FUNDAMENTALS CONCEPTS OF INDIVIDUAL INCOME TAXATION

In 1992 up to 1997, the SIMPLIFIED NET INCOME TAXATION SCHEME

(SNITS) for individuals was imposed per Republic Act no. 7496. Under this
taxation scheme, Schedular Income Taxation was imposed, separating the
computations for each of the following:

1. Taxable Compensation Income derived from employment subject to the
progressive tax rates of from 0% to 35%;
2. Taxable Net Income derived from profession, trade or business subject to the
progressive tax rates of from 3% to 30%;
3. And in the case of a Nonresident Citizen, the adjusted Gross Income abroad in
terms of US dollars, shall be separately computed subject to the graduated tax
rates of 1,2,3%.

Likewise under the SNITS, there were very limited items of deductible costs and
expenses of the business that were allowed by law as deductions from the
business gross income.
Under Republic Act No. 8424 otherwise known as the Tax Reform Act of 1997,
effective January 1, 1998 and thereafter, amendment were made abolishing the SNITS
and thereby imposing a globalized or unified individual income taxation, wherein the
The Taxable Net Income derived from whatever sources whether from employment,
business, trade, or profession is computed and is subject to the progressive tax rates of
from 5% to 34%.
Tax laws/rules must be correctly interpreted for purposes of practical applications
in given tax cases/situations, more particularly in actual preparations of the
individual income tax returns. Appropriate declaration of and computations for
taxable income and deductible expenses/allowances are needed to be reflected
in the tax returns to be filed by the individual taxpayers.





Income Tax
Refers to the tax imposed by the government on the taxable income, whether
gross or net, earned by taxable persons.

It is a national tax because it is imposed by the national government as per the
tax law provisions under the National Internal Revenue Code. It is likewise
deemed an excise tax because it is imposed on a persons right to earn income.
Said tax is also considered as a direct tax since it is one imposed upon persons
who are personally bound by law to pay said tax, a burden which cannot be
shifted or billed to others for payment.

Income
Refers to the profit, gain, fruit, wealth or fortune derived from labor, from capital
or from both labor and capital, from sale/exchange of assets, as well as those
derived from other sources, whether legal or illegal, other than those
representing returns of capital. Examples are; salaries for services rendered;
gross profit from sale of merchandise; gain from sale of property; interest income
on receivables.


Capital
Represents a fund or a tree that generates the income. In contrast, income
represents the benefit, or the fruit derived from the capital. Examples are; bank
deposits which earn interest income; business capital or property which earn
business profits.

Taxable Income
Are income items which may be subject to income tax based on either Gross
Amount or Net Amount.

Requisites of a Taxable Income:
1. There must be gain or profit.
2. The gain or profit must be realized or received.
3. The gain or profit must not be excluded by law from income taxation.



A citizen of the Philippines residing therein is taxable on all income derived from
sources within and without the Philippines.

A nonresident citizen, resident alien and non resident alien are taxable only on
income derived from sources within the Philippines.

Gross Income
Means the total amount of income earned/received without any deductions


Taxable Net Income
Means the excess of the gross income from employment, business , trade or
profession or any other income subject to the basic income tax over the allowed
/deductible business expenses and the allowed personal exemptions and Health
& Hospitalization Insurance Premiums.

Classification of Income as to Taxability
1. Income exempt from income tax
These are incomes that are exempt from both the basic income tax as
well as the different final income taxes. Examples are; Winnings/prizes
from the Philippine Charity Sweepstakes and Lotto draws.
2. Income subject to final income taxes
These are the income exempt from the basic income tax but are subject
to the different final income taxes. Examples are; Interest income on bank
deposits in the Philippines, and gains from sale of real property located in
the Philippines, if held as capital assets.
3. Income subject to basic income tax
In general, these are incomes which are neither expressly exempt from
income tax nor subject to the different final income taxes. Examples are;
gains from sale of property deemed as ordinary assets, gross profit from
sale of merchandise, salary from employment.




Income may be classified as to source:
1. Compensation income from employment
2. Income from business, trade or profession
3. Other income, except from employment, business, trade or profession
Expenses may be classified as follows:
1. Non-business expenses
2. Non-deductible business expenses
3. Deductible business expenses
Income and expenses may be derived/incurred as follows:
1. From sources within the Philippines
2. From sources without the Philippines
3. From sources partly from within and without the Philippines

Individuals classified as resident citizens, resident aliens, non-resident aliens
engaged in business in the Philippines are required by law to file their Income
Tax Returns whereas, non-resident aliens not engaged in business in the
Philippines are not required to file such income tax return.

The following are the different civil status of an individual taxpayer:
1. Single includes unmarried, widow, widower, divorcee, married legally
separated (If said individual has no qualified dependent).
2. Head of the family means individual considered as single but is having at
least one qualified dependent.
3. Married a person who is legally married and includes married person who is
already separated from his spouse neither by way of divorce nor by legal
separation.

Individual taxpayers are grouped into:
1. Special Individuals
Are foreigners or their Filipino counterparts, who are special employees of
any of the following business or organizations, established in the Philippines:
a.) Regional Area Headquarters of Multi-National Corporations
b.) Regional Operating Headquarters of Multi-National Corporations


c.) Offshore Banking Units
d.) Foreign Petroleum Service Contractors or Foreign Sub-Contractors
Engaged in Petroleum Operations in the Philippines
2. Ordinary Individuals
Refers to any individual who cannot be classified as Special individual
taxpayers as earlier cited. These individuals are further classified as:

a.) Resident Citizen
b.) Resident Alien
c.) Non-resident Citizen
d.) Non-resident Alien engaged in business in the Philippines
e.) Non-resident Alien not engaged in business in the Philippines

The following individuals are deemed citizens of the Philippines:
1. Natural born citizens of the Philippines
2. Naturalized citizens of the Philippines
3. Citizen of the Philippines at the time of the adaptation of the Philippine
Constitution
4. Persons who elected Philippine citizenship pursuant to the provisions of
the Constitution

Natural born citizen
Is one who is a citizen of the Philippines from birth without having to perform any
act to acquire or perfect his Philippine citizenship.

Philippine citizenship may be lost or reacquired in the manner provided by law.

A female citizen of the Philippines who married an alien shall retain her Philippine
citizenship unless by her act or omission she is deemed under the law to have
renounced her citizenship.

Resident Citizen
Refers to an individual whose residence is in the Philippines and is a citizen
thereof.



Resident Alien
Refers to an individual whose residence is in the Philippines but is not a citizen
thereof.

Non-resident Citizen
Refers to an individual who is a Filipino citizen but is residing outside the
Philippines.
The term non-resident citizen means:
1. A citizen of the Philippines who establishes to the satisfaction of the BIR
Commissioner the fact of his physical 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 the 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 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.
5. The taxpayer shall submit proof to the BIR Commissioner to show his intention of
leaving the Philippines to reside permanently in abroad or to return to and reside
in the Philippines as the case may be.









Immigrant
One who leaves the Philippines to reside abroad as an immigrant for which a
foreigner visa as such has been secured.

Permanent Employee
One who leaves the Philippines to reside abroad for employment on a more or
less permanent basis.

Overseas Contract Worker
One who leaves the Philippines on account of employment which is renewed
from time to time within or during the taxable year under such circumstances as
to require him to be physically present abroad most of the time during the taxable
year. To be considered physically present abroad most of the time during a
taxable year, a contract worker must have been outside of the Philippines for not
less than one hundred eighty three days (183) during such taxable year.

Non-Resident Alien
Refers to an individual whose residence is not within the Philippines and is not a
citizen thereof. He is further classified into either a nonresident alien engaged in
business in the Philippines or a nonresident alien not engaged in business in the
Philippines.

Non-Resident Alien Engaged in business in the Philippines refers to the following
persons:
1. An individual who is not a citizen of the Philippines and is not a resident thereof
but has a sole-proprietorship business established and operating within the
Philippines.
2. A non-resident alien individual who shall come to the Philippines and stay therein
for an aggregate period of more than one hundred eighty (180) days during the
calendar year.

Employer
Means the person for whom an individual performs any service, of whatever
nature, as the employee of such person.



Employee
One who is a fixed earner deriving income out of an employer-employee
relationship. He is also an individual who is the recipient of wages and includes
an official, employee, an elected official of the government or its political
subdivision, agency or instrumentalities thereof. It also includes an officer of a
corporation.

Self-employed
Refers to an individual who is engaged in business, trade or profession. This
includes sole- proprietors, such as manufacturers, traders, market vendors,
owners of eateries, farmers, and service shops owners.


Professional
Means an individual who derives his income from the practice of his profession.
This includes lawyers, architects and other persons who are registered with the
Professional Regulation Commission. For purposes of income taxation, the term
Professional likewise includes one who pursues an art and makes his living
therefrom, such as artist, athletes, and other similarly situated.

Tax Laws are prospective in nature. They are given retroactive effect only if
clearly specified in the laws or such is the legislative intent.

Bacause Taxation is the lifeblood of the government, the courts are not allowed
to interfere in the collection of taxes.

The power of taxation may be construed as to include both the power to create
and the power to destroy.







Sole-proprietorship
Refers to a form of business organization whose ownership rest entirely upon
one person. Said owner provides the needed capitalization and manages the firm
by himself, although he hires employees to help him in the operations, conduct
and management of the business affairs and activities.

In individual income taxation, the generally accepted accounting principle which
is the Entity Concept is not being observed or followed. There is no such thing
as separation of the business entity of that of the owner. For example, the owner
cannot become a debtor, creditor, or an employee of his own firm.

In matters of preparation of the income tax returns, determination of the taxable
income and tax due, if there is a conflict between the Generally Accepted
Accounting Principles and the Income Tax Laws/Principles, then the latter shall
prevail over the former.

Effective in the year 1998 and thereafter under RA no. 8424, the net income or
net loss of a self-employed individual is computed much the same as that of a
corporation. The only difference is that the individuals income, whether from
employment, business, trade, profession or from other sources such as
gains/profits from personal transaction, shall be included in the taxable gross
income to be reflected in his individual income tax return.

Philippine Income Taxation Laws are sourced or derived from the following
1) National Internal Revenue Code of the Philippines
2) Bureau of Internal Revenue Rulings
3) Bureau of Internal Revenue Regulations
4) Philippine Special Laws
5) Decision of the Philippine Courts; Supreme Court, Court of Appeals, Court of Tax
Appeal, Regional and other Inferior Courts
6) Opinion/Ruling of the Secretary of Justice of the Philippines
7) Philippine Constitution
8) Presidential Decrees
9) International Tax Treaty, Comity, Convention



The Bureau of Internal Revenue has authority and jurisdiction on the following
national taxes in the National Internal Revenue Code:
1) Individual Income Tax
2) Corporate Income Tax
3) Estate Tax
4) Donors Tax
5) Percentage Tax
6) Value Added Tax
7) Excise Tax
8) Documentary Stamp Tax


















Allowed Personal Exemptions and Health/Hospitalization Insurance Premiums

In the case of resident citizens, resident aliens, non-resident aliens engaged in
business in the Philippines, allowances for personal exemptions and for
Health/Hospitalization Insurance Premiums shall be granted to them, which
amounts can be deducted from their gross compensation income or net income
for business, trade or profession to arrive at the net income subject to income
tax.
However, the non-resident alien engaged in business in the Philippines as well
as special alien and or Filipino employees are not privilege to claim said allowed
personal exemptions and health and hospitalizations insurance premiums.
The Allowed Personal Exemptions and Health/Hospitalization Insurance
Premiums can be availed of by an individual, who is either an employee, a self-
employed or one who is both, whether adopts the Itemized Deduction or the
Optional Standard Deduction.

A. Rules on Allowed Personal Exemptions (APE)

Allowed personal exemptions means arbitrary amounts granted by law to
an individual taxpayer in general, representing their personal, family and
living expenses or minimum subsistence for themselves and their
dependents.

The amount of the allowed personal exemption shall consist of the Basic
Allowed Personal Exemptions plus the additional allowed Personal
Exemption.

1. Basic Allowed Personal Exemptions (BAPE)

The determination of the allowed personal exemption shall be based
on the civil status of the taxpayer.

P 20, 000.00 If the taxpayer is single and without any qualified
dependent.
P 25, 000.00 If the taxpayer is the Head of the Family.
P 32, 000.00 If the taxpayer is married, or married but not legally
separated.





Notes:

a. If both spouses are earning, then each of the spouse shall claim P
32, 000.00 basic allowed personal exemptions.
b. In the case where one only of the spouses earns income, then
only said spouse shall be allowed to claim said basic allowed
personal exemption.
c. A married individual or a head of the family shall be entitled to the
additional personal exemption for their qualified dependent
children.
d. The husband shall claim the additional personal exemption for the
children dependents; however the wife may claim the additional
allowed personal exemptions for the children under any of the
following situation.

1. The husband has no earnings or income subject to basic tax
during the taxable year.
2. The husband is non-resident citizen earning or deriving
income from sources without the Philippines only.
3. The husband issues a written waiver of his right to claim the
additional allowed personal exemptions for their dependent
children in favor of his wife.

e. Unmarried, widow, widower, divorcee, married but legally
separated, if without any qualified dependent, are considered
single.
f. These rules on Allowed Personal Exemptions apply to the resident
citizens, resident aliens, non-resident citizens, and non-resident
aliens engaged in business in the Philippines.

2. Additional Allowed Personal Exemptions (AAPE)

The determination of the amount of the additional allowed personal
exemption shall be based on the number of the qualified dependent
children.

P 8, 000.00 For each qualified dependent child but not to exceed at
four.








Notes:
a. In the case of a married couple, if a dependent child is qualified to
one of the spouses, then the said dependent child is likewise
presumed to be qualified to the other spouse.
b. Additional Allowed Personal Exemptions shall not be claimed for a
qualified citizen dependent.

Non-Resident Alien Engaged in Business in the Philippines
In the case of the non-resident alien engaged in a business in the
Philippines, they are granted allowed personal exemptions, only if there is
an existing reciprocal agreement between the Philippines and his country,
provided the following conditions have been complied with:
1. His country has its own income tax.
2. The income tax laws of his country grant allowed personal exemption
to Filipinos who are engaged in business in said foreign country but is
not residing therein.
3. He must file a true and accurate return of the total income received by
him from all sources within the Philippines as required under the
NIRC.

Note: In the case of a nonresident alien engaged in trade or business
in the Philippines, if the problem data is silent, presume that all of the
above mentioned requirements have been complied with and
therefore there is an existing reciprocity clause/law.

Change of Status during the year

1. In case the tax payer gets married or should have additional
dependent children during the taxable year, such taxpayers claim the
appropriate basic and additional personal exemptions as the case
maybe in full for such year.
2. In case the taxpayer dies during the taxable year, he still may claim
the same personal exemptions for himself and his dependents as if he
died at the end of the year.
3. In case the taxpayers spouse or any of his dependents dies or if any
of such dependent marries, become 21 years old or becomes
gainfully employed during the taxable year, the taxpayer may still
claim the same exemptions as if the spouse or any of the dependents
died or as if such dependents married, became 21 years of age or
became gainfully employed at the close of the year.



Note: Excluded under the change of status nos. 1 to 3 are the following:
1. When a dependent ceased living with the taxpayer during the taxable
year.
2. When a dependent ceased being dependent upon the taxpayer for
chief support during the taxable year.
3. A married taxpayer becoming a divorcee or a legally separated
person during the taxable year.

In the case of a married but legally separated spouses, the additional
personal exemption for the children can only be claimed by the spouse
who was judicially awarded custody of the qualified dependent children.
Provided that the total amount of additional allowed personal exemptions
that may be claimed by both shall not exceed the maximum additional
personal exemptions allowed by the law.

Head of the Family
Means an unmarried or legally separated man or woman with one or both
parents or with one or more brothers and sisters, or with one or more
legitimate recognized natural, or legally adopted children, living with and
dependent upon him for chief support, where such brothers and sisters
or children are not more than 21 years of age, unmarried, not gainfully
employed, or where such children, brother or sister are incapable of self-
support because of mental or physical defects.

Qualified Dependent Child
Means a legitimate, or illegitimate adopted child, chiefly dependent upon
and living with a taxpayer if such dependent is not more than 21 years
old, unmarried and not gainfully employed or if such dependent,
regardless of age, is incapable of self support because of mental or
physical defect.

Legitimate Child
Refers to a child who was born within wedlock of parents. The child was
born of parents who were married to each other at the time of the childs
conception.










Legally adopted Child
Refers to a child adopted by parents under judicial decree or legal
adoption paper.

Adoption may be way of:
1. Non-judicial/natural adoption
2. Judicial/Legal Adoption

Natural Child
Refers to a child born outside of wedlock of parents who, at the same
time at the conception of the former, were not disqualified by means by
any impediment to marry each other. A natural child may be recognized
by the mother or by the father jointly or severally. In the case where
recognition is made only by one parent, then it shall be presumed that the
child is natural, if the recognizing parent has a legal capacity to contract
marriage at the same time of the conception. Recognition must be made
in the record of birth, a will, a statement before a court of record or in any
authentic writing.

Illegitimate Child
Refers to a child born outside the wedlock of parents, who at the same
time of the conception were disqualified by any impediment to marry each
other.

Senior Citizen
Refers to any resident of the Philippines who is at 60 years of age,
including those who have retired from both government offices and
private enterprises, and has an income of not more that sixty thousand
pesos (P 60, 000.00) per annum subject to review by the NEDA every
after three years.

Qualifications of Dependent Parents and/or Senior Citizens

1. Living with the taxpayer
2. Dependent upon the tax payer for chief support
3. Not gainfully employed









Qualification of dependent brothers, sisters or children
1. Unmarried
2. Not gainfully employed
3. Living with the taxpayer
4. Dependent upon the taxpayer for chief support
5. Not more than 21 years of age or incapable of self-support due to mental or
physical defects even if over 21 years old.
6. In the case of dependent children, they should be considered as either legislate
recognized natural, illegitimate or legally adopted children

Note: If the individual taxpayer has as dependent, any of his parents, brothers,
sister, children, and senior citizens, and the problem data is silent on the
qualifications compliance, the presumption should be all requisites are present.

Illustration A. Mr. X is single. He has his minor legally adopted child as
dependent.

Basic APE (head of the family) P 25000
Additional ape (legally adopted child) P 8000
Allowed personal exemption P 33000

Illustration B. R and S who are legally married have as dependents their seven
minor children. They are both self-employed.

HUSBAND WIFE
Basic APE (4 children) P32,000 P32,000

Additional APE (4 children) P32,000 0
Allowed Personal Exemption P64,000 P32,000

ILLUSTRATION C. Mr. Y who is married and with 3 qualified dependent children
is an Australian residing in his country. He has a sole proprietorship business in
the Philippines managed by a Filipino employee. His country allows the following
amounts of personal exemptions to Filipinos who are non resident entrepreneurs
in said foreign country:

a. For married person P40,000
b. For head of a family P25,000
c. For each qualified child/dependent P 6,000




The total allowed personal exemptions is determined as follows:
Australia Philippines Lower
Married P40,000 P32,000 P32,000
3 children P 18,000 P24,000 P18,000
Allowed Personal Exemption P58,000 P56,000 P50,000

B. RULES ON HEALTH/HOSPITALIZATION INSURANCE PREMIUMS (HHIP)
Aware of the importance of health and hospitalization care and the
necessary expenses to be incurred in case of sickness, the taxpayer
ordinarily secures health & hospitalization insurance contracts for himself
and his family. In so doing payment for health and hospitalization
insurance premiums are being made during taxable year.
Exemption for a health/hospitalization insurance premiums can be
claimed by individuals classified as resident citizen, resident alien,
nonresident citizen, and nonresident alien engaged in business in the
Philippines.
Exemptions for health/hospitalization insurance premiums cannot be
claimed by individuals classified as nonresident alien not engaged In
business in the Philippines as well as special aliens/Filipino employees.
The taxpayer is allowed to claim an exemption for health and
hospitalization insurance premiums (HHIP) subject to the following
conditions and limitations.
1. There must be an actual Health & Hospitalization Insurance Premium payments
made during the taxable year.
2. The amount of insurance premiums not to exceed Two Thousand Four Hundred
Pesos (P2,400) per family per year or Two Hundred (P200) a month paid during
the taxable year for health/hospitalization insurance taken by the taxpayer for
himself, including his family.
3. Provided, that said family (the husband and wife, in case of married couple) has
a gross income of not more than Two Hundred Fifty Thousand Pesos (P250,000)
for the taxable year.
4. Provided finally, that in the case of married taxpayers, only the spouse claiming
the additional personal exemption for dependents shall be entitled to this HHIP
deduction.
5. If the married couple has no qualified dependent children, then the husband shall
claim the allowance for health and hospitalization insurance premiums.




ILLUSTRATIONS 1.
CASE 1 CASE 2 CASE 3
Years gross income P340,000 P215,000 P230,000
Actual HHIP payments P 3,400 P 2,150 P 4,500
HHIP limits P 2,400 P 2,400 P 2,400
Allowed HHIP none P 2,150 P 2,400
Remarks gross income gross income gross income
Over P250,000 not over P250,000 not over
P250,000
HHIP Limit lower




ILLUSTRATION 2. Mr. R. an employee, has a gross compensation income for the year 1999 of
P160,000. His spouse likewise earned a gross income of P90,000 from her own business
enterprise. They have a 6 qualified dependent children and incurred / paid P6,500 for their health
hospitalization insurance premiums.

The total allowances/exemptions for each of the spouse is computed as follows.


Married P32,000 P32,000
4 children P32,000 0

Allowed Personal Exemptions P64,000 P32,000
Health /hospitalization Insurance Premium P 2,400 0

Total Allowances/Exemptions P66,400 P32,000

Notes:
1. P 66,400 shall be deducted from the gross compensation income of the husband to arrive
at his own taxable net income
2. P 32,000 shall be deducted from the net business income of the wife to arrive at her own
taxable net income.






TAX ON CITIZENS OF THE PHILIPPINES

THE RESIDENT CITIZEN
A resident citizen is:
a. A citizen of the Philippines, who is
b. Residing in the Philippines.
Residence means physical presence in the Philippines. However
A citizen of the Philippines who shall have stayed outside the Philippines for one
hundred eighty-three days or more by the end of the year shall be considered a non-
resident citizen by the mere fact of his length of stay abroad (Bureau of Internal Revenue
ruling).
Illustration. Mr. A, a citizen of the Philippines left the Philippines on October 5, 2012
and returned on January 1, 2013. For 2012, he shall be considered a resident citizen.
Illustration. Mr. B, a citizen of the Philippines left the Philippines on February 10, 2011,
and returned only on January 1, 2013. For 2012, he shall be considered a non-resident
citizen.
When a citizen was previously a non-resident citizen and he arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines,
he shall be considered a non-resident citizen for the taxable year in which he arrives in
the Philippines with respect to income derive from sources abroad after the day of his
arrival in the Philippines. (Provision of Law)
Illustration. Mr. C was non-resident citizen in 2011. He returned to the Philippines on
June 5, 2012 to reside permanently in the Philippines. He had income from January 1 to
June 4, 2012 from Philippine sources of P 300, 000 and from foreign sources of P
200,000. He had income from june 6 to December 31 of the same year of P600, 000from
Philippine sources and of P400, 000from foreign sources. He shall be considered a
resident citizen on P1, 300, 000 (P 300,000 + P 600, 000 + P 400,000), and a non-
resident citizen on P 200, 000 (income from abroad, while still abroad).








Capital gain tax
a. On direct sale buyer of shares of stock of a domestic corporation not listed and
traded in a local stock exchange, held as capital asset:

On the net capitall gain:
Final Tax of 5%
Not over P100,000 Final
Tax of 10%
On any amount in excess of P100,000
b. On sale of real property in the Philippines held as capital asset:

On the gross selling price, or the current fair market value
at the time of sale, whichever is higher
Final Tax of 6%
*Sale of shares of stock of a domestic corporation thru a local stock exchange or thru
initial public offering pays the stock transaction tax (one of the several percentage taxes
in the National Internal Revenue Code) and having paid this tax, any gain shall not be
subject to income tax.
Shares of stock.
a. Domestic corporation
There is a capital gain tax only if the shares involved are those of a domestic
corporation. A domestic corporation is a corporation organized and constituted in
accordance with Philippine laws.
Illustration. An individual sold directly to a buyer shares of stock of a foreign
corporation licensed to do business in the Philippines . the was a gain from the sale of
P100,000. There is no capital gain tax because the shares of stock were not those of a
domestic corporation.
b. Capital asset
Capital assets are properties held as investments.
Capital asset means property not used in business. Thus, for a tax payer who owns
shares of stock held as investment, the shares of stock are capital assets.
Illustration. An individual held shares of stock of a domestic corporation as
investment. He sold the shares of stock directly to a buyer at a gain. There is a capital
gain tax. The shares of stock were held as capital asset.


The capital gain tax is on direct sale to a buyer.
The shares of stock should not be sold in the local stock exchange. The shares should
be sold by the taxpayer directly to buyer. Shares of stock of a domestic corporation
traded in a local stock exchange pays a percentage tax (business tax), and the gain on
the sale is exempt from income tax (but the loss on the sale goes into the year-end and
quarterly-end computations for income tax).
Illustration. Mr. D is an investor and speculator in shares of stock. He owned shares
of stock of Co. Y and Co. Z. the shares of Co. Y were not listed in the Philippines Stock
Exchange, while the shares of Co. Z were listed. He made a direct sale to a buyer on his
shares of stock of Co. Y at a gain, and sold his Co. Z shares of stock thru his stock
broker at Exchange at a gain. There is a capital gain tax on the sale of Co. Z shares.
c. Net Capital Gain
Selling price less expenses of sale equals net selling price
Purchase price plus expenses of acquisition equals adjusted cost (a) less (b)
equals net capital gain
By net capital gain is meant capital gains less capital losses from several
transactions within the year. But tax on capital gain should be paid within thirty (30) days
from the date of sale. This means that there shall be a computation of the tax based on
the capital gain on a sale, and that same gain shall go into the computation of the tax
based on the capital gain for the year. On the net capital gain for the year, the 5% and
10% tax shall be applied, and the total of the taxes paid on a per transaction basis shall
be deducted to arrive at the capital gain tax still due or refundable.
The formula for the capital gain on a sale on which to apply the capital gain tax
rate/s is:
Selling price or fair market value whichever is higher Pxxx
Less: Expenses of sale xxx
Net selling price Pxxx
Less: Cost -
Purchase price Pxxx
Add: Expenses of acquisition xxx
Adjusted cost xxx
Capital gain Pxxx



Illustration. Mr. E sold directly to a buyer of stock of a domestic corporation held as
capital asset. The selling price was P300,000 and the cost was P250,000. The capital
gain was P50,000. The capital gain tax at 5% should have been P2,500.
Illustration. Mr. F sold directly to a buyer shares a stock of a domestic corporation
held as capital asset. The selling price was P200,000 at the time when the fair market
value of the shares sold was P250,000, and the cost was P100,000. The capital gain
tax should have been:
On P100,000 at 5% P 5,000
50,000 at 10% 5,000
P150,000 P10,000

Illustration. Mr. G sold directly to a buyer shares of stock of a domestic corporation
held as capital asset. The selling price was P420,000 with a P20,000 commission given
to the person who negotiated the transaction. The shares were purchased for P240,000
with a commission of P10,000 paid to the person who negotiated the transaction. The
capital gain tax should have been on a net capital gain of P150,000 computed as
follows:
Selling price P420,000
Less: expense on the sale
Net selling price
20,000
P400,000
Less: Cost -
Purchase price P240,000
Add: Expense on the acquisition 10,000 250,000
Capital Gain P150,000

Capital gain tax (5% on P100,000 and 10% 0n the excess of P50,000)
There is a capital gain tax on shares of stock only if there is a gain on the sale.
Illustration. Mr. H sold directly to a buyer share of stock of a domestic corporation
held as capital asset. The selling price was P200,000 and the cost was P250,000. There
is no capital gain tax on the sale because the sale resulted in a loss. The capital loss,
however, shall be included in the year-end computation for the net capital gain of the
year subject to the capital gain tax.




Real property
Real property is land, building or anything attached to the soil with permanence.
The real property should be in the Philippines in order that there may be a capital gain
tax.
The capital gain tax is applied on the selling price or fair market value at the time of the
sale whichever is higher. Any gain or loss on the sale is immaterial because there is a
conclusive presumption by law that the sale resulted in a gain. The tax is on a per
transaction basis.
Illustration. Mr. I sold for P4,500,000 a land and building in the phjlippines held as
capital with a cost to him of P2,000,000, for a gain on the sale of P2,500,000. The fair
market value at the time of sale was P5,000,000. The capital gain tax is 6% of
P5,000,000, or P300,000.
Illustration. Mr. J sold a land and building in the Philippines held as capital asset for
P2,000,000, when the market fair value was P1,900,000 and which had a cost to him of
P2,500,000, for a loss on the sale of P500,000. The capital gain tax is 6% of
P2,000,000, or P120,000. The loss from the sale is immaterial.
The capital gain tax on shares of stock is paid within thirty days from the date of
sale, and it has its own annual income tax return. On real property, the capital gain tax is
withheld at source. In a deferred payment sale, the tax may, under certain conditions, be
withheld in installments as payments on the price are made to seller. Thus, the capital
gain tax on shares of stock shall have been paid, and on real property shall have been
withheld already even before the end of the year. The capital gain need not be included
anymore in the quarterly and year-end computations.
The income tax rules for the resident citizen.
a. Capital gain on sale of shares of stock of domestic
corporation
Final tax of 5% and
10%
b. Capital gain on sale of real property in the Philippines Final tax of 6%
c. From sources within the Philippines, on passive income
of:
Interest under the expanded foreign currency deposit system

Final tax of 7 %
d. From sources within the Philippines, on passive income
of:



Final tax of 10%


Royalty from books, literary works and musical compositions
e. From sources within the Philippines, on passive income
of:
Interest on any currency bank deposit, yield or other monetary
benefits from deposit substitutes, trust fund and similar
arrangement;
Royalty other than (d), above;
Price exceeding P10,000
Other winnings (except Philippine Charity Sweepstakes and
Lotto winnings)






Final tax of 20%
f. From sources within the Philippines, on passive income
of:
Dividend from a domestic corporation, or from a joint stock
company, insurance or mutual fund company, and regional
operating headquarters of multinational company, or share in
the distributive net income after tax of a partnership (except a
general professional partnership), joint venture or consortium
taxable as a corporation





Final tax of 10%
g. From sources within the Philippines, on passive income
of: interest on long-term deposit of investment in banks
(with maturity of 5 years or more)


Exempt
h. Taxable income (others) within and outside the
Philippines
5% to 32%
Taxable income (others) may arise from:
a. Employer-employee relationship (compensation income)
and/or
b. Business or practice of profession.


Categories of Income subject to Tax of a Resident Citizen.
Category A Category B Category C
Capital gain with capital
gain tax of
a. 5% and 10%
b. 6%
Passive income final tax:
a. 7 %
b. 10%
c. 20%
Other income graduated tax
of 5% to 32%



The tax in (a.) is due within
30 days from date of sale.
The tax in (b.) is withheld at
source.
The tax in (a.), (b.) or (c.) is
withheld at source. The
income receive is tax paid
already.
Computation of the income
tax is made in the quarterly
and year-end income tax
returns period.



CAPITAL GAIN TAX
Final Tax on Passive Income
Certain passive income items from sources within the Philippines are subject to
withholding income tax. The income tax is withheld by the income payer so that the
amount received by the income earner is net to tax.
The income tax withheld remitted by the income payor to the BIR. The tax is a
final tax. The income is not included anymore in the quarterly and year-end
computations of the income tax.
An FCDU is a unit of a local bank or a local branch of a foreign bank authorized
by the Banko Sentral ng Pilipinas to engage in foreign currency dominated transactions.
These transactions include accepting foreign currency deposits and granting of foreign
loans to domestic borrowers.
Illustration
Entries in a passbook on interest on bank deposit
Date Withdrawal Deposit/Interest Balance
250,000.00
3,750.00 253,750.00
750 253,000.00
The P3,750.00 was the interest earned on the deposit, and the P750.00 was the final tax
withheld from the interest income.








What is a deposit substitute? It is a means of borrowing money from the public
other than by way of deposit with banks through the issuance of debt instruments.
What is trust fund? Example. A bank pools together the small amounts entrusted to it by
its clients for investment in safe and high-yielding securities. The small investors earn
interest (also called yield), and in addition, a small amount which is called additional
yield, is subject to a final tax.
Royalties from books, literary works and musical compositions are subject to a
final tax of 10%. Other royalties are subject to a final tax of 20%.
What is the difference between a prize and a winning? A prize is a result of an effort
(e.g., prize in a beauty contest). A winning is a result of transaction where the outcome
depends upon chance (e.g., betting).

The Graduated Income tax of 5% to 32%
The graduated income tax rates are applied on income other than capital gain
with capital gain tax and passive income with final tax. From this point on, this income
shall be called other income.
Other income maybe derived from:
a. Employer-employee relationship, which is called compensation income;
b. Business or profession;
c. Sale or exchange of property which is not subject to capital gain tax; and
d. Incidental sources, such as interest or dividend which is not subject to final tax.
Formula that follow, on other income
Tax formula 1:
For an individual with income from employer-employee relationship (gross compensation
income).
Gross compensation income*
Less: personal exemptions
Equals: Taxable compensation income
Income tax: on the taxable compensation income, apply 5% to 32%
*but a minimum wage earner is not subject to income tax






Tax formula 2:
For an individual who is self-employed (business or practice of profession)
Gross Income
Less: Deductions for expenses and losses and personal exemptions
Equals: Taxable income
Income Tax: On the taxable income, apply the rates of 5% to 32%
Tax formula 3:
For an individual who has mixed income:
Gross compensation income
Add: Net income from business or profession
Less: personal exemptions
Equals: taxable income
Income tax: On the taxable income, apply the rates of 5% to 32%
In tax formula 1, 2, and 3, of the taxpayer paid premiums on hospitalization
and/or health insurance, the premium payments are deductions from gross income in the
amounts allowed by law.
What are personal exemptions? They are amounts allowed to reduce the income
earned to the taxable income on which the graduated tax rates are applied. A resident
citizen is always allowed a basic personal exemption of P50,000. He is also allowed, for
each dependent child an exemption of P25,000, but not to exceed P100,000
(corresponding to four children).
Graduated income tax for individuals.
ON TAXABLE INCOME OF: THE TAX IS:
Not over P10,000 5%
Over P10,000 but not over P30,000 P 500 + 10% of excess over P10,000
Over 30,000 but not over 70,000 2,500 + 15% of excess over 30,000
Over 70,000 but not over 140,000 8,500 + 20% of excess over 70,000
Over 140,000 but not over 250,000 22,500 + 25% of excess over 140,000
Over 250,000 but not over 500,000 50,000 + 30% of excess over 250,000
Over 500,000 125,000 + 32% of excess over 500,000






How much is the income tax on a taxable income of P82,153?
On P70,000 P8,500.00
12,153 at
20%
2,430.60
P82,153 P10,930.60 or P10,931.00

Centavos. In the gross income and the deductions for expenses and losses,
there can be centavos. In the taxable income centavos shall be dropped. In the income
tax arrived at with the application of the tax rates, fifty or more centavos shall be
considered as one peso, and less than fifty centavos shall be disregarded.
Illustration. Mr. K received the following from his employment, net of inclusions*
Regular salary P300,000
Overtime pay 50,000
* The following are exclusions (reduce the taxable compensation income): SSS,
Philhealth, and Pagibig contributions, and labor union dues.
His taxable income was P300,000, with an income tax of P45,000, computed as follows:
Regular pay P300,000
Overtime pay 50,000
Total P350,000
Less: Basic personal exemption 50,000
Taxable compensation income P300,000
Income tax:
On P250,000 P50,000
50,000 at 30% 15,000
P300,000 P45,000

THE WITHHOLDING TAX SYSTEM.
Certain income payments are subject to the withholding income tax system.
Under this system, an income tax is withheld to an income payment to a receiving
individual taxpayer, so that what he shall receive shall be the amount of the income, net
of the income tax deducted from it.
There are two kinds of withholding income taxes:
a. Withholding final income tax on certain passive income (example: dividend from
domestic corporation)


b. Creditable withholding tax on certain income payments. Examples are:
1. Creditable withholding tax on compensation income;
2. Creditable income tax on professional fees
Creditable income tax which has withheld shall be deducted from the income tax of 5%
to 32%.
Illustration. A taxpayer had a taxable compensation income of P250,000. His
employer withheld an income tax of P40,000 from it. The income tax due from the
employee at the end of the year shall be:
Income tax on the compensation income P50,000
Less: Income tax withheld 40,000
Income tax still due P10,000

Illustration. Assuming that in the preceding illustration the income tax withheld by the
employer was P50,000 , computations at the end of the year shall be:
Income tax on the compensation income P50,000
Less: Income tax withheld 50,000
Income tax still due P____0
When the income tax still due is P0, the employee is not required anymore to file
an income tax return at the end of the year.


The Personal Exemptions
Personal exemptions are arbitrary amounts allowed by law to reduce
income to TAXABLE INCOME. Theoretically, they are to provide for personal,
living and family expenses of the taxpayer and there is no need of proof of actual
expenses. They are:
For the TAXPAYER P50, 000
For each DEPENDENT CHILD (not to be exceeded to four) P25,
000

The Dependent Child
A dependent child for whom there can be a claim for an additional
exemption of P25, 000, is a LEGITIMATE, ILLEGITIMATE or LEGALLY
ADOPTED CHILD.


a. Chiefly dependent upon the taxpayer
b. Living with the taxpayer
c. Not more than twenty-one years of age, or regardless of age, if incapable of self-
support because of mental of physical defect.
d. Not married and
e. Not gainfully employed
LEGITIMATE CHILD is one born in wedlock, a genuine and a valid one.
Under the New Civil Code of the Philippines, a natural child is one conceived of
parents who, at the time of conception, without being married, were qualified to
marry. While under the Family Code of the Philippines, an ILLEGITIMATE
CHILD is one conceived and born outside the marriage.

The Senior Citizen
Under the Senior Citizen Act, a senior citizen which is sixty years of age
and above, dependent on the taxpayer is a dependent with an additional
exemption.

Illustrations:
a. Mr. Radcliff had a dependent legitimate child. The personal exemptions are.
Basic personal exemption for the taxpayer P50, 000
Additional exemption for the child P25, 000
Total P75, 000

b. Mr. Sandford had four dependent legitimate children. The personal exemptions
are.
Basic personal exemption P50, 000
Additional exemptions (maximum) P100, 000
Total P150, 000

c. Mr. Thumper had with him one legitimate child, one illegitimate and a senior
citizen. The personal exemptions are.
Basic personal exemption P50, 000
Additional exemptions
-for the legitimate child P25, 000


-for the illegitimate child P25, 000
-for the senior citizen P25, 000 P75, 000
Total P125, 000


There is also what we called CHANGE OF STATUS
Provisions of the Law:
1. If the taxpayer should have additional dependents during the taxable year, he
may claim the corresponding exemptions in full for the year.
2. If the taxpayer should die during the taxable year, his estate may claim the
personal exemptions as if he died at the close of such year.
3. If any dependent should die; or should marry; or should become 21 years old; or
should become gainfully employed during the year, the taxpayer may claim the
personal exemptions as if the dependent die or as if such dependent married,
became 21years of old or become gainfully employed at the close of such year.

Illustrations:
a. Mr. Undrei had a legitimate child, 19 years old at the beginning of the year. He
died on July 1 of the year, with gross income and expenses from the beginning of
the year to June 30 of P220, 000 and P60, 000, respectively.
In a last income tax return to be filed for him, for the taxable period ending June
30, the computations should be:
Gross income P220, 000
Less: expenses P60, 000
Personal exemptions
(in full, as if died at the
close of the year)
Basic personal exemption P50, 000
Additional exemption P25, 000 P135, 000
Taxable Income P85, 000

For any other event that results in a change in the status of the taxpayer as it
affects his personal exemptions and for which there are no specific rules


applicable from those above mentioned, the status of the taxpayer at the end of
the year determines his exemptions for such year.

b. Mr. Vanrey had a legitimate child, 25 years old at the beginning of the year, who
was insane. Within the year the child recovered his sanity. His status at the end
of the year shall allow him only basic personal exemption of P50, 000. The child
was not a dependent anymore. See solution at table 2-5.
Table 2-5. Change of status as affecting the personal exemptions of the taxpayer
Change of Status Exemptions Reason
A taxpayer, married, had living
with and dependent upon him for
support at the beginning of the
year his spouse, a legitimate
child, minor, single, unemployed
and a brother, single, 24 years
old but crippled. The taxpayer
died on March 20 of the year.
P75, 000 If a taxpayer died during the
year, his estate may claim the
personal exemption as if he
died at the close of the year.
Thus:
Basic P50, 000
For child P25, 000
Total P75, 000
A taxpayer was married, with a
child, 7 years old at the
beginning of the year. The wife
and the child died in an accident
on October 25 of the year.
P75, 000 A taxpayer whose dependent
died during the year may
claim personal exemptions as
if the death took place at the
close of the year. Thus:
Basic P50, 000
For child P25, 000
Total P75, 000
A taxpayer was married and had
a child, 3 years old at the
beginning of the year. On May
17 of the year, another child was
born. His wife died giving birth to
the second child. The second
child lives.
P100, 000 A taxpayer who should have
an additional dependent
during the year may claim the
additional exemption in full for
such year. Thus:
Basic P50,
000
For the children P50, 000
Total P100,
000
A taxpayer was married, with a
qualified dependent child at the
beginning of the year. On April 1
of the year, the child became
gainfully employed.
P75, 000 If a dependent became
gainfully employed during the
year, the taxpayer may claim
the personal exemptions as if
such dependent became
gainfully employed at the end
of the year. Thus:
Basic P50, 000
For child P25, 000
Total P75, 000




Married Persons
In the case of married individuals where only one of the spouses is
deriving gross income, only such spouse shall be allowed the personal
exemption.
Husband and wife, both income earners, accomplish one income tax
return only. They compute the income tax separately on their respective
incomes. The two taxes shall be added to arrive at a single income tax due or
refundable. Income which cannot be identified as exclusively of one spouse, with
the related deductions, shall be divided equally. There shall be a basic personal
exemption P50, 000 for each. Only one spouse shall claim the additional
exemptions. Where the husband and wife are both compensation income
earners, the husband is the proper claimant of the additional exemptions, but he
may waive it in writing in favour of the wife. When only one spouse is the gross
compensation income earner, such spouse is usually the claimant of the
additional exemptions. When the spouses are both self-employed (business or
profession), either may claim the additional exemptions.











HUSBAND & WIFE
Gross Income
Deductions
Husband Wife
of H&W
Gross Income
Own Gross
Income
of H&W
Gross Income
Own Gross
Income
Less: of H&W
Deductions
Own
Deductions
Balance


of H&W
Gross Income
Own Gross
Income
Less: of H&W
Deductions
Own
Deductions
Balance


of H&W
Gross Income
Own Gross
Income
Less: Personal Exemptions
Taxable Income
Income Tax
Less: Personal Exemptions
Taxable Income
Income Tax
Add = Husband
and Wife Income
Tax


Where the spouse of an employee is a non-resident citizen deriving
income from foreign sources, the employed spouse within the Philippines shall
be entitled to claim the additional exemptions.
When the income of both the spouses are only gross compensation
income, and the taxes withheld by their employers were correct, there shall be no
computations and no income tax to be prepared at the end of the year.
When the income of one spouse is gross compensation income and the
income of the other spouse is from self-employment, there shall be an income
tax return to be prepared at the end of the year. When the income of both
spouses is from self-employment, there shall be an income tax return at the end
of the year.

Illustration. Assume that Mr. & Mrs. Walters, husband and wife, with three
children, the eldest of whom is twelve years old, had:
Mr. & Mrs. Walters:
Rent Income P300, 000
Expenses P100, 000
Income Tax withheld by the lessee from
rental payments (5% of P300, 000) P15, 000

Mr. Walters:
Professional fees- gross income from profession P600, 000
Expenses: practice of profession P200, 000
Income tax withheld from professional fees
(10% of P600, 000) P60, 000
Income tax paid (for three quarters) P10, 000

Mrs. Walters:
Gross compensation income, after deduction
for SSS, Philhealth and Pagibig Contributions
and labor union dues P204, 000
Gain on sale of bonds held for 6 months P20, 000
Income tax withheld on compensation income P6, 100





The income tax still due at the end of the year from Mr. and Mrs. Walters should
have been computed as follows:
Mrs. Walters Mr. Walters
Gross income from profession P600, 000
Gross compensation income P204, 000
Gross income from rent (1/2 each) P150, 000 P150, 000
Gain on sale of bonds P20, 000
total P374, 000 P750, 000

Less
Expenses on practice of profession P200, 000
Expenses on rental properties (1/2 each) P50, 000 P50, 000
Basic personal exemption P50, 000 P50, 000
Additional exemption P75, 000
Taxable income P199, 000 P450, 000
Income Tax P37, 250 P110, 000
Less: Quarterly income taxes paid P10, 000
Withholding Taxes:
On professional fees P60, 000
On compensation income P6, 100
On rent (1/2 each) P7, 500 P7, 500
Income Tax still due P23, 650 P32, 500

The income tax still due from the husband and wife, shown in one income tax
return prepared by them is P23, 650 plus P32, 500 or P56, 150.

QUARTERLY INCOME TAX OF THE RESIDENT CITIZEN
Resident citizens in business or practice of profession within and/or
outside the Philippines, non-resident citizens in business or practice of profession
in the Philippines, must file three quarterly and a final or annual income tax
return, pay the income tax, not later than:
First quarterly return April 15 of the current year
Second quarterly return August 15 of the current year
Third quarterly return November 15 of the current year
Final and annual return April15 of the succeeding year

Per revenue regulation, in the quarterly and final returns, gross income
and deductions shall be computed on cumulative basis and shall cover only
income subject to the graduated rates of 5% to 32%. Personal and additional
exemptions shall be claimed in the final return only.



The income tax computed on the cumulative balances shall be reduced
by the income tax payments of the preceding quarter/s and any income tax
withheld on income included in the return. The quarterly computations cannot
have an income tax refundable. The final income tax return may have an
income tax refundable, or creditable, against the income tax of the succeeding
quarter/s of the succeeding year, set off (credit/refund), being taken even without
a prior consent or approval of the Bureau of Internal Revenue.

Should the taxpayer have mixed income (gross compensation income
and income from business or profession), quarterly returns shall include only the
income from business or profession. The computations on the gross
compensation income for the year shall be at the end of the year, to be
aggregated with the data on the income from business or profession for the year.
The income tax on the aggregate shall be reduced by all the creditable
withholding income taxes, on business or profession and on compensation
income.

Illustration. Mr. Dela Rosa, a resident citizen, with five qualified dependent
children, had, as September 30, 2012, a taxable income from business of P680,
000 and income tax payment thereon of P182, 600. For 2012, he had a gross
compensation income of P320, 000 from which there was a withholding income
tax of P30, 000. The cumulative data on business as of the end each of the first
three quarters, and end of the year, and income taxes thereon, see on Table 2-7.
Illustration. Mr. Carpio, a resident citizen, had gross income from business
and itemized expenses, at the end of each of the first three quarters, and of the
year, as shown in Table 2-8.











NOTE: Quarterly and year-end return should consistently be on the
itemized, or on the optional standard deduction.

Table 2-7. Quarterly and Year-end computation of income tax of the self-
employed.
In pesos 1
st
Q 2
nd
Q 3
rd
Q Year
Gross income, business 400, 000 780, 000 1, 300, 000 1, 800, 000
Capital gain on direct sale to
buyer of shares of domestic
corporation
50, 000 50, 000
Interest on Philippine currency
bank deposit
10, 000 20, 000 30, 000 40, 000
Expenses and losses 200,000 410, 000 620, 000 730, 000
1
st
Q 2
nd
Q 3
rd
Q Year
Gross income, business 400, 000 780, 000 1, 300, 000 1, 800, 000
Expenses and losses 200, 000 410, 000 620, 000 730, 000
Balance 1, 070, 000
Compensation income 320, 000
Total 1, 390, 000
Personal exemptions 150, 000
Taxable income 200, 000 370, 000 680, 000 1, 240, 000
Income tax (graduated) 37, 500 86, 000 182, 600 361, 800
Less: Income tax paid
First quarter 37, 500 37, 500 37, 500
Second quarter 48, 500 48, 500
Third quarter 96, 600
Income tax withheld 30, 000
Income tax still due 37, 500 48, 500 96, 600 149, 200

























Table 2-8. Quarterly and Year-end computation of income tax of the self-
employed.
In pesos 1
st
Q 2
nd
Q 3
rd
Q Year
Gross sales 300, 000 650, 000 720, 000 987, 000
Cost of sales 90, 000 195, 000 276, 000 350, 000
expenses 100, 000 200, 000 300, 000 450, 000

The income tax in pesos
1
st
Q 2
nd
Q 3
rd
Q year
Gross sales 300, 000 650, 000 720, 000 987, 000
Less: cost of sales 90, 000 195, 000 276, 000 350, 000
Gross profit from sales 210, 000 455, 000 444, 000 637, 000

Standard deduction (40% of
gross sales)
120, 000 260, 000 288, 000 394, 800
Balance 90, 000 195, 000 156, 000 242, 200
Less: personal exemption 50, 000
Taxable income 90, 000 195, 000 156, 000 192, 200
Income tax 12, 500 36, 250 26, 500 35, 550
Less: income tax paid
First quarter 12, 500 12, 500 12, 500
Second quarter 23, 750 23, 750
Third quarter 0
Income tax due (refundable) 12, 500 23, 750 0 700


THE MINIMUM WAGE EARNER
A minimum wage earner is exempt from income tax on the:
a. Minimum wage
b. Holiday pay
c. Overtime pay
d. Night shift differential pay
e. Hazard pay












THE NON-RESIDENT CITIZEN
Who is a non-resident citizen? He is a citizen who:

a. Establishes to the satisfaction of the Commissioner of the Internal
Revenue the fact of his physical presence abroad with a definite intention to
reside therein; or
b. Leaves the Philippines during the taxable year to reside abroad:
1. As an immigrant
2. For employment on a permanent basis; or
3. 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.
c. Was previously a non-resident citizen and who arrives in the Philippines
at any time during the taxable year to reside permanently in the Philippines. He
shall be considered a non-resident citizen for the taxable year in which he arrives
in the Philippines with respect to income derived from sources abroad until
the date of his arrival in the Philippines.

The income tax rules on non-resident citizens are in Table 2-9. The personal
exemptions are the same as those of a resident citizen.

Illustrations.
a. Ms. Enrile, a citizen of the Philippines, resides in Canada. In a year, her
income from Canada, in its equivalent in the Philippine peso was P500, 000. She
was not subject to the Philippine income tax.

b. A non-resident citizen of the Philippines had:
Gross income from business, Philippines PhP540, 000
Gross income from business, foreign sources USD81, 000
Expenses, Philippines PhP240, 000
Expenses, foreign business USD8, 000
How much was the income tax for the year?





On the foreign income no income tax
On the Philippine income:
Gross income, Philippines
Less: P540, 000
Expenses, Philippine business P240, 000
Basic personal exemption P50, 000 P290, 000
Taxable income P250, 000
Income tax P50, 000

c. Mixed income. Mr. Andrews, a citizen of the Philippines, resides and is
employed, in a Middle East country. In a year, his income from the foreign
country, in its equivalent pesos, was P200, 000. His wife, Mrs. Andrews, a citizen
of the Philippines, resides in the Philippines, with one qualified dependent child.
She had:

Capital gain on sale directly to buyer of shares
of stock of a domestic corporation P30, 000
Interest on Philippine currency bank deposit P20, 000
Net income from business in the Philippines P200, 000
Net income from business in Hong Kong P100, 000

What were the taxes of Mr. and Mrs. Andrews?

Table 2-9. Income tax rules for non-resident citizen

a. Capital gain tax of resident citizen Final tax of 5% and 10%
b. Capital gain tax of resident citizen Final tax of 6%
c. From sources within the Philippines, on passive
income of:
Interest under the expanded foreign currency deposit
system
Exempt
d. From sources within the Philippines, on passive
income of:
Royalty from books, literary works and musical
compositions
Final tax of 10%
e. From sources within the Philippines, on passive
income of:
Interest on any currency bank deposit, yield or other
monetary benefits from deposit substitute, trust fund
and similar arrangement;
Final tax of 20%


Royalty other than (d), above;
Prize exceeding P10, 000
Other winnings, except Philippine Charity
Sweepstakes and lotto winnings
f. From sources within the Philippines, on passive
income of:
Dividend from a domestic corporation, or from a joint
stock company, insurance or mutual fund company,
and regional operating headquarters of multinational
company, or share in the distributive net income after
tax of a partnership; joint stock or joint venture or
consortium taxable as a corporation
Final tax of 10%
g. From sources within the Philippines, on passive
income of:
Interest on long-term deposit or investment in banks
(with maturity of 5yrs or more)
Exempt
h. Taxable income (others) within the Philippines
Taxable income (others) may arise from:
1. Employer-employee relationship (compensation
income) and/or
2. Business or practice of profession
5% to 32%

The capital gain tax on sale of shares of stock:
(P30, 000 x 5%) P1, 500
The final tax on passive income of interest:
(P20, 000 x 20%) P4, 000

The income tax on the other income for the year:

On the income of Mr. Andrews, non-resident citizen,
from outside the Philippines No income tax












On the other income of Mrs. Andrews:

Net income from the Philippines P200,
000
Net income from Hong Kong P100,
000
Net income from within and outside the Philippines P300,
000
Less:
Basic personal exemption P50, 000
Additional exemption P25, 000 P75,
000
Taxable income P225,
000
Income tax P43,
750