TAXATION

FAR EASTERN UNIVERSITY – MANILA

INDIVIDUAL INCOME TAX (1401)
A. Classification of Individual Taxpayers
1. Citizens Under the Philippine Constitution, citizens are:

1. Those who are citizens of the Philippines at the time of adoption of the constitution (on Feb. 2,
1987).
2. Those whose fathers or mothers are citizens of the Philippines.
3. Those born before January 17, 1973 of Filipino mothers who elect Philippine citizenship upon
reaching the age of majority.
4. Those who are naturalized in accordance law.

Resident Resident citizen - is a citizen of the Philippines who has a permanent or perpetual
Citizen home in the Philippines to which he plans or intends to return whenever he is away
or out of the country.
Nonresident Nonresident citizen
Citizen 1) A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite intention to
reside therein. (Sec 22(E)(1), NIRC)
2) A citizen of the Philippines who leaves the Philippines during the taxable
year to reside abroad, either as an immigrant or for employment on a permanent
basis. (Sec 22, (E)(2), NIRC)
3) A citizen of the Philippines who works and derives income from abroad
and whose employment thereat requires him to be physically present abroad most
of the time during the taxable year. (Sec 22 (E)(3), NIRC)
The phrase "most of the time" shall mean that the said citizen shall have stayed
abroad for at least 183 days in a taxable year. (Sec. (2)(c), Revenue Regulations
No. 1-79)
4) A citizen who has been previously considered as nonresident citizen and
who arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen for
the taxable year in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the Philippines. (Sec
22(E)(4), NIRC)
The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in
the Philippines as the case may be for purpose of this Section. (Sec 22(E)(5), NIRC)

Overseas Contract Worker (OCW)/Overseas Filipino Workers (OFW)

• RR 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
non-resident 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).
• Seafares 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).

2. Aliens Resident Resident alien - is an individual whose residence is within the Philippines and who
Alien is not a citizen thereof. (Sec. 22 (F), NIRC)

An expatriate may be considered a resident alien if:

14. INCOME TAX - INDIVIDUAL Page 1 of 18

 (1) he or she is not a mere transient or sojourner***

(2) he or she has no definite intention to leave, or

(3) his or her purpose is of such a nature that an extended stay may be necessary
for its accomplishment, and to that end the alien makes his or her home temporarily
in the Philippines.

(4) An alien who has acquired residence in the Philippines retains his status as such
until he abandons the same and actually departs from the Philippines.

An intention to change his residence does not change his status as a resident alien to
that of a nonresident alien. Thus an alien who has acquired a residence in the
Philippines is taxable as a resident for the remainder of his stay in the Philippines.
(Sec 6, Revenue Regulation 2-40)

Notes:
***(Resident Alien - An alien actually present in the Philippines who is not a mere
transient or sojourner is a resident of the Philippines for purposes of income tax. Whether he
is a transient (non-resident) or not is determined by his intentions with regards to the
length and nature of his stay. One who comes to the Philippines for a definite purpose, which is
promptly accomplished, is a transient (non-resident). But if his purpose is of such a
nature that an extended stay may be necessary for its accomplishment, and to that end the alien
makes his home temporarily in the Philippines, he becomes resident, though it may be his intention
at all times to return to his domicile abroad when the purpose for which he became has been
consummated or abandoned (Sec. 5, Rev. Reg. No. 2))

***(Resident Alien – Means an individual whose residence is within the Philippines and who
is not a citizen thereof. He is one who is actually present in the Philippines and who is not a mere
transient or sojourner. But residence does not mean mere physical presence. An alien is considered
a resident or a non-resident depending on his intention with regard to the length and nature of is
stay.)
Nonresident Nonresident alien - is an individual who is not a citizen of the Philippines and
Alien whose residence is not within the Philippines. (Sec. 22 (G), NIRC)

One who comes to the Philippines for a definite purpose which in its nature may
be promptly accomplished is a transient (non-resident).
1) Nonresident alien-Engaged in trade or business- a nonresident alien who has stayed in the
Philippines for an aggregate period of more than 180 days during any calendar year.

Engaged in trade or business- includes the performance of personal services on regular basis and does
not include casual or incidental transactions.

Trade or business includes the performance of the functions of a public office. (Sec. 22 (S), NIRC)

2) Nonresident alien-not engaged in trade or business- a nonresident alien who has stayed in the
Philippines for an aggregate period of not more than 180 days (180 days or less) during any calendar
year.

The following table summarizes the situs of taxable income to individual taxpayers:
Taxpayer Length of Stay Tax Base
Resident Citizen Taxable income – World
Non-resident citizen A citizen staying abroad for at least 183 days (365 Taxable income – Philippines
days/2)
Resident alien An alien staying in the Philippines for more than one year Taxable income – Philippines
Non-resident alien engaged in trade or An alien who stays in the Philippines for more than 180 days in any Taxable income – Philippines
business calendar year.
Non-resident alien not engaged in trade or An alien who stays in the Philippines for an aggregate period at least Gross income – Philippines
business 180 days in any calendar year. (360 days /2)
Taxable estate – estate under judicial settlement. Taxable income – World
Taxable trust – trust irrevocably designated by the grantor.

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Exercise: Determine the classification of the individual.

1. Mr. LoydD.Tumayo, a Filipino, received his U.S. visa as an immigrant. He left the Philippines to reside in the U.S.

2. Ms. Kris Tiuper, a Filipino who has an expertise in forensic audit was hired by Earls and Yums, a U.S. based auditing firm.
She will work in the U.S. as an auditor. He will be staying in the United States of America because of her permanent
employment.

3. Mr. Ivan Ibanez, a Filipino contract worker, whose employment contract did not passed through and was not registered with
the Philippine Overseas Employment Agency (POEA), left the Philippines to work in Saudi Arabia as a dance instructor. His
work contract is for eight (8) months, after which he will be having a vacation for two (2) months and an option to renew the
contract for the same period or longer.

4. Mr. Ronald R. Blanca , a Filipino contract worker, whose employment contract passed through and was registered with the
Philippine Overseas Employment Agency (POEA), left the Philippines to work in Saudi Arabia as a dance instructor. His work
contract is for five (5) months, after which he will be having a vacation for two (2) months and an option to renew the contract
for the same period or longer.

5. Mrs Josephine Bolpangco is an architect and an employee of a domestic corporation in the Philippines. He is assigned to render
services in Japan. He will stay abroad for a maximum period of 10 months. The architect remains in the Philippine payroll of
the company.

6. James George, an American basketball player, stayed in the Philippines for eight (8) months in the Philippines to educate and
train young basketball players to play systematic and scientific basketball.

7. Leonel is a Jamaican singer. He was invited to hold a four-day concert at Nuvali, Laguna on the 4th of July of the current year.

8. Serena Williams , an American tennis player visited and spent a five (5) day vacation at El Nido Palawan.

B. Categories of Income of Individual

Income of individuals are grouped as follows:

1. Compensation income- those arising from employer-employee relationship.

Compensation income includes Salaries, wages, emoluments and honoraria, commissions, taxable bonuses and fringe benefits,
taxable allowances (such as transportation, representation, entertainment, and the like), non-monetary compensation, director’s
fees and the like, taxable pensions and retirement pay, amounts drawn as salaries by partners of a partnership and other incomes
of a similar nature unless specifically exempted by the Tax Code.

2. Business income and income from practice of profession,-these are incomes from business. such as incomes from
manufacturing and selling goods, incomes from buying and selling goods, incomes, fees from the exercise of profession, gains
from sale or exchange of assets other than inventories, commissions, rental income, and other incomes not covered by
compensation income.

3. Passive income- consist of interest from currency deposits, yields and other monetary benefits from deposit substitutes, trust
fund and similar arrangements, royalties, prizes, winnings, interest from foreign currency deposits, share in a business
partnership income, dividends in a domestic corporation, interest on long term deposits.

4. Capital gains- include capital gains from sales of shares of stock and sales of real property

5. Other sources of income-this includes income such as informer’s rewards

C. Taxable Income of Individuals

1. Resident citizen - is taxable on all income derived from sources within and without the Philippines; (Sec 23 (A), NIRC)

2. Nonresident citizen - is taxable only on income derived from sources within the Philippines; (Sec 23 (B), NIRC)

An individual citizen of the Philippines who is working and deriving income fromabroad as an overseas contract worker is
taxable only on income derived from sources within the Philippines.

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

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 3. Resident alien - is taxable only on income derived from sources within the Philippines. Sec 23 (C), NIRC)

4. Non-resident alien-engaged in trade or business - is taxable only on income derived from sources within the
Philippines.(Sec 23 (D), NIRC)

5. Non-resident alien- not engaged in trade or business - - is taxable only on income derived from sources within the
Philippines (Sec 23 (A), NIRC)

Classification Income within (Philippines) Income without(Foreign

Country)
Resident Citizen √ √
Non-Resident Citizen √
Resident Alien √
Non-Resident Alien ETB √
Non- Resident Alien NETB √

D.Tax Base and Tax Rate

Taxpayer’s Classification Tax Base Tax Rate
a. Resident citizen Taxable income within and without Sec. 24 (A)(2) or 8% in excess of P250,000
b. Non-resident citizen Taxable income within Sec. 24 (A)(2) or 8% in excess of P250,000
c. Resident alien Taxable income within Sec. 24 (A)(2) or 8% in excess of P250,000
d. Non-resident alien ETB Taxable income within Sec. 24 (A)(2) or 8% in excess of P250,000
e. Non-resident alien NETB Gross income within 25%(Sec.25(B))

SEC. 24(2) Rates of Tax on Taxable Income of Individuals.

The tax shall be computed in accordance with and at the rates established in the following schedule:

Effective January 1, 2018 until December 31, 2022:

Not over PH P 250,000 0%

Over 250,000 but not over 400,000 20% of the excess over
PH P 250,000
Over 400,000 but not over 800,000 30,000 + 25% of the excess
over 400,000
Over 800,000 but not over 2,000,000 130,000 + 30% of the excess
over 800,000

Over 2,000,000 but not over 490,000 + 32% of the excess

8,000,000 over 2,000,000
Over 8,000,000 2,410,000 + 35% of the
excess over 8,000,000

Effective January 1, 2023 and onwards

Not over PH P 250,000 0%

Over 250,000 but not over 400,000 15% of the excess over
PH P 250,000
Over 400,000 but not over 800.000 22,500 + 20% of the excess
over 400,000
Over 800,000 but not over 2,000,000 102,500 + 25% of the excess
over 800,000

Over 2,000,000 but not over 402,500 + 30% of the excess

8,000,000 over 2,000,000
Over 8,000,000 2,202,500 + 35% of the
excess over 8,000,000

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E. Computation of Income Tax
a. Pure compensation income
Income Tax Rates
• Graduated income tax rates of 0% to 35% ( see graduated tax table above)
• Exclusion and deductions: Tax exempt 13th month pay and other benefits – P90,000
• No Personal exemption and premium for health insurance

b. Pure business or professional income (Self-employed/Professionals)

Income / business tax computed as follows:

Annual gross sales/receipts not exceeding the VAT Annual gross sales/receipts exceeding the P3 Million VAT
threshold (P3 Million) threshold

• 8% of gross sales/receipts and other income in excess of

P250,000 in lieu of the graduated income tax rates and
percentage tax (no option to register for VAT);

OR

• graduated income tax rates of 0% to 35% on net taxable • graduated income tax rates of 0% to 35% on net taxable
income + 3% percentage tax income + VAT
• No change in computation of Net Taxable Business
Income
NO option to avail 8% GIT

Self-employed – a sole proprietor or an independent contractor who reports income earned from self-employment.
He/She 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 – 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.

NOTES:

Unless the taxpayer signifies the intention to elect the 8%o income tax rate in the 1st Quarter Percentage and/or
lncome Tax Return, or on the initial quarter return of the taxable year after the commencement of a new business
practice of profession, the taxpayer shall be considered as having availed of the graduated rates under Section 24 (A)
(2) (a) of the Tax Code, as amended. Such election shall be irrevocable and no amendment of option shall be made
for the said taxable year.

The option to be taxed al \oh income tax rate is not available to a VAT-registered taxpayer, regardless of the amount
of gross sales/receipts, and to a taxpayer who is subject to Other Percentage Taxes under Title V of the Tax Code, as
amended, except those subject under Section 116 of the same Title. Likewise, partners of a General Professional
Partnership (GPP) by virtue of their distributive share from GPP which is already net of cost and expenses cannot avail
of the 8olo income tax rate option' A taxpayer who signifies the intention to avail of the 8%o income tax rate option,
and is conclusively qualified for said option at the end of the taxable year annual gross sales/receipts and other non-
operating income did not exceed the VAT threshold (P3,000,000.00)1. shall compute the final annual income tax due
based on the actual annual gross sales/receipts and other non-operating income. The said income tax due shall be in
lieu of the graduated rates of income tax and the percentage tax under Sec. 116 of the Tax Code, as amended. The
Financial Statements (FS) is not required to be attached in filing the final income tax return. However, existing rules
and regulations on bookkeeping and invoicing/ receipting shall still apply.

A taxpayer shall automatically be subject to the graduated rates under Section 2a(A)(2)(a) of the Tax Code, as
amended, even if the flat 8oZ income tax rate option is initially selected, when taxpayer's gross sales/receipts and
other non-operating income exceeded the VAT threshold during the taxable year. In such case, his income tax shall be
computed under the graduated income tax rates and shall be allowed a tax credit for the previous quarter/s income
tax payment/s under the 8oh income tax rate option.

ln addition, a taxpayer subject to the graduated income tax rates (either selected this as the income tax regime or
failed to signify chosen intention or failed to qualify to be taxed at the 8% income tax rate) is also subject to the
applicable business tax, if any, Subject to the provisions of Section '8 of these Regulations, an FS shall be required as
an attachment to the annual income tax return even if the gross sales/receipts and other non-operating income is less

14. INCOME TAX - INDIVIDUAL Page 5 of 18

than the VAT threshold. However, the annual income tax return of a taxpayer with gross sales/receipts and other non-
operating income of more than the said VAT threshold shall be accompanied by an audited FS.

Taxable income for individual is earning income from self-employment/practice of profession shall be the net income,
if taxpayer opted to be taxed at graduated rates or has failed to signify the chosen option. However, if the option
availed is the 8% income tax rate, the taxable base is the gross sales/receipts and other non-operating income.

c. Mixed income earners

Income / business tax computed as follows:

Annual gross sales/receipts not exceeding the P3M VAT threshold - Annual gross sales/receipts exceeding the P3M VAT threshold
Option to be taxed as follows:
• 8% of Gross Sales/Receipts and other income in lieu of the
graduated income tax rates and percentage tax (no option to
register for VAT) + graduated income tax rates of 0% to 35% on
compensation income (computed separately);
OR
• graduated income tax rates of 0% to 35% on total net taxable • Compensation income and net taxable income from business subject
business income and taxable compensation income + 3% to graduated income tax rates of 0% to 35% + VAT
Percentage Tax on business income

Notes:
Self-employed/professional Mixed income earner

Allowed to deduction P250,000 if they choose the 8% gross
Not allowed to deduct P250,000 in their business/ professional
income taxation. income if they choose the 8% GIT, because it is already used
/applied to their compensation income

Notes:

The provision under Section 24 (A)(2) (b) of the Tax Code, as amended, which allows an option of 8% income tax
rate on gross sales/receipts and other non-operating income in excess of P250,000.00 is available only to purely self-
employed individuals and/or professionals. The P250,000.00 mentioned is not applicable to mixed income earners
since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income.
Under the said graduated rates' the excess of the P250,000.00 over the actual taxable compensation income is not
deductible against the taxable income from business practice of profession under the 8%o income tax rate option.

The total tax due shall be the sum of: (1) tax due from compensation, computed using the graduated income tax
rates; and (2) tax due from self-employment/practice of profession, resulting from the multiplication of the 8olo
income tax rate with the total of the gross sales/receipts and other non-operating income.

Mixed income earner who opted to be taxed under the graduated income tax rates for income from business/practice
of profession' shall combine the taxable income from both compensation and business/practice of profession in
computing for the total taxable income and consequently, the income tax due.

F. Optional Standard Deductions (RR No. 16-2008 as amended by RR No. 2-2010)

1) Persons covered
The following may be allowed to claim OSD in lieu of the itemized deductions (i.e. items of ordinary and necessary
expenses allowed under Section 34 (A) to (J) and (M),Section 37, other special laws, if applicable):
a) Resident citizen
b) Non-resident citizen
c) Resident alien

2) Determination of the amount of OSD for individuals

a) The OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross sales (if on accrual
basis) or gross receipts (if on cash basis) during the taxable year.
b) The “cost of sales” in case of individual seller of goods, or the “cost of services” in the case of individual seller
of services, are not allowed to be deducted for purposes of determining the basis of the OSD
c) For other individual taxpayers allowed by law to report their income and deductions under a different method of
accounting (e.g. percentage of completion basis, etc.) other than cash and accrual method of accounting, the
“gross sales” or “gross receipts” shall be determined in accordance with said acceptable method.

14. INCOME TAX - INDIVIDUAL Page 6 of 18

 (L) Optional Standard Deduction (OSD). – In lieu of the deductions allowed under the preceding Subsections,
an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an
amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be.

Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be
considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when
made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an
individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with
his tax return such financial statements otherwise required under this Code: Provided, further, That a general
professional partnership and the partners comprising such partnership may avail of the optional standard
deduction only once, either by the general professional partnership or the partners comprising the
partnership: Provided, finally, That except when the Commissioner otherwise permits, the said individual shall
keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records
pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required
by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.

G. Income Tax Returns and Payment of Tax (Sec 51, NIRC)

1. Individuals who are required to file an income tax return:
a. Every Filipino citizen residing in the Philippines; (Sec 51(A)(1)(a),NIRC)
b. Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines; (Sec
51(A)(1)(b),NIRC)
c. Every alien residing in the Philippines, on income derived from sources within the Philippines; and (Sec
51(A)(1)(c),NIRC)
d. Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.(Sec
51(A)(1)(d),NIRC)

2. Individuals not required to file an income tax return:

a. An individual whose taxable income does not exceed Two hundred fifty thousand pesos (P250,000) under
Section 24 (A) (2) (a): Provided, That a citizen of the Philippines and any alien individual engaged in business
or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross
income; (Sec 51(A)(2)(a),NIRC)
b. An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources
within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79
of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return. (Sec 51(A)(2)(b),NIRC)
c. An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this
Code; and (Sec 51(A)(2)(c),NIRC)
d. A minimum wage earner as defined in section 22 (HH) of this Code or an individual who is exempt
from income tax pursuant to the provisions of this Code and other laws, general or special. (Sec
51(A)(2)(d),NIRC)

• The foregoing notwithstanding, any individual not required to file an income tax return may nevertheless be
required to file an information return pursuant to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner. (Sec 51(A)(3),NIRC)
• In accordance with Sec 51(A)(4) of the NIRC, the income tax return shall be filed in duplicate by the
following persons:
a. A resident citizen - on his income from all sources;
b. A nonresident citizen - on his income derived from sources within the Philippines;
c. A resident alien - on his income derived from sources within the Philippines; and
d. A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources
within the Philippines.
• The income tax return (ITR) shall consist of a maximum of four (4) pages in paper form or electronic form, and shall
only contain the following information:
“(A) Personal profile and information;
“(B) Total gross sales, receipts or income from compensation for services rendered, conduct of trade or business or
the exercise of a profession, except income subject to final tax as provided under this Code;
“(C) Allowable deductions under this Code;
“(D)Taxable income as defined in Section 31 of this Code; and
“(E) Income tax due and payable.

3. Place of Filing
Except in cases where the Commissioner otherwise permits, the return shall be filed with an:
14. INCOME TAX - INDIVIDUAL Page 7 of 18
 a. authorized agent bank,
b. Revenue District Officer,
c. Collection Agent or
d. duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal
place of business in the Philippines,
e. or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner.

4. Time of Filing
a. Pure compensation income earner
Residents citizens and resident aliens whose income had been derived solely from compensation- on or before
May 15 of the succeeding year.
Notes: Income Tax Return
b. Income from business or practice of profession • All are required to file except:
1) Quarterly declarations: 1. employees qualified for substituted filing ; OR
2. Employees with annual taxable compensation
First quarter May 15 not exceeding P250,000.
Second quarter August 15 • 4-page return for purely compensation income
Third quarter November 15 earner
• 4-page return for self-employed/professionals or
mixed income earner
2) Final adjusted return
May 15 of the succeeding year

a. Substituted Filing of Income Tax Returns

An individual taxpayer receiving purely compensation income from only one employer is no longer required to
file the Annual Income Tax Return (Form No. 1700) if the income tax has been correctly withheld by the
employer.

The Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (BIR
Form No. 1604-CF) filed by employers shall be equivalent to the substituted filing of income tax returns by said
employees.

The following taxpayers, however, are not qualified to avail of the substituted filing:
a) Individuals deriving compensation from two or more employers concurrently or successively at any time
during the taxable year.
b) If the income tax of the employee has not been withheld correctly resulting to collectible or refundable return.
c) Individuals deriving other non-business, non-profession-related income in addition to compensation not
otherwise subject to a final tax.
d) Individuals receiving purely compensation income from a single employer, although the income tax of which
has been correctly withheld, but whose spouse falls under Section 2.83.4(A), (B), (C) and (D) of RR No. 2-
98, as amended.
e) Nonresident aliens engaged in business in the Philippines deriving purely compensation income, or
compensation income and other non-business, non-profession-related income.

5. Payment of tax
The income tax is paid at the time the return is filed.
When the income tax due exceeds P2,000, it may be paid in two equal installments:
• 1st installment – May 15
• 2nd installment – October 15

6. E-filing and Payment System

Both large and non-large individual taxpayers filing BIR form 1700 who are required to file an income tax return have
the option to avail of the EFPS in filing their annual income tax returns and paying the taxes due thereon.

All taxpayers who intend to e-file their income tax return and pay electronically their income tax liability must register
with the BIR - Integrated Tax System (ITS) and must have an e-mail

7. Returns of Married Individuals

Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from
compensation, shall file a return for the taxable year to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so
filed shall be consolidated by the Bureau for purposes of verification for the taxable year.

8. Return of Parent to Include Income of Children. –

The income of unmarried minors derived from properly received from a living parent shall be included in the return of
the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is
exempt from donor's tax.

9. Persons Under Disability. –

14. INCOME TAX - INDIVIDUAL Page 8 of 18

 If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative
or by the guardian or other person charged with the care of his person or property, the principal and his representative
or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or
fraudulent returns.

10. Signature Presumed Correct. –

The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the
return was actually signed by him.

11. Substituted Filing of ITR by Employees Receiving Purely Compensation Income. –

“SEC. 51-A. Substituted Filing of Income Tax Returns by Employees Receiving Purely Compensation
Income. – Individual taxpayers receiving purely compensation income, regardless of amount, from only
one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly
by the said employer (tax due equals tax withheld) shall not be required to file an annual income tax
return. The certificate of withholding filed by the respective employers, duly stamped ‘received’ by the BIR,
shall be tantamount to the substituted filing of income tax returns by said employees.”

H. Basic forms used in filing an income tax return:

Taxpayers who are within the jurisdiction of Revenue District Offices (RDOs) are required to use the following
redesigned/new BIR forms:

For individuals earning pure compensation income - 1700

For Self-Employed, Professionals, Estates, and Trusts - 1701

For real property transactions (individual capital gains tax) - 1706
Account Information Form -1701AIF

I. Minimum Wage Earners(R.A. 9504)

1.The term 'minimum wage earner' shall refer to a worker in the :

a. private sector paid the statutory minimum wage,

b. 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." (Sec 22(HH), NIRC)

2. The term 'statutory minimum wage' shall refer to rate fixed by the Regional Tripartite Wage and Productivity
Board(RTWPB), as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor
and Employment (DOLE) (Sec 22(GG), NIRC)

3. Minimum wage earners are exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay,
night shift differential pay and hazard pay received by minimum wage earners shall likewise also be exempt from
income tax.

4. When a minimum wage earner receives or earns additional compensation such as

a. commissions,
b. honoraria,
c. fringe benefits,
e. taxable allowances
f. and other taxable income

other than the minimum wage earner’s, holiday pay, overtime pay, hazard pay and night shift differential pay, His entire
income (minimum wage and additional compensation) will now be subject to normal income tax under Sec 24A.

5. When a minimum wage earner receives or earns both compensation income and income from the conduct of trade,
business, or practice of profession,

income from the conduct of trade, business, or practice of profession, are not exempted from income tax , thus subject to
normal income tax under Section 24A.

However, his statutory minimum wage, holiday pay, overtime pay, night shift differential pay and hazard pay shall still
be exempt from income tax.

14. INCOME TAX - INDIVIDUAL Page 9 of 18

 6. Passive income and capital gains earned will be taxed accordingly.

For purposes of these regulations, hazard pay shall mean the amount paid bythe employer to MWEs who were actually
assigned to danger or strife-torn areas,disease- infested places, or in distressed or isolated stations and camps, which
exposethem to great danger of contagion or peril to life. Any hazard pay paid to MWEswhich does not satisfy the above
criteria is deemed subject to income tax andconsequently, to withholding tax.

In case of hazardous employment, the employer shall attach to the MonthlyRemittance Return of Withholding Tax on
Compensation (BIR Form No. 1601C) forreturn periods March, June, September and December a copy of the list
submitted tothe nearest DOLE Regional/Provincial Offices – Operations Division/Unit showingthe names of MWEs
who received the hazard pay, period of employment, amount ofhazard pay per month; and justification for payment of
hazard pay as certified by saidDOLE/allied agency that the hazard pay is justifiable.

J. Special Aliens

Income derived by ALIEN individuals EMPLOYED by

1. Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.

The term 'regional or area headquarters' shall mean a branch established in the Philippines by
multinational companies and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

The term 'regional operating headquarters' shall mean a branch established in the Philippines
by multinational companies which are engaged in any of the following services: general
administration and planning; business planning and coordination; sourcing and procurement of raw
materials and components; corporate finance advisory services; marketing control and sales
promotion; training and personnel management; logistic services; research and development
services and product development; technical support and maintenance; data processing and
communications; and business development.

2. Offshore Banking Units- An offshore banking unit (OBU) is a branch of a multi-national bank located in a financial
center away from its home country.

3. Petroleum contractors and subcontractors

Thus all concerned employees of the regional or area headquarters and regional operating
headquarters of multinational companies, offshore banking units and petroleum service
contractor and subcontractors shall be subject to the regular income tax rate under Sec
24(A)(2)(a) of the Tax Code' as amended'

Tax Advisory

In view of the recent amendment of the provisions of Section 25(B), 25(C). 25(D) and 25 (E) of the National Intemal
Revenue Code (NIRC). as amended by Republic Act No. 10963 (TRAIN Act) that were subject of the President's Veto
Message, the following pronouncement shall take effect:

ALL EMPLOYEES OF REGIONAL HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS OF

MULTINATIONAL COMPANIES; OFFSHORE BANKING UNITS; AND PETROLEUM SERVICE CONTRACTORS AND
SUBCONTRACTORS, ENJOYING PREFERENTIAL TAX TREATMENT PRIOR TO 2018 ARE NOW SUBJECT TO
REGULAR INCOME TAX RATES. THUS. WITHHOLDING TAXES ON COMPENSATION OF THESE EMPLOYEES SHALL BE
ENFORCED BASED ON WITHHOLDING TAX TABLE PER REVENUE MEMORANDUM CIRCULAR NO. 1- 201 8

Problems

(RR 8 – 2018) Individual Earning Purely Compensation Income. – individuals earning purely compensation
income shali be taxed based on the income tax rates prescribed under subsection (A) hereof.

Taxable income for compensation earners is the gross compensation income less non-taxable income/benefits such as
but not limited to the Thirteenth (13th) month pay and other benefits (subject to limitations, see Section 6(G)(e) of

14. INCOME TAX - INDIVIDUAL Page 10 of 18

these Regulations), de minimis benefits, and employee's share in the SSS, GSIS, PHIC, Pag-ibig contributions and
union dues.

Husband and wife shall compute their individual income tax separately based on their respective taxable income; 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.

Minimum wage eamers shall be exempt from the payment of income tax based on their statutory minimum wage
rates. The hoiiday pay, overtime pay, night shift differential pay and hazard pay received by such earner are likewise
exempt.

Problem 1: (Compensation income) Mr. CSO, works for G.O.D., Inc. He is not engaged in business nor has any
other source of income other than his employment. For 2018, Mr. CSO earned a total taxable compensation income of
₱1,060,000.00.
Required: Compute the income tax payable

Problem 2: (MWE) Mr. CSO, a minimum wage eamer, works for G.O.D., lnc' He is not engaged in business nor has
any other source of income other than his empioyment. For 2018, Mr. CSO earned a total compensation income of P
135,000.00.

Required:

Assuming 1: The taxpayer contributed to the SSS, Philhealth, and HDMF amounting to P5,000.00 and has
received 13th month pay of P11,000.00. His income tax liability will be_________

Assuming 2: The following year, Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00
which consists of the overtime pay- P80,000.00, night shift differential- P30,000'00, hazard pay- P15,000.00.
and holiday pay- Pl5,000.00. He has the same benefits and contributions as above. His income tax liability will
be____

Notes:
* Taxpayer is tax exempt as an MWE. The statutory minimum wage as well as the holiday pay, overtime pay. night shift differential pay
and hazard pay' received by such MWE are specifically exempted from income tax under the law.

Problem 3: (Business income) Ms. EBQ operates a convenience store while she offers bookkeeping services to her
clients. In 2018, her gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of
₱300,000.00. She already signified her intention to be taxed at 8% income tax rate in her 1st quarter return.
Required: Compute the income tax payable

Notes:
* The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00,
*Taxpayer's source of income is purely from self-employment, thus she is entitled to the amount allowed as deduction of P250,000.00
under Sec. 24(A)(2)(b) of the Tax Code, as amended.
* lncome tax imposed herein is based on the total of gross sales and gross receipts.
* Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and percentage tax due, by express
provision of law.

Problem 4: (Business income) Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on
gross sales in her 1st Quarter Income Tax Return, and she incurred cost of sales and operating expenses amounting
to ₱600,000.00 and ₱200,000.00, respectively, or a total of ₱800,000.00
Required: Compute the income tax payable

Notes: Aside form income tax, Ms. EBQ is likewise liable to pay business tax.

Problem 5: Mr. JMLH signified her intention to be taxed at 8% income tax rate on gross sales in her 1st Quarter
Income Tax Return. However, her gross sales during the taxable year has exceeded the VAT threshold.
Q1 Q2 Q3 Q4
(8%) (8%) (8%)
Sales 500,000 500,000 2,000,000 3,500,000
Cost of sales (300,000) (300,000) (1,200,000) (1,200,000)
Gross income 200,000 200,000 800,000 2,300,000
Operating expenses (120,000) (120,000) (480,000) (720,000)
Taxable income 80,000 80,000 320,000 1,580,000

Required: Compute the income tax payable

14. INCOME TAX - INDIVIDUAL Page 11 of 18

Notes:
* The gross receipts exceeded the VAT threshold of P3,000,000.00. Taxpayer shall be liable to pay income tax under
graduated rates pursuant to Section 2a@)(2)(a) of the Tax Code, as amended.

* Taxpayer shall be allowed an income tax credit of quarterly payments initially made under the 8oh income tax
option computed net of the allowable deduction of P250,000.00 granted for purely business income.

* 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. Percentage tax pursuant to Section 1 16 of the Tax Code, as
amended, shall be imposed from the beginning of the year until taxpayer is liable to VAT. VAT shall be imposed
prospectively

* Percentage tax due on the non-VAT portion of the sales/receipts shall be collected without penalty, if timely paid on
the due date immediately following the month/quarter when taxpayer ceases to be a non-VAT.

Problem 6: Ms. RPSV, a prominent independent contractor who offers architectural and engineering services. Since
her career flourished, her total gross receipts amounted to ₱4,250,000.00 for taxable year 2018. Her recorded cost of
service and operating expenses were ₱2,150,000.00 and ₱1,000,000.00, respectively.
Required: Compute the income tax payable

Notes: The gross receipts exceed the VAT threshold of P3,000,000; subject to graduated income tax rates; liable for
business tax –VAT, in addition to income tax

Problem 7: In 2018, Mr. GCC owns a nightclub and videoke bar, with gross sales/receipts of ₱2,500,000.00. His cost
of sales and operating expenses are ₱1,000,000.00 and ₱600,000.00, respectively, and with non-operating income of
₱100,000.00.
Required: Compute the income tax payable

Notes:
* The taxpayer has no option to avail of the 8%o income tax rate on his income from business since his business
income is subject to Other Percentage Tax under Section 125 of the Tax Code, as amended'
* Aside from income tax, taxpayer is liable to pay the prescribed business tax, which in this case is percentage tax of
18% on the gross receipts as prescribed under Sec. 125 of the Tax Code, as amended'

Problem 8: (Mixed income) In 2018, Mr. MAG, a Financial Comptroller of JAB Company, earned annual
compensation of ₱1,500,000.00, inclusive of 13th month and other benefits in the amount of ₱120,000.00 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with
gross sales of ₱2,400,000. His cost of sales and operating expenses are ₱1,000,000.00 and ₱600,000.00,
respectively, and with non-operating income of ₱100,000.00.

Required:
a. Assuming opt the 8%, Compute the income tax payable
b. Assuming did no opt the 8%, Compute the income tax payable
c. Assuming, on February 2019,taxpayer tendered his resignation to concentrate on his business. His total
compensation income amounted to P150,000'00, inclusive of benefits of P20,000. His business operations for taxable
year 2019 remains the same. He opted for the eight percent (8%) income tax rate. Compute the income tax
payable.

Note A:
*The option of 8% income tax rate is applicable only to taxpayer's income from business, and the same is in lieu of
the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code. as
amended.

*The amount of P250,000 allowed as deduction under the law for taxpayers earning solely from self-employment /
practice of profession, is not applicable for mixed income earner under the 8% income tax rate option.

*The P250,000 mentioned above is already incorporated if the first tier of the graduated income tax rates applicable
to compensation.

Note B
* The taxable income from both compensation and business shall be combined for purposes of computing the income
tax due if the taxpayer chose to be subject under the graduated income tax rates.
* in addition to the income tax, Mr. MAG is likewise liable to pay percentage tax of P72,000.00, which is3% of
P2,400,000.

14. INCOME TAX - INDIVIDUAL Page 12 of 18

Note C
* The option of 8% income tax rate is applicable only to taxpayer's income from business, and the same is in lieu of
the income tax under the graduated income tax rates and the percentage tax under Section 116 of the Tax Code. as
amended.

* The amount of F250,000.00 which is allowed as deduction under the law for taxpayers earning solely from self-
employment/practice of profession, is not applicable for mixed income earner under the 8% income tax rate option.

* The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income tax rates
applicable to compensation income. The excess of the P250,000.00 over the actual taxable compensation income is
not creditable against the taxable income from business/practice of profession under the 8% income tax rate option'

Problem 9: Mr. WBV, an officer of AMBS International Corp., earned in 2018 an annual compensation of
P1,200,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00. Aside from employment
income, he owns a farm, with gross sales of P3,500,000. His cost of sales and operating expenses are P1,000,000.00
and P600,000.00, respectively, and with non-operating income of P100.000.00. His tax due for 2018 shall be____

Notes: The taxpayer has no option to avail of the 8% income tax rate on his income from business since his gross
sales exceeds the VAT threshold. However, he is still not subject to business tax since the nature of his business
transactions is VAT exempt.

Problem 10: (RHQs/ROHQs/OBUs) Ms. CCF, an alien employed in MCUD Corporation, a Petroleum Service
Contractor received compensation income of ₱5,000,000.00 for 2018, inclusive of ₱400,000.00 13th month pay and
other benefits.
Required: Compute the income tax payable

Problem 11: (FBT) MRU Company (a domestic employer/company) granted Ms. MHLCO (a Filipino branch manager
employee), in addition to her basic salaries, P 5,000 cash per quarter for her personal membership fees at Country
Golf Club.
Required: The Fringe Benefits Tax (FBT) shall be______

Problem 12: Same facts (Problem 11) but the employee is nonresident alien individual not engaged in trade or
business within the Philippines
Required: The Fringe Benefits Tax (FBT) shall be______

OSD (OPTIONAL STANDARD DEDUCTION)

In general, there shall be allowed at the option of the taxpayer, itemized deductions or an Optional Standard
Deduction (OSD) at the rate of forty percent (40%). In case of individual taxpayers, OSD shall be computed at the
rate of forty percent (40%) of gross sales/receipts, as the case may be' Corporations may elect standard deduction in
an amount not exceeding forty percent (40%) of its gross income.

However. no deductions shall be allowed to individual taxpayers earnings compensation income arising from personal
services rendered under an employer-employee relationship, and those who Opted to be taxed at 8% income tax rate
on their income from business/practice of profession.

Unless the taxpayer, who is taxable under the graduated income tax rate, signifies in the income tax return the
intention to elect the OSD, it shall be considered as having availed of the itemized deductions. Such election of the
option, when made in the return, shall be irrevocable for the taxable year for which the return ii made. The election to
claim either the itemized deductions or the OSD for the taxable year must be signified by checking the appropriate
box in the income tax return filed for the first quarter or the initial quarter of the taxable year after the
commencement of a new business/practice of profession. Once the election is made' it must be consistently applied to
all the succeeding quarterly returns and in the final income tax return for the taxable year.

The OSD allowed to individual taxpayers, except non-resident aliens, shall be forty percent(40%) of gross
sales/receipts during tire taxable year. An individual who is entitled to and claimed for the OSD shall not be required
to submit with the tax return such Financial Statements otherwise required under the Tax Code, as amended. A
General Professional Partnership (GPP) may avail of the OSD only once, either by the GPP or the partners comprising
the Partnership.

Problem 14: Ms. RPSV is a prominent independent contractor who offers architectural and engineering services.
Since her career flourished, her total gross receipts amounted to ₱4,250,000.00 for taxable year 2018. Her recorded
cost of service and operating expenses were ₱2,150,000.00 and ₱1,000,000.00, respectively.
Required: Compute the income tax payable

14. INCOME TAX - INDIVIDUAL Page 13 of 18

Notes:
* The individual taxpayer elected OSD in the computation of her taxable income and the election is irrevocable for the
taxable year for which the return was made.
*Taxpayer is not required to submit her financial statements with his tax return.
* The gross receipts exceeded the VAT threshold of P3,000,000'00, thus. The taxpayer is subject to the graduated
income tax rates and liable for VAT, in addition to income tax.

Problem 15: Ms. MRU operates a convenience store while she offers bookkeeping services to her clients. In 2018,
her gross sales amounted to ₱1,800,000.00, in addition to her gross receipts from bookkeeping services of
₱400,000.00. Her recorded cost of goods sold and operating expenses were ₱1,325,000.00 and P320,000.00,
respectively.

Required:
A. Ms MRU opted to avail of the OSD, Compute the income tax payable
B. Her income tax liability if she signifies her intention to be taxed at 8% income tax rate in her 1st quarter_____

Notes:
* The taxpayer elected OSD in the computation of her taxable income, thus the graduated income tax rate shall be
applied'
* The election of OSD is irrevocable for the taxable year for which the return is made.
* Taxpayer is not required to submit her financial statements with her tax return.
* Taxpayer is liable for business tax - Percentage Tax, in addition to income tax.

Problem 16: The gross sales of GEAL Corporation for 2018 amounted to ₱6,000,000.00, with cost of sales
amounting to ₱4,000,000.00. It incurred operating expenses amounting to ₱1,000,000.00, and on the filing of its First
Quarter Income Tax Return, it signified its intention to avail of the OSD.
Required: Compute the income tax payable

Notes:
*OSD for corporation is based on gross income.
*Income tax rate of corporation is currently at 30%.

Problem 17: Z, married, had the following data for the taxable year:
Sales – Philippines P5,000,000
Sales- China 4,000,000
Gross income, Philippines 400,000
Gross income, China 300,000
Expenses, Philippines 200,000
Expenses, China 150,000
Required:
1. If the taxpayer is a resident citizen, married, his taxable income is
2. If the taxpayer is a non-resident citizen, married, his taxable income is
3. If the taxpayer is a resident alien, married his taxable income is
4. If the taxpayer is a non-resident alien engaged in business in the Phil. married and his country allows a reciprocity
P30, 000 as personal exemption for married individuals, his taxable income is?
5. If the taxpayer is non-resident alien not engaged in business in the Phil. married and his country grants P35, 000
as personal exemption for married individuals, his taxable income is?

Notes:

SECTION 4. INCOME TAX RATES ON NON-RESIDENT ALIEN INDIVIDUAL

The following income tax rates shall be imposed to non-resident alien individual:

A. Non-resident Alien Engaged in Trade or Business Within Philippines.- ln general, the income tax rates applicable to
this taxpayer shall be the rates imposed on individual citizen and a resident alien individual on the taxable income
derived within the Philippines;

B. Non-resident Not Engaged in Trade or Business within the Philippines – upon the entire income received from all
sources within the Philippines by this taxpayer such as interest, cash and/or properly Jiria.rat, rents, salaries, wages,
premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or
casual gains, profits and income and capital gains- 25%.

C. The preferential income tax rate under subsection (C)' (D) and (E) of Section 25 of the Tax code. as amended,
shall no longer be applicable without prejudice to the application of preferential tax. rates, under existing international
tax treaties' if warranted, Thus, all concern’s employees of the regional or area headquarters and regional operating

14. INCOME TAX - INDIVIDUAL Page 14 of 18

headquarters of multinational companies offshore banking units and petroleum service contractor and subcontractors
shall be subject to the regular income tax rate under Sec 24(A)(2)(a) of the Tax Code' as amended.

Notes: SECTION 9. INDIVIDUALS NOT REQUIRED TO FILE INCOME TAX RETURN. – (RR 8-2018)

The following individuals are not required to file income tax return:
A. An individual earning purely compensation income whose taxable income does not exceed Two Hundred Fifty
Thousand pesos (P250,000);

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’

B. 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;

C. An individual whose sole income has been subjected to final withholding tax;

D. A rninimum wage earner as defined in these regulations - 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.

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'

Notes: (RR8-2018) SECTION 10. TIME OF FILING OF INDIVIDUAL INCOME TAX RETURN. - Individuals
engaged in business/practice of profession, regardless of amount of sales/receipts, are required to file quarterly
income tax return on or before May 15, August 15 and November i5 for the first, second and third quarters of the
current year, respectively pursuant to Section 74(A) of the Tax Code, as amended; and to file an annual income tax
return, not later than fifteenth (15th) day of the fourth month following the close of the calendar year or April 15 as
provided under Section 51(C)(1) of the Tax Code, as amended.
Problem 13: Ms. Alona Will, a popular actress, received talent fees from EBQ-Cyril Promotions amounting to
₱20,000,000.00 for 2018. The creditable taxes withheld from the talent fees amounted to ₱1,600,000.00. She
incurred costs and expenses amounting to ₱5,000,000.00.
Required: Compute the income tax payable

Notes:
* Taxpayer is required to file quarterly and annual income tax returns.
* The creditable tax withheld is deductible from the income tax due.
* Taxpayer is allowed to pay in two (2) equal installments since the tax due is more than P2,000'00.
* As a professional actress, taxpayer is also liable to pay business tax.

Notes: (RR 8-2018)

SECTION 11. INSTALLMENT PAYMENT OF INDIVIDUAL TNCOME TAX. – When the tax due is in excess of Two
thousand pesos (P2,000.00), the individual may elect to pay the tax in two (2) equal installments, in which case, the
first installment shall be paid at the time the annual income tax return is filed and the second installment paid on or
before October 15 following the close of the calendar year..

If any installment is not paid on or before the date fixed for its payment, the whole amount of the unpaid tax becomes
due and payable, together with the delinquency penalties to be reckoned on the original date when the tax is required
to be paid.

SECTION 12. REGISTRATION UPDATES. - ln relation to Sections 24 (A)(2) (b) and 24 (A) (2) (c) (2) of the Tax
Code, as amended, relative to the option of self-employed individuals and / or professional to avail 8% income tax
rate based on gross sales/receipts and other non-operating income, the existing non-VAT taxpayer who is
contemplating to avail of the 8% income tax rate at the beginning of the taxable year or before the due date for filing
and/or payment of the percentage tax shall file an Application for Registration Information Update (BIR Form No.
1905) to end-date the registered tax type of percentage tax. [f the taxpayer is unable to timely update the required
registration, s/he shall continue to file the percentage tax return reflecting a zero-amount of tax with a notation that
s/he is availing of the 8% income tax rate option for the taxable year. S/he is still required to signified the intention to
avail the option on the initial quarterly income tax return for income tax purposes.

On the other hand, if the non-VAT taxpayer opted to be taxed under the graduated income tax rates s/he shall
continue to pay the required percentage tax under Sec' 116 of the Tax Code, as amended.

14. INCOME TAX - INDIVIDUAL Page 15 of 18

A taxpayer who initially presumed that the gross sales/receipts and other non-operating income for the taxable year
will not exceed the P3,000,000.00 VAT threshold but has actually exceeded the same during the taxable year, shall
immediately update his/her registration to reflect the change in tax profile from non-VAT to a VAT taxpayer. S/he
shall be required to update registration immediately within the month following the month s/he exceeded the VAT
threshold. S/he shall liable to VAT prospectively starting on the first day of the month following the month when the
threshold is breached. The taxpayer shall pay the required percentage tax covering the sales/receipts and other non-
operating income, from the beginning of the taxable year or commencement of business/practice of profession until
the time the taxpayer becomes liable for VAT, without imposition of penalty if timely paid on the immediately
succeeding month/quarter. Thus, there may be an instance when a taxpayer files two (2) business tax returns in a
month/quarter - i.e., percentage and VAT returns.

A VAT taxpayer who did not exceed the VAT threshold within the immediately preceding three (3) year period, may
opt to be a non-VAT taxpayer and avail of the 8% income tax rate option. S/he shall update the registration records
on or before the first quarter of taxable year to reflect the change in registration. However, s/he shall remain liable for
VAT for as long as there is no update of registration and VAT-registered invoices/receipts are continuously issued.
Registration updates shall be subject to existing rules and regulations on updates, verification, inventory and
surrender/cancellation of unused VAT-invoices/receipts.

A non-VAT taxpayer who volunteers to be a VAT taxpayer knowing that sales/receipts and other non-operating income
will exceed the VAT threshold within the taxable year, shall update the registration records. Such taxpayer becomes
liable to VAT on the day when such updating is made. In this case, the taxpayer shall automatically be subject to the
graduated income tax rates if the 8%o income tax rate option is initially selected. Any income tax paid under the said
flat 8oh income tax rate shall be deducted from the income tax due under the graduated income tax rates. The
percentage tax due from the beginning of the taxable year or commencement of business/practice of profession shall
be paid on the month/quarter immediately following such registration update. However, if the graduated income tax
rates is chosen from the beginning then taxpayer ceases to be liable to percentage tax upon registration updates and
instead is now liable to VAT.

Illustration: Ms. ENA is a newly registered non-VAT taxpayer engaged in merchandising of car accessories on
February 1. 2018. In September 2018' her cumulative gross sales /receipts reached three million five hundred pesos
(P3,500,000.00).

a. If the taxpayer availed the 8% income tax rate upon her registration with the BIR on February 1, 2018,
or upon filing of her first quarter income tax return, she is required to update her registration and comply
with the following:

*Ms. ENA needs to visit BIR Office where she is registered to register as VAT taxpayer or before October 31, 2018,
one month from the time that she exceeded the P3,000,000'00 VAT threshold'

* Since she availed the option of 8% income tax fate (not required to file the percentage tax return), sire shall file the
required percentage tax covering the- sales/receipts and other non-operating income, from February 1 to September
30, 2018 due on or before October 20, 2018, without imposition of penalty if timely paid. She is likewise liable to VAT
beginning October 1, 2018.

* The taxpayer shall automatically be subjected to the graduated income tax rates from the time the gross
sales/receipts and other non-operating income exceeded the VAT threshold'

* The 8-%o income tax paid by the taxpayer shall be credited/deducted from her annual income tax due using the
graduated income tax regime.

b. If the taxpayer did not avail the 8% income tax rate upon her registration with the BIR on February i,
2018 or upon filing of her first quarterly income tax return, she shall update her registration and comply
with the following:

* Since she is subject to the graduated income tax rate, she is required to file the 1't and 2fr quarterly percentage tax
returns' The last quarterly percentage tax return that she needs to file should cover the period July 1, 2018 to
September 30, 201 8, which is due on or before October 20, 2018, She becomes liable to VAT on October 1, 2018.

* The taxpayer needs to visit the BIR Office where she is registered to update her registration profile as VAT taxpayer
on or before October 31, 2018, one month from the time that she exceeded the P3,000,000.00 VAT threshold

SOURCES OF INCOME
Situs – Place of taxation. It is the state or political unit which has jurisdiction to impose a particular tax. The state
where the subject to be taxed has a situs may rightfully levy and collect the tax. The situs is necessarily in the state
which has jurisdiction or which exercises dominion over the subject in question.

Factors to Consider in Determining Situs of Taxation

1. Subject matter ( person, property, or activity)
2. Nature of tax
14. INCOME TAX - INDIVIDUAL Page 16 of 18
3. Citizenship
4. Residence of the taxpayer
5. Sources of income
6. Place of exercise, business or occupation being taxed

Sources of Income Test of Source of Income

1. Income from services Place of performance
No. of days of performance in RP_________ x
Compensation Received
No. of days of performance in RP and outside RP
2. Rent Location of property
3. Royalties Place of use of intangible
4. Gain on sale of real property Location of property
5. Gain on sale of personal property
purchased in one country and sold in
another Place of sale
6. Gain on sale of foreign shares of
stock Place of sale
Income within (shares of domestic corporation treated as derived
6. Gain on sale of domestic shares ofentirely from sources within the Philippines regardless of where the said
stock shares are sold)
7. Interest Residence of debtor
8. Mining Place where mince is located
9. Farming Place where farm is located
Source of income
Produced and sold within Within
Produced and sold without Without
Produced in whole/part within Partly within and without
and sold without
Produced in whole/part Partly within and without
10. Manufacturing business*** without and sold within
11. Dividend
a. From domestic company Income within
If ratio is:
(< 50%) Less than 50%, the entire dividend purely without the
Philippines
( > 50%) At least 50%, the dividend income partly within and partly
b. From foreign company without the Philippines
From foreign corporation (based on the ratio of the gross income of the foreign corporation for the preceding 3 years
prior to declaration of dividends derived from Philippine sources):
Philippine Gross income (3 years) x Dividend
Income within = Total Gross income (3 years)

***MANUFACTURING BUSINESS: Computation of income within when independent factory or production price
has not been established:
Taxable income X Value of property, within
2 Value of property, within and without
Add: Xxx
Taxable income X Gross sales, within
2 Gross sales, within and without Xxx
Income within Xxx

Deductions of Taxpayer Whose Taxable Income is From Philippine Sources Only

Gross income within xxx
Less: Expenses, interest, losses and other deductions properly allocated to income within
Ratably portion of unallocated expenses, interest, etc
Phil. Gross income x Unallocated expenses
Total Gross income (xxx)
Net Income xxx

Dividend received may be:

Corporation:
Not Taxable/Exempt from Tax Final Tax Subject to year end tax
1. Received by domestic Received by non-resident Received by domestic corporation

14. INCOME TAX - INDIVIDUAL Page 17 of 18

corporation from another corporation from domestic from foreign corporation
domestic corporation corporation 15% (tax sparing (included in gross income)
credit) or 30% (no tax sparing credit)
2. Received by resident foreign TaxSparingCredit
corporation from a domestic 15% or 30%
corporation 15%/30%- if received from domestic
corporation Philippines USA
30%- if NRFC does not allow a tax Investment
credit or received from foreign
corporation (predominance test,
proportion in the Philippines) Dividend Taxablefor
Corporatetax 30% taxdeemedpaid15%
Notes:
*NRFC- All passive income within the TaxCredit (15%)
Philippines is subject to 30% Final Finaltax 15%
Tax ( except interest income and
income under expanded foreign
currency deposit system-EXEMPT)
** NRFC – Interest on foreign
loans subject to 20% Final Tax

Individual Taxpayer:
Final Tax
RC NRC RA NRA –Engaged
On dividend from Domestic Corporation and any entity
Taxable as Domestic Corporation 10% 10% 10% 20%
* Non-resident alien not engaged in business –All passive income within the Philippines is subject to 25% Final
Tax (except interest income received from a depository bank under expanded foreign currency deposit system –
exempt)
PROBLEMS
Problem 1: (Location and situs of income) Compute how much is earned within and earned outside the
Philippines from each of teh following independent cases:
Income description Within Without
1. A fiance company earned P100,000 interest income. 80% of these were 20 80
from non-resident debtors.
2. Juan earns P1,000,000 royalties from his Mr. Juan Lechon franchise. 20 80
80% of these were derived abroad.
3. Roy earned P1,000,000 rent from OFWs in his apartment in the
Hongkong. He also earned P400,000 rent from his Philppine condominium
unit.
4. Santa, a resident citizen, works home online and submits his output to 1,200,000
clients. He collected P1,000,000 service fee from foreign clients and
P200,000 from resident clients
5. Santos rendered audit services to client in USA for P1,000,000. The 0 1,000,000
services were paid in USA.
6. Carlos has a store in a tourist park in Cebu City, Philippines. He earned a P1,000,000
total of P1,000,000 gain from selling souvenir items. 60% were from
foreign tourists.
7. Don Pepito sold to his friend abroad a commercial building located in P1,000,000
Metro Manila, Philippines at a gain of P1,000,000.
8. Juan sold his stocks in a domestic corporation to a foreign investor at a P1,000,000
gain of P1,000,000
9. Juan received P1,000,000 dividends from a domestic corporation and P1,000,000 P500,000
P500,000 dividend income from a non-resident foreign corporation
10. Allan received P40,000 dividend from a resident foreign corporation 24 16
60% of its historical income is form the Philippines.
11. Reymart received P1,000,000 dividend from a resident foreign 0
corporation which realized 40% of tis income from the Philippines
12. Izza received P1,000,000 dividend from a non-resident foreign 0
corporation
13. Davao plant manufactures tables and sells to resident clients. A total of 1,000,000 0
P1,000,000 gross income were realized during a period.
14. ABC, Inc. manufactures in the Philipppines and sells to unaffiliated 1,000,000 0
export clients. A total of P1,000,000 gross income were earned during a
period.

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