MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

ACT183: INCOME TAXATION

INDIVIDUAL TAXPAYERS
PART 1

LESSON OBJECTIVES
At the end of this module, you will be able to:
1.Classify the individual taxpayers;
2.Identify the basic and additional exemptions, and premiums payments for health and/or
hospitalization insurance;
3.Identify the different income tax rates applicable to income of individual taxpayers;
4.Compute taxable income and income tax due of affixed earner taxpayer.

OVERVIEW
In dealing with taxation especially for individuals, it is very important to know its classification
because each individual may differ as to situs of income, manners of computing tax, treatment to
certain incomes, allowable deductions and references to the tax code.

ACTIVITY
Classify each individual whether he/she is a resident citizen, non-resident citizen, resident alien,
or a non-resident alien.
1. Alas, a native of General Santos City is working as overseas contract worker in
Saudi Arabia.
2. Bambina, Korean singer, residing in Seoul. She was invited to hold a three-day
concert at Araneta Coliseum in September of the current year.
3. Caipas, Filipino, now residing in Vancouver, Canada.
4. Dabiana, American married to a Filipino. She has been living in the Philippines
since 1977.
5. Ellias, Spanish citizen, a resident of Madrid, Spain, spent a one-week vacation in
Boracay and another week in El Nido Resort Palawan.
6. Fujiko, a Japanese engineer, stayed in the Philippines for seven (7) months during
the current year to manage the rehabilitation of the railroad track going to Bicol.

ABSTRACTION
Definition
Individual Taxpayers are natural persons with income derived from within territorial jurisdiction of
a taxing authority. They are classified as follows:

1. Resident Citizen
Under section 1, Article III of the Constitution, a Filipino Citizen is a natural person who is/has:
1) Born (by birth) with father and/or mother as Filipino Citizens;
2) Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon
reaching the age of maturity;
3) Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine Laws.

2. Non-resident Citizen
Sec. .22 (E) of the NIRC describes a non-resident citizen as a citizen who:
1) Establishes, to the satisfaction of the Commissioner of Internal Revenue, the fact of his
physical presence abroad with a definite intention to reside therein;
2) Leave the Philippines during the taxable year to reside abroad

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

• As an immigrant; or
• For employment on a permanent basis; or
• For work and derives income from abroad and whose employment thereat requires
him to be physically abroad most of the time during the taxable year.

3) A citizen of the Philippines who shall have stayed outside the country for 183 days or more
by the end of the year (aggregate)

NOTE: A non-resident citizen who arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines shall be considered a nonresident 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. (Same rules apply for Resident Citizens
who leaves the Philippines.)

3. Resident Alien
An individual whose residence is within the Philippines and who is not a citizen thereof. An
alien who lives in the Philippines with no definite intention as to stay is also classified as
resident alien.

4. Nonresident Alien
The term nonresident alien under the Tax code means an individual whose residence is not
in the Philippines and who is not a citizen thereof. The are aliens who come to the Philippines
for a definite purpose.

Alien who stayed in the Philippines for an aggregate period of more than 180 days during the
taxable year and/or alien who have business income in the Philippines are considered
nonresident alien engaged in trade/business. In contrast, if an alien stays in the Philippines
for less than 180 days and does not derive income within, he/she is classified as nonresident
alien not engaged in trade/business.

Source of Income
It is important to know the source of income for tax purposes because as resident citizens are
taxable based on their worldwide income while others are taxable only on their income derived
from sources within the Philippines

Individual Taxpayer Source Tax Base

RC WITHIN & WITHOUT NET INCOME
NRC, RA, NRA-ETB WITHIN ONLY NET INCOME
NRA-NETB WITHIN ONLY GROSS INCOME

Classification of Income

1. Compensation income
Gain derived from labor, especially employment (earned from employer-employee relationship)
such as salaries and commissions. These earnings are subject to normal tax.

2. Profession or Business Income

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Value derived from an exercise of profession, business or utilization of capital including profit or
gain derived from sale or conversion of assets. Examples are net income from business and gain
from the sale of assets used in trade or business. These earnings are subject to normal tax.

3. Passive Income
Income in which the taxpayer merely waits for the amount to come in. Examples are royalties,
interest, prizes, and winnings. Generally, passive income earned within the Philippines is subject
to final tax.

4. Capital Gain
Income derived from sale of assets not used in business. Examples are sale of family home and
other sales of shares of stock not traded in the stock exchange. Capital gains are subject to
capital gains tax. Other sale of capital assets is subject to normal tax.

Normal tax vs Final Tax

Normal Tax, also called “regular” or “customary/ordinary tax”, is imposed on ordinary income.
The ordinary income recipient is required to file an income tax return to report income and normal
tax for individuals is computed using the tax table. (see table 1)

Final tax is the term used to describe the tax on earnings that have been subjected to complete
withholding tax payment at source (tax on passive income). These earnings are not anymore
reported in the income tax return of the recipient since it is collected at source. Examples of these
earnings are interest income from bank, royalty and dividend income. To compute final taxes, we
will use different passive income tax rates depending on what time of passive income. (see table
2)

TABLE 1:

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

TABLE 2
➢ CERTAIN PASSIVE INCOMES OF CITIZENS AND RESIDENT ALIEN:
Passive Income Tax Rate
1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical compositions) 10%
- In general: 20%
3. Prizes (P10,000 or less) Graduated
Income Tax
Rates
- Over P10,000 20%
4. Winnings (except from PCSO and Lotto amounting to P10,000 or less) 20%
- From PCSO and Lotto amounting to P10,000 or less exempt
5. Interest Income from a Depository Bank under the Expanded Foreign Currency 15%
Deposit System
6. Cash and/or Property Dividends received by an individual from a domestic 10%
corporation/ joint stock company/ insurance or mutual fund companies/ Regional
Operating Headquarter of multinational companies
7. Share of an individual in the distributable net income after tax of a partnership 10%
(except GPPs)/ association, a joint account, a joint venture or consortium taxable
as corporation of which he is a member or co-venture
8. Capital gains from sale, exchange or other disposition of real property located 6%
in the Philippines, classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the stock exchange 15%
10. Interest Income from long-term deposit or investment in the form of savings, Exempt
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed on the entire
income from the proceeds of the long-term deposit based on the remaining maturity
thereof:
Holding Period
- Four (4) years to less than five (5) years 5%
- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%

➢ CERTAIN PASSIVE INCOMES OF NONRESIDENT ALIENS NOT ENGAGED IN

TRADE OR BUSINESS
A. Tax Rate in General – on taxable income from all sources within the same manner as
Philippines individual citizen
and resident
alien individual

B. Certain Passive Income Tax Rates

1. Interest from currency deposits, trust funds and deposit substitutes 20%
2. Royalties (on books as well as literary & musical compositions) 10%
- In general 20%
3. Prizes (P10,000 or less ) Graduated Income
Tax Rates

- Over P10,000 20%

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

4. Winnings (except from PCSO and Lotto) 20%

- From PCSO and Lotto exempt
5. Cash and/or Property Dividends received from a domestic corporation/ joint 20%
stock company/ insurance/ mutual fund companies/ Regional Operating
Headquarter of multinational companies
6. Share of a non-resident alien individual in the distributable net income after tax 20%
of a partnership (except GPPs) of which he is a partner or from an association, a
joint account, a joint venture or consortium taxable as corporation of which he is a
member or co-venture
7. Interest Income from long-term deposit or investment in the form of savings, Exempt
common or individual trust funds, deposit substitutes, investment management
accounts and other investments evidenced by certificates in such form prescribed
by the Bangko Sentral ng Pilipinas (BSP)
Upon pre-termination before the fifth year, there should be imposed on the entire
income from the proceeds of the long-term deposit based on the remaining maturity
thereof:
Holding Period
- Four (4) years to less than five (5) years 5%
- Three (3) years to less than four (4) years 12%
- Less than three (3) years 20%
8. Capital from the sale, exchange or other disposition of real property located in 6%
the Philippines classified as capital asset
9. Net Capital gains from sale of shares of stock not traded in the Stock Exchange

- Not over P100,000 5%

- Any amount in excess of P100,000 10%

➢ CERTAIN PASSIVE INCOMES OF NONRESIDENT ALIENS ENGAGED IN TRADE OR

BUSINESS
1. Gross amount of income derived from all sources within the Philippines 25%
2. Capital gains from the exchange or other disposition of real property located in the 6%
Philippines
3. Net Capital gains from the sale of shares of stock not traded in the Stock Exchange
- Not Over P100,000 5%
- Any amount in excess of P100,000 10%
(SOURCE: https://www.bir.gov.ph/index.php/tax-information/income-tax.html#it_rates)

APPLICATION
INSTRUCTION: For Application, I will classify five income listed and continue the rest.
Submit this together with the activity above.

Classify the following income into Compensation, Professional/Business Income, Passive

Income, or Capital Gain
1. Rent income on apartments. Professional/Business
2. Gain on sale of commercial building Professional/Business
3. Gain on sale of residential building Capital Gain
4. Interest on peso deposit with Bank of the Philippines Passive Income
5. Productivity incentive pay Compensation
6. Royalty as book author
7. Night shift differential pay

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

8. Interest income in Euro deposit with Metrobank

9. Share in the net income of a partnership in trade
10. Honorarium of a CPA as speaker in a Continuing Professional Development seminar
11. Income received by a CPA as an independent Auditor
12. 13th month pay
13. Gain on sale of shares of stocks
14. Winnings in a lottery sponsored by Philip Morris Philippines
15. Honorarium received as President and Director of a Corporation
16. Dividend Received as stock holder of a corporation
17. Travel allowance
18. Lotto winnings
19. Income as street vendor
20. Income as owner of a Junk Shop

REFERENCES
Tabag, E. D. (2019). INCOME TAXATION. Manila: Info Page.
Valencia, E. G. (2017). Income Taxation. Baguio City: Valencia Educational Supply.