpayer

On the other hand, capital assets include all other property held by the
taxpayer (whether or not connected with his trade or business) not included in the
definition of ordinary assets above.

Gain on sale of ordinary assets are commonly known as ordinary or

regular income. Ordinary gains are subject to the graduated tax rate as provided
for under Section 124(A) of the Tax Code (as amended).
Gain on sale of Capital Assets are classified as capital gains. CAPITAL
GAINS may be:

1. Subject to CAPITAL GAINS TAX if it pertains to sale of:

a. Shares of stock of a domestic corporation sold directly to a buyer

(shares of closely-held or non-listed domestic corporations); and

b. Sale of real properties located in the Philippines.

Capital Gains Tax on sale of shares of a domestic corporation

Capital gains tax on sale of shares of a domestic corporation sold directly

to a buyer, under Section 124(C) of the Tax Code is computed as follows:

Prior to 2018: 5% on 1st P100,000 capital gain There is no CGT if the

10% in excess of P100,000 capital gain transaction resulted to a
capital loss.
Beginning 2018: 15% of capital gain

Under RR 6-2008 as amended by RR 6-2013, the value of the shares of

stock at the time of sale shall be the fair market value. In determining the value of
the shares, the Adjusted Net Asset Method shall be used whereby all assets and
liabilities are adjusted to market values. For purposes of illustrations in this book,
the selling price is assumed to be the market value using the aforementioned
method,

Capital Gains Tax on sale of real properties

Sale of real properties classified as capital assets located in the Philippines
is subject to capital gains tax (CGT) under Section 124(D) of the Tax Code (basic
tax if located abroad). CGT is computed as follows:

CGT = 6% x the higher between Gross Selling Price (GSP) and FMV**

**Refer to the discussion of FMV in Table 2-4.

SALE OF REAL PROPERTY TO THE GOVERNMENT

If a real property classified as capital asset is sold to the government, the

individual taxpayer shall have the option to be taxed at 6% CGT or basic income
tax using the graduated tax rate.

SALE OF PRINCIPAL RESIDENCE

If the real property sold is classified as principal residence, it may be exempt from
CGT provided the requisites for exemption as provided under the Tax Code are
met. Sale of principal residence is discussed in the succeeding pages.

2. Subject To Other Percentage Tax, (OPT). OPT is not an income tax but a
business tax (a topic in Tax 2 subject). Sale of shares of stock of a
corporation listed in the local stock exchange is not subject to income tax
but to OPT as provided under Section 127(A) of the Tax Code. The
 applicable business tax for this type of transaction is known as "stock
transaction tax".

Stock transaction tax (STT) is computed as follows:

Prior to 2018 = ½ of 1% of Gross Selling Price

Beginning 2018 = 6/10 of 1% of Gross Selling Price

Since the tax rate is based on gross selling price, stock transaction tax is computed
regardless of whether the transaction resulted to a gain or loss (Refer to "Transfer
and Business Taxation" book for additional discussions).

3. Subject to Basic Tax

Capital gains not subject to capital gains tax and stock transaction tax are
subject to basic tax or the graduated tax rate under Section 124(A) of the Tax Code
(as amended). Examples of capital gains subject to basic income tax are gains
derived from:

 Sale of shares of foreign corporations

 Sale of real properties located abroad
 Sale of other personal assets other than shares of stock of domestic
corporations such as cars, jewelries, and the like.

Capital gains subject to basic tax are subject to additional tax rules such as
holding period and net capital loss carry-over (Refer to Module 9 for additional
discussions).

ILLUSTRATION 9:
Determine the amount of capital gains tax (CGT) for the following:

CASE A – (SHARES OF STOCK)

1) George sold 2,000 shares of a domestic corporation in the local stock exchange
at P110 per share. The shares were purchased 3 years ago for P100 per share.

Answer: P0. Subject to 6/10 of 1% stock transaction tax, not CGT.

 2) George sold 2,000 shares of a domestic corporation directly to a buyer (Clifford)
ate P180 per share. The shares were acquired six (6) months ago at P105 per
share.

Answer: P10,000 computed as follows:

Selling price (2,000 sh. x P180) P360,000
Cost (2,000 sh. x P105) (210,000)
Capital gain P150,000
CGT rate 15%
CAPITAL GAINS TAX P22,500

CASE B (Real Properties Situated in the Philippines)

The following are the transactions of real properties for the current year.

1) Sale of a parcel of land used in his trading business. Selling price is P3,000,000.
The property was acquired five (5) years ago at P1,500,000.

2) Sale of the taxpayer’s residential lot for P5,000,000. The fair market value of the
property was P6,000,000. The property was acquired three (3) years ago at P
P103,000,000.

Question 1: What is the amount of final income tax for these real estate transactions?

Answer: P360,000 (P6M x 6%)

 Capital gains tax is 6% of gross selling price or fair market value whichever is higher.

Transaction "1" pertains to ordinary asset, hence not subject to capital gains tax. The
difference of P1.5M (P3M-P1.5M) is included in the determination of gross income, which
is subject to basic tax.

Question 2: Assume that the residential lot in transaction "2" was sold at P3,000,000. What
should be the correct amount of capital gains tax on the transaction?

Answer: P360,000 (P6M x 6%)

Capital gains tax is 6% of the higher amount between selling price and fair market
value.

Unlike in capital gains in the case of shares of stock directly sold to a buyer, the
capital gains tax on the sale of real properties classified as capital assets situated
in the Philippines is not dependent on the gain derived from the transaction. Thus,
regardless of gain or loss, the transaction is still subject to 6% capital gains tax.

CASE C (Real Properties Situated Abroad)

Assume a corporation sold a parcel of land used in its operations "abroad". Selling price
is P3,000,000. The property was acquired five (5) years ago at P1,500,000.

Question: What is the amount of final income tax on the transaction described above?
Answer: P0.
 The 6% capital gains tax on real properties sold are applicable only on real
properties "held as capital assets" situated in the Philippines. If the property sold
is located abroad and classified as an ordinary asset, hence, subject to basic tax.
CASE D (Real Properties Sold to the Gov't or to a GOCC)
Assume that the residential lot in transaction "2" was sold at P3,000,000 to the Quezon
City government. How much is the tax due of the seller?
Answer: Either 360,000 CGT (P3M x or Basic tax, at the option of the individual seller.

CASE E (Shares of Stock and Real Property)

Pedro, resident citizen, realized the following gains from sale of assets:
Capital gains on sale of shares of a domestic corporation 110,000
sold directly to a buyer (Sales Price-P1,110,000; Cost P1,000,000)
Gain on sale of shares of a domestic corporation sold in the 25,000
local stock exchange Sales Price-Pl 15,000; Cost P90,000)
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

Question 1: How much is the capital gains tax?

 Answer: P196,500

Sale of shares of a domestic corporation sold directly to a buyer

CGT = P110,000 x 15% P16,500

CGÌ on sale of real property in the Phils. (P3M x 6%) 180,000
Total capital gains tax P196,500

 Sale of shares of Domestic Corporation listed in the local stock

exchange "exempt" from income tax. However, it is subject to 6/10 of 1% stock
transaction tax (a business tax) under Section 127(A) of the Tax Code.

 Gain on sale on real property classified as capital assets are subject to 6%

withholding tax, provided the property is located "within" the Philippines, However,
real properties sold abroad, regardless of classification, are subject

SALE OF PRINCIPAL RESIDENCE

"Principal Residence" is the family home of the individual taxpayer. It refers

to the dwelling house, including the land on which it is situated, wherein an
individual including his family resides as a permanent dwelling, or whenever
absent, wherein the said individual intends to return (RR 14-2000). The Barangay
Chairman should certify it over the place, or the Building Administrator if the
residence is a condominium or the individual taxpayer's address as indicated in his
latest tax return.

The residential address shown in the latest income tax return filed by the
vendor/transferor immediately preceding the date of sale of said real property shall
be treated 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 notwithstanding, in accordance with the
doctrine of admission against interest or the principle of estoppel.
 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 the RDO to approve and issue the certificate Authorizing
Registration (CAR) or Tax Clearance Certificate (TCC) of the principal residence
sold, exchanged or disposed by the aforesaid taxpayer. Said CAR or TCC shall
state that the said sale, exchange or disposition of the 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 Sec. 3(3) of the Regulations.

REQUISITES FOR TAX EXEMPTION

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 utilized in acquiring or constructing a new principal residence
subject to the following conditions:

1. The proceeds is fully utilized in acquiring or constructing a new principal

residence within eighteen (18) calendar months from the date of disposition.

"Fully utilized" shall mean that the taxpayer has actually commenced with
the construction of his new principal residence or has actually entered into
a 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 or construction of his new principal residence. Any expense
paid for by the seller in effecting the sale (i.e. documentary stamp tax,
transfer fees, broker's commission) shall be considered as part of the
amount utilized.

If there is no full utilization of the proceeds of sale or disposition, the portion

of the gain presumed to have been realized from the sale or disposition shall
be subject to capital gains tax as follows:

Gross Selling price or fair market

Taxable = Unutilized Portion x value at the time of sale,
Amount Gross Selling Price whichever is higher.

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 prescribed 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

It is likewise required under RR 2-98 that the amount representing the CGT must
be deposited under an Escrow Agreement between the concerned Revenue
District Officer, the Seller and the Transferee, and the Authorized agent bank (in
cash or manager's check in an interest bearing account with the Authorized Agent
Bank). Release occurs if the proceeds of the sale has in fact been utilized in the
 acquisition or construction of the Seller/Transferor's new principal residence within
18 calendar months from date of the said sale or disposition.

The date of sale or disposition of a property refers to the date of notarization of the
document evidencing the transfer of said property.

ILLUSTRATION 10: Sale of Principal Residence

Pedro, a resident citizen, sold his residential house and lot (principal residence) in the
Philippines with the following additional data:
Selling price P4,000,000
Fair market value 6,000,000
Zonal value 5,000,000
Expenses on the sale 125,000

If applicable, assume that the taxpayer was able to comply all the requirements for
exemption.

Question 1: Assuming Pedro bought a new principal residence for P4,000,000,

how much is the applicable CGT?

 Answer: P0

Question 2: Assuming Pedro bought a new principal residence for P8,000,000,

how much is the applicable CGT?

 Answer: P0

Question 3: Assuming Pedro bought a new principal residence for P2,000,000,

how much is the applicable CGT?

 Answer: P180,000;

CGT = 2/4 x 6M x 6%

FORMAT IN COMPUTING TAXABLE INCOME

A. PURE COMPENSATION INCOME EARNER:

Gross taxable income (net of exclusions; Chapter 3 & and 8)) Pxxx

Tax Due (Graduated tax rate; Table 2-2) Pxxx

Less: Creditable withholding tax on compensation income (Pxxx)
Income Tax Payable Pxxx

Under RA 10963 (TRAIN Law), NO DEDUCTION is allowed for pure compensation income
earners beginning Jan. 1, 2018.

B. PURE BUSINESS INCOME EARNER

(Under TRAIN Law, using graduated tax rate):

Gross sales/receipts Pxxx

Less: Cost of Sales/ Cost of direct services (xxx)
Gross business/professional income Pxxx
Less: Allowable business expenses (xxx)
Taxable income ** Pxxx

Income tax due (graduated rate tax) ** Pxxx

Less: Creditable Withholding Taxes Pxxx
Prior year’s excess credit xxx
Tax payments for the previous quarter(s) xxx
Tax withheld at source xxx
Foreign income tax credit xxx (xxx)
Income Tax Payable Pxxx

C. MIXED INCOME EARNER (Business and compensation income)

(Under TRAIN Law, using graduated tax rate on business income):

Gross compensation income Pxxx

Gross sales/receipts Pxxx
Less: Cost of Sales/ Cost of direct services (xxx)
Gross business/professional income xxx
Less: Allowable business expenses (xxx) xxx
Taxable net income
Pxxx

Income Tax Due (Graduated tax rate)**

Pxxx
Less: Creditable Withholding Taxes
Creditable withholding tax on compensation income Pxxx
Prior year's excess credit xxx
Tax payments for the previous quarter(s) xxx
Tax withheld at source xxx
Foreign income tax credit xxx (xxx)
Income Tax Payable Pxxx

 For Purely S.E.P. and/or Mixed Income Earner.

 **lf qualified, the individual taxpayer may choose to be taxed at a preferential tax rate of
8%.

CREDITABLE vs. FINAL TAX

FINAL WITHHOLDING TAX

Certain Incomes such as those enumerated under section 24(B) of the Tax
Code, as summarized in Table 2-3, are subject to final taxes instead of basic tax
or graduated tax rates.

CREDITABLE WITHHOLDING TAX

Certain regular incomes not subject to final taxes on passive income and
capital gains tax are subject to "creditable" withholding taxes. Creditable
a
withholding tax (CWT) is not an internal revenue tax but method of collecting
income tax "in advance" from the recipient of income through the payor thereof,
which is constituted by law as the withholding agent of government. Taxes withheld
on certain payments are intended to equal or at least approximate the tax due of
the payee on said income computed using the graduated tax rate under Section
24(A) of the Tax Code or as shown in Table 2-1. The recipient of income is still
required to file an income tax return, as prescribed in Sec. 51 and Sec. 52 of the
NIRC, as amended, to report the income and/or pay the difference between the
tax withheld and the tax due on the income. The term "creditable" means the taxes
withheld are deductible from tax due as shown below:

Gross compensation income Pxxx

Gorss business/professional income xxx
Less: Allowable business/professional expenses (xxx)
Income tax due (Graduated tax rate) Pxxx
Less:
CREDITABLE WITHHOLDING TAXES:
CWTx on compensation income Pxxx
CWTx withheld at source xxx
OTHER TAX CREDITs:
Prior year’s excess credit xxx
Tax payments for the previous quarter(s) xxx
Foreign income tax credit xxx
Income tax payable Pxxx

The most common example of creditable withholding tax for an individual

taxpayer is the tax withheld by an employer from the compensation income of an
employee. The employer will remit the amount of tax withheld to the BIR.

On the other hand, the withholding taxes at source are amounts withheld by
the payor (other than employer) such as creditable withholding taxes for the
purchase of goods, services and rentals. The most commonly known CWT rates
are provided under RR 11-2018 as follows:

Purchase of/payment for: CWT %

Professional fees
 Individual payee
o If gross income for the current year ≤ P3M 5%
o If gross income for the current year > P3M 10%

 Non-individual payees
o If gross income for the current year ≤ P720k 10%
o If gross income for the current year > P720k 15%

Rentals 5%
Goods 1%
Services 2%
Income payments to beneficiaries of estates/trusts 15%

Income payments to partners of GPPs

o If gross income for the current year ≤ P720k 10%
o If gross income for the current year > P720k 15%

Certain income payments made by credit card companies 1%

The details of the creditable withholding tax rates above based on RR 11-2018; RR 14-2018
 The duty to withhold and remit income taxes arises only on instances
required by law or regulation. Withholding tax return shall be filed and tax, paid in
withholding agent's legal residence or principal place business, or where the
withholding agent is a corporation, where the principal office is located, except on
sales of real property subject to income tax, where the withholding tax shall be paid
in the RDO where the property is located. Creditable withholding taxes shall be
filed and the applicable paid not later than the last day of the month following the
close of the quarter.
The obligation to withhold is imposed upon the buyer-payor of income
although the burden of tax is really upon the seller-income earner/payee; hence,
unjustifiable refusal of the latter to be subjected to withholding shall be ground for
the mandatory audit of all internal revenue tax liabilities, as well as imposition of
penalties pursuant to Section 275 of the Tax Code.
Every payor required to deduct and withhold taxes shall furnish each payee,
a withholding tax statement, in triplicate, within 20 days from the close of the
quarter. The prescribed form (BIR Form No, 2307 for creditable withholding tax
and BIR Form 2306 for final withholding tax on passive income) shall be used,
showing the monthly income payments made, the quarterly total, and the amount
of taxes withheld. Provided however, that upon request of the payee, the payor
must furnish such statement, simultaneously with the income payment.

ILLUSTRATION 11:

Case A.
A resident citizen employee provided the following data for the taxable year:
Compensation income (gross of deductions 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 35,000

Question: How much is the income tax payable of the employee?

 Answer: P3,000

Solution:
Compensation income (gross of deductions below) P450,000
Less: Income exempt from tax (Refer to Chapter 8)
SSS premiums contributions (6,000)
Philhealth contributions (8,400)
Pag-ibig contributions (2,400)
Union dues (1,200)
Taxable income P432,000

Tax Due:
Tax on 1st P400,000 P30,000
Excess: P32,000 x 25% 8,000
Total tax due 38,000
Less: Tax withheld by the employer (35,000)
Income tax payable P3,000
  SSS/GSIS, Pag-ibig, Philhealth contributions of the employee as well as Union
dues are excluded by law in the computation of taxable income. Exclusions from
gross income are discussed in Chapter 8.
 As a rule, taxable income shall refer to incomes subject to basic tax.
 It is usual that if the taxpayer is a purely compensation income earner, the income
tax payable is already zero.

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 taxpayer's 150,000
employer on his compensation income
Income tax withheld by "certain" payors on business 100,000
income in the Philippines
Income tax payments to the BIR for the first three (3) 125,000
quarters of the year

Required: Determine income tax payable of the taxpayer.

 Answer: P80,000 computed as follows:

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)
Taxable income P2,550,000

Tax due:
Tax on 1st P2,000,000 P490,000
On excess over P2M (P550k832%) 176,000 P666,000
Less: CWT
Tax withheld by employer 150,000
Taxes by certain payors 100,000
Income tax paid 125,000 (375,000)
Income tax payable P291,000

QUARTERLY TAX RETURNS

Income tax returns for income derived from business and/or practice of
profession are required to be filed on a quarterly basis (regardless of the results of
operations) as follows:
1st Quarter May 15
2nd Quarter Aug. 15 (45 days after end of Quarter)
3rd Quarter Nov. 15 (45 days after end of Quarter)
Final adjusted/annual return April 15 of the succeeding year
FORMULA:

Q1 Q2 Q3 Q4
Gross income (cumulative amounts) Pxxx Pxxx Pxxx Pxxx
Business expenses (cumulative (xxx) (xxx) (xxx) (xxx)
amounts)
Pxxx Pxxx Pxxx Pxxx
Taxable net income

Basic Income Tax Due Pxxx Pxxx Pxxx Pxxx

Less: Creditable withholding taxes:
Prior year's excess credit (xxx) (xxx) (xxx) (xxx)
Quarterly withholding taxes (xxx) (xxx) (xxx) (xxx)
Quarterly tax payments - (xxx) (xxx) (xxx)
Foreign tax credit (Chapter 12) (xxx) (xxx) (xxx) (xxx)
Income Tax payable Pxxx Pxxx Pxxx Pxxx

ILLUSTRATION 12:
The following cumulative balances on income and expenses in 2020 of Juan Dela Cruz
were given to you:
Q1 Q2 Q3 Q4/Annual
Gross sales P1,200,000 P2,100,000 P3,000,000 P3,700,000
Cost of sales 700,000 1,200,000 1,800,000 2,200,000
Business expenses 200,000 325,000 550,000 700,000
Income tax paid on:
Interest income 1,560 3,040 4,520 5,9600
Sale of land 24,000 24,000 24,000 24,000

Dividend received from domestic corp. 10,000 10,000 10,000 10,000

Interest income from:
BPI 2,000 4,000 6,000 8,000
UCPB 800 1,200 1,600 1,800
Metrobank 5,000 10,000 15,000 20,000
Capital gain on sale of land 80,000 80,000 80,000 80,000
Selling Price: P400,000
Cost: P320,000

Required:
Using above information, compute the following for 2020:
1. Income tax payable, first quarter
2. Income tax payable, second quarter
3. Income tax payable, third quarter
4. Income tax payable, fourth quarter
5. Final tax on passive income
6. Capital gains tax

Answers:
(1)P10,000; (2)P63,750; (3)P18,750; (4)P25,000; (5)P7,960;
(6)CGT(Land)=P24,000
Solution: (#1-4; Quarterly income tax due):
1st Q 2nd Q 3rd Q Q4/Year

Gross sales P1,200,000 P2,100,000 P3,000,000 P3,700,000

Cost of sales (700,000) (1,200,000) (1,800,000) (2,200,000)
Business expenses (200,000) (325,000) (550,000) (700,000)
Taxable income P300,000 P575,000 P650,000 P800,000

Income tax due P10,000 P73,750 P92,500 P117,500

Less: Tax paid
Q1 - (10,000) (10,000) (10,000)
Q2 - (63,750) (63,750)
Q3 - (18,750)
Income tax payable P10,000 P63,750 P18,750 P25,000

Solution 5 Final taxes on passive income:

(Amounts are cumulative) Amount % Tax
Divined received from Domestic 20,000 10 P2,000
Corp.
Interest income from
BPI 8,000 20 1,600
UCPB 1,800 20 360
Metrobank 20,000 20 4,000
Total final tax on passive income P7,960

INCOME TAX DUE OF MARRIED TAXPAYERS

Under RA 10963, husband and wife, shall compute separately their
individual income based on their respective total taxable income: Provided that if
any income cannot be definitely attributed to or identified as income exclusively
earned or realized by either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining their respective taxable
income.

ILLUSTRATION 13:
Spouses Kristof and Ana provided the following data for 2020:
Kristof Ana Kristof & Ana
Gross income-practice of profession P800,000 - -
Gross compensation income - P400,000 -
Dividend income:
from domestic corporation 5,000 5,000 -
from resident corporation - - 12,000
Interest on notes receivable - - 4,000
Interest on Philippine bank deposit 2,000 3,000 6,000
Royalty income - - 2,000
Miscellaneous income - 10,000 60,000
Capital gain on sale of shares of ABC -
Corp (domestic corp.) sold directly to a 80,000 -
buyer
Capital loss on sale of shares of DEF Co -
(20,000) -
(domestic corp.) sold directly to a buyer
 capital gain on sale of land in Q.C; FMV – -
- 2,000,000
P12M, SP – P10M, Cost – P8M
Expenses, business/profession 425,000 - 20,000

Determine the following:

1. Total capital gain taxes paid by the spouses in 2020
2. Total final taxes paid on passive income by the spouses in 2020
3. Taxable income of Kristof in 2020
4. Taxable income of Ana in 2020

Answers: (1)P732,000; (2)P3,600; (3)P403,000; (4)438,000

Capital Gain - ABC co. (P80,000 x 15%) P12,000

Capital gain-sale of land (P12M x 6%) 720,000
Total capital gains tax P732,000

Dividend income-domestic corp. (P10,000 x 10%) P1,000

Interest on bank deposit (P11,000 x 20%) 2,200
Royalty income (P2,000 x 20%) 400
Total final tax on passive income P3,600

Gross income from practice of profession P800,000

Dividend income from resident corp. (12,000/2) 6,000
Interest on notes receivable (4,000/2) 2,000
Miscellaneous income (P60,000/2) 30,000
Expenses- practice of profession (425,000)
Expenses- miscellaneous income (P20,000/2) (10,000)
Taxable income – Kristof P403,000

Taxable income of Ana:

Gross income P400,000
Dividend income from resident corp. (12,000/2) 6,000
Interest on notes receivable (4,000/2) 2,000
Miscellaneous income (P60,000/2) + P10,000 40,000
Expenses- miscellaneous income (P20,000/2) (10,000)
Taxable income - Ana P438,000

MINIMUM WAGE EARNERS (MWE)

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 or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector
where he/she is assigned.

The Regional Tripartite Wage and Productivity Board as defined by the Bureau of
Labor and Employment Statistics (BLES) of the Department of Labor and
Employment (DOLE) fix the rate. Regional Tripartite Wage and Productivity Boards
(RTWPB) of each region determine the wage rates in the different regions based
on established criteria and shall be the basis of exemption from income tax.

Minimum Wage Earners are exempt from income tax on:

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

MWE with additional "compensation" income in excess of P90,000

Section 32(B)(7)(E) of the Tax Code in relation to PD 851 as amended by

RAI 0963 (TRAIN Law) provides that 13th month pay and other benefits received
by officials and employees of public and private entities are exempt from income
tax and creditable withholding tax on compensation, provided, however, that
beginning January 1 , 2018, the total exclusion shall not exceed P90,000.
Otherwise, the excess would form part of an individual's gross income and would
be subject to income tax and applicable creditable withholding taxes (refer also to
discussions in Chapter 3 in relation to 13th month pay and other benefits).

An employee who receives/earns additional "compensation" such as

commissions, honoraria, fringe benefits, benefits in excess of the allowable
P90,000 (as amended), taxable allowances and other taxable income other than
the statutory minimum wage, overtime pay, holiday pay, night shift differential,
hazard pay shall still enjoy the privilege of being a minimum wage earner (Supreme
Court ruling - Soriano vs. Secretary of Finance with GR No. 184450 dated January
24, 2017). Under this case, the SC reiterated that the intent of the income tax
exemption of MWEs is to free the low-income earner from the burden of tax. RSA.
No. 9504. In other words, the law exempts from income taxation the most basic
compensation an employee receives - the amount afforded to the lowest paid
employees by the mandate of law. In a way, the legislature grants to these lowest
paid employees' additional income by no longer demanding from them a
contribution for the operations of government. This is the essence of RA 9504 as
a social legislation. The government, by way of the tax exemption affords
increased purchasing power to this sector of the working class.

The Supreme Court nullified the provision of Revenue Regulations No. 10-
2008 [(i) Sections 1 and 3], insofar as they disqualify MWEs who earn purely
compensation income from the privilege Of the MWE exemption in case they
receive bonuses and other compensati0n related benefits exceeding the statutory
ceiling of P90,000 (as amended).

MWE with additional "business" income

Minimum wage earners receiving other income such as income from the
conduct of trade, business or practice of profession, except income subject to final
tax; in addition to compensation income are not exempted from income tax on their
entire income earned during the taxable year. This rule, notwithstanding, statutory
minimum wage, overtime pay, holiday pay, night shift differential, and hazard pay
shall still be exempt from income tax and consequently to withholding tax.
HAZARD PAY GIVEN TO MINIMUM WAGE EARNERS

Given to those on working on hazardous workplaces where primary duty

performed under circumstances in which an accident could result in serious injury
or death, such as a duty performed on a high structure where protective facilities
are not used, or on an open structure where adverse conditions such as darkness,
lightning, fumes/gases, steady rain, or high wind velocity exist, work were primarily
health-related that may result to radiation/contamination
[communicable/infectious. However, exposures to hazard which affects the entire
population in a locality as air, land, and water borne and noise hazards are
compensable under these Regulations. Under RR 10-2008, the following are
considered "hazardous workplaces:"

1. Where the nature of work exposes the workers to dangerous environmental

elements, contaminants or work conditions including ionizing radiation,
chemicals, fire, flammable substances, noxious components and the like;

2. Where the workers are engaged in construction work, logging, firefighting,

mining, quarrying, blasting, stevedoring, dock work, deep-sea fishing and
mechanized farming;

3. Where the workers are engaged in the manufacture or handling Of

explosives and other pyrotechnic products;

4. Where the workers use or are exposed to power driven or explosive powder
actuated tools;

5. Where the workers are exposed to biologic agents such as bacteria, fungi,
viruses, protozoa, nematodes, and other parasites.

Senior Citizens (SCs) and Persons with Disabilities (PWDs)

Generally, Senior Citizens and PWDs are subject to income tax in the same
manner as an ordinary individual taxpayer. Hence, qualified Senior Citizens and
PWDs deriving returnable income during the taxable year, whether from
compensation or otherwise, are required to file their income tax returns and pay
the tax as they file the return. However, if the returnable income of a Senior
Citizen/PWD is in the nature of compensation income but he qualifies as a
minimum wage earner under RA No. 9504, he shall be exempt from income tax on
the said compensation income subject to the rules provided under RR10-2008
applicable to minimum wage earners.

Likewise, if the aggregate amount of gross income earned by the Senior

Citizen/PWD during the taxable year does not exceed P250,000 he shall be
exempt from income tax and shall not be required to file income ta x return.
Consequently, a senior citizen/PWD can still be liable for other taxes such as:

1. The 20% final withholding tax on interest income from any currency bank
deposit

2. The 15% final withholding tax on interest income from a depository bank
under the expanded foreign currency deposit system (Sec. 24 (B), Tax
Code

3. Pre-termination of long-term deposit or investment under Section 24(B)(1)

of the Tax code

Four years to less than five years 5%

Three years to less than four years 12%
Less than three years 20%

4. The 10% final withholding tax:

 On cash and/or property dividends actually or constructively received

from a domestic corporation or from a joint stock company,
insurance or mutual fund company and a regional operating
headquarters of a multinational company; or

 On the share of an individual in the distributable net income after tax

of a partnership (except a general professional
partnership) of which he is a partner; or

 On the 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 of which he is a member or a co-venturer (Sec.
24(B)(2), Tax Code).

5. The Capital gains tax from sales of shares of stock not traded in the stock
exchange (Sec. 24(C), Tax Code); and

6. The 6% final withholding tax on presumed capital gains from sale of real
property, classified as capital asset, except capital gains presumed to have
been realized from the sale or disposition of principal residence (Sec. 24(D),
Tax Code).

7. OTHER TAXES. A Senior Citizen/PWD shall also be subject to the

following internal revenue taxes, among others, imposed under the Tax
Code:

 Value Added Tax or Other Percentage Taxes. If he is self-employed

or engaged in business or practice of profession, and his gross
 annual sales and/or receipts exceeds the revised vat threshold of
P3,000,000 or such amount to which this may be adjusted pursuant
to Sec. 109(1 of the Tax Code, he shall be subject to VAT. Otherwise,
he shall be subject to the 3% percentage tax (VAT and Other
Percentage Taxes are discussed in volume2—Transfer and
Business Taxes).

 Donor's Tax on all donations made by a Senior Citizen/PWD during

any calendar year, unless exempt under a specific provision of law
(Donor's Tax is discussed in volume2—Transfer and Business
Taxes).

 Estate Tax. In the event of death, the estate of the Senior

Citizen/PWD may also be subject to the estate tax following the rules
enunciated under Title Ill of the Tax Code and its implementing
Regulations (Estate Tax is discussed in volume2—Transfer and
Business Taxes).

 Excise Tax on certain goods (discussed in volume2—Transfer and

Business Taxes).

 Documentary stamp tax (discussed in volume2—Transfer and

Business Taxes).

Benefits for Senior Citizens and/or PWDs

Senior citizens and/or PWDs, as the case may be, under under the law are
entitled to the following benefits

 20% discount and exemption from VAT on their purchase of specified goods
and services (d more detailed discussed is presented in volume2—Transfer
and Business Taxes);

 5% discount on basic and prime commodities

 P500 monthly social pension, for indigent senior citizens;

 Death benefit assistance;

 5% discount on utilities; and

 Income tax exemption for minimum wage earners or for senior

citizens/PWDs whose annual taxable income is not more than P250,OOO

FILING OF INCOME TAX RETURNS (ITR)

 BASIC TAX
 FOR PURELY COMPENSATION INCOME EARNERS:
o Once a year only (unless qualified for substituted filing)
o On or before April 15 of the following year.

 FOR BUSINESS INCOME EARNERS including income from

practice of profession:
 o The individual taxpayer is required to file a quarterly tax
return on or before the following dates (regardless of the
results of operations):
1st Quarter May 15
nd
2 Quarter Aug. 15 (45 days after end of
Quarter)
3rd Quarter Nov. 15 (45 days after end of
Quarter)
Final adjusted/annual return April 15 of the succeeding year

 FINAL WITHHOLDING TAX ON PASSIVE INCOME

PRIOR to 2018

January to November 10th day of the month following the month

the withholding was made

December January 15 of the succeeding year

Beginning 2018

For Final and Creditable Withholding taxes, the return shall be filed and paid
not later than the last day of the month following the close of the taxable
quarter during which the withholding was made. The power of the
Secretary of Finance to require withholding agents to pay or deposit taxes
deducted or withheld at more frequent intervals is repealed under
RA10963.

 CAPITAL GAINS TAX

a) Shares of stock

 Ordinary Return — within 30 days after each transaction

 Final Consolidated Return - on or before April 15 of the following year

b) Real Property — within 30 days following each sale or other disposition

Manner of Filing

Filing of ITR may be made through:

a) Manual Filing
b) Electronic Filing and Payment System (EFPS)
c) eBlR Forms

The aforementioned manners of filing income tax returns are discussed

extensively in Chapter 5 (Income Tax for Corporations).

Payment

Generally, the income tax payable shall be paid at the time the return is filed
(also known as "Pay as you file system"). The deadline for filing is discussed in the
preceding page. However, RÅ 10963 (TRAIN Law) provides, that, when the tax
due is in excess of P2,000, the individual taxpayer may elect to pay the tax in two
equal installments as follows:

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

2nd installment : on or before October 15 following the close of the calendar
year.

ILLUSTRATION 13:
Juan Dela Cruz, a practicing CPA, with four dependent children, provided the following
data for 2018 taxable year; Gross receipts, P100,000,000, direct cost and expenses,
P5,000,000, creditable withholding taxes, P1,250,000. His income tax payable is
computed as follows:
Gross receipts P10,000,000
Direct cost and expenses (5,000,000)
Taxable net income P5,000,000

Income Tax:
1st P2M P490,000
In excess of P2M @ 32% (P3M x 2%) 960,000
Total income Tax Due P1,450,000
Less: Creditable withholding taxes (1,250,000)
Income tax payable P200,000

NOTE:
 Juan Dela Cruz is required to file quarterly and annual income tax returns
 The creditable withholding taxes is deductible from income the tax due
 He is allowed to pay the income tax payable in two (2) equal annual
installments.
 In addition to income tax, as a practicing professional, he is also required
to pay business tax.

Place of Filing Income Tax Return

The Income tax return shall be filed and paid with any of the following;
(1)authorized agent banks, (2)Revenue District Officer, (3)Collection agent;
(4)Duly authorized city or municipal Treasurer in which the taxpayer has his legal
residence or principal place of business in the Philippines or if there be no legal
residence or place of business in the Philippines, with the Office of the
Commissioner of Internal Revenue.

For "With Payment" Returns

File the return in with the Authorized Agent Bank (AAB) of the place where
the taxpayer registered or required to be registered. In places where there are no
AABs, the return shall be filed directly with the Revenue Collection Officer or duly
Authorized Treasurer of the city or municipality in which such person has his legal
residence or principal place of business in the Philippines, or if there is none, filing
of the return will be at the Office of the Commissioner.

For "No Payment" Returns (refundable, break-even, exempt and no operation)

 File the return with the concerned Revenue District Office (RDO) where the
taxpayer is registered. However, "no payment" returns filed late shall be accepted
by the RDO but shall be filed with an AAB of Collection Officer/Deputized Municipal
Treasurer (in places where there are no AABs, for payment of necessary penalties.

Persons Required to file Income Tax Return

1) Individuals engaged in business and/or practice of profession, regardless

of the results of operations.

2) Individuals deriving compensation from two or more employers concurrently

or successively at any time during the taxable year.

3) Employees deriving compensation income, regardless of the amount,

whether from a single or several employers during the calendar year, 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. 4) Individuals
deriving other non-business, non-profession-related income in addition to
compensation income not otherwise subject to final tax.

4) Individuals receiving purely compensation income from a single employer,

although the income tax of which has been correctly withheld, but whose
spouse is required to file income tax return.

5) Non-resident alien engaged in trade or business in the Philippines deriving

purely compensation income, or compensation income and other non-
business, non-profession-related income.

Persons not Required to file Income Tax Return (RR 8-2018)

1) An individual earning purely compensation income whose taxable income

does not exceed P250,000.

2) An individual whose income tax has been correctly withheld by his

employer, provided that such individual has only one employer for the
taxable year — the Certificate of Withholding filed by the respective
employers, duly stamped "Received" by the Bureau, shall be tantamount to
the substituted filing of income tax returns by said employees.

3) An individual whose sole income has been subjected to final withholding

tax.

4) Minimum wage earners

CERTIFICATE OF WITHHOLDING BY THE EMPLOYER (BIR FORM 2316)

Under Section 2.83 of RR2-98, as amended, every employer is required to

furnish its employees (including minimum wage earners) Form 2316 on or before
January 31 of the succeeding calendar year, or if employment is terminated before
the close of such calendar year, on the day on which last payment of compensation
is made. Failure to furnish BIR Form 2316 shall be grounds for the mandatory audit
of payor's income tax liabilities (including withholding tax) upon verified complaint
of the payee.

In addition to the requirement to furnish BIR Form 2316 to employees, the

BIR now requires that all employers submit the duplicate copy of BIR Form 2316
to the BIR not later than February 28 following the close of the calendar year.
Failure to submit/file BIR Form 2316 on or before February 28 following the close
of the calendar year will merit a penalty of P1,000 for each failure, or a maximum
amount of P25,000 for all such failures during a calendar year. In case the
employer fails to comply with the filing or submission of BIR Form 2316 for two
consecutive years, the employer shall be liable to a fine in the amount of P10,000
and suffer imprisonment of not less than one year but not more than 10 years upon
conviction, in accordance with Section 255 of the Tax Code. This is in addition to
other penalties provided by law. In settlement, a compromise fee of P1,000 for
each BIR Form 2316 not filed without any maximum threshold shall be collected
by the BIR. (Revenue Regulations No. 11-2013, June 6, 2013).

Substituted filing of income tax returns (ITR)

Under RA 9504 and RR 10-2008, individual taxpayers may no longer file

income tax return on or before April 15 of the following taxable year, provided the
taxpayer is/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 the taxable year.
4. If married, the employee's spouse also complies with all three
aforementioned conditions, or otherwise receives no income.

PREPARATION OF INCOME TAX RETURN

Juan Dela Cruz is a MIXED INCOME EARNER. He is a self-employed resident

citizen and currently the Finance manager of Omega Corporation. The following
data were provided for 2020 taxable year:

Compensation income P1,800,000

Sales 2,800,000
Cost of sales 1,125,000
Business Expenses 650,000
Interest income from peso bank deposit 80,000
Interest income from bank deposit under FCDS 120,000
Gain on sale of land in the Philippines held as capital asset 500,000
with cost of P1,500,000 when the zonal value is P1,200,000
Gain on sale of land in the Philippines held as capital asset 500,000
with cost of P1,500,000 when the zonal value is P1,200,000
Creditable withholding tax on compensation income 448,000
13th month pay and other benefits 150,000
Creditable withholding tax on sale of goods 28,000
1. How much is his total income tax expense assuming he opted to be taxed
at 8%?

 Answer: P826,000

 If the self-employed or practitioner is a mixed income earner, the 8% income tax

rate is based on Gross Slaes and/or receipts and other non-operating income
without deducting P250,000.
 The compensation income is not subject to 8% tax rate.

2. How much is the income tax payable of Juan for the year?
Answer: P196,000
 End of Module 2
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