Income tax is imposed on taxable income received by individuals, corporations, and partnerships. It does not include return of capital. To be taxed, income must be gained or realized from property, activity, or service and not be exempt by law. Individual taxpayers are classified based on citizenship and residency, and taxed differently depending on if their income is from within or outside the Philippines. The main types of individual income are compensation, business, professional, and passive.

1. Prepared by: RA Resurreccion

2. Income Tax Defined
 We defined income tax as the tax on all wealth which
flows into the taxpayer other than as mere return of
capital. It is important to note that this tax is imposed
based on the taxable income of individual persons,
corporations or partnerships in one taxable year.

3. Income vs. Capital and Property
 Any entrepreneur or business entity normally financed
their establishment through the infusion of cash, also
known as capital, and/or investment of property to
commence operations.
 Simply put, we differentiate them as follows:
 CAPITAL is a fund, while INCOME is a flow.
 CAPITAL is wealth, while INCOME is the result of wealth.
 PROPERTY is like a tree, while INCOME is its fruit

4. Elements in the Imposition of Income Tax
 Income tax is assessed on the income received from any
property, activity or service that produces the income.
Thus, the following elements must be present:
1. There must be gain or profit
2. The gain or profit is realized (i.e. goods already delivered,
or services performed) or received (actual payment is
collected)
3. It is not exempted by law or treaty from income tax (i.e.
Sec. 30 of the NIRC, BMBE law).

5. Kinds of Income Tax
 Any person subject to tax imposed by the Tax Code are called taxpayers
and are categorized as individual, corporate, estate, and trust. Thus,
the kind of income taxes are:
1. Tax on Individuals;
2. Tax on Taxable Partnership or Corporations;
3. Income Tax on Estates;
4. Tax on Trusts.
 Note: In this module, however, we will have a thorough discussion
about the income taxation for individual taxpayers only.

6. Individual Taxpayers
 Are natural persons with income derived within the
territorial jurisdiction of a taxing authority. These
individual taxpayers are classified as citizen and aliens.
 Under Art. I, Section 1 of the Philippine Constitution, a
Filipino citizen is he who is / has:
a. Those who are citizens of the Philippines at the time
of the adoption of the 198 Philippine Constituiton
b. Born (by birth ) with father and/ or mother as
Filipino citizens

7. c. Born before January 17, 173 of Filipino mother who
elects Philippine citizenship upon reaching the age
of majority
d. Acquired Philippine citizenship after birth
(naturalized) in accordance with the Philippine laws.
An Alien is a foreign-born person who is not qualified to
acquire Philippine citizenship by birth or after birth.

8. Classification of Individual Taxpayers
For income tax purposes, individual taxpayers are classified as follows:
1. Resident Citizen - is a Filipino citizen who stayed permanently in the
Philippines or stayed outside the Philippines for less than 183 days during the
taxable year.
- an individual whose residence is within the Philippines and who is a citizen
thereof receiving income from sources within or outside the Philippines:
 Employees deriving purely compensation income from 2 or more employers,
concurrently or successively at any time during the taxable year.

 Self-employed individuals receiving income from the conduct of trade or business
and/or practice of profession.

 Individuals deriving mixed income – Compensation income and income from the
conduct of trade or business and/or practice of profession.

 Marginal income earners (those individual whose business do not realize gross sales
or receipts exceeding P100,000.00 in any 12-month period.

9. 2. Non-resident citizen – is a Filipino citizen who
stayed outside the Philippines for 18 days or more
during the taxable year and has established proof to
the BIR Commissioner of his definite intension to
reside outside the Philippines on a permanent bais as
an immigrant or employee.
a. A nonresident citizen is taxable only on income
derived from sources within the Philippines.
b. A citizen of the Philippines who works and derives
income from abroad and whose employment
requires him to be physically present abroad most of
the time (at least 183 days) during the taxable year is
to be classified as nonresident citizen.

10. c. An individual citizen of the Philippines who is working
and deriving income from abroad as overseas contract
worker is taxable only on income from sources within the
Philippines.
d. 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
overseas contract worker.
e. A Filipino citizen who was previously a non resident
citizen and who arrive and resides permanently in the
Philippines at any time during the taxable year shall
likewise be treated as a non-resident citizen for the same
taxable year with respect to his income derived from
sources abroad until the date of his arrival to the
Philippines.

11. Illustration:
During 200B, Mr Dongdi Perio, a Filipino Citizen,
worked and earned P 200,000 in Saudi Arabia.
Before the end of yea 200B, he returned to the
Philippines and earned P 80,000 salary from his
employment here.
How much would be his gross taxable income for
year 200B as basis for Philippine income tax
computation under each of the following
independent assumptions?

12. Assumption 1: Mr Perio went abroad on January
200B and returned to the Philippines on March
200B.
Assumption 2: Mr Perio was in Saudi Arabia since
June 1, 200A and returned to the Philippines on
March 200B.
Assumption 3: Mr Perio went to Saudi Arabia on
March 1, 200B and returned to the Philippines on
December 5, 200B
Note: This is part of our online activities. Please see
our LMS for the copy and make a response and submit.

13. Classifications of Aliens:
As a rule alien individuals whether a resident or not of
the Philippines is taxable only for income derived from
sources within the Philippines.
Aliens are classified as either a Resident Alien, or Non-
Resident Alien
1. Resident Aliens (RA) are persons who are not
citizens of the Philippines but are residing within the
Philippines including foreign individuals who have
stayed in the Philippines for more than one year from
date of arrival.

14. 2. Non resident Aliens (NRA) are foreign individuals
whose residences are not within the Philippines, Sec
22G of the NIRC classifies Non Resident Aliens as
follows:
a. Those engaged in trade or business within the
Philippines
Those who have stayed within the Philippines for
more than 180 days during the taxable year shall be
demeed non-resident aliens doing business in the
Philippines. A non-resident alien who is engaged in
trade or business and has business income in the
Philippines also belongs this group.

15. b. Those not engaged in trade or business within the
Philippines
They are non-resident foreign individuals who have
stayed within the Philippines for only 180 days or less,
and have no business income derived within the
Philippines.

16. Table 1: Classification of and taxability of
income of individual taxpayers
Individual Taxpayer Income Within the
Philippines
Income Without
/Outside the
Philippines
1. Resident Citizen TAXABLE TAXABLE
2. Non Resident Citizen TAXABLE NON TAXABLE
3. Resident Alien TAXABLE NON TAXABLE
4. Non Resident Alien TAXABLE NON TAXABLE

17. Kinds of Income of Individual Taxpayers
1. Compensation income – in general, means all
remuneration for services performed by and employee for
his employer under an employer-employee relationship,
unless specifically excluded or exempt by the Tax Code.
 Examples of remuneration for services includes: salaries,
wages, emoluments and honoraria, allowances (e.g.
transportation, representation, entertainment and the
like), commissions; fees including director’s fees, if the
director is, at the same time, employee of the employer
corporation; taxable bonuses and benefits, taxable
pensions and retirement pay; and other income of similar
nature.

18.  However, there are certain provisions in the Tax Code,
as amended by the TRAIN Law, about certain income
and/or employee benefits that are non-taxable. This
includes de-minimis benefits (benefits that are
relatively of small in value) andincome and other
bonuses (i.e. 13th month pay) that can be applied as
non-taxable up to a maximum P90,000 limit.

19. 2. Business income – earned by a sole proprietor or an
independent contractor who reports income earned
from self-employment. She or he controls who she or
he works for, how the work is done and when it is
done.
 Examples of business income includes: income from
the conduct of trade or business; and income of those
hired under a contract of service or job order.

20. 3. Professional income – earned by professionals
whose income is derived purely from the practice of
profession and not under an employer-employee
relationship.
4. Passive Income – income earned without working
actively, although they are subject to different final
withholding tax rates rather than income tax.
 Examples of passive income includes: interest from
any currency bank deposits, royalties, prizes,
winnings, and dividends from investments.