UCP: TAX 1002_INDIVIDUAL TAXATION FY 2022- 2023

UNIVERSAL COLLEGE OF PARAÑAQUE

COLLEGE OF BUSINESS AND ACCOUNTANCY

TAXATION INTEGRATED REVIEW

INCOME TAX AND TAX ON INDIVIDUALS

I. Income Tax

• An income tax is one levied on the income from property or an occupation. It is a direct tax upon the
thing called income.

Income Tax in the Philippines

• It is generally imposed on the net income of citizens, resident aliens, domestic corporations, and non-
resident aliens and foreign corporations engaged in trade or business within the Philippines.
• It is further imposed as a final tax on certain passive income (interest income, royalties, prizes, and
other winnings), cash and property dividends, capital gains from the sale of domestic shares of stock
and real property classified as capital assets located in the Philippines.

Purpose of Income Tax

The imposition of the income tax is intended:

1. To raise revenue to defray the expenses of the government; and

2. To mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation
which places the burden on those best able to pay. (Madrigal vs. Rafferty & Concepcion, 38 Phil. 414)

Basis in Imposing Income Tax

a. Benefits-received Theory – the payment of taxes is based upon the benefits received from public
services, such as the government protection of life, property, and other rights; and
b. Ability to pay Theory – support of the government should be provided by the taxpayers based on their
relative abilities to share in the tax burden.

Characteristics of Philippine Income Tax

Philippine income tax has the following characteristics:

1. A national tax – It is imposed and collected by the National Government throughout the country.

2. A general tax – It is levied without a specific or predetermined purpose. Thus, the revenue from income
tax may be appropriated for general public purposes.

3. An excise tax – It is imposed on the right or privilege of a person to receive or earn income.

4. A direct tax – It is payable by the person upon whom it is directly imposed by law. It cannot be shifted
or passed on to others.

5. In general, a progressive tax for individual taxpayers – It is based upon one’s ability to pay. The
higher the taxable net income of the individual, the higher the marginal tax rate.3

6. The income tax system is a comprehensive system. – It adopts the citizen principle, the residence
principle, and the source principle.

7. Semi-global or semi-schedular system. – Some types of taxable income are compounded or grouped
together without distinction, and after deducting expenses and other allowable deductions therefrom, are
then subjected to the same set of tax rate(s). This is known as the global tax system (or net income tax
system).

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However, there are some types of taxable income like passive income and certain capital gains which are
classified into different categories, and are accorded different tax treatments. Each category of income has
its own schedule of tax rates. This is known as the schedular tax system (or gross income tax system).

Meaning of Income

• Income means all wealth which flows into the taxpayer other than a mere return of capital. Income is
a gain derived from:
a. The use or employment of labor or capital, or both labor and capital; and/or
b. From the sale or other disposition of assets or property (both ordinary and capital).

Income Distinguished from Capital

• Capital is a fund; income is a flow. Capital is wealth, while income is the service (or fruit) of wealth.
Capital is the tree, income the fruit.
• Amounts received as a return of capital are not income.

Theory of Separability or Severance Test of Income

• Under the doctrine of severance test of income, in order that income may exist, it is necessary that
there be a separation from capital of something of exchangeable value.
• The concept of income requires a realization of gain.
• The following are examples which do not give rise to income nor to a realization of gain, and therefore
no income tax shall be imposed:
1) Stock dividends;
2) Mere increase in the value of property.

Requisites for Taxability of Income

1. There must be a gain or profit whether in cash or its equivalent;

2. The gain must be realized or received; and
3. The gain must not be excluded by law or international treaty from taxation.

Classification of Income According to Source

• For income tax purposes, the word “source” refers to the activity, or property, or labor that gave rise
or produced the income.
• Based on source, income is classified as follows:
1. Income from sources within the Philippines;
2. Income from sources without the Philippines; and
3. Income from sources partly within and partly without the Philippines

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UCP: TAX 1002_INDIVIDUAL TAXATION FY 2022- 2023

How To Determine Income Within and Income Without

Income Test Source of Income

(1) Interest income Residence of the debtor

(2) Income from services Place of performance

(3) Rent Location of property

(4) Royalty Place of use of intangible

(5) Gain on sale of real property Location of property

(6) Gain on sale of personal property Place of sale

purchased in one country and sold
in another

(7) Dividend
A. From Domestic Corp. Income within

B. From Foreign Corp. Income without

Except: If 50% or more of the gross

income of the foreign corporation for the
preceding three (3) years prior to the
declaration of dividend or for such part of
such period as the corporation has been in
existence, was derived from sources within
the Philippines, then part of the dividend is
income within.

Income within = (Phil. Gross Income/Total

Gross Income) x Dividend

(8) Sale of domestic shares Income within

(9) Sale of foreign shares Income without

(10) Income from transportation and other Partly within and partly without
services rendered partly within and
partly without the Philippines

Situs of Income

• The situs of the income is the place of taxation of the income or the country which has jurisdiction to
impose the tax.
• For income tax purposes, income may be taxed in one or more or all of the following places or
countries
a. The place where the taxpayer is a citizen;
b. The place where the taxpayer is a resident; and
c. The place where the income is earned or derived.

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UCP: TAX 1002_INDIVIDUAL TAXATION FY 2022- 2023

Income Tax System in the Philippines

The income tax system of the Philippines may be characterized under two general categories, namely:

1. Gross income taxation, whereby a final tax is imposed on the gross amount of specified types of
income, such as interest income, royalty, prizes, dividends, and capital gains. This is also known
as the schedular system of taxation.

2. Net income taxation, whereby certain deductions are allowed and subtracted from the aggregate
of incomes not subject to final tax, and the tax computed is based on the resulting net income
therefrom. This is also known as the global system of taxation.

Types of Taxable Income

Ordinary/Returnable Income Passive Income subject to Capital Gains subject to

subject to Income Tax (“IT”) Final Withholding Tax Capital Gains Tax (“CGT”)
(“FWT”)
a. Compensation income from Earned without any further Arise from the sale of 2 types of
being an employee action on the part of the taxpayer. capital assets, namely:
b. Business income obtained The taxpayer merely waits for
from profits in engaging in trade the income to be received or a. Real property in the
or business realized. Philippines classified as capital
c. Professional income derived asset; and
from professional services like Examples: dividends, interest b. Shares of domestic
medical and legal services. income on bank deposits corporations (provided the seller
d. Gain from sale of ordinary or taxpayer is not a dealer in
assets. securities)
e. Net capital gain from sale of
“other capital assets;” and
f. Other taxable income not
subject to FWT and CGT
Income Tax Return (“ITR”) Final Withholding Tax Return Final Withholding Tax Return

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UCP: TAX 1002_INDIVIDUAL TAXATION FY 2022- 2023

II. Individual Taxation

Taxpayer Defined (Sec. 22, NIRC)

• The term “taxpayer” means any person subject to income tax imposed by Title II of the Tax Code.

Person Defined (Sec. 22, NIRC)

• The term “person” means an individual, trust, estate, or corporation.

Classification of Taxpayers

1. Individuals
2. Corporations
3. Partnerships;
4. Estates and Trusts

Individuals

• Individual taxpayers are further classified into the following categories:

1. Citizen

• Those who are citizens of the Philippines at the time of the adoption of the Constitution (on
February 2, 1987);
• Those whose fathers or mothers are citizens of the Philippines;
• Those born before January 17, 1973 of Filipino mothers who elect Philippine citizenship upon
reaching the age of majority;
• Those who are naturalized in accordance with law.

A. Resident Citizen

• Under Sec. 1, Art IV of the 1987 Constitution, the following are citizens of the Philippines:
(1) Those who are citizens at the time of the adoption of the 1987 Constitution; or
(2) Those whose fathers and mothers are citizens; or
(3) Those born before January 17, 1973 of Filipino mothers, and who elect Philippine
citizenship upon reaching majority age; or
(4) Those who are naturalized in accordance with law.
AND
Whose residence is within the Philippines
• They are taxable on all income derived from sources within and without the Philippines.

B. Non-Resident Citizen

• A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of
his physical presence abroad with a definite intention to reside therein;
• A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis;
• 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 (≥ 183 days)
during the taxable year; (Sec 22E)
• A citizen who has been previously considered as non-resident 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 non- resident 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;

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• The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be.

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 treated as a non-resident citizen for the taxable year
in which he arrives in the Philippines with respect to his income from sources abroad until the date
of his arrival in the Philippines.

C. Overseas Contract Worker (“OCW”) or Overseas Filipino Worker (“OFW”)

• Refers to Filipino citizens in foreign countries who are physically present in a foreign country
as a consequence of their employment in that country;
• Commonly referred to as OFWs;
• Their salaries and wages are paid by an employer abroad and is not borne by an entity or person
in the Philippines;
• Must be duly registered as such with the Philippine Overseas Employment Administration
(“POEA”) with valid Overseas Employment Certificate (“OEC”).
• Seaman who is a citizen and works as a member of the complement of a vessel engaged
exclusively in international trade (Sec. 22(F)) He must also be duly registered with the POEA
with a valid OEC, and a valid Seafarer’s Identification Record Book (“SIRB”) or Seaman’s
Book issued by the Maritime Industry Authority (“MARINA”).

Tax Treatment under the 1997 Tax Code, as amended

• An individual citizen of the Philippines who is working and deriving income from abroad as
an OCW is taxable only on income from sources within the Philippines;
• A seaman who is a citizen of the Philippines and who receives compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade shall be treated as an OCW.
• An OCW or OFW’s income arising out of his overseas employment is exempt from income
tax.

2. Alien

• Individuals who are not Filipinos.

1. Resident alien;
2. Non-resident alien doing business in the Philippines;
3. Non-resident alien not doing business in the Philippines.

A. Resident Alien

• Not a citizen but whose residence is within the Philippines.

a. His purpose in coming to the Philippines requires an extended stay in the country, and makes
his home temporarily in the Philippines (ex. expatriates or those employed in the Philippines).
b. Not a mere transient or sojourner as determined by his intention regarding the nature and
length of stay.

B. Non-resident Alien

• An individual whose residence is not within the Philippines and who is not a citizen thereon.
1. One who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished

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2. A non-resident alien individual who shall come to the Philippines and stay therein for an
aggregate period of more than 180 days during any calendar year shall be deemed a “non-
resident alien doing business in the Philippines.”

Intended Stay in the Philippines Classification for Tax Purposes

Up to 180 days Non-resident alien not engaged in trade or
business (“NRANETB”)
More than 180 days up to 2 years Non-resident alien engaged in trade or
business (“NRAETB”)*
Greater than 2 years Resident alien (“RA”)

*Note: “Trade or business” includes functions of public office, performance of personal

services, but normally does not include performance of services as an employee.

3. Special Individual Taxpayers

a. Non-resident alien cinematographic film owner, lessor, or distributor

b. Subcontractor, whether citizen, resident alien, or NRAETB, of service contractors engaged in
petroleum operations
c. Filipinos registered with the BOI availing of the Income Tax Holiday (“ITH”)
d. PEZA-registered individuals availing of ITH incentive
e. PEZA-registered individuals availing of 5% gross income tax (GIT) incentive
f. Individual registered as a BMBE

4. Minimum Wage Earners (“MWE”)

• Worker, whether in the public or private sector, who is paid not more than the statutory
minimum wage (Sec. 22 (HH)).
• MWEs shall be exempt from the payment of the income tax based on their statutory minimum
wage rates. The holiday pay, overtime pay, night shift differential pay, and hazard pay received
(HONZ) by such MWE are likewise exempt from income tax. - Sec. 24 (A) (2), NIRC; RR
No. 8-2018

Examples:

Example A: J. Takahashi, a Japanese Citizen, lives in Tokyo, Japan, with his family. In February of the
year, he was designated the resident auditor of a Japanese firm doing business in the Philippines. He
transferred his residence to Manila, and has since then lived in the Philippines. What is his tax status for
income tax purposes?

J. Takahashi is an individual whose residence is within the Philippines, and who is not a citizen thereof.
He is thereof a resident citizen.

Example B: Ni Hao, a Chinese actor from Hong Kong, came to the Philippines to do a film under contract
with Mother Lily Productions, a local film producer. He arrived in the Philippines on September 1 of the
current year, completed the film, and then left on July 31 of the following year. What is his tax status for
income tax purposes?

Ni Hao stayed in the Philippines during the current year for 122 days (September 1 to December 31),
and the following year for 212 days (January 1 to July 31). Having stayed in the Philippines for not
more than 180 days during the current year, his tax status is that of a NRA not engaged in trade or
business. The following year, he will be considered as a NRA engaged in trade or business as he stayed
in the Philippines for more than 180 days.

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UCP: TAX 1002_INDIVIDUAL TAXATION FY 2022- 2023

Taxable Income - The term ‘taxable income’ means the pertinent items of gross income specified in the
Tax Code, less deductions if any, authorized for such types of income by the Tax Code or other special
laws.

Taxpayer Tax Base

Resident citizen Taxable income within and without
Non-resident citizen Taxable income within
Resident alien Taxable income within
Non-resident alien engaged in trade or business Taxable income within
Non-resident alien not engaged in trade or business Gross income within

How to Tax an Individual

STEP 1: Determine the type of income.

1. Returnable income (ordinary income and other income not subject to final tax)
2. Passive income
3. Capital gains

STEP 2: Determine the Type of Income Tax Liability

1. Net income tax using graduated rates, of the 8% tax on gross sales/receipts plus other non-
operating income, on Returnable Income.
2. Final tax on passive income.
3. Capital gains (final) tax on capital gains

STEP 3: Compute the Income Tax

1. Returnable income

a. Net income tax is determined by 3 factors:

• Gross income derived during the calendar year;
• Allowable deductions or expenses to be subtracted from gross income; and
• The tax rates to be applied using the graduated (progressive) rate table.

b. 8% tax is determined by 3 factors:

• Gross sales/receipts derived during the calendar year;
• Other non-operating income not subject to final tax; and
• The 8% tax rate.

2. Final tax on Passive Income is determined by 2 factors:

a. The specific passive income; and
b. The applicable final tax rate

3. Capital Gains Tax (“CGT”) is determined by 2 factors:

a. The specific capital gains realized either from the sale of domestic shares of stock, or from the
sale of real property classified as capital asset; and
b. The applicable capital gains tax rate

Notes: In computing the income tax, a fractional part of a peso less than P0.50 shall be disregarded. If the
fractional part is P0.50 or more, it shall be rounded up to P1.00 (R.A. No. 590).

Examples: Amount of computed as tax P17,590.45

Correct tax (P0.45 disregarded) P17,590.00

Amount of computed as tax P59,016.60

Correct tax (P0.60 rounded to P1.00) P59,017.00

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UCP: TAX 1002_INDIVIDUAL TAXATION FY 2022- 2023

III. Returnable Income

Individual Source of Type of Tax Base Tax Rate

Taxpayer Taxable Income Returnable
Income
Resident Citizen Within and
without the Taxable
Philippines Compensation Compensation Graduated Rates
Non-resident Within the Income Income (A)
Citizen Philippines
OCWs/OFWs Within the Taxable Net Graduated Rates
Philippines Income from Income (B)
Resident Alien Within the Business, Trade, OR
Philippines or Practice of Sales/Receipts*
Non-Resident Within the Profession plus non- 8%
Alien ETB Philippines operating income
(C), (D)
Non-Resident Within the Gross Income 25% FT
Alien NETB (E) Philippines

*“Gross sales”, for purposes of the 8% income tax, shall be the total sales, net of the following: (1) sales
returns and allowances; and (2) discounts determined and granted at the time of sale.

“Gross receipts,” for purposes of the 8% income tax, refers to the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty, including the amount charged
for materials supplied with the services, and deposits and advance payments, actually or constructively
received during the taxable period for the services performed or to be performed for another person, except
for returnable security deposits. (RR 8-2018).

Notes:

(A)

Gross Compensation Income xxx

Non-taxable/Exempt Income xxx
Taxable Compensation Income xxx

Non-Taxable/Exempt Income includes:

1. SMW, holiday pay, overtime pay, night shift differential, and hazard pay of an MWE;
2. First ₱90,000 of 13th Month Pay and Other Benefits;
3. De minimis fringe benefits
4. Employee’s share of SSS, GSIS, Philhealth, and PAG-IBIG contributions**; and
5. Union dues**

** Employee’s share of mandatory contributions and union dues are actually DEDUCTIONS.

(B)

Sales/Receipts, net of returns, allowances and discounts xxx

Less: Cost of Sales/Cost of Services (xxx)
Gross Income from Operations xxx
Less: Itemized Deductions or OSD (xxx)
Net income from operations xxx
Add: Non-operating income xxx
Add: Share in GPP net income xxx
Taxable Net Income xxx

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UCP: TAX 1002_INDIVIDUAL TAXATION FY 2022- 2023

(C) Purely self-employed individuals or mixed earners can avail of the 8% income tax rate if the gross
sales/receipts from their business/profession plus non-operating income does not exceed the VAT
threshold of P3,000,000.

The 8% tax is in lieu of (1) graduated rates and (2) the OPT under Section 116 of the Tax Code.

• The taxpayer must signify his intention to elect the 8% income tax rate in any of the following:

1. For a new business registrant:

a. Upon registration using BIR Form No. 1901; or
b. On the initial quarterly Income Tax Return (BIR Form No. 1701Q) or initial quarterly
Percentage Tax Return (BIR Form No. 2551Q) of the taxable year after the commencement of a
new business or practice of profession.

2. For existing individual business taxpayers

a. Upon filing the Application for Registration Information Update (BIR Form No. 1905) at the
beginning of the taxable year, to end-date the form type of quarterly percentage tax. Provided that
the option to avail of the 8% income tax rate is selected upon filing the initial quarterly income tax
return for income tax purposes; or
b. The First (1st) Quarter Income Tax Return (BIR Form No. 1702Q), or
c. The First (1st) Quarter Percentage Tax Return (BIR Form No. 2551Q)

• Otherwise, he/she shall be considered to have availed of the graduated rates under Section
24(A)(2)(a) of the Tax Code. (RMC No. 32-2018; RMO No. 23-2018)

• Once the taxpayer elects to be taxed at the 8% tax rate, such election is irrevocable for the taxable
year. No amendment of the option shall be made for the said taxable year.

• The 8% income tax rate is effective only for the current taxable year when the election has been
made. Thus, a taxpayer is required to signify such intention in every year he wishes to be covered
under the 8% income tax regime.

• However, this option is not available to the following individual taxpayers:

(1) VAT-registered taxpayers;
(2) Taxpayer subject to OPT other than the 3% OPT under Section 116*
(3) Partners of general professional partnerships (“GPP”)
(4) Individuals enjoying income tax exemption (e.g., those registered as BMBEs); and
(5) Taxpayers who fail to signify their intention to avail of the 8% income tax rate in the First (1st)
Quarter Income Tax Return, or in the First (1st) Quarter Percentage Tax Return, or in the initial
quarterly return of the taxable year upon the commencement of a new business or practice of
profession (RR 8-2018)

* Section 116 of the Tax Code provides for the imposition of a 3% percentage tax on the
sales/receipts of persons engaged in VAT-taxable transactions, but who are not VAT-registered,
and whose annual sales or receipts do not exceed the threshold of ₱3,000,000.

• If a taxpayer initially elects the 8% income tax rate and remains qualified for said option at the end
of the taxable year*, such taxpayer shall compute his final annual income tax at 8% of the actual
gross/sales receipts plus other non-operating income. He is not required to attach Financial
Statements (“FS”) in filing his final (annual) income tax return. However, existing rules and
regulations on bookkeeping and invoicing/receipting shall still apply.**

*That is, his annual gross sales/receipts plus other non-operating income did not exceed
P3,000,000 at the end of the year.

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**A self-employed individual who is qualified and avails of the 8% income tax rate option is:
a. Required to file the Quarterly Income Tax Return, unless exempted by a revenue issuance;
b. Required to file the Annual Income Tax Return. Financial Statements are not required to be
attached.
c. Not required to file the Quarterly Percentage Tax Return.
d. Required to maintain books of accounts and issue receipts/invoices (RMO No. 23-2018).
• A taxpayer subject to the graduated income tax rates shall also be subject to the applicable business
tax (VAT or OPT), if any.
• Subject to the provisions of Section 8* of the RR No. 8 – 2018. His FS shall be required as an
attachment to the annual income tax return even if the gross sales/receipts plus other non-operating
income is less than P3,000,000. If the same exceeds P3,000,000, his annual income tax return shall
be accompanied by Audited Financial Statements (“AFS”).

(D) Net of ₱250,000 if individual taxpayer is a self-employed individual earning income purely from self-
employment or practice of profession. Mixed income earners are not allowed this ₱250,000 deduction.

(E) In the case of NRAs not engaged in trade or business (“NRANETBs”)–

(1) The 25% tax on gross income is a final tax to be deducted and withheld by the payor of the income
and remitted to the BIR.
(2) The payor of the income is constituted by law as a withholding agent.
(3) The NRANETB does not have to file a Philippine income tax return because the tax on the income
received is considered paid, said tax having been deducted by the payor of the income.

Special Individual Taxpayers Type of Income Tax Base Tax Rates

Income from film leasing
a) Non-resident alien cinematographic 25% FT
and distribution within the Gross
film owner, lessor, or distributor
Philippines (including Income
royalties)
b) Subcontractor, whether citizen, resident Income derived from
alien, or NRAETB, of service contract with a service Gross
contractors engaged in petroleum contractor engaged in Income 8% FT
operations petroleum operations in the
Philippines.
c) Qualified individuals availing of the
Income Tax Holiday (“ITH”) under Income from registered Exempt
special laws activities

d) Qualified individuals availing of ITH

incentive under Section 294 of the Tax Income from registered Exempt
Code activities

e) Qualified individuals availing of 5% gross

income tax (GIT) incentive under special Income from registered Gross Income 5%
laws activities

f) Qualified individuals availing of the 5% Income from registered Gross Income 5%

GIT under Section 294 of the Tax Code activities

g) Individual registered as a BMBE Income arising purely from Exempt

its operations as a BMBE

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Minimum Wage Earners (“MWEs”) Statutory Minimum Wage

(SMW) including holiday
pay, overtime pay, night
shift differential pay, and
hazard pay.

Graduated Rate Regime 8% Tax Rate Regime

Who may avail? Generally, applicable to all May be availed only by qualified
individual taxpayers. individuals engaged in trade or
business, or practice of
profession whose income does
not exceed P3,000,000 for the
taxable year.
Tax Base Net Taxable Income Gross Sales/Receipts plus other
non-operating income
Allowable Deductions Itemized Deductions or Optional Deduction of P250,000, but only
Standard Deductions (“OSD”) for individuals earning income
purely from trade, business, or
practice of profession.
Financial Statements (“FS”) to If claiming Itemized Deductions: No FS is required.
be attached to ITR 1. If gross sales/receipts are less
than P3.0 million, FS must
be attached.
2. If gross sales/receipts exceed
P3.0 million, audited FS
must be attached.

If claiming OSD:
1. No FS is required

Business Taxes (VAT or OPT) Taxpayer liable for either VAT Not subject to VAT nor OPT.
or OPT

Rates of Tax on Taxable Income of Individual

A. Effective January 1, 2018 (until December 31, 2022)

If the taxable income is:

Over But not over The tax shall be Plus Of excess over
P250,000 0%
P250,000 P400,000 20% P250,000
P400,000 P800,000 P30,000 25% P400,000
P800,000 P2,000,000 P130,000 30% P800,000
P2,000,000 P8,000,000 P490,000 32% P2,000,000
P8,000,000 P2,419,000 35% P8,000,000

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B. Effective January 1, 2023

If the taxable income is:

Over But not over The tax shall be Plus Of excess over
P250,000 0%
P250,000 P400,000 15% P250,000
P400,000 P800,000 P22,500 20% P400,000
P800,000 P2,000,000 P102,500 25% P800,000
P2,000,000 P8,000,000 P402,500 30% P2,000,000
P8,000,000 P2,202,500 35% P8,000,000

Married Individuals

1. Joint Return of husband and wife

• Married individuals, whether citizens, resident, or nonresident aliens, who do not derive income purely
from compensation, shall file a return for the taxable year to include the income of both spouses, but
where it is impracticable for the spouses to file one return, each spouse may file a separate return of
income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the
taxable year. [Sec. 51 (D)]

2. Separate computation of income tax

• For married individuals, the husband and wife, subject to the provision of Section 51(D) hereof, shall
compute separately their individual income tax based on their respective total taxable income.

3. Certain income to be divided equally

• If any income cannot be definitely attributed to or identified as income exclusively earned or realized
by either of the spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.

IV. Passive Income Subject to Final Withholding Tax (FWT)

• Some types of income, collectively referred to as passive income, like interest income, dividends,
royalty income, etc. are subject to final withholding taxes.

1. To be subject to the final withholding tax (“FWT”), (a) the income must be taxable by the
Philippine government and (b) the payor must be under the jurisdiction of the BIR. This means
that such income must necessarily be sourced within the Philippines. If the payor of income is
outside the Philippines, the BIR is powerless to impose much less collect taxes from such outside
source.

2. The payor of the income must withhold the tax. In the case of interest income on a bank deposit,
the bank must withhold the tax.

3. The income subject to final WT is not returnable. This means that the interest income in number
(2) does not have to be reported or included in the ITR of the taxpayer.

4. Under a final withholding tax system, the amount of income tax that is withheld by a withholding
agent is constituted as a full and final payment of the income tax due from the payee on said
income. The liability of the tax primarily rests upon the payor as the withholding agent (G.R. No.
168056 - ABAKADA Guro Party List vs. Eduardo Ermita; RMC No. 45-2015)

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5. In case of failure to withhold or of underwithholding of the tax, the deficiency tax shall be collected
from the payor/withholding agent.

The table below summarizes the different types of passive income and the rate of tax applicable to each
individual taxpayer.

RC NRC RA NRAETB NRANETB*

Interest income from any currency 20% 20% 20% 20% 25%
bank deposit
Yield of any other monetary benefit 20% 20% 20% 20% 25%
from (YOMB):
1. Deposit substitutes
2. Trust funds; and
3. Similar arrangements
Interest income from long-term Exempt Exempt Exempt Exempt 25%
deposits or investment of 5 years or
more in the form of:
1. Savings
2. Common or individual trust funds
3. Deposit substitutes
4. Investment management accounts,
and
5. Other investments
Interest income from a depositary bank 15% Exempt 15% Exempt Exempt
under the expanded foreign currency
deposit system (EFCDS)
Proceeds of pre-terminated long-term
deposit/investments with holding
period of
a. More than 5 years Exempt Exempt Exempt Exempt 25%
b. 4 years to less than 5 years 5% 5% 5% 5% 25%
c. 3 years to less than 4 years 12% 12% 12% 12% 25%
d. Less than 3 years 20% 20% 20% 20% 25%
Royalties
a. In general 20% 20% 20% 20% 25%
b. Books, literary works, musical 10% 10% 10% 10% 25%
compositions
Prizes
a. More than P10,000 20% 20% 20% 20% 25%
b. P10,000 or less NIT NIT NIT NIT 25%
Winnings
a. PCSO and Lotto Winnings ≤ P10,000 Exempt Exempt Exempt Exempt 25%
b. PCSO and Lotto Winnings > 20% 20% 20% 20% 25%
P10,000
c. Others 20% 20% 20% 20% 25%
Cash or property dividend received
from a domestic corporation, or 10% 10% 10% 20% 25%
regional operating headquarter of a
multinational companies.
Share of an individual partner in the
after-tax net income of a business 10% 10% 10% 20% 25%
partnership, or an organization, JV,
or consortium taxable as a
corporation.

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* Generally, 25% of gross income received from all sources within the Philippines as interest, dividends,
rents, salaries, premiums, annuities, compensation, etc.

If received by:
RC NRC, RA, NRAETB NRANETB

GR: Such dividend is Included in the Exempt Exempt

income without ITR

EXC: When dividend is 100% of dividend Part without shall be Part without shall be
sourced partly within and is included in the exempt exempt
partly without ITR
Part within shall be Part within shall be
included in the ITR subject to a 25% FT

Notes:

1. Deposit substitutes – alternative form of obtaining funds from the public other than deposits. “Public”
means borrowing from 20 or more lenders at any one time. Examples - Banker acceptances, PNs,
repurchase agreements, government debt instruments and securities.*

* Government debt instruments and securities shall be considered deposit substitutes irrespective of
the number of lenders at the time of origination, if the same are to be traded or exchanged in the
secondary market.

If the debt instrument is not a deposit substitute, interest income shall not be subject to a final
withholding tax. Instead, the interest income shall be included in the taxpayer’s ITR, and the same
shall be subject to CWT.

2. Long-term deposit or investment certificate – Certificate of time deposit or investment certificates

with a maturity of at least 5 years issued by a bank, and not by a non-bank financial intermediary.
The exemption only covers interest income. Any gain from trading such certificates is not covered
by the exemption.

- NRANETB shall not be exempt

- the LT deposit or investment certificate must be issued by a bank
- may be in the form of savings, common, or individual trust funds, deposit substitutes, investment
management accounts
- investment must have a maturity of at least 5 years from the time it is held
- investment must be held for at least 5 years for the interest income to be exempt

Pre-termination of investment
If the deposit or investment is pre-terminated before the 5th year, the entire income shall be subject to
final tax to be withheld by the depositary bank from the proceeds of the long-term deposit or
investment based on the holding period of the taxpayer:

Less than 3 years 20%

3 years to less than 4 years 12%
4 years to less than 5 years 5%

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Example: A long-term investment instrument with a maturity of 30 years was bought by Mr. A from
a bank. The instrument was sold successively to other investors. The holding periods of the investors
are as follows:
Holding Period FWT Rate
Mr. A (NRC) 3 years 12%
Mr. B (RA) 2 years 20%
Mr. C (NRAETB) 5 years Exempt
Mr. F (NRANETB) 5 years 25%

V. Final Tax on Capital Gains, also known as Capital Gains Tax (“CGT”)

A. On the Sale of Domestic Shares of Stock

1. Shares of stock in a domestic corporation not traded in the stock exchange.

(a) Tax Base – Net capital gain which is the excess of the amount realized on the sale
(selling price) over the basis or adjusted basis of the shares.

Selling price – the total consideration of the sale consisting of the sum of money and/or
the fair market value of property received, if any.

Adjusted basis – the basis of the shares sold plus expenses of sale/disposition

(b) Tax rate on net capital gain: 15%

Note: Before January 1, 2018, the FT was 5% on the first ₱100,000 of gain plus 10%
on any gain in excess of ₱100,000.

(c) Withholding agent – The payor of the income who, in this case, is the buyer.

(d) Who are subject? All individual taxpayers, except the following:

(1) Dealers in securities. The gains from such sales by dealers shall be included as
ordinary income in their income tax returns;
(2) Investors in shares of stock in a mutual fund company.
(3) All other persons, whether natural or juridical, who are specifically exempt from
national internal revenue taxes under existing investment incentives and other special
laws.

(e) The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange
of shares of stock not listed on the stock exchange. (RMC No. 79 – 2014)

(f) BIR Forms to be filed:

Form 1707 Filed within thirty (30) days after each transaction
Form 1707-A (Final Filed on or before April 15 of each year covering all
Consolidated Return) stock transactions of the preceding year.

2. Shares of stock listed and traded thru the local stock exchange (Sec. 127A,
NIRC)

(a) Rate and Base – Six-tenths of one percent (6/10 of 1%)48 of the gross selling price or
gross value in money of the shares of stock sold.

(b) Withholding agent – The tax must be deducted and withheld by the stockbroker who
effected the sale at the stock exchange.

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(c) Who are subject? All individual taxpayers, except the following:49

(1) Dealers in securities;

(2) Investors in shares of stock in a mutual fund company;

(3) All other persons, whether natural or juridical, who are specifically exempt from
national internal revenue taxes under existing investment incentives and other special
laws.

(4) Sellers of shares of a publicly-listed company which is non-compliant with the

mandatory minimum public ownership (“MPO”)* – subject to the 15% capital gains
tax.

* MPO – the minimum percentage of outstanding shares held by the public or public
float. It also refers to the portion of outstanding shares of the company which are freely
available and tradeable in the market. Currently the MPO is 20%.

(5) Sellers of shares of stock in the stock exchange where the transaction excludes the
public by pre-arranging the sale or pre-determining the buyers. Ex. Block sale - subject
to the 15% capital gains tax.

(d) Kind of tax – Business tax. Strictly speaking, this is a tax on the sales transaction and
not on the income or gain from such sale.

(e) BIR Form to be filed by the Stockbroker who effected the sale:
Form No. 2552 Filed within five (5) banking days from the date of collection

B. On the Sale of Real Property Classified as Capital Assets

1. Transaction subject – Sale, transfer, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and other forms of
conditional sales.

2. Rate and Base of Tax – Six percent (6%) of the gross selling price or current fair market value
of the property, whichever is higher. The fair market value of the property is the higher of zonal
value or assessor’s value.

3. Final Tax – The tax to be withheld by the payor (buyer) is a final tax and the capital gain from the
sale is not returnable.

4. Who are Subject? All individual taxpayers.

5. Forced Sale to the State Under Eminent Domain – If the sale is made to the government or any
of its political subdivisions or agencies, or to government-owned or –controlled corporations, the
taxpayer may choose either (a) to have the gain included in the ITR and taxed under the graduated
rates or the 8% tax under Section 24(A), or (b) to be subject to the capital gains tax under Section
24(D).

6. Exemption from the Capital Gains Tax:

(a) Sale of raw lands to be used for “socialized housing” projects, or sold under the Community
Mortgage Program (CMP). (RA No. 7279)
(b) Land transfers under the Comprehensive Agrarian Reform Law of 1988.
(c) Sale of principal residence, and subsequent acquisition or construction of another principal
residence:

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1) Sale by a natural person (individual) of his principal residence located in the Philippines;
2) The proceeds of the sale must be fully utilized in acquiring or constructing a new
principal residence within 18 calendar months from the date of sale;
3) The historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired;
4) The taxpayer must notify the Commissioner within 30 days from the date of sale or
disposition of his intention to avail of the tax exemption;
5) The tax exemption can be availed of only once every 10 years.

7. Proceeds of sale not fully utilized – If the proceeds of the sale are not fully utilized in the purchase
or construction of a new residence in 6(c) above, the portion of the gain presumed to have been
realized on the sale shall be subject to capital gains tax. The following formula is used to arrive at
the taxable portion:

Unutilized Amount / Gross Selling Price (“GSP”) x (Higher of GSP or FMV) = Taxable Portion

How to Compute Capital Gains Tax

1. Compute the tax payable on account of the unutilized amount

Unutilized Amount / Gross Selling Price (“GSP”) x (Higher of GSP or FMV) = Taxable Portion

CGT = Taxable Portion x 6%

2. Compute the cost basis of the new principal residence.

Unutilized Amount / Gross Selling Price (“GSP”) x Historical Cost of Old Residence
= Amount to be carried over to the cost basis of new principal residence

OR

Historical Cost of Old Principal Residence xxx

Less: Portion of Historical Cost pertaining to unutilized amount (xxx)
Adjusted Cost basis of new principal residence xxx

8. BIR Form to be Filed

Form 1706 Filed within thirty (30) days following each sale, exchange, or
disposition of real property.

VI. Final Tax on Informer’s Reward

Informer – person (except a BIR employee, or other public employee, or his relative within the 6th
degree of consanguinity) who gives information that leads to the discovery of frauds or violations of tax
laws, which results in the recovery of taxes, or in the conviction of the tax evader, or in a compromise
agreement with the BIR.

Reward = LOWER of (a) Ten percent (10%) of the revenues, surcharges, or fees recovered and/or
fine, or penalty imposed and collected, or the value of smuggled and confiscated goods, OR (b)
One million pesos (₱1,000,000) per case.

Final Tax = 10% of the reward.

“Nurture your mind with great thoughts. To believe in the heroic makes heroes."
—Benjamin Disraeli

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