CHAPTER 10

BASIC INCOME
TAX PATTERNS
GLOBAL INCOME TAX SYSTEM
GROSS INCOME TAX SYSTEM
AND
SCHEDULAR TAX SYSTEM
 GLOBAL INCOME TAX
SYSTEM
THIS INCOME TAX SYSTEM IS A COMBINATION OF GROSS
COMPENSATION INCOME AND/OR NET INCOME
FROM BUSINESS, TRADE OR PROFESSION TO ARRIVE
AT THE TOTAL (GLOBAL) INCOME SUBJECT TO
TABULARTAX RATES.

EXAMPLES OF GLOBALIZED INCOME ARE THE

FOLLOWING:
1. COMPENSATION INCOME;
2. NET INCOME FROM BUSINESS, TRADE OR
PROFESSION;
3. PASSIVE INCOME (NOT SUBJECTED TO FINAL TAX);
AND
4. CAPITAL GAINS (NOT SUBJECTED TO CAPITAL GAINS
TAX).
GROSS INCOME TAX SYSTEM
UNDER THIS TAX SYSTEM, THE TAXPAYER’S INCOME
TAX IS FIXED OR COMPUTED BASED ON THE
GROSS INCOME. THE USUAL ALLOWABLE
DEDUCTIONS ARE COMPLETELY DISREGARDED
IN COMPUTING THIS INCOME TAX.

EXAMPLES OF INCOME UNDER GROSS INCOME ARE

THE FOLLOWING INCOME TAXES:
1. FRINGE BENEFIT TAX
2. PASSIVE INCOME SUBJECT TO FINAL TAX;
3. CAPITAL GAINS TAX ON REAL PROPERTY
(CAPITAL ASSET); AND
4. MINIMUM CORPORATE INCOME TAX (MCIT).
 SCHEDULAR TAX SYSTEM
SINCE INCOME TAXES ARE EITHER COMPUTED
BASED ON GLOBAL TAX SYSTEM OR GROSS INCOME
TAX SYSTEM, THEIR FILING AND PAYMENT SHOULD
BE ACCOMPANIED WITH SEPARATE BIR FORM AS
REQUIRED PER CATEGORY OF INCOME.

EXAMPLES OF INCOME TAX UNDER SCHEDULER TAX

SYSTEM ARE THE FOLLOWING:
1. ANNUAL INCOME TAX RETURN(FOR GLOBAL
INCOME TAX); AND
2. CAPITAL GAINS TAX RETURN (FOR SALE OF REAL
PROPERTY CLASSIFIED AS CAPITAL ASSET, AND
SALE OF SHARES OF STOCKS NOT TRADED INTHE
STOCK MARKET).
 BASIC SUMMARY OF PHILIPPINE INCOME TAX
GROUPS AND SOURCES OF INCOME TAXPAYER
IN THE PHILIPPINES, INCOME TAXPAYERS ARE CLASSIFIED
AS FOLLOWS:
A. INDIVIDUALS
a)CITIZEN
a)RESIDENT CITIZEN (TAXABLE WITHIN AND OUTSIDE)
b)NONRESIDENT CITIZEN (TAXABLE WITHIN)
b)ALIEN
a)RESIDENT ALIEN (TAXABLE WITHIN)
b)NONRESIDENT ALIEN, DOING BUSINESS IN THE
PHILIPPINES (TAXABLE WITHIN)
c)NONRESIDENT ALIEN, NOT DOING BUSINESS IN THE
PHILIPPINES (TAXABLE WITHIN)
 BASIC SUMMARY OF PHILIPPINE INCOME TAX

B. CORPORATIONS AND PARTNERSHIPS

1. DOMESTIC CORPORATION (TAXABLE WITHIN AND
OUTSIDE)
2. RESIDENT FOREIGN CORPORATION (TAXABLE
WITHIN)
3. NONRESIDENT FOREIGN CORPORATION (TAXABLE
WITHIN)
C. ESTATES AND TRUSTS (TAXABLE AS INDIVIDUAL
TAXPAYER)
SUMMARY OF GROUPS OF INCOME
THE GROUPS OF INCOME MAY BE SUMMARIZED
AS FOLLOWS:
COMPENSATION INCOME COMPENSATION
SALARIES INCOME
WAGES ALLOWANCES
HOLIDAY PAY TIPS
SICK LEAVE PAY BONUS
VACATION LEAVE PAY 13TH MONTH PAY
PER DIEM RETIREMENT PAY
HONORARIUM TERMINAL PAY
NIGHT SHIFT DIFFERENTIAL PENSIONS
HAZARD PAY
COMMISSION
BUSINESS INCOME PASSIVE INCOME
INCOME FROM TRADING INTEREST
INCOME FROM INCOME
MERCHANDISING
INCOME FROM ROYALTIES
MANUFACTURING
PROFESSIONAL INCOME DIVIDENDS
INCOME FROM FARMING
RENT INCOME PRIZES
INCOME FROM
CONSTRUCTION WINNINGS
CONTRACT
 CAPITAL GAIN
SALE OF CAPITAL ASSETS (NOT
AN INVENTORY/NOT USED
IN BUSINESS)

SALE OF REAL PROPERTY

(CAPITAL ASSET)

SALE OF SHARES OF
STOCK(SOLD OUTSIDE
STOCK EXCHANGE)
DEDUCTIONS FROM BUSINESS INCOME
1. ITEMIZED ALLOWABLE DEDUCTIONS (BUSINESS
EXPENSES) OR
2. OSD – 40% OF GROSS SALES OR GROSS RECEIPTS
FOR INDIVIDUALS AND 40% OF GROSS INCOME
FOR CORPORATIONS
PERSONAL EXEMPTIONS
PERSONAL EXEMPTIONS OF INDIVIDUAL TAXPAYERS
ARE:
1. BASIC EXEMPTION OF P50,000 FOR EACH
INDIVIDUAL TAXPAYER (WHETHER SINGLE,
MARRIED, OR HEAD OF FAMILY). IN CASE OF
MARRIED INDIVIDUAL, ONLY THE SPOUSE
DERIVING GROSS INCOME SHALL BE ALLOWED
TO AVAIL PERSONAL EXEMPTION.
2. ADDITIONAL OF P25,000 FOR EACH DEPENDENT
CHILD, MAXIMUM OF 4 CHILDREN. THE
EXEMPTION SHALL BE CLAIMED ONLY BY
ONE OF THE SPOUSES IN CASE OF MARRIED
INDIVIDUALS.
CREDITABLE WITHHOLDING TAX REFERS TO THE
INCOME TAX WITHHELD BY THE EMPLOYER BEFORE
THE EARNER RECEIVES THE NET PROCEED OF HIS
INCOME.
THE AMOUNT WITHHELD REPRESENTS AN ESTIMATED
PORTION OF THE TOTAL INCOME TAX FOR THEYEAR.
THIS TAX IS CALLED “CREDITABLE” BECAUSE IT IS
DEDUCTIBLE FROM THE TOTAL ACTUAL INCOME
TAX DUE COMPUTED AT THE END OF THE TAXABLE
YEAR.
FINAL WITHHOLDING TAX IS ALSO AN INCOME TAX
WITHHELD FROM THE TOTAL INCOME BEFORE THE
EARNER RECEIVESTHE NET PROCEEDS OF HIS INCOME.

THIS TAX IS CALLED “FINAL” BECAUSE IT IS NOT

ALLOWED AS DEDUCTION FROM THE TOTAL ACTUAL
INCOME TAX DUE AT THE END OF THEYEAR.

QUARTERLY INCOME TAX IS PAID QUARTERLY BY THOSE

WHO ARE ENGAGED IN BUSINESS/SELF EMPLOYED.
THIS INCOME TAX IS ALSO A CREDITABLE TAX AT THE
END OF THEYEAR.
ANNUAL INCOME TAXES ARE NORMAL TAXES THAT
ARE USUALLY 30% FOR CORPORATION AND 5 TO
32% FOR INDIVIDUAL TAXPAYERS. THESE TAXES
ARE PAID AT THE END OF THE TAXABLE YEAR AND
USUALLY REDUCED BY THE CREDITABLE TAXES.

MINIMUM CORPORATE INCOME TAX (MCIT) IS AN

INCOME TAX OF 2% BASED ON THE GROSS
INCOME OF CORPORATION THAT INCURS LOSSES
OR REPORTS MINIMAL INCOME TAX EVEN AFTER
THE 3RD YEAR OF BUSINESS OPERATION. THE MCIT IS
OBSERVED STARTING FROM THE 4TH YEAR OF THE
BUSINESS.

CAPITAL GAIN TAX IS GENERALLY AN INCOME TAX

ON SALE OF REAL PROPERTY (BIR FORM 1706)
AND SHARES OF STOCKS CLASSIFIED AS CAPITAL
ASSETS (BIR FORM 1707).
 Income Tax Return and Filing
A. INDIVIDUAL, EMPLOYED, NOT DOING BUSINESS
IF AN INDIVIDUAL IS EMPLOYED WITH ONLY ONE
EMPLOYER DURING THE TAXABLE YEAR, THE
CORRESPONDING WITHHOLDING TAX EVERY MONTH
FOR THEWHOLEYEAR WILL BE ACCURATELY DEDUCTED.

EMPLOYER WILL FURNISH THE EMPLOYEE WITH FORM 2316

WHICH WILL SERVE THE SAME PURPOSE AS THAT OF BIR
FORM 1700 ( TAX RETURN FOR EMPLOYED, NOT DOING
BUSINESS).

BIR FORM 2316 IS A SWORN DECLARATION OF THE

EMPLOYER OF THE COMPENSATION PAYMENT TO AN
EMPLOYEE (WITH ORWITHOUT TAXWITHHELD)
AND THE AMOUNT OF CREDITABLETAXWITHHELD.
B. INDIVIDUAL, EMPLOYED, WITH SEVERAL EMPLOYERS
DURINGTHE YEAR, NOT DOING BUSINESS

UNDER THIS CASE, THE INDIVIDUAL TAXPAYER IS REQUIRED

TO ACCOMPLISH FORM 1700 AND ATTACH TO IT THE FORM
2316 FURNISHED BY HIS EMPLOYERS.

C. INDIVIDUAL, EMPLOYED AND DOING BUSINESS

UNDER THIS CASE, THE TAXPAYER’S INCOME TAX RETURN

SHOULD BE REPORTED IN BIR FORM 1701Q FOR THE FIRST
THREE QUARTERS AND BIR FORM 1701 FOR THE ANNUAL
INCOME TAX RETURN.
D. CORPORATION AND PARTNERSHIPS

JURIDICAL PERSONS ENGAGED IN BUSINESS ARE

REQUIRED TO ACCOMPLISH BIR FORM 1702Q FOR THE
FIRST THREE QUARTERS, AND FORM 1702 FOR
ANNUALTAX RETURN.

E. ONEROUS TRANSFER OF REAL PROPERTY

CONSIDERED AS CAPITAL ASSET

UNDER THIS CASE, THE TAX IS 6% BASED ON THE

SELLING PRICE OR ZONAL VALUE, WHICHEVER IS
HIGHER. ACCORDINGLY, THE ACTUAL GAIN OR LOSS
ON THE SALE OF REAL PROPERTY CLASSIFIED AS
CAPITAL ASSET IS NOT CONSIDERED IN THE
CALCULATION OF THE CAPITAL GAINS TAX.
F. ONEROUS TRANSFER OF SHARES OF STOCK NOT
TRADED THROUGH LOCAL STOCK MARKET

THE CAPITAL GAINS IS SUBJECT TO A 5% FINAL TAX

IF THE AMOUNT IS WITHIN THE P100,000
THRESHOLD. THE CAPITAL GAINS IN EXCESS OF
THE FIRST P100,000 IS SUBJECT TO A FINAL TAX
OF 10%.
THE
END