Tax 301 – Income Tax

Prepared by: Mark Paul I. Ramos

MODULE 3
INDIVIDUAL TAXPAYERS

INTRODUCTION
This module introduces the relevant laws governing individual income taxation. Topics
include classification of individual taxpayers under Tax Code of the Philippines, applicable
taxes and tax rates, graduated rates under TRAIN Law 2018-2022, and 2023 onwards, final
withholding tax, capital gains, requisites of tax exemption, format in computing taxable income,
benefits of senior citizens and person with disability, minimum wage earner (MWE), filing of
income tax returns, manner and place of filing income tax return, persons required to file
income tax returns, persons not required to file income tax returns and substituted filing of
income tax returns. This module will also cover amendments in the National Internal Revenue
Code based on the Ease of Paying Taxes Act.

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

Importance of classification
They differ as to:
1. Situs of income
2. Manner of computing tax
3. Treatment of certain passive incomes
4. Allowable deductions
5. References in the Tax Code

Classification of Taxpayers for purposes of Responsive Tax Administration under

Section 21(b) of the Tax Code as amended by RA 11976 of the Ease of Paying Taxes
Act (EOPTA)
1. Micro
2. Small
3. Medium
4. Large

CITIZENS OF THE PHILIPPINES

Under Sect 1, Article IV of the Philippine Constitution, the following are citizens of the
Philippines:
1. Those who are citizens of the Philippines at the time of the adoption of the 1987
Philippine Constitution
2. Those born with father and/or mother as Filipino citizens
3. Those born before Jan. 17,1973 of Filipino mother who elects Philippine
citizenship upon reaching the age of maturity
4. Those who acquired Philippine citizenship after birth (naturalized) in
accordance with Philippine Laws

NON-RESIDENT CITIZEN OF THE PHILIPPINES

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

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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:

a. As an immigrant
b. For employment on a permanent basis
c. For work and derives income that requires him to be physically abroad
most of the time during the taxable year

3. A citizen of the Philippines who shall have stayed outside the Philippines for
one hundred eighty-three days (183) or more by the end of the year.
a. A non-resident citizen who arrives in the Philippines at any time during
the taxable year to reside permanently in the Philippines shall be
considered a non-resident citizen for the taxable year in which he
arrives in the Philippines with respect to income derived from sources
abroad until the date of his arrival in the Philippines.

ILLUSTRATION
Alice left the Philippines on July 1, 2024, to go abroad and work there
for two years. The following data were provided for 2024 taxable year (assume
40% of gross income and business expenses presented below were derived
from abroad:

Gross Income Business

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

Question 1: Her taxable income is

Question 2: Assuming she arrived from abroad on July 1, 2024, to

permanently resettle in the Philippines, his taxable income for 2024 is:

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

Revenue Regulation 1-2011 defines OCWs as Filipino citizens employed in foreign
countries, commonly referred to as OFWs, who are physically present in a foreign country as
a consequence of their employment 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

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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, OCWs/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 as
resident aliens. Whether an alien
is a transient or
not is determined
An alien who lives in the Philippines with no definite intention as to by his intentions
his stay is also a resident alien. Likewise, an alien who comes to the with regard to the
Philippines for the purpose that requires extended stay for its length and nature
accomplishment, so he makes his home temporarily in the Philippines, is a of his stay.

resident, regardless of his intention to return to his residence abroad.

Non-resident alien
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 (NRAET). 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 stays 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 (NRA-NETB) 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.

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ILLUSTRATION
Determine the correct classification of the taxpayer from the independent cases
provided below:

Case 1
Apollo is a natural born Filipino citizen. His family migrated to the U.S.
fifteen years ago. For personal reasons, he decided to return and reside
permanently in the Philippines on March 1, 2024.
➢ Answer: From Jan.-Feb. 2024: Apollo is classified as NRC
From March 1, 2024 onwards: Apollo is classified as RC

Case 2
Joe is an American information technology expert. He was signed by KOJC
Telecom (a local telecommunication company) from January to March 2024 to
improve its internet services. Due to the anticipated entry of competitors from other
countries, KOJC decided to extend indefinitely the services of Joe.
➢ Answer: He is a resident alien.
An alien who comes to the Philippines for the purpose
that requires extended stay for its accomplishment, so he makes
his home temporarily in the Philippines, is a resident, regardless
of his intention to return to his residence abroad.

Case 3
Marco Leta, head coach of Orlando Magic 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: Marco Leta is classified as NRA-NETB.

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

Case 5
Guo “Kaibigan” Hua Ping, a Chinese cue artist and former world billiard
champion is a resident of China. He won the world 9-ball championships in 2019
in the Philippines. He is also the owner of one of the POGOs in Tarlac since then.
➢ Answer: NRA-ETB
He is engaged in actual trade and business in the Philippines
but is non-resident.

APPLICABLE TAXES AND TAX RATES

The applicable taxes for individuals depend on several factors such as but not limited
to:
1. Classification of taxpayer
2. Source of income
3. Type of income

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

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(NRA-NETB) are taxable based on the gross income while others are taxable based on their
net income.

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

Taxpayer Tax Base Source of taxable

Income
RC Net Income Within and without
NRC, RA, NRA-ETB Net Income Within
NRA-NETB Gross Income Within

TYPES OF INCOME (APPLICABLE TAX)

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

2. Passive income (FINAL WITHHOLDING TAX) - subject to final withholding

taxes are certain passive incomes from sources within the Philippines such as:
1. Interest income
2. Dividend Income
3. Royalties
4. Prizes
5. Other winnings

3. Capital gains subject to gains tax (CAPITAL GAINS TAX)

a. Capital gains from sale of shares of stocks of a domestic corporation
b. Capital gains from sale of real property in the Philippines

Type of Income Applicable tax

Regular income Graduated rate
Passive income (Phils.) Final withholding tax
Capital gains subject to CGT Capital gains tax

ILLUSTRATION (Cases A-G)

Use the following data for Cases A-E
An individual taxpayer provided the following information for 2024:
Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000
Determine the taxable income assuming:

CASE A: The taxpayer is a resident citizen

Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000

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Gross business income, Singapore 1,000,000

Business expenses, Philippines (3,000,000)
Business expenses, Canada (1,000,000)
Business expenses, Singapore (500,000)
Taxable income ₱3,500,000

CASE B: The taxpayer is a non-resident citizen

Gross business income, Philippines ₱5,000,000
Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000

CASE C: The taxpayer is an alien

Gross business income, Philippines ₱5,000,000
Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000

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

Gross business income, Philippines ₱5,000,000
Business expenses, Philippines (3,000,000)
Taxable income ₱2,000,000

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

Gross business income, Philippines ₱5,000,000
Taxable income ₱5,000,000
**NRA-NETB are taxable on their gross income**

CASE F:
The income and expenses of a Filipino citizen for 2024 were provided as follows:
January to June Philippines Canada
Gross Income ₱5,000,000 ₱2,000,000
Allowable Deductions 2,000,000 1,000,000
July to December
Gross Income 2,000,000 3,000,000
Allowable Deductions 1,000,000 1,200,000

Assume that the taxpayer is a resident who left the country in July of 2024
reside permanently in Canada, how much is his taxable income?

Gross income, Philippines (Jan-Dec) ₱7,000,000

Gross income, Canada (Jan-June) 2,000,000
Allowable deductions, Philippines (Jan-Dec) (3,000,000)
Allowable deductions, Canada (Jan-June) (1,000,000)
Taxable income ₱5,000,000

CASE G:
Assume the same data in Case F except that the taxpayer is a non-resident
who returned and resided permanently in the country in July of 2024. His taxable
income before personal exemptions is
Gross income, Philippines (Jan-Dec) ₱7,000,000
Gross income, Canada (July-Dec) 3,000,000

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Allowable deductions, Philippines (Jan-Dec) (3,000,000)

Allowable deductions, Canada (July-Dec) (1,200,000)
Taxable income ₱5,800,000

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

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

INCOME TAX TABLE FOR INDIVIDUAL TAXPAYERS

ILLUSTRATION – Computation of Basic Income Tax Due

PURELY COMPENSATION INCOME EARNER

CASE A: Determine the income tax due assuming the taxable compensation income for 2021
is ₱240,000.
Answer: Zero, Taxable income do not exceed P250,000

CASE B: Determine the income tax due assuming the taxable compensation income for 2021
is ₱300,000.
Answer:

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CASE C: Determine the income tax due assuming the net taxable compensation income for
2021 is ₱1,850,000.
Answer:

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

SELF EMPLOYED AND/OR PROFESSIONALS (SEP)

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

Self-Employed Individual - is defined as a sole proprietor or an independent

contractor who reports income earned from self-employment. He or she controls who
he/she works for. It includes professionals whose income is derived purely from the
practice of profession and not under an “employer-employee relationship”

Professional individual - is a “person formally certified by a professional body

belonging to a specific profession by virtue of having completed a required course of
studies and/or practice, whose competence can usually be measured against an
established set of standards. It also refers to a person engaged in some art or sport of
money.

TAX RULES OF SELF EMPLOYED AND/OR PROFESSIONALS (SEP)

Purely SEP with gross sales/receipts
• If income is ₱3M and Below
− Regular Income Tax (graduated tax table) OR 8% tax on Gross
Sales/ Receipts and other operating income in excess of
250,000 in LIEU of the graduated tax rate and SECTION 116
• Above ₱3M - regular income tax (graduated tax table)

Mixed Income Earner

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

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− If income is ₱3M and below

o Regular income tax OR 8% tax on Gross sales and other
operating income in LIEU of the graduated tax rate and
Sec. 116
− Above ₱3M – regular income tax (graduated tax table)

Requisites to Avail the 8% Preferential Rate

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 under Section 116 of the Tax
Code, as amended; and
5. The SEP signifies his/her intention to elect the 8% income tax.

BASIS FOR THE P3M VALUE ADDED TAX (VAT) THRESHOLD:

• Prior to the effectivity of RA 11976 or the Ease of Paying Taxes Act (EOPTA):
o If the taxpayer is a seller of goods: Gross Sales
o If the taxpayer is a seller of service/s: Gross Receipts

• After the effectivity of RA 11976 or the Ease of Paying Taxes Act (EOPTA) and its
related implementing rules and regulations:
o Seller of goods or services (same basis): Gross Sales

GROSS SALES under the EOPTA refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the
amount charged for materials supplied with the services during the taxable period for the
services performed for another person, which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter, or exchange of services that has already been
rendered by the seller and the use or lease of properties that have already been supplied by
the seller, excluding VAT and those amounts earmarked for payment to third (3rd) party or
received as reimbursement for payment on behalf of another which do not redound to the
benefit of the seller as provided under relevant laws, rules or regulations: Provided, that for
long-term contracts for a period of one (1) year or more, the invoice shall be issued on the
month in which the service, or use or lease of properties is rendered or supplied."

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Election of 8% Preferential Tax is irrevocable during the year

RR 8-2018 provides that unless the taxpayer signifies in his/her 1st Quarter return of
the taxable year the intention to elect the 8% income tax, s/he 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.

SEP's GROSS SALES and/or 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 and/or receipts exceeded the VAT Threshold of P3,000,000.00, s/he 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 taxes), 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 still be imposed from the beginning of the
year until taxpayer is liable to vat. The Percentage tax pursuant to Section 116
of the Tax Code, as amended, shall be imposed on the first P3,000,000.00.
The excess of the threshold shall be subject to VAT. Thus, for this purpose, vat
shall be imposed prospectively.
• Percentage tax due on the P3,000,000.00 shall be collected without penalty, if
timely paid on the due date immediately following the month the threshold was
breached.

ILLUSTRATION
CASE A: PURELY SEP whose gross sales/receipts and other non-operating income does not
exceed the VAT threshold of ₱3,000,000.

1. Determine the income tax due assuming the gross sales/receipts and other non-
operating income for 2021 is ₱240,000.
Answer: Zero, Taxable income do not exceed P250,000

2. Using the data below, calculate the income tax due for 2021:

Answer:

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3. Using the data below, calculate the income tax due for 2024:

Answer:
Taxable Income 550,000.00
Tax bracket threshold (400,000.00)
Net 150,000.00
Multiply by Tax Rate based on tax bracket 20.00%
basic 30,000.00
additional as per bracket 22,500.00
Income Tax 52,500.00

CASE B: PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-
operating income exceeds the VAT threshold of ₱3,000,000 during the year.

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

1. How much is Harry’s annual income tax due?

Answer:
Taxable Income 2,060,000.00
Tax bracket threshold (2,000,000.00)
Net 60,000.00
Multiply by Tax Rate based on tax bracket 30.00%
basic 18,000.00
additional as per bracket 402,500.00
Income Tax 420,500.00

2. How much is Harry’s annual income tax payable?

Taxable Income 2,060,000.00
Tax bracket threshold (2,000,000.00)
Net 60,000.00
Multiply by Tax Rate based on tax bracket 30.00%
basic 18,000.00
additional as per bracket 402,500.00
Income Tax 420,500.00

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Answer:
Annual Income Tax Due 420,500.00
Less: Tax Payments
1st quarter 20,000.00
2nd quarter 40,000.00
3rd quarter 160,000.00
Annual Income Tax Payable 200,500.00

CASE C: Mixed Earner whose gross sales/ receipts and other non-operating income does not
exceed the VAT threshold of ₱3,000,000

Assume the following data for 2023:

1. Determine the correct income tax due:

Answer:
Taxable Income 1,450,000.00
Tax bracket threshold (800,000.00)
Net 650,000.00
Multiply by Tax Rate based on tax bracket 25.00%
basic 162,500.00
additional as per bracket 102,500.00
Income Tax 265,000.00

2. Assume the SEP opted to avail the 8% tax under the TRAIN LAW, determine the tax
due.
Answer:
On his compensation income:
Taxable Income 900,000.00
Tax bracket threshold (800,000.00)
Net 100,000.00
Multiply by Tax Rate based on tax bracket 25.00%
basic 25,000.00
additional as per bracket 102,500.00
Income Tax on compensation 127,500.00

On his business income:

Taxable Income (Gross Sales) 2,800,000.00
Multiply by Tax Rate 8.00%
Income Tax on business 224,000.00

Total Income Tax Due 351,500.00

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

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1. Determine the income tax due assuming the following data for 2023:

Answer:
Taxable Income 2,400,000.00
Tax bracket threshold (2,000,000.00)
Net 400,000.00
Multiply by Tax Rate based on tax bracket 30.00%
basic 120,000.00
additional as per bracket 402,500.00
Income Tax 522,500.00

PASSIVE INCOME
Passive income is the income earned from allowing others to use one’s right, or game
of chance or investment, in which the taxpayers merely wait for the income to come in. The
law subjects passive income to final tax. Once subjected to a final tax, it is no longer included
in the taxable income subject to normal (tabular) tax. Deductions and exemptions do not apply
to items subject to final tax.

Passive income is classified as follows:

Unless exempt, other passive
a. Interest income income derived from Philippines
b. Dividend income but not in the list (if any) as well as
c. Royalties passive income derived abroad are
d. Prizes, and subject to basic tax.
e. Other winnings

FINAL WITHHOLDING TAXES

Final withholding taxes is a kind of tax, which is prescribed on “certain income” derived
from the Philippine sources.

RECEIVED BY
Citizens & NRA-
NRA-ETB
Residents NETB
1. INTEREST
a. Interest from any currency bank deposit 20% 20% 25%
b. Yield or any other monetary benefit from deposit substitutes 20% 20% 25%
c. Yield or any other monetary benefit from trust funds and
20% 20% 25%
similar arrangements
d. Interest income received from a depositary bank under
expanded foreign currency deposit system RC = 15%
Exempt Exempt
Note: Only residents are subject to this type of tax. NRC =
Nonresident taxpayers are exempt from tax on this particular exempt
income.
e. Interest income from long-term deposit or investment Exempt Exempt 25%

If pre-terminated before fifth year, a final tax shall be imposed

based on remaining maturity as follows:
- 4 years to less than 5 years 5% 5% 25%
- 3 years to less than 4 years 12% 12% 25%
- Less than 3 years 20% 20% 25%

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RECEIVED BY
Citizens & NRA-
NRA-ETB
Residents NETB
2. ROYALTIES
a. Royalties, in general (other than royalties described in letter B) 20% 20% 25%
b. Royalties on books, as well as other literary works and musical
10% 10% 25%
compositions
3. PRIZES
a. Prizes exceeding P10,000 20% 20% 25%
Exempt, Exempt,
b. Prizes not exceeding P10,000 subject to subject to 25%
Basic Tax Basic Tax
4. OTHER WINNINGS
Under CREATE ACT:
a. Other Winnings, regardless of amount 20% 20% 25%
b. PCSO Winnings, not exceeding P10,000 Exempt Exempt 25%
c. PCSO Winnings exceeding P10,000 20% 20% 25%
5. CASH and/or PROPERTY DIVIDEND
a. Cash and/or property dividends actually/constructively
received from a domestic corporation or from a joint stock
10% 20% 25%
company, insurance or mutual fund companies and ROHQ of
multinational companies
b. Share of an individual in the distributable net income after tax
10% 20% 25%
of a Partnership (other than a GPP)
c. Share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium
10% 20% 25%
taxable as a corporation, which he is a member or a co-
venturer

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).

ORDINARY ASSET vs. CAPITAL ASSET

Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the 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 of the taxpayer

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.
Generally, assets not used or held for sale in the ordinary course of business (i.e., personal
assets) are classified as capital assets.

Classification of an asset, either as capital or ordinary is important because of the

special tax rules on gains and losses from sale or exchanges of capital assets which do not
apply to gains and losses from sale or exchanges of ordinary assets.

Gain on sale of ordinary assets are commonly known as ordinary or regular income
that are subject to basic income tax or graduated tax rate as provided for under Section 124(A)
of the Tax Code. On the other hand, gain on sale of capital assets are classified as capital
gains subject to the following taxes:

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1. Capital Gains Tax (CGT) if pertaining to the following:

a) Capital gain on sale of shares of stocks of a closely-held domestic
corporation is subject to a capital gains tax of 15%.

REQUISITES:
• The shares of stock sold, bartered or exchanged must be from a domestic
corporation.
• The transaction must be not through the local stock exchange (the shares
are not listed and traded in the local stock exchange). Hence, the sale is
made directly to the buyer.
• The seller should not be a dealer in securities (the shares are held as capital
asset)
• The transaction should result to a capital gain based on computation shown
below:

TAX BASE:
• Capital gain computed as follows:
Selling price xxx
Cost (xx)
Capital Gain xx
Rate (beginning Jan 1, 2018) 15%
Capital Gains Tax xx

b) Sale of real properties classified as capital asset located in the

Philippines is subject to six percent (6%) capital gains tax (CGT) imposed
under Section 124(D) of the Tax Code, as amended.

Section 24(D)(1) of the Tax Code provides that sale, exchange, or other
disposition of real property subject to capital gains tax shall include pacto de
retro sales and other forms of conditional sales, by individuals, including
estates and trusts.

REQUISITES:
(regardless of whether the transaction resulted to a gain or loss)
• The land and/or building must be a capital asset; and
• It must be located in the Philippines.

FORMULA:
Tax Base xxx
Rate 6%
Capital Gains Tax xx

TAX BASE:
• Selling price or fair market value (FMV), whichever is higher

Fair market value (FMV) of real property shall refer to the higher between:
- Fair market value as provided by City or Provincial assessors (also
known as assessed value or FMV for real property tax declaration
purposes); and
- Zonal value as provided by the Commissioner of Internal Revenue
(CIR).

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Sale of Real Property to the Government

If a real property classified as capital asset located in the Philippines is sold to
the government or any of its political subdivisions or agencies or to government
owned or controlled corporations (GOCCs), the individual taxpayer shall have
the option to be taxed at 6% CGT or basic income tax using the graduated tax
rate.

Citizens & NRA-

Summary of Capital Gains Subject to CGT NRA-ETB
Residents NETB
1. Capital gain from sale of shares of stock of a domestic corporation
15% 15% 15%
not traded in the local stock exchange (Beginning Jan. 1, 2018)
2. Sale of real property located in the Philippines. 6% 6% 6%

SALE OF PRINCIPAL RESIDENCE

Under certain conditions, sale of real property located in the Philippines classified as
principal residence is exempt from capital gains tax.

"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). It should be certified by the Barangay Chairman 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 are 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

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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:

2. The historical cost or adjusted basis of the real property sold or disposed shall be
carried over to the new principal residence built or acquired.

3. The BIR shall have been duly notified by the taxpayer within 30 days from the date
of sale or disposition through a prescribed return of his intention to avail of the tax
exemption.

4. The tax exemption can only be availed of once every 10 years.

OTHER CLASSIFICATION (GROUPINGS) of Taxpayers under RA 11976 or the EASE OF

PAYING TAXES ACT (EOPTA)
Under RA 11976, paragraph "B" of Section 21 of the Tax Code was "added" as follows:
Section 21 (b): Classification of Taxpayers. - For purposes of responsive tax administration,
taxpayers shall be classified as follows:

Group** Gross Sales***

Micro Less than P3M
Small P3M to less than P20M
Medium P20M too less than P1B
Large P1B and above

**These categories shall apply to all types of taxpayers (individuals, estates, trusts,
corporations, partnership, joint ventures, etc.).
***Gross Sales under these categories shall refer to:
- Total sales revenue, net of vat, if applicable, during the taxable year, without
any other deductions; and
- Business income, excluding compensation income earned under employer-
employee relationship, passive income under Sections 24, 25, 27 and 28, and
income excluded under Section 32(B), all of the Tax Code, as amended.
Business income shall include income from the conduct of trade or business or
the exercise of a profession.

PURPOSE of GROUPING Taxpayers as Micro, Small, Medium and Large:

1. For purposes of responsive tax administration.
2. Provide certain tax concessions to Micro and Small taxpayers, such as the following
civil penalties and other concessions:
- Reduced surcharge rate to 10% surcharge;
- Reduced interest rate to 6% interest;
- Reduced to P500 the penalty for failure to file certain information returns;

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- Reduced compromise penalty rate to 50% on violations invoicing/printing of

invoices)
- Income Tax Return (ITR) was reduced to two (2) pages only

NOTE:
- Civil penalties and interest are discussed Tax Remedies.
- Micro and small taxpayers are still required to withhold taxes as mandated by
law and regulations (exemption from withholding tax obligation was vetoed by
the President).

TAXATION OF ALIEN INDIVIDUALS EMPLOYED BY POGOs or OGLs

TAXATION OF ALIEN INDIVIDUALS EMPLOYED BY AN OFFSHORE GAMING LICENSEE
(OGL) OR PHILIPPINE OFFSHORE GAMING OPERATIN (POGO) AND ITS SERVICE
PROVIDERS under RA 11590 and RR 20-2021, regardless of residency and term and class
of working permit or visa.

Section 3 of RA 11590, also known as "An Act Taxing Philippine Offshore Gaming Operations
(POGOs)", added a new paragraph of Section 25 of the Tax Code, paragraph "G", as follows:
Sec. 25(G) Tax on Nonresident Alien Individuals.
"(A) xxx
"(B) xxx
xxx …
"(G) Alien Individuals Employed by an Offshore Gaming Licensee and Service
Providers. -
Alien individuals regardless of residency and who are employed and assigned
in the Philippines, regardless of term and class of working or employment
permit or visa, by an offshore gaming licensee or its service provider as defined
in Section 22(II) and Section 27(G) of the Tax Code, as amended.

Applicable Income Tax

**Gross Income (whether in cash or in kind):

• Basic salary/wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, received from such service provider or offshore
gaming licensee.
• OGLs and Service Providers shall submit to the Bureau of Internal Revenue (BIR) the
original copy of notarized contract of employment clearly stating therein the annual
salary and other benefits and entitlements of the concerned alien.

The FWT shall be withheld and remitted monthly by the employer, including corresponding
penalties, interests and surcharges, if any, in accordance with RR 2-98, as amended.

All foreign employees of OGLs and their Service Providers, regardless of nature of
employment, shall have a Tax Identification Number (TIN). All OGLs and service providers
that employ or engage a foreign national without the foregoing shall be liable for a fine of
Twenty thousand pesos (P20,000.00) for every foreign national without such TIN and, in

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proper instances, revocation of their primary and other licenses obtained from government
agencies and/or perpetual or temporary ban in employing or engaging foreign nationals for
their operations: Provided, That the foreign national concerned shall still pay, and the employer
shall remit, any corresponding taxes, penalties, interests, and surcharges due in accordance
with the Tax Code, as amended.

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

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

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2. MODE OF FILING RETURN AND PAYMENT OF THE TAX DUE (RR 4-2024)

3. WHEN TO FILE AND PAY INCOME TAX RETURN?

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

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

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• Quarterly using BIR Form 1701Q

o 1st Quarter – May 15
o 2nd Quarter – August 15
o 3rd Quarter – November 15
• Annually on or before April 15 of the following year using BIR Form No. 1701
or BIR Form No. 1701A, as the case may be

c. BIR FORMS
➢ BIR Form 1700
- This form shall be filed annually by Individuals earning Purely
Compensation Income (income arising from employer-employee
relationship) including those individual taxpayers with non-business-
related income.

➢ BIR Form 1701

- This form shall. be filed annually by individuals who are engaged in
trade/business or the practice of profession including those with mixed
income (i.e., those engaged in the trade/business or profession who are
also earning compensation income) in accordance with Sec. 51 of the
Code, as amended.

➢ BIR Form 1701A

- This form shall be filed annually by individuals earning PURELY from
business/profession subject to graduated income tax rates with Optional
Standard Deduction (OSD) as mode of deduction; and

- Those who opted to avail of the 8% income tax rate

➢ BIR Form 1701Q

- This form shall be filed quarterly by the following:
• Resident citizens engaged in trade, business, or practice of
profession within and without the Philippines;
• A resident alien, nonresident citizen or nonresident allen
individual engaged in trade, business. or practice of profession
within the Philippines,
• A trustee of a trust, guardian of a minor, executor/administrator
of an estate, or any person acting in any fiduciary capacity for
any person, where such trust, estate, minor, or a person is
engaged in trade or business.

4. INDIVIDUAL TAXPAYERS REQUIRED TO FILE ITR:

1. Individuals engaged in business and/or practice of profession, regardless of the
results of operations.

2. Individuals not qualified under Substituted Filing of ITR such as:

• Individuals/employees deriving compensation from two or more employers,
concurrently or successively, at any time during the taxable year.
• Individuals/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.
• Individuals receiving purely compensation income from a single employer,
although the income tax of which has been correctly withheld, but whose

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spouse is required to file income tax return (this is no longer a requirement

upon the effectivity of EOPT).

3. Individuals deriving other non-business, non-profession-related income in addition to

compensation income not otherwise subject to final tax.

4. Non-resident alien engaged in trade or business in the Philippines deriving purely

compensation income, or business income and other non-business, non-profession-
related income from sources within the Philippines.

5. INDIVIDUAL TAXPAYERS NOT REQUIRED TO FILE ITR (EOPTA; RR 4-2024):

1. An individual earning purely compensation income whose taxable income does not
exceed P250,000. The Certified List of Employees Qualified for Substituted Filing of
Income Tax Return, reflecting the amount of income payment, the tax due and tax
withheld, if any, 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;

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 Certified List of
Employees Qualified for Substituted Filing of Income Tax Return, reflecting the
amount of income payment, the tax due and tax withheld, if any, 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. A minimum wage earner. The Certified List of Employees Qualified for Substituted
Filing of Income Tax Return reflecting the amount of income payment, the tax due
and tax withheld, if any, 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; and

5. An individual citizen of the Philippines who is working and deriving income solely from
abroad as an "Overseas Contract Worker (OCW)" or "Overseas Filipino Worker
(OFW)" as defined under Section 3(G) of RA No. 11641, or the "Department of
Migrant Workers Act".

In all cases, all individuals deriving compensation income, regardless of the amount,
from two (2) or more concurrent or successive employers at any time during the
taxable year, are not qualified for substituted filing. Thus, they are still required to file
a return."

6. FRINGE BENEFIT TAX (FBT)

Due Date and BIR Form:
➢ Shall be filed and the tax paid/remitted on a quarterly basis not later than the last
day of the month following the close of the quarter during which withholding was
made using BIR Form 1603Q (RR 11-2018).

7. FINAL WITHHOLDING TAX (FWT) ON PASSIVE INCOME

Due Date and BIR Form:
➢ Shall be filed and the tax paid/remitted on a quarterly basis not later than the last
day of the month following the close of the quarter during which withholding was
made using BIR Forms 1601-FQ and 1602Q.

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8. CAPITAL GAINS TAX

a. Shares of Stock of a Domestic Corporation not listed in the Local Stock Exchange
(LSE)
Due Date and BIR Form:
➢ Filed and paid within 30 days following each sale or other disposition using BIR
Form1707
➢ Annual: On or before April 15 of the following year covering all stock transactions
of the preceding taxable year.

b. Real Property classified as capital asset and located within the Philippines.
Due Date and BIR Form:
➢ Filed and paid within 30 days following each sale, exchange or disposition of real
property using BIR Form1706.
➢ In case of installment sale, the return shall be filed within 30 days following receipt
of the 1s down payment and within 30 days following each subsequent installment
payment.
➢ One return is filed for every transfer document regardless if the number of each
property sold, exchange or disposed of.

9. DEFINITION OF TERMS
➢ Person - the term "person" means an individual, a trust, estate or corporation.

➢ Filing of Return - shall refer to the act of accomplishing and submitting the
prescribed tax return, electronically or manually, to the Bureau of Internal
Revenue (BIR), or through any Authorized Agent Bank (AAB) or Authorized Tax
Software Provider (ATSP) for specific tax returns as approved by BIR.

➢ Payment of Tax or Remittance of Tax - shall refer to the act of delivering the
amount of tax due or withheld, either electronically or manually, to the BIR, or
through any AAB or ATSP for specific tax returns as approved by BIR.

➢ Authorized Agent Banks (AABs) - shall refer to financial institutions that are
accredited to collect the payment of internal revenue taxes on BIR's behalf.

➢ Revenue Collection Officers (RCOs) - shall refer to the BIR officers tasked to
accept tax payments from taxpayers under certain limitations and remit the tax
collected within the prescribed period.

➢ Authorized Tax Software Provider (ATSP) - shall refer to an individual or

organization whose business is to render electronic tax filing and/or tax payment
services to taxpayer-clients by offering third-party solutions tested and certified by
BIR, that is, an electronic tax return filing and/or payment solution.

➢ Overseas Filipino Worker (OFW) - refers to a Filipino who is to be engaged, is

engaged, or has been engaged in remunerated activity in a country of which he
or she is not an immigrant, citizen or permanent resident or is not awaiting
naturalization, recognition or admission, whether land- based or sea-based
regardless of status; excluding a Filipino engaged under a government-
recognized exchange visitor program for cultural and educational purposes. For
purposes of this provision, a person engaged in remunerated activity covers a
person who has been contracted for overseas employment but has yet to leave
the Philippines, regardless of status and includes "Overseas Contract Workers"
(OCWs). The term OFW is synonymous to the term "Migrant Worker" pursuant to
Section 3[G] of RA No. 11641 or the "Department of Migrant Workers Act".

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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) BIR 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.

FINAL WITHHOLDING TAX ON PASSIVE INCOME

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

OTHER CONSIDERATIONS

Minimum Wage
The term “statutory minimum wage earner (SMW)” or “minimum wage earner (MWE)”
under RA 9504 shall refer to a worker in the private sector paid the statutory minimum wage.
The rate is fixed by the Regional Tripartite Wage and Productivity Board as defined by the
Bureau of Labor and Employment Statistics. MWE are exempt from income tax on:
1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay

Substituted Filing of Income Tax Returns (ITR)

Under RA 9504 and RR 10-2008, individual taxpayers may no longer file income tax
return provided he has (all the requirements must be satisfied):

1. Receiving purely compensation income, regardless of amount

2. The amount of income tax withheld by the employer is correct (Tax due = Tax withheld)
3. Only one employer during taxable year
4. If married, the employee’s spouse also complies with all the three aforementioned
conditions, or otherwise receives no income.

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

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

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

REQUIRED: Using the above information, compute the following:

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

Reference:

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

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

Bureau of Internal Revenue, https://www.bir.gov.ph/index.php/tax-information/income-

tax.html

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