ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 5

TAXATION A. Tamayo  G. Caiga  C. Lim  K. Manuel  E. Buen

TAX-601: INCOME TAX - INDIVIDUALS, ESTATES AND TRUSTS

1. Classification of Individuals

a. Citizens 1) Those who are citizens of the Philippines at the time of the adoption of the
Constitution (on February 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 with law.
1) Resident citizen A citizen of the Philippines residing therein.
2) Non-resident 1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical
citizen presence abroad with a definite intention to reside therein;
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;
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;
4) A citizen who has been previously considered as non-resident 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 non-
resident 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;
5) 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.

Overseas Contract Worker (OCW) or Overseas Filipino Worker (OFW)

a. Refers to Filipino citizens in foreign countries who are physically present in a foreign country as a
consequence of their employment in that country;
b. Commonly referred to as OFWs;
c. Their salaries and wages are paid by an employer abroad and is not borne by an entity or person in
the Philippines;
d. Must be duly registered as such with the Philippine Overseas Employment Administration (POEA)
with valid Overseas Employment Certificate (OEC).

Tax Treatment under the 1997 Tax Code, as amended

• An individual citizen of the Philippines who is working and deriving income from abroad as an OCW
is taxable only on income 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 OCW;
• An OCW or OFW’s income arising out of his overseas employment is exempt from income
tax.

b. Aliens Individuals who are not Filipinos.

1) Resident alien;
2) Non-resident alien doing business in the Philippines;
3) Non-resident alien not doing business in the Philippines.
1) Resident alien An individual whose residence is within the Philippines and who is not a citizen thereof.
1) An alien who lives in the Philippines with no definite intention as to his stay;
2) One who comes to the Philippines for a definite purpose which in its nature would require an extended
stay and to that end makes his home temporarily in the Philippines, although it may be his intention at all
times to return to his domicile abroad;
3) 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.
2) Non-resident alien An individual whose residence is not within the Philippines and who is not a citizen thereon.
1) One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished
2) A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period
of more than 180 days during any calendar year shall be deemed a “non-resident alien doing business in
the Philippines.”

Resident vs. Non-Resident Alien

Intended stay in the Philippines Classification for Tax Purposes

Up to 180 days Non-resident alien not engaged in trade or business (NRANETB)
More than 180 days up to 2 years * Non-resident alien engaged in trade or business (NRAETB)
Greater than 2 years * Resident alien

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2. Taxable income

Taxable income defined The term ‘taxable income’ means the pertinent items of gross income specified in the Tax Code, less
deductions if any, authorized for such types of income by the Tax Code or other special laws.

3. Tax Base and Tax Rate (please see Section 42 of the Tax Code, as amended – Annex A of this handout)

TAXPAYER TAX BASE

a. Resident citizen Taxable income within and without
b. Non-resident citizen Taxable income within
c. Resident alien Taxable income within
d. Non-resident alien engaged in trade or business Taxable income within
e. Non-resident alien not engaged in trade or
business Gross income within
f. Estate and trust Taxable income within and without

4. Rates of Tax on Taxable Income of Individual

a. Effective January 1, 2018 (until December 31, 2022)

If the taxable income is:

Over But not over The tax shall be Plus Of excess over
P 250,000 0%
P 250,000 400,000 20% P 250,000
400,000 800,000 P 30,000 25% 400,000
800,000 2,000,000 130,000 30% 800,000
2,000,000 8,000,000 490,000 32% 2,000,000
8,000,000 2,419,000 35% 8,000,000

b. Effective January 1, 2023

If the taxable income is:

Over But not over The tax shall be Plus Of excess over
P 250,000 0%
P 250,000 400,000 15% P 250,000
400,000 800,000 P 22,500 20% 400,000
800,000 2,000,000 102,500 25% 800,000
2,000,000 8,000,000 402,500 30% 2,000,000
8,000,000 2,202,500 35% 8,000,000

c. Married individuals
1) Joint return of husband and Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely
wife 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. [Sec. 51 (D)]
2) Separate computation of For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall
income tax compute separately their individual income tax based on their respective total taxable income.
3) Certain income to be divided If any income cannot be definitely attributed to or identified as income exclusively earned or
equally realized by either of the spouses, the same shall be divided equally between the spouses for the
purpose of determining their respective taxable income.

4) Exercise: A husband and wife, resident citizens, with one (1) qualified dependent child, had the following income and expenses
for the year 2021. The husband waived the additional exemption in favor of his wife.

Salary of the husband, net of P50,000 withholding tax P 450,000

Salary of the wife, gross of P60,00 withholding tax 600,000
Gross professional income, husband, gross of 15% withholding tax 1,500,000
Cost of services, husband 500,000
Expenses, practice of profession 300,000
Gross sales, wife 800,000
Cost of sales, wife’s business 300,000
Business expenses, wife 100,000
Gross rental income, lease of common property (Gross receipts, P1,000,000) 700,000
Expenses, leased common property 200,000
Gross business income, Singapore (gross sales, P800,000) 600,000
Business expenses, Singapore 150,000

How much was the taxable income and the income tax due of the husband and wife using itemized deduction?

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Week 5: INCOME TAX - INDIVIDUALS, ESTATES & TRUSTS

Suggested Solutions:
Husband Wife
Gross compensation income (A) P 500,000 P 600,000
Gross receipts/sales 1,500,000 800,000
Less: Cost of services/sales ( 500,000) (300,000)
Gross income 1,000,000 500,000
Other income
Rent income 350,000 350,000
Gross income, Singapore 300,000 300,000
Total 1,650,000 1,150,000
Less: Itemized deductions ( 300,000) ( 100,000)
Expenses, leased property ( 100,000) ( 100,000)
Expenses, Singapore ( 75,000) ( 75,000)
Taxable income – business / practice of profession (B) 1,175,000 875,000
Total taxable net income (A) + (B) P1,675,000 P1,475,000

d. Minimum Wage Earners

1) Definition The term “minimum wage earner” shall refer to a worker in the private sector paid the statutory
minimum wage, or to an employee in the public sector with compensation income of not more
than the statutory minimum wage in the non-agricultural sector where he/she is assigned.
2) Exempt from income tax Minimum wage earners shall be exempt from the payment of income tax on their taxable income.

The holiday pay, overtime pay, night shift differential pay, and hazard pay received by such minimum
wage earners shall likewise be exempt from income tax.

For purposes of these regulations, hazard pay shall mean the amount paid by the 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 expose them to great danger or contagion or peril to life.
Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed subject to income tax
and consequently, withholding tax on the said hazard pay.

e. Individuals Earning Purely Compensation Income

Individuals earning purely compensation income shall be taxed based on the graduated income tax rates above.

f. Self-Employed Individuals and/or Professionals

Self-employed individuals and/or professionals shall have the options to be taxed at:
a. graduated income tax rate on taxable income or
b. an eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand
pesos (P250,000) in lieu of the graduated income tax rates and the percentage tax under Section 116 of this Code.

g. Mixed Income Earners

Type of Income Income Tax Rate
1) All Income from Graduated income tax rates above
Compensation
2) All Income from
Business or
Practice of
Profession
a) If Total Gross Graduated income tax rates above (Section 24 A),
Sales and/or
OR
Gross
Receipts and 8% income tax based on gross sales or gross receipts and other non-operating income in lieu of the graduated
Other Non- income tax rates under Section 24(A) and the percentage tax under Section 116 all under the Tax Code, as
Operating amended.
Income Do
Not Exceed Unless the taxpayer signifies in the 1st Quarter Return of the taxable year the intention to elect the 8% income
the VAT tax, the taxpayer shall be considered as having availed of the graduated rates under Section 24(A) of the Tax
Threshold Code, as amended, and such election shall be irrevocable. He shall also be liable to business tax.

The following cannot avail of the 8% income tax rate option:

a. A VAT-registered taxpayer, regardless of the gross sales/receipts
b. Taxpayers who are subject to Other Percentage Taxes under Title V of the Tax Code, as amended,
except those subject under Section 116 of the same Title
c. Partners of a General Professional Partnership (GPP) by virtue of their distributive share from GPP which
is already net of cost and expenses

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b) If Total Gross If at any time during a given taxable year, a taxpayer’s gross sales or receipts exceeded the VAT Threshold
Sales and/or (₱3,000,000), he/she shall automatically be subjected to the graduated rates under Section 24(A)(2)(a) of the
Gross Tax Code, as amended.
Receipts and
A non-VAT registered taxpayer who initially opted to avail of the 8% option but has exceeded the VAT threshold
Other Non-
during the taxable year, shall be subject to 3% Percentage Tax on the first ₱3,000,000.00 of his/her gross
Operating
sales/receipts under Section 116 of the Tax Code, as amended, without imposition of any penalty if payment is
Income
timely made on the following month when the threshold is breached.
Exceed the
VAT Threshold The excess of the threshold shall be subject to VAT prospectively, and the 8% income tax previously paid shall
be credited to the Income Tax Due under the graduated rates provided in Section 24(A)(2)(a) of the Tax Code,
as amended.

5. Optional Standard Deductions (OSD) for Individual Taxpayers

a. In lieu of the deductions allowed (itemized), 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.
b. 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 itemized deductions allowed.
c. 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 the Tax Code.
d. The said individual shall keep such records pertaining to his gross sales or gross receipts.

6. Exercises

a. 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
2021, Mr. CSO earned a total taxable compensation income of ₱1,060,000. How much is his income tax liability?

Suggested Solutions:
His income tax liability will be computed as follows:

Taxable Compensation Income P 1,060,000

Tax Due:
On P800,000 P 130,000
On excess (P1,060,000 – 800,000) x 30% 78,000
Tax Due P 208,000

b. Ms. EBQ operates a convenience store while she offers bookkeeping services to her clients. In 2021, her gross sales amounted to
P800,000, in addition to her receipts from bookkeeping services of ₱300,000. She already signified her intention to be taxed at 8%
income tax rate in her 1st quarter return. How much is the income tax liability for the year?

Suggested Solutions:
His income tax liability will be computed as follows:

Gross Sales – Convenience Store P 800,000

Gross Receipts - Bookkeeping 300,000
Total Sales/receipts P 1,100,000
Less: Amount allowed as deduction under Sec. 24(A)(2)(b) (250,000)
Taxable Income P 850,000
Tax Due (8% x P850,000) P 68,000

• The total of gross sales and gross receipts is below the VAT threshold of ₱3,000,000.
• Income 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.

c. Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on gross sales in her 1 st Quarter Income Tax
Return, and she incurred direct costs and operating expenses amounting to ₱600,000 and ₱200,000, respectively, or a total of
₱800,000. How much is the income tax?

Suggested Solutions:

Gross Sales/Receipts P 1,100,000

Less: Direct Costs (600,000)
Total Sales/receipts P 500,000
Less: Itemized deduction (i.e., operating expenses) (200,000)
Taxable Income P 300,000
Tax Due - on excess over P250,000 (P300,000 – 250,000) x 20% P 68,000
• Aside from income tax, Ms. EBQ is likewise liable to pay business tax.

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d. Ms. MRU operates a convenience store while she offers bookkeeping services to her clients. In 2021, her gross sales amounted to
₱1,800,000, in addition to her gross receipts from bookkeeping services of ₱400,000. Her recorded cost of goods sold and operating
expenses were P1,325,000 and P320,000, respectively.
Questions:
1. How much is Ms. MRU’s taxable income and income tax due if she opted to avail of the OSD?
2. How much is the business tax, if any?
3. Can she avail of the 8% option if she does not opt to use OSD?
4. How much is her income tax liability if she signifies her intention to be taxed at 8% income tax rate in her 1st Quarter return?
Suggested Answers (1 and 2)
Ms. MRU opted to avail of the OSD, the OSD and taxable income shall be computed as follows:
Gross Sales –Convenience Store ₱ 1,800,000
Gross Receipts – Bookkeeping 400,000
Total ₱ 2,200,000
Less: OSD (P2,200,000x 40%) 880,000
Net Taxable Income ₱ 1,320,000
Tax Due:
On ₱800,000 ₱ 130,000
On Excess(₱1,320,000–₱800,000) x30% 156,000
Total tax due ₱ 286,000
* The taxpayer elected OSD inthe 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 his financial statements with her tax return.
* Taxpayer is liable for business tax , in addition to income tax.
Suggested Answers (3 and 4)
Her income tax liability if she signifies her intention to be taxed at 8% income tax rate in her 1st Quarter return will be computed as follows:
Gross Sales –Convenience Store ₱ 1,800,000
Gross Receipts – Bookkeeping 400,000
Total ₱ 2,200,000
Less: Amt. allowed as deduction under Sec. 24(A)(2)(b 250,000
Net Taxable Income ₱ 1,950,000
Tax Due:
8% of ₱ 1,950,000 ₱ 156,000
* The gross sales and receipts did not exceed the VAT threshold of ₱3,000,000.
* Taxpayer opted to be taxed at 8% income tax rate.
* Taxpayer is not liable for 3 % percentage tax under Section 116 of the Tax Code, as amended.

e. In 2020, Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation of ₱1,500,000, inclusive of 13 th month
and other benefits in the amount of ₱120,000 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
and ₱600,000, respectively, and with non-operating income of ₱100,000.
Questions:
1. How much is his tax due for 2020 if he opted to be taxed at 8% income tax rate of his gross sales for his income from business?
2. How much is his income tax due for 2020 if he did not opt for the 8% income tax based on gross sales/receipts and other non-
operating income?
3. How much is the percentage tax 2020 if he did not opt for the 8% income tax based on gross sales/receipts and other non-
operating income?

Suggested Answers (1)

His tax due for 2020 shall be computed as follows:
Total compensation income ₱ 1,500,000
Less: Non-taxable 13th month pay and other benefits 90,000
TaxableCompensationIncome ₱ 1,410,000

Tax due:
1. On Compensation:
On ₱800,000.00 ₱ 130,000
On excess (P1,410,000 – P800,000) x 30% 183,000
Tax due on Compensation Income ₱ 313,000

2. On Business Income:
Gross Sales ₱ 2,400,000
Add: non-operating income of 100,000
TaxableBusinessIncome ₱ 2,500,000
Multiplied by income tax rate 8%
Tax Due on Business Income ₱ 200,000
TotalIncomeTaxDue (CompensationandBusiness) ₱ 513,000

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* 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 ₱250,000 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.

Suggested Answers (2 and 3)

His tax due for 2020 shall be computed as follows:

Total compensation income ₱ 1,500,000

Less: Non-taxable 13th month pay and other benefits 90,000
Taxable Compensation Income ₱ 1,410,000
Add: Taxable Income from Business –
Gross Sales ₱ 2,400,000
Less: Cost of Sales 1,000,000
Gross Income ₱ 1,400,000
Less: Operating Expenses 600,000
Net Income from Operation ₱ 800,000
Add: Non-operating Income 100,000 900,000
Total Taxable Income ₱ 2,310,000
Tax Due:
On ₱2,000,000 ₱ 490,000
On excess (₱2,310,000 - 2,000,000) x 32% 99,200
Total Income Tax P582,200

* 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 ₱72,000, which is 3% of ₱2,400,000

7. Estate and Trust

a. Definition of estate Estate refers to the mass of all property, rights and obligations of a person which are not extinguished by his
death.
b. Definition of trust Trust is a right on property, real or personal, held by one party for the benefit of another.

8. Important Pointers on Estates and Trusts

a. Estate as a taxpayer An estate is a taxpayer if it is under settlement or administration.
b. Trust as a taxpayer 1) A trust is a taxpayer if under the terms of the trust the fiduciary must accumulate the income.
2) A trust is a taxpayer if under the terms of the trust the fiduciary may accumulate or
distribute the income, in his discretion.
c. When is the income 1) If under the term of the trust the title to any part of the corpus or principal of the trust may be revested to
of the trust taxable the grantor, the income of the part of the corpus or principal shall be taxable to the grantor.
to the grantor? 2) If under the term of the trust the income of the trust shall be applied for the benefit of the grantor, the
income that shall be applied for the benefit of the grantor shall be taxable to the grantor.
d. Treatment of income When an estate or a trust is a taxpayer, a distribution of the year’s income to an heir or beneficiary is:
distribution of the 1) A special item of deduction for the estate/trust;
year’s income to 2) A special item of income to the heir/beneficiary.
heir or Beneficiary
e. Computation of Gross income xxx xxx
taxable income of Less: Deductions
the estate or trust Business expenses xxx
Distribution of year’s income to the heir or beneficiary xxx xxx
Taxable net income xxx
Tax due [Sec. 24 (A)] xxx

9. Several Trusts with a Common Grantor and a Common Beneficiary

a. Filing of separate A separate return will have to be filed for each trust by the respective trustee or fiduciary.
returns
b. Consolidation of the The separate returns filed by the different fiduciaries shall be consolidated in the BIR.
separate returns
c. Consolidated income An income tax shall be computed on the consolidated income.
tax
d. Apportionment of The tax computed on the consolidated income shall be apportioned to the different trusts, such that each trust
the consolidated shall have a share in the income tax on consolidated income.
income tax to the
different trusts The format of computation follows:
Taxable income of the trust x Consolidated income tax
Taxable income of all trusts

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e. Tax payable of each Each trust shall pay an income tax still due computed as follows:
trust Income tax apportioned to the trust xxx
Less: Income tax already paid by the fiduciary of the trust xxx
Income tax still due xxx
f. Exercises: a. On December 1, 2020, Juanito Cruz created a trust for his son Alberto and appointed Danilo Paz as the trustee. On
December 26, 2020, another trust was created by Juanito for the benefit of the same son, Alberto, single. Juancho Garcia was appointed as
the trustee. The following data pertain to the two trusts: Trust under Danilo Trust under Juancho
Gross income P500,000 P600,000
Expenses 100,000 300,000
Income distributed to Alberto, gross of 15% withholding tax 50,000 100,000
Compute the tax due from:
1) each trust. 3) each trust after share in the consolidated income tax.
2) the consolidated income. 4) the beneficiary.

Suggested Solutions:
1) Tax due of each trust
Trust under Danilo Trust under Juancho
Gross income P500,000 P600,000
Less: Expenses ( 100,000) ( 300,000)
Income distribution ( 50,000) ( 100,000)
Taxable net income P 350,000 P 200,000
Tax due [Sec. 24 (A)] P 20,000 Exempt

2) Tax due from the consolidated income

Consolidated gross income P1,100,000
Less: Consolidated expenses (400,000)
Consolidated income distribution ( 150,000)
Taxable net income P 550,000
Tax due [Sec. 24 (A)] P 67,500

3) Tax due from each trust after share in the consolidated income tax
Trust under Danilo Trust under Juancho
Share in the consolidated income tax P42,955 P24,545
Less: Income already paid 20,000 -
Tax payable P22,955 P 24,545

Trust under Danilo – 350,000/550,000 x 67,500 = P42,955

Trust under Juancho – 200,000/550,000 x 67,500 = P24,545

4) Tax due from the beneficiary using OSD

Income distribution received P150,000
Tax due [Sec. 24 (A)] -
Less: Creditable withholding tax (15% x 150,000) ( 22,500)
Tax payable (overpayment) ( P 22,500)

b. Mr. Sixto Cruz IV, a rich businessman, established on December 2019 a trust for the benefit of his son Sixto Cruz V, 18 years old, single.
He transferred to the trust two (2) income producing properties with the following gross rentals:
Vacant lot leased for P600,000 annually, gross of withholding tax
Office building with monthly rental income of P25,000, gross of withholding tax
The appointed trustee was Mr. Osmundo de la Cruz. During the year 2020, ordinary trust expenses amounted to P350,000 and income
distributed to the beneficiary amounted to P150,000. The beneficiary has gross sales from his trading business amounting to P500,000 and
business expenses totaling P100,000.
Compute the taxable net income of the:
1) Trust using optional standard deduction. (2)Beneficiary using itemized deduction.

Suggested Solutions:
1) Taxable net income of the trust
Gross rentals –vacant lot P600,000
Gross rentals – office building (P25,000 x 12) 300,000
Total gross rentals 900,000
Less: Optional standard deduction (40% x 900,000) ( 360,000)
Taxable net income P540,000

2) 2) Taxable net income of the beneficiary using OSD

Gross sales for trading business P500,000
Less: Business expenses 100,000
Gross income 400,000
Add: Income distribution received 150,000
Taxable net income P550,000

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8. Income Tax Returns (Individuals, Estates and Trusts)

a. Required to File The following individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.
b. Contents of ITR 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.
c. Substituted Individual taxpayers shall not be required to file an annual income tax return if:
Filing of IncomeTax a. receiving purely compensation income, regardless of amount,
Returns b. from only one employer in the Philippines for the calendar year,
c. the income tax of which has been withheldcorrectlybythesaid employer(taxdue equals tax
withheld).

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.
d. Where to File Except in cases where the Commissioner otherwise permits, the return shall be filed with a. an
authorized agent bank,
b. Revenue District Officer,
c. Collection Agent or duly authorized Treasurer of the city or municipality
in which such person has his legal residence or principal place of business in the Philippines, or
d. if there be no legal residence or place of business in the Philippines, with the Office of the
Commissioner.
e. When to File Quarterly declarations:
First quarter (Sec. 20, TRAIN, amending
Sec. 74, NIRC) May 15 of the current year
Second quarter August 15 of the current year
Third quarter November 15 of the current year

Final adjusted return [Sec. 51 (C) April 15 of the succeeding year

(1)]
f. Payment of Tax The tax is paid as the return is filed.

9. Exercise: Mr. JMLH signified her intention tobe taxed at 8% income tax rate on grosssalesinher1st QuarterIncomeTaxReturn. However,her grosssales
duringthe taxable year has exceeded the VAT threshold.
Q1 Q2 Q3 Q4
(8% Rate) (8% Rate) (8% Rate)
Total Sales ₱ 500,000.00 ₱ 500,000.00 ₱ 2,000,000.00 ₱ 3,000,000.00
Less: Cost of Sales 300,000.00 300,000.00 1,200,000.00 1,200,000.00
Operating Expenses 120,000.00 120,000.00 480,000.00 720,000.00

REQ: 1) Compute the quarterly income tax payable and show the due dates
2) Compute the income tax due when the final or adjusted return is filed and show the due date
3) Compute the percentage tax, if any.
4) Compute the VAT, if any.

Suggested Solutions:

Requirement 1) Quarterly income tax payable

Frist quarter Second quarter Third quarter
Gross sales P500,000 P1,000,000 P3,000,000
Less: Exempt amount 250,000 250,000 250,000
Taxable income P250,000 P 750,000 P2,750,000
Tax due (8%) P 20,000 P 60,000 P 220,000
Less: Tax payments, previous quarters - 20,000 60,000
Tax payable P 20,000 P 40,000 P 160,000
Due date May 15 August 15 November 15

Requirement 2 Income tax due when final income tax return is filed
Tax due shall be computed as follows:
Total Sales ₱ 6,000,000
Less: Cost of Sales 3,000,000

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Gross Income 3,000,000

Less: Operating Expenses 1,440,000
Taxable Income ₱ 1,560,000
Tax Due under the graduated rates ₱ 358,000
Less: 8% income tax previously paid (Q1 to Q3) (3,000,000 – 250,000 = 2.750,000 x 8%) 220,000
Annual Income Tax Payable ₱ 138,000
Due date April 15

Tax due shall be computed as follows:

The gross receiptsexceeded the VAT threshold of P3,000,000.00. Taxpayer shall be liable to pay income tax under graduated rates pursuant to Section
24(A)(2)(a) of the Tax Code, as amended.

Taxpayer shall be allowed an income tax credit of quarterly payments initially made under the 8% income tax option.

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

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.

Requirement 3 Quarterly percentage tax

Frist quarter Second quarter Third quarter
Gross sales P500,000 P500,000 P2,000,000
Tax rate 3% 3% 3%
Percentage tax (Sec. 116) P15,000 P15,000 P60,000

Requirement 4 – VAT
Gross receipts (6,000,000 – 3,000,000) P3,000,000
Tax rate 12%
VAT P 360,000

10. Exercise: Compute the withholding tax using the table on the next page.

1) An employee receiving daily compensation in the amount of P2,500, net of mandatory contributions.

Suggested Solutions:

By using the daily withholding tax table, the withholding tax beginning January 2018 is computed by
referring to compensation range under column 4 which shows a predetermined tax of P356.16 on
P2,192 plus 30% of the excess of Compensation Range (Minimum) amounting to P308 (P2,500 — P2,192)
which is P92.40. As such, the withholding tax to be withheld by the employer shall be P448.56.

Total taxable compensation P 2,500

Less: Compensation Range (Minimum) 2,192
Excess P 308

Withholding tax shall be computed as follows:

Predetermined Tax on P2,192 P 356.16
Add: Tax on the excess (P308.00 x 30%) 92.40
Total daily withholding tax P 448.56

2) An employee receiving weekly compensation in the of P9,500, net of mandatory contributions.

Suggested Solutions:
By using the weekly withholding tax table, the withholding tax beginning January 2018 is computed by
referring to compensation range under column 3 which shows a predetermined tax of P576.92 on
P7,692 plus 25% of the excess of Compensation Range (Minimum) amounting to P1,808.00 (P9,500 —
P7,692) which is P452. As such, the withholding tax to be withheld by the employer shall be P1,028.92.

Total taxable compensation P 9,500

Less: Compensation Range (Minimum) 7,692
Excess P 1,808
Withholding tax shall be computed as follows:

Tax on P7,692.00 P 576.92

Tax on the excess (P1,808.00 x 25%) 452.00
Total weekly withholding tax P 1,028.92

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3) An employee receiving semi-monthly compensation in the amount of P15,500, net of mandatory contributions.
Suggested Solutions:
By using the semi- monthly withholding tax table, the withholding tax beginning January 2018 is computed by referring
to compensation range under column 2 which shows a predetermined tax of P0.00 on P10,417.00 plus 20% of the
excess of Compensation Range (Minimum) amounting to P5,083.00 (P15,500.00 — P10,417.00) which is
P1,016.60. As such, the withholding tax to be withheld by the employer shall be P1,016.60.
Total taxable compensation P 15,500
Less: Compensation Range (Minimum) 10,417
Excess P 5,083
Withholding tax shall be computed as follows:
Tax on P10,417.00 P 0.00
Tax on the excess (P5,083.00 x 20%) 1,016.60
Total semi-monthly withholding tax P 1,016.60

4) An employee receiving monthly compensation in the amount of P170,500, with supplemental income of
P5,000, net of mandatory contributions.

Suggested Solutions:
By using the monthly withholding tax table, the withholding tax beginning January 2018 is computed by
referring to compensation range under column 2 which shows a predetermined tax of P40,833.33
on P166,667.00 plus 32% of the excess of Compensation Range (Minimum) amounting to P8,833.00
(P170,500.00 + P5,000 —P166,667.00) which is P2,826.56. As such, the withholding tax to be withheld by
the employer shall be P43,659.89.
Total taxable compensation P 170,500
Less: Compensation Range (Minimum) 166,667
Excess P 3,833
Add: Supplemental Compensation 5,000
Total Taxable compensation for the month P 8,833

Withholding tax shall be computed as follows:

Tax on P166,667 P 40,833.33
Tax on the excess including supplemental compensation (P8,833 x 32%) 2,826.56
Total monthly withholding tax P 43 659.89

REVISED WITHHOLDING TAX TABLE (version 2)

Effective January 1, 2018 to December 31, 2022
DAILY 1 2 3 4 5 6
Compensation P 685 and
P 685-P1,095 P1,096-P2,191 P 2,192- P5,478 P 5,479 – P21, 917 P 21,918 and above
Range below
Prescribed 0.00 P 82.19 P 356.16 P 1,342.47 P 6,602.74
Withholding 0.00
Tax + 20% over P 685 + 25% over P1,096 + 30% over P2,192 + 32% over P5,479 + 35% over P21, 918
Weekly 1 2 3 4 5 6
P 4,808
Compensation P 7,692 – P 15, 385 –
and P 4,808 – P7,691 P 38,462 – P153,845 P 153,846 and above
Range P 15,384 P38, 461
below
Prescribed 0.00 P 576.92 P 2,500.00 P 9,423.08 P 46, 346.15
Withholding 0.00
Tax + 20% over P4,808 + 25% over P7,692 + 30% over P15,385 + 32% over P38,462 +35% over P153,846
SEMI-MONTHLY 1 2 3 4 5 6
P 10,417
Compensation P 10,417 – P 16,667 – P 33,333 –
and P83,333 – P333,332 P 333,333 and above
Range P16,666 P33,332 P 83,332
below
0.00 1,250.00 5,416.67 20,416.67 100,416.67
Prescribed
Withholding 0.00
+ 20% over + 25% over + 30% over P33,333 + 32% over P83,333 + 35% over P333,333
Tax
P10,417 P16,667
MONTHLY 1 2 3 4 5 6
P 20,833
Compensation P 20,833 – P166,667 –
and P33,333 – P66,666 P66,667 – P166,666 P 666,667 and above
Range P 33,332 P 666,666
below
0.00 P 2,500 P 10,833.33 P 40,833.33 P 200,833.33
Prescribed
Withholding 0.00
+20% over P + 25% over + 30% over P66,667 + 32% over + 35% over P666,667
Tax
20,833 P33,333 P166,667

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Steps in the Use of the Withholding Tax Table

1. Determine the total amount of monetary and non-monetary compensation paid to an employee for the payroll period segregating non-
taxable benefits and mandatory contributions.
2. Use the appropriate the table above for the applicable payroll period.
3. Determine the compensation range of the employee and apply the applicable tax rates prescribed thereon.
4. Compute the withholding tax due by adding the tax predetermined in the compensation range indicated on the column used and the tax on
the excess of the total compensation over the minimum of the compensation range.

END

APPENDIX A
(Section 42 of the TAX Code, as amended)
SEC. 42. Income from Sources Within the Philippines. -

(A) Gross Income from Sources Within the Philippines. - The following items of gross income shall be treated as gross income
from sources within the Philippines:

(1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing
obligation of residents, corporate or otherwise;

(2) Dividends. - The amount received as dividends:

(a) From a domestic corporation; and

(b) From a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-
year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as
the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this
Section; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such
period derived from sources within the Philippines bears to its gross income from all sources;

(3) Services. - Compensation for labor or personal services performed in the Philippines;

(4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property,
including rentals or royalties for –

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge or information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or
enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b)
or any such knowledge or information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to,
or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and

(iii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and

(6) Sale of Personal Property. - Gains; profits and income from the sale of personal property, as determined in Subsection (E)
of this Section.

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(B) Taxable Income From Sources Within the Philippines. –

(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the
expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other
deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely
be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully
substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income
from sources within the Philippines.

(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in
subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of
trade or business in the Philippines.

(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income
from sources without the Philippines:

(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this
Section;

(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this
Section;

(3) Compensation for labor or personal services performed without the Philippines;

(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or
royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas,
goodwill, trademarks, trade brands, franchises and other like properties; and

(5) Gains, profits and income from the sale of real property located without the Philippines.

(D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of
this Section, there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a
ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income.
The remainder, if any, shall be treated in full as taxable income from sources without the Philippines.

(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and
deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources
within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation
of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be
deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly
apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be
allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources
within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable
income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a
ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income;
and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas
of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property
produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources
without the Philippines.

Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the
purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within
the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated
as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident
alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in
its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any
income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor
and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement.

(F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange' or 'exchanged'; and the word 'produced'
includes 'created', 'fabricated,' 'manufactured', 'extracted,' 'processed', 'cured' or 'aged.'

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