Chapter a Income Tax for Individuals Definition Individual Taxpayers are natural persons with income derived from. within the territorial jurisdiction ofa taxing authority. Under RA 8424, otherwise known as the National Internal Revenue Code (NIRC), also known as the Tax Code, as amended, individual taxpayers are classified as follows: 1. Resident citizens (RC) ln Classification: 2. Nonresident citizens (NRC) Indlvcual taxpayers. difer among 3. Resident aliens (RA) ‘others, ast: . 4. Nonresident aliens (NRA) = Situs of income Engaged in Trade (NRAET) Manner of computing tax * Nonresident aliens not engaged in * Treatment of passive incomes = Alowable deductions Trade or Business (NRANET) ‘ ? References in the Tax Code * Alien individuals employed by POGOs and/or OGLs CLASSIFICATION of Taxpayers for purposes of Responsive Tax Administration under Section 21(b) of the Tax Code as amended by RA 11976 or the Ease of Paying Taxes Act (EOPTA). 1. Micro 2. Small 3. Medium 4 Large ‘This dassficaton i also appllabe to other types of taxpayers such a corporation and Partnerships. f 59Citizens of the Philippines following are i stitution, th .der Sec. 1, Article Ivor the Piipine CO” Under Sec. 1, Article IV of ctzens of the Philippines: no time of the adoption I the a tt 4. Those who are atzens of the Philippines 4 ae i ion; i Eee 1987 Philippine Constitution; gare alzens of the i penes 2. These whose fer tT, 1978. OF ary : aaeate “atizenship upon reaching a ew. 4, Those who are naturalized in acoordan Nonresident Citizen (NRC) of the Philippines i a citizen who: NIRG describes a nonresident citizen aS Se ston, the satisfaction of the Commissioner of bene Revel Paraott of tis physical presence abroad with a definite intention to res therein; the Philippines during the taxable year to reside abroad AAs an immigrant; or +» For employment on a permanent basis; or + For work'and derives income from abroad and whose ; ‘employment thereat requires him to be physically abroad most of | the time during the taxable year. ‘ I . Leaves Accttizen of the Philippines who ‘ ie for one hundred eighty-three cd have stayed outside the Philippines (aggregate). (183) or more by the end of the year non-resident cizen who arrives i i Aon resident in the Philippines at a ing the year fo reside feeb the Philippines than bo ced i ed fom Sour Nearives in the Philippi lon 2a Na Unt the date of ae Fst an OFW, lured in the Pipi shall be as so 202 tab year cen May 2024, sahuary to Api 202 4. From May 2024 owas ot cian sident citzenOlen 2 ndsidel Tgagyer _The same rule shall apply to a resident citizen who leaves the Philippines anytime during the for the following reasons: As an immigrant abroad; or For employment abroad on a permanent basis. ILLUSTRATION 2: ‘Ana, a resident citizen, left the Philippines on July 1, 2024 to reside permanently ml ust together with her family. She shall be classified for 2024 taxable year as a Januay to Jie 2024 - resident ctzen From July 2024 onwards — nonresident citizen Overseas Contract Workers(OCW)/ Overseas Filipino Workers (OFW) Revehue Regulation 1-2011 defines OCWs as’ Filipino citizens employed jn-foreign countries, commonly referred to. as OFWs, who are physically present in a foreign country as a consequence of their employment thereat. Their salaries and wages are paid by an employer abroad and are not ” borne by.entities or persons in the Philippines. Hence, OFWs are classified as nonresident citizens for tax purposes. To be considered as an OCW or OFW, they must be duly registered as such with the Philippine Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (QEC). Seafarers or seamen are Filipino citizens who receive compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively for international trade, To be considered as an OOW or OFW, they must be duly registered as such with the Philippine Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC) with Seafarers Identification Record Book (SIRB) or Seaman's Book issued by the Maritime Industry Authority (MARINA). For income taxation purposes, OCWs/OFWs. are classified as nonresident citizens. Resident citizen of the Philippines ‘A Filipino citizen taxpayer not classified as nonresident citizen is considered a resident citizen for tax purposes. Alien ‘An alien is a foreign-born person who is not qualified to acquire Philippine citizenship by birth or after birth. 61oly 2 z reboideal Tapper Resident aliens dotnes resident ion wrote Cos it ines tyansiontornot Set ot een iswithin t oneal is determined and roles sah thereat Alone WIN hot mere by his ei lippines and Who Oe liens. intentions with roan a ce bacbsg resent ite regard to the transients or sojourners 29 cetpines inno efi wom he inonton ato re say is also a resident alien Likewise, eee or ‘tis in i e that drvefien who comes tothe Philippines for tho Pee fe stay. aries extended stay for its accomplishrmers Si. rakes his home temporarily in the Philippines: Tesident, regardless of his intention to return residence abroad. z Non-resident aliens ‘The term “nonresident alien’ under Section 22(G) of the Tax Code means an individual whose residence is not in the Philippines and who is not a citizen thereof. They are aliens who come to the Philippines for a definite, purpose, which in its nature may be promptly accomplished. They are alien who are mere transients or non-residents, hence, classified as nonresident alien. 4 Aliens who stayed in the Philippines for an. aggregate period of more than 180 days during the taxable year andlor aliens who have businoss Income in the Philippines are considered as nonresident resident alien not en, ‘ 25% in gaged in trade or busi f ippines (ordinary mere se8 OF OFOSS income from ats eA NETE) Capital gains tax). as interocr, ePoSSNE income except for ouroeS within the wages, premiums, annuiter, oS? andlor property divin «come: Subject 19 other fied or determinable ao pemsatin, remuneratin rents: Salaries capital gaing, able annual or periodic: or eration, emoluments, 0 sual gains, profits, and 62Clap 2 2 edividual Tagpagers ILLUSTRATION 3: Determine the correct classification of the taxpayer from the Independent cases provided below: Case 1: ‘Alan is a natural bor Filpino citizen. His family migrated in U.S. fiteen (18) years ‘ago.. For personal reasons, he decided to return and reside permanenty in the Philippines on March 1, 2024. + Answer: - From Jan. to Feb. 2024: Allan ‘classified es NRC. From March 1, 2024 onwards: Allan is dassified as RC. i : Case 2: : Gl. Joe is an American information technology expert. -He was signed by Doon Telecom, a local telecommunicaton company, from January to March of 2024 to improve its wireless services. Due tothe anticipated en of competitors from other countries, Doon Telecom decided to extend indefinitely the services of G.I. Joe + Answer. Heis a resident alien = “Analion who comes tothe Philippines forthe purpose that requires extended ‘tay for its accomplishment, so he makes his home temporary in. the Ftipps sare egardless of his intention fo retum o his residence abr Case 3: Michael Malone, head coach of the Denver Nuggets in the NBA is ii the Philippines for:a month-long NBA promotional tour. He also expressed his intention to regularly visit the Philippines. Answer, Michael Malone is classified as NRA-NETB Case 4: . Using the same data n Case 3, assume that Michael Malone invested in shares of stacks of various domestic corporations during his recent tay in the Philippines. ’ > Answer: Michael Malone is NRA-NETB. Passive income such as dividend income is'not considered as income derived from trade or business. Case 5: Nicola Jokic "The Joker" is an NBA Champion and NBA Finals MVP. He is a resident citizen of Serbia. Assuming Nicola Jokic owns a restaurant in Majate, he should bé classified as: “Answer: NRA-ETB. He is engaged in ‘actual conduct of trade or business in the Philopines but is nonresident. 63p TAX RATES incom tree (8) types of income ter. Nerney) Ss AN mee e tax, namely; (1) APPLICABLE Generally, there are only or regular tax, atnolding (a oe etl le tax (CGT) je taxes is presented * Classification of the taxpayer = Source of income = Type of income Classification of the taxpayer Itis important to property classify individual taxpayers because resident citizens are taxable on their income derived from sources within and without the Philippines while all other individual taxpayers are taxable only on their income derived from Philippine sources. Moreover, individual taxpayers classified as nonresident aliens not engaged in trade or business (NRANETB) _ are taxable based on their “gross income" while others are taxable based on “net income” (Refer to Table 2-1 in the next page). 4 Source of Income Fa tcc Within and Without . Within ony Within on-dependin Income subject to income tax may be derived from within of without the Philippines, 1g on the classification of the individual taxpayer, summarized as follows: ILLUSTRATION 4; Use the fol 905 AE ‘An individual taxpayer provided the following information: Gross business income, Philippines 5,000,000 Gross business income, Canada 2,000,000 Gross business income, Singapore 1,000,000 Business expenses, Philippines + 3,000,000 Business expenses, Canada 1,000,000 Business expenses, Singapore ~ 500,000 Determine the taxable income assuming: |. Case A: The taxpayers a resident citizen Answer: 23,500,000 Gross business income, Philippines 5,000,000 Gross business income, Canada 2,000,000 Gross business income, Singapore 1,000,000 Business expenses, Philippines (3,000,000) Business expenses, Canada (1,000,000) Business expenses, Singapore \ (500,000) Taxable income | 3,500,000 ‘A resident ctizanis taxable on income win and without the Philppines. Basis of taxable income as described in Table 21 is net income, 65is it citizen / yori a nonresident = lee +P2,000,000 -P5,000,000 ‘income, Philiopines Gross business Pil 000,000) Taxable income + sahwoabton wh Cse®,Aresitert len faxate on income Case D: The taxpayer is @ nonresident alien engaged in trade or business > Answer: 2,000,000 Gross Q ‘or business is taxable on income derived from within Philippine o i Case E:. The taxpayer is a nonrésidentaion not engaged in trade or business. A such, assume further thatthe data pertaining to gross income is other than busi Income, "Answer: 5,000,000 (D)_NRA-NETBS are taxable on their ‘gross income” Case F: ‘The income and expenses of a Filipino citizen were Provided as follows: January to June: Philippines Canada Gross income. 5,000,000 2,000,000 ‘Allowable deductions 2,000,000 4,000,000 Gross income P2,000,000 3,000,004 Allowable deductions 1,000,000 120000Obapter 2 : edivideale Tagger ‘Assume the taxpayer is a resident who left the country in July of the current year to reside permanently in Canada, how much is his taxable income? Answer: 25,000,000 Gross income, Philippines (Jan.-Dec,) 7,000,000 Gross income, Canada (Jan-June) ° 2,000,000 Allowable deductions, Philippines (Jan-Dec,) (3,000,000) ‘Allowable deductions, Canada (Jan-vune) _(1,000,000) Taxable income 5,000,000 Case G: Assume the same data in case F, except that the taxpayer is a nonresident citizen who retuned and reside permanently in the country in July of the current year. His taxable income is: Answer: P5,800,000: Gross income, Philippines (Jan.-Dec.) 7,000,000 Gross income, Canada (Jul-Dec. 3,000,000, Deductions, Philippines (Jan.-Dec.) (3,000,000) Deductions, Canada (July-Dec.) (1,200,000) Taxable income. 'P5;800,000 TYPES OF INCOME For income taxation purposes, the three (3) types of incomes subject to income tax are as follows: "Ordinary or regular income "Passive income derived from Philippine sources; and * Capital gains subject to capital gains tax Ordinary or regular income refers to income such as compensation income (salaries or wages), business income, income from practice of profession, income from sale and/or dealings of property and miscellaneous income and passive income other than those subject to final taxes and capital gains tax of the Tax Code, as amended. Regular incomes are subject to ‘graduated tax table (also known as basic or normal tax) as provided for under Section 24(A) of the Tax Code, as amended. The graduated. tax rate is summarized in Table 2-3. Passive incomes subject to Final Withholding Taxes (FWT) are Certain passive incomes from sources within the Philippines as enumerated under Sections 24(B) and 25(A)(2) of the Tax Code, as amended. These passive incomes are not subject to graduated tax rate or basic tax presented in Table 2-3 but to specific FWT rates as summarized in Table 2-8, 67 ts4) Interest income 2), Dividend Income 3) Royalties 4) Prizes: and 5) Other winnings Incomes from sale of capital assets subject to capital gains tax (CGT): 1) Capital gains from sale of shares of stocks ofa Gomestic corporation not traded in the local stock exchange [Sec. 24(C) NIRC]; and : Capital.gains from sale of real property in the Philippines [Section 24(D) NIRC] 2) D “Unless exempt under the law, exempt under the law, incomes not subject to final withholding tax and capital tax are classified as ordinary income and are subject to graduated tax rate. Interest income from bank deposit abroad, for ir ; : for instance, ne illustrated in Tables 2-8 and 20, Hotes ae te ba rae (or tx lable forinddvals pesenedin Table 23), 68oooanghit aes coma rE Ore SE Nok over P250,000 ‘Over P250,000 but nat over P400,000 1596 of excess over P250,000 ‘Over P400,000 but not over P800,000 'P22,500 + 20% In excess of P400,000 ‘Over P00,000 but not over P2M £102,500 + 25% In excess of PB00,000 (Over P2,000,000 but not over PSM, (402,500 + 3096 in excess of P2M ver P8,000,000 'P2,202,500 + 35% In excess of PEM {2 Provided, That minimum wage earners as defined in Section 22{HH) ofthe Tax Code shall be exempt {rom the payment of income tax on thelr taxable income: Provided, further, That the holiday pay, ‘overtime pay, nightshif differential and hazard pay received by such minimum wage eamers shall likewise be exempt from income tax. Ordinary income subject to basic income tax derived from 2018 to 2022 shall be subject to the following graduated tax rate: SUITE) PaO TEPC TAK ‘Not over P250,000 Exempt ‘ver P250,000 but not over 400,000 20% of excess over P250,000 (Over P400,000 but not over PE00,000 'P30,000 + 25% in excess of P400,000 ver P800,000 but not over P2M £130,000 + 30% in excess of PB00,000 ‘Over P2,000,000 but not over PSM. 'P490,000 + 32%6 in excess of P2M ‘Over 8,000,000 2,410,000 + 35% in excess of PEM UTATION OF BASIC INCOME TAX DUE ILLUSTRATION 5 ~ COMPI PURELY COMPENSATION INCOME EARNER (from salaries ‘or wages): : 4) Determine the income tax due assuming the “taxable compensation income” for 2024 taxable year is P240,000 Answer: PO; tax exempt based on the graduated tax rate 2) Determine the income due assuming the “axle compensation come” for 2024 taxable year is P300,000 4 500 Taxon First 250,000, PO. In excess of P250,000; (P50, 000 x 15%) Tax Due, 2024=n Tax due assuming the “net taxable compensation 3) Deterine th abe year i Bt,850 000 income” for 2024 taxable Answer: P365,000 Taxon on Ress (1,050,000 x 25%) In excess of P800,000;, 0, 2024 COMPENSANSATION INCOME Self-Employed is defined under RASS cn ea Po ee costal Raho works for, how tho work i done ‘employment, S/he controls ol fie wor it ic ose income is derived purely when itis done. It includes professionals wh Se Se SELF-EMPLOYED and PROFESSIONALS (SEP) Employed is defined under RA10963 (TRAIN Law) as “a s promis or an’ independent contracior who reports income eared from ‘employment. S/he controls who he/she works for, how the work is done and itis done, Itincludes professionals whose income is derived purely from the pra of profession and not under an employer - employee relationship”. Professional is defined as a “person formally certified by a professi body belonging to a specific profession by virtue of having completed a requit course of studies and/or practice, whose competence can usually be measul against an established set of standards. It also refers to a person who enga some art or sport for money, as a means of livelihood, rather than as a hob! includes but is not limited to professional entertainers, professional athlete directors, producers, insurance agents, insurance adjusters, management technical consultants, bookkeeping agents, and other recipients of professio promotional and talent fees”. Income derived from self-employment Is considered income derived from th Conduct of trade or business, hence, classified as regular or ordinary income. Such, itis subject to the graduated ¢ poe of basic income tax dus . However, unlike compensation income or salarieei itis on Subject to basic tax (refer to illustration #5), income derived ess ee ts arOlepter 2 - Hedivideall Tagpager Scie ar 8% Preferential Tax Rate for Self-Employed and Professionals (SEP) Beginning taxable year 2018 or upon the effectivity of RA 10963 [Tax Reform for. Acceleration and Inclusion Law (TRAIN Law)], regular income of SEP amounting to more than P250,000 in a taxable year but with a gross sales/receipts and other non-operating income not exceeding the vat threshold of P3,000,000 SHALL HAVE THE OPTION to avail: of 8% tax on gross salesirecelpts and other non-operating income in excess of 250,000 IN LIEU of the graduated income tax rate and business tax under Section 116 of the Tax Code, as amended. 714 < tng 7 SPREE SD ects es ces ale no pegnine ua of OR fe ast) 250,50. {ap ncone cane: oof won mleeces eater nor epertanas- nae te sven amet e stmt mt re unease tit Business income, in addition to income tax, is generally subject fo business tax such as value added ta ‘or percentage tax. Business faxes are discussed in a separate tax subject, Transfer and Business Taxation (generally the 2 tax subject in the undergraduate course). > The Grass Sales andé Gross Recepsshalnclude oer income and/or non-operating Income, an, > Refer also io Pages 76-79 and Tables 2-6 and 2-7 for additional presentation : : REQUISITES TO AVAIL the 8% Preferential Tax Rate In order to avail the 8% preferential tax, the SEP shall satisfy all th following conditions: 1. The gross sales/réceipts and other Non-operating income does not _ exceed the vat threshold of P3,000, 000; : The SEP’ shall be non-vat registered; The gross salesireceipts were not derive 3 transactions; /ed from vat- ‘exempt sales 2 -F wn 4 a o m v wa 2 a @ 2 s ro} 3 Ss v @ 3BASIS FOR THE P3M VALUE ADDED TAX (VAT) THRESHOLD: of Z Ease of Pay Act (Et g "Ifthe taxpayer is.a seller of goods: Gross Sales = IF the taxpayer is a seller of service/s: Gross Receipts After. i 11976 or Taxes Act (EOPTA) and its nd fons: $ " Seller of goods or services (same basis): Gross Sales GROSS SALES under the EOPTA refers to the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services during the taxable period for the services performed for another person, which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter, or exchange of services that has already been rendered by the seller and the use or lease of properties that have already been supplied by the seller, excluding VAT and those amounts earmarked for payment to third (3rd) party or received as reimbursement for payment on behalf of another which do riot redound to the benefit of the seller as provided under relevant laws, rules or regulations: Provided, that for long-term contracts for a period of one (1). year or more, the invoice shall be issued on the month in which the service, or use or lease of properties is rendered or supplied.” 11976 (EOPTA) TIMELINE: = January 5, 2024 ~ The RA 11976 was signed into law by Pres. Bong2 Marcos. ‘ £ January 7, 2024 - The EOPTA was published ini the Official Gazette = January 22, 2024 — Effectivity of the law; 15 days after publication ‘April 11, 2024 — Publication of the revenue regulations implementing the provisions of the FOPTA ‘Apri 26, 2024 ~ Effectivity of the implementing rules and requiations _ “regarding EOPTA: (compliance is mandatory from this date); 15 days after publication ‘ 73ope 2 - tli Tage self-Employed and Professionals (SEP) ‘ Se BHNONE) ofthe Tax Code provides the following rules for SEP: + PURELY SEP E ’ PURE Tvdeal taxpayer is considered purely SEP if s/he is not earning income from employment (there is no income arising from employe; employee relationship). The applicable taxes of PURELY SEP, as sho in Table 2-5, are also summarized as follows: ‘A. With annual Gross Sales and/or receipts of not more than P3M In General, apply graduated rate: QD Percentage “Ge fax under § and Business Taxation, 16 'Sa topic discusseq ihe i other Tax subj s, ject, Transfer yeOkeper 2- nedsvideall Cagpayers B. With annual Gross Sales and/or receipts of more than P3M ‘€2._The option to choose 8% Preferential axis nt applicable to vat registered and or SEPs whose ‘annul gross sales and/or tecelpts exceed the P3,000,000 threshold. Moreover, value added ‘ax (val), ust Eke Percentage tax, Is topic discussed inthe other Tax subject, Transfer and Business Taxation. Election of 8% Preferential Tax is irrevocable during the year \RR 8-2018 provides that unless the taxpayer signifies in his/her 1% Quarter retum of the taxable year the intention to elect the 8% income tax, s/he shall be considered as having availed of the graduated rates under Section 24(A) of the Tax Code, as amended, and such election shall be irrevocable for the taxable year. Income tax is differ from business tax. The latter is discussed in volume 2 of our text book entitled, “Transfer and Business Taxation”. Since these topics are discussed in a separate subject, we assume that undergraduate students are not yet adept on topics involving business taxes. Thus, for illustration purposes in this book, the option to be taxed at 8% will not involve complicated transactions subject to business taxes. Additional comprehensive illustrations on the 8% preferential or optional tax are discussed in volume 2 of our textbook, specifically under Chapter 9 entitled, “Other Percentage Taxes (oPTy. 75jonals (SEP) ILLUSTRATION 6 - Self-Employed andlor Professi CASE A: PURELY SEP whose gross salsrecelpts and ther non-operating does not exceed the VAT threshold of P3,000,000. Ay patonin the Income tox de in 2024 assuming the gross slesrcepts and other non-operating income was P240,000 ‘Answer: PO; exempt from income tax ing the data below, determine the income tax due: eet Gross sales 2,800,000 Cost of sales (1,500,000) Operating expenses _(750,000) _ Net income P550,000 “_Answer: 52,500 using graduated rate_- Taxon i First P400,000 income 22,500 Inexcess of 400,000 income 30,000 (150,000 x 20%) Income Tax Due, 2024 P52,500 > Inaddition to the income tax computed above, the SEP is stil subject to a business tax. Business faxes are discussed in volume 2 of this book entitled “Transfer and Business Taxation’. For purposes of ilustration, assume the taxpayer in this particular case is subject to Other Percentage Tax (OPT) under Sec. 116 as amended by CREATE Ac (being a non-vat registered taxpayer and the gross sales did not exceed the vat threshold | of P3M), the business tax is computed as follows; + ‘OPT 2024 = 2,800,000 x 3% = 84,000, Consequently, the total tax expense (income and business fax) of the SEP is P136,500... This tax shall likewise apply.in the preceding number (assumption #1) irrespective ofits ‘exemption from income tax.. The basis of a business tax is not the “income" | but gross sales/eceipts and other non-operating income (excluding ‘compensation income). 3) Assume the SEP in number "2" opted to avail the 8% Preferential Tax “Answer: (2,800,000 --250,000) x 8% = 204,000 The 8% tax is computed based on gross salesireceipts and other no operating income in excess of P250,000. This is in LIEU of the Income using the Graduated Rate and Business Tax under Sec. 116 of the Tax Cod Comparing total. taxes of tems #2 and #3 above, the former (using ; graduated rate + and the business tax) will result to a lower fotal amount ‘axes than using the preferential tax rate of 8%. However, this is not al {he case, Ifthe actual cost of sales and operating expenses are minimal, t | 8% preferential tax will result to a lower: tax. Thus, the SEP shall compare {otal taxes using the two metho tpalowortotalaree ds and may choose the method which wlOhepter Ze Jedevidead. Tagpeges CASE B: PURELY SEP whose gross sales/receipts and other non-operating income EXCEEDs the VAT threshold of P3,000,000. Determine the income tax due in 2024 assuming the following data: Gross sales 5,000, Cost of sales (2,250,000) Operating expenses - _ (1,250,000) Net taxable income _ 1,500,000 + _Answer:_ 277,500 using graduated rate Taxon First 800,000 income 102,500 In excess of P800,000 income 175,000 (P700,000 x 25%) Tax Due, 2023 P277,500 > In addition to the income tax computed above, the SEP in this partcular'case is stil ‘subject toa business tax. Since the gross saleslreceipts and other non-operating income ‘exceeds the vat threshold, the applicable business taxis 12% vat computed as follows: \VAAT = 5,000,000 x 12% = 600,000 , > The 8% tax is not applicable if (a)the gross sales/receipts and other non-operating income exceeds the val threshold; or (be SEP is vat registered, CASE C: Purely SEP + GR or GS._ Answer: P388,500 using graduated rate ‘Income Tax: s First P400,000 income 22,500 In exoess of P400,000 income 30,000, 52,500 (150,000 x 20%) ° Business Tax: 12% vat = P2.8M x 12% 336,000 Total Tax Due 388,500 > The 8% taxis not applicable in this particular case bogause the taxpayers vat registred. The following are not allowed to aval the 8% tax: 2) VAT-registered taxpayers (regardless of goss sales/eceipts) ') those lable for Percentage Taxes other than Sec. 116 under Tite Vof NIRC. ~ TE