Fundamental Concepts of Individual Income Taxation

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 person’s 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 individual’s 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 taxpayer’s 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 FamilyMeans 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 ChildMeans 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 ChildRefers 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 child’s 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 adoption2. Judicial/Legal Adoption

Natural ChildRefers 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 ChildRefers 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 CitizenRefers 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 taxpayer2. Dependent upon the tax payer for chief support3. Not gainfully employed

Qualification of dependent brothers, sisters or children

1. Unmarried2. Not gainfully employed3. Living with the taxpayer4. Dependent upon the taxpayer for chief support5. 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 25000Additional ape (legally adopted child) P 8000Allowed 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 WIFEBasic APE (4 children) P32,000 P32,000

Additional APE (4 children) P32,000 0Allowed 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 P40,000b. For head of a family P25,000c. 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 P32,0004 children P32,000 0

Allowed Personal Exemptions P64,000 P32,000Health /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 income2. 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 taxa. 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 propertyReal 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 ½%

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 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 ½%

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 (a.), (b.) or (c.) is

withheld at source. The

Computation of the income

tax is made in the quarterly

The tax in (b.) is withheld at

source.

income receive is tax – paid

already.

and year-end income tax

returns period.

CAPITAL GAIN TAXFinal 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 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 ExemptionsPersonal 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 ChildA 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 CitizenUnder 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.


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 STATUSProvisions 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)


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 ReasonA 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, 000For child P25, 000Total 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, 000For child P25, 000Total 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, 000For the children P50, 000Total 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, 000For child P25, 000Total 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.

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.

HUSBAND & WIFE

Gross Income

DeductionsHusband Wife

½ of H&W Gross Income Own Gross Income

½ of H&W Gross Income Own Gross Income

Less: ½ of H&W Deductions Own Deductions Balance

Less: ½ of H&W Deductions Own Deductions Balance

Less: Personal Exemptions Taxable Income Income Tax

Less: Personal Exemptions Taxable Income Income Tax

Add = Husband and Wife Income

Tax

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, 000Gross compensation income P204, 000Gross income from rent (1/2 each) P150, 000 P150, 000Gain on sale of bonds P20, 000total P374, 000 P750, 000

LessExpenses on practice of profession P200, 000Expenses on rental properties (1/2 each) P50, 000 P50, 000Basic personal exemption P50, 000 P50, 000Additional exemption P75, 000Taxable income P199, 000 P450, 000Income Tax P37, 250 P110, 000Less: Quarterly income taxes paid P10, 000Withholding Taxes: On professional fees P60, 000 On compensation income P6, 100 On rent (1/2 each) P7, 500 P7, 500Income 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 CITIZENResident 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 1st Q 2nd Q 3rd Q Year

Gross income, business 400, 000 780, 000 1, 300, 000 1, 800, 000Capital 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, 0001st Q 2nd Q 3rd Q Year

Gross income, business 400, 000 780, 000 1, 300, 000 1, 800, 000Expenses and losses 200, 000 410, 000 620, 000 730, 000Balance 1, 070, 000Compensation income 320, 000Total 1, 390, 000Personal exemptions 150, 000Taxable income 200, 000 370, 000 680, 000 1, 240, 000Income tax (graduated) 37, 500 86, 000 182, 600 361, 800Less: Income tax paid First quarter 37, 500 37, 500 37, 500 Second quarter 48, 500 48, 500 Third quarter 96, 600Income tax withheld 30, 000Income 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 1st Q 2nd Q 3rd Q YearGross sales 300, 000 650, 000 720, 000 987, 000Cost of sales 90, 000 195, 000 276, 000 350, 000expenses 100, 000 200, 000 300, 000 450, 000

The income tax in pesos1st Q 2nd Q 3rd Q year

Gross sales 300, 000 650, 000 720, 000 987, 000Less: cost of sales 90, 000 195, 000 276, 000 350, 000Gross 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, 200Less: personal exemption 50, 000Taxable income 90, 000 195, 000 156, 000 192, 200Income tax 12, 500 36, 250 26, 500 35, 550Less: income tax paid First quarter 12, 500 12, 500 12, 500 Second quarter 23, 750 23, 750 Third quarter 0Income tax due (refundable) 12, 500 23, 750 0 700

THE MINIMUM WAGE EARNERA 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;Royalty other than (d), above;Prize exceeding P10, 000Other winnings, except Philippine Charity

Final tax of 20%

Sweepstakes and lotto winningsf. 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 PhilippinesTaxable income (others) may arise from:1. Employer-employee relationship (compensation

income) and/or2. 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:


Additional exemption P25, 000 P75,

000

Taxable income P225,

000

Income tax P43,

750

Fundamental Concepts of Individual Income Taxation

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