This document discusses the taxation of individuals in the Philippines. It defines the different classifications of individual taxpayers including resident citizens, nonresident citizens, resident aliens, and nonresident aliens. It explains how an individual's classification determines factors like the situs of their income and allowable deductions. The document also provides examples to illustrate how individuals are correctly classified. It then discusses applicable tax rates and taxes depending on the individual's classification, income source, and income type. This includes income tax rates, final withholding taxes, and capital gains tax. The document concludes by covering taxation specifics for self-employed individuals, mixed-income earners, and minimum wage earners.

1. TAXATION OF
INDIVIDUALS

2. INDIVIDUAL TAXPAYERS are natural persons with
income derived from within the territorial jurisdiction of
taxing authority. They are classified as:
1. Resident Citizens (RC)
2. Nonresident Citizens (NRC)
3. Resident Aliens (RA)
4. Nonresident Aliens (NRA)
● Engaged in trade/business (NRA-ETB)
● Non-resident alien not engaged in trade or business (NRA-NETB
Importance of classification:

3. They differ as to:
● Situs of income
● Manner of computing tax
● Treatment of certain passive incomes
● Allowable deductions
● References in the tax choice

4. CITIZENS OF THE PHILIPPINES (Art. IV,
Sec. 1 of the 1987 Constitution)
1. Those who are citizens of the Philippines at the time of the adoption of the
Constitution
2. Born with father and/or mother as Filipino citizens
3. Born before Jan. 17,1973 of Filipino mother who elects Philippine citizenship
upon reaching the age of maturity
4. Acquired Philippine citizenship after birth (naturalized) in accordance with
Philippine Laws

5. NON-RESIDENT CITIZEN OF THE
PHILIPPINES (Sec. 22(E) of the Tax Code)
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. Leaves the Philippines during the taxable year to reside abroad:
● As an immigrant
● For employment on a permanent basis
● For work and derives income that 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 Philippines for one
hundred eighty-three days (183) or more by the end of the year.

6. 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 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.
ILLUSTRATION:
Pedro, an OFW, returned in the Philippines for good on May 2021. He shall
be classified for 2021 taxable year as follows:
January to April 2021 – nonresident citizen
From May 2021 onwards – resident citizen

7. The same rule shall apply to a resident citizen who leaves the Philippines
anytime during the yea for the following reasons:
• As an immigrant abroad or
• For employment abroad on a permanent basis
ILLUSTRATION:
Ana, a resident citizen, left for the Philippines on July 1, 2021 to reside
permanently in US together with her family. She shall be classified for 2021 taxable
year as follows:
January to June 2021 – resident citizen
From July 2021 onwards – nonresident citizen

8. OVERSEAS CONTRACT WORKER
(OCW)/OVERSEAS FILIPINO WORKER (OFW)
• Revenue regulation 1-2011 defines OCWs as Filipino citizens employed in foreign
countries commonly referred to as OFWs, who are physically present in a foreign
country as a consequence of their employment. Their salaries and wages are paid
by an employer abroad and are not borne by entities or persons in the Philippines.
Hence, OFWs are classified as non-residents citizens for tax purposes.
• 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.

9. RESIDENT ALIEN (Sec. 22(F) of the Tax
Code)
• An individual whose residence is within the Philippines and who is not a citizen
thereof. He is one who is actually present in the Philippines and who is not a mere
transient or sojourner.
• An alien who lives in the Philippines with no definite intention as to his stay is also
a resident alien.
• An alien who comes to the Philippines for the purpose that requires extended stay
for its accomplishment, so he makes his home temporarily in the Philippines, is a
resident, regardless of his intention to return to his residence abroad.

10. NON-RESIDENT ALIEN (Sec. 22(G) of the
Tax Code)
• An individual whose residence is not within the Philippines and who is not a
citizen thereof.
• Aliens who come to the Philippines for a definite purpose, which in tis
nature may be promptly accomplished.
• Alien who are mere transients or non-residents

11. • Non-resident alien engaged in trade or business (NRA-ETB) – an alien who
stayed in the Philippines for an aggregate period of more than 180 days during
the taxable year and/or alien who has business income in the Philippines
Under Section 22(S) of the Tax Code, “trade or business” include
performance of the functions of a public office or performance of personal services
in the Philippines (except performance of services by the taxpayer as an employee).
• Non-resident alien not engaged in trade or business (NRA-NETB) – an alien
who stayed in the Philippines for only 180 days or less, or he is not deriving
business income in the Philippines

12. ILLUSTRATION: Determine the correct classification of
the taxpayer from the independent cases provided below:
Case 1: Allan is a natural born Filipino citizen. His family migrated to the U.S. fifteen years
ago. For personal reasons, he decided to return and reside permanently in the Philippines on
March 1, 2018.
Answer: From Jan.-Feb. 2018: Allan is classified as NRC
From March 1, 2018 onwards: Allan is classified as RC
Case 2: G.I. Joe is an American information technology expert. He was signed by Noypi
Telecom (a local telecommunication company) from January to March 2018 to improve its
internet services. Due to the anticipated entry of competitors from other countries, Noypi
decided to extend indefinitely the services of G.I.Joe.
Answer: He is a resident alien. An alien who comes to the Philippines for the purpose
that requires extended stay for its accomplishment, so he makes his home temporarily in the
Philippines, is a resident, regardless of his intention to return to his residence abroad.

13. ILLUSTRATION: Determine the correct classification of
the taxpayer from the independent cases provided below:
Case 3: Greg Popovich, head coach of San Antonio Spurs in the NBA is in the
Philippines for a month-long NBA promotional tour. He also expressed his intention
to regularly visit the Philippines.
Answer: Greg Popovich is classified as NRA-NETB.
Case 4: Using the same data in Case 3, assume that Greg Popovich invested in
shares of stock of various domestic corporations during his recent stay in the
Philippines.
Answer: Greg Popovich is NRA-NETB. Passive income such as dividend income
is not considered income derived from trade and business.

14. ILLUSTRATION: Determine the correct classification of
the taxpayer from the independent cases provided below:
Case 5: Mika “The Iceman” Immonen, a Finnish cue artist and former world billiard
champion is a resident of Finland. He won the world 9-ball championships in 2005 in
the Philippines. He is also the owner of one of the disco pubs in Malate since then.
Answer: NRA-ETB. He is engaged in actual trade and business in the
Philippines but is non-resident.

15. APPLICABLE TAXES AND TAX RATES
The applicable taxes for individuals depend on several factors such as but not
limited to:
❖ Classification of taxpayer
❖ Source of income
❖ Type of income

16. CLASSIFICATION OF TAXPAYER
It is important to properly classify the individual taxpayers because resident
citizens are taxable on their income derived from sources within and without the
Philippines while other taxpayers are taxable only on their income derived from the
Philippine sources. Moreover, individual taxpayers classified as non-resident aliens
not engaged in trade and business (NRA-NETB) are taxable based on the gross
income while others are taxable based on their net income.

17. SOURCES OF INCOME
It is important to know the source of income for tax purposes (income
derived from within and without the Philippines) 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.

18. ILLUSTRATION:
Use the following data for Cases A-E
An individual taxpayer provided the following information for 2018:
Gross business income, Philippines ₱5,000,000
Gross business income, Canada 2,000,000
Gross business income, Singapore 1,000,000
Business expenses, Philippines 3,000,000
Business expenses, Canada 1,000,000
Business expenses, Singapore 500,000

19. Determine the taxable income assuming:
• Case A: The taxpayer is a resident citizen.
• Case B: The taxpayer is a non-resident citizen.
• Case C: The taxpayer is an alien.
• Case D: The taxpayer is a non-resident alien engaged in trade or business.
• Case E: The taxpayer is a non-resident alien not engaged in trade or business.

20. TYPES OF INCOME
• Ordinary or regular income (GRADUATED RATE) – refers to income such as
compensation income, business income, and income from practice of profession
• Passive income (FINAL WITHHOLDING TAX) – subject to final withholding taxes are
certain passive incomes from sources within the Philippines such as:
⮚ Interest income
⮚ Dividend Income
⮚ Royalties
⮚ Prizes
⮚ Other winnings
• Capital gains subject to gains tax (CAPITAL GAIN TAX)
⮚ Capital gains from sale of shares of stocks of a domestic corporation
⮚ Capital gains from sale of real property in the Philippines

21. GRADUATED TAX RATE

22. ILLUSTRATION: Computation of basic income tax
due.
Purely Compensation Income Earner
1. Determine the income tax due assuming the taxable compensation income for
2018 is ₱240,000.
2. Determine the income tax due assuming the taxable compensation income for
2018 is ₱300,000.
3. Determine the income tax due assuming the net taxable compensation income
for 2018 is ₱1,850,000.

23. COMPUTATION OF WITHHOLDING TAX
(PURELY COMPENSATION)

24. SELF EMPLOYED AND/OR
PROFESSIONALS (SEP)
Self Employed – is defined as a sole proprietor or an independent contractor who
reports income earned from self-employment. He or she controls who he/she works
for. It includes professionals whose income is derived purely from the practice of
profession and not under an employer-employee relationship”.
Professional - is a “person formally certified by a professional body belonging to a
specific profession by virtue of having completed a required course of studies and/or
practice, whose competence can usually be measured against an established set of
standards. It also refers to a person engaged in some art or sport of money.

25. SELF EMPLOYED AND/OR
PROFESSIONALS (SEP)
Beginning 2018 or upon the effectivity of RA 10963 (Tax Reform for
Acceleration and Inclusion Law (TRAIN LAW) , regular income of Self- Employed
and Professionals (SEP) amounting to more than P250,000 in a taxable year but
with a gross sales/receipts and other non-operating income not exceeding the
revised vat threshold of P3,000,000 shall have the option to avail of 8% tax on gross
sales/receipts and other operating income in excess of P250,000 IN LIEU of the
graduated income tax rate and business tax (Sec. 116).
Percentage tax under Section 116 of the Tax Code, as amended, is a
business tax, not an income tax. It is computed at 1% of gross sales/receipts and
other operating income beginning July 1, 2020 up to June 30,2023 based on CREATE
Law.

26. RULES OF SELF EMPLOYED AND/OR
PROFESSIONALS (SEP)
Purely SEP with gross sales/receipts
• ₱3M and Below
Regular Income Tax + Business Tax (1% percentage tax) OR 8% tax on Gross
Sales/ Receipts and other non-operating income in excess of 250,000 in LIEU of the
graduated tax rate and SECTION 116
• Above ₱3M - regular income tax + 12% VAT unless engaged in vat exempt sales
and trasactions

27. ILLUSTRATION:
CASE A: Purely SEP whos gross sales/receipts and other non-operating income
does not exceed the VAT threshold of P3,000,000.
1. Determine the income tax due assuming the gross sales/receipts and other non-
operating income was P240,000.
2. Using the data below, determine the income tax due:
Gross sales P2,800,000
Cost of sales 1,500,000
Operating expenses 750,000
1. Assuming the SEP in number 2 opted to avail the 8% tax under the TRAIN Law.

28. ILLUSTRATION:
CASE B: Purely SEP whos gross sales/receipts and other non-operating income
exceed the VAT threshold of P3,000,000.
Determine the income tax due assuming the following data:
Gross sales P5,000,000
Cost of sales 2,250,000
Operating expenses 1,250,000

29. RULES OF SELF EMPLOYED AND/OR
PROFESSIONALS (SEP)
Mixed Income Earner
➔ Compensation - regular income tax
➔ Business/Professional Income
• ₱3M and below: Regular income tax + Business Tax (1% percentage tax) OR 8%
tax on Gross sales and other non-operating income in LIEU of the graduated tax
rate and Sec. 116
• ₱3M and above: Regular income tax + 12% VAT unless engaged in vat exempt
sales and trasactions

30. ILLUSTRATION:
CASE A: Mixed income earner whose gross sales/receipts and other non-
operating income does not exceed the VAT threshold of P3,000,000.
Assume the following data for the year:
Compensation income P900,000
Gross sales
2,800,000
Cost of sales 1,500,000
Operating expenses 750,000
1. Determine the correct income tax due
2. Assume the SEP opted to avail the 8% tax under the TRAIN Law, determine the
income tax due.

31. ILLUSTRATION:
CASE B: Mixed income earner whose gross sales/receipts and other non-
operating income exceed the VAT threshold of P3,000,000.
Determine the income tax due assuming the following data:
Compensation income P900,000
Gross sales
5,000,000
Cost of sales 2,250,000
Operating expenses 1,250,000

32. REQUISITES TO AVAIL THE 8%
PREFERENTIAL TAX RATE
In order to avail the 8% preferential tax, the SEP shall satisfy all the following
conditions:
• The gross sales/receipts and other non-operating income does not exceed the vat
threshold of P3,000,000
• The SEP shall be non-vat registered
• The gross sales/receipts were not derived from vat-exempt sales and transactions
• The SEP is not subject to Percentage Tax other than Section 116
• The SEP signifies his/her intention to elect 8% income tax

33. FINAL WITHHOLDING TAX
• a kind of tax, which is prescribed on “certain income” derived from the Philippine
sources.
PASSIVE INCOME
is an income earned from allowing others to use one’s right, or game of
chance or investment, which the taxpayers merely waits for the income to come in.
The law subjects passive income to final tax. Once subjected to a final tax, it is no
longer included in the taxable income subject to normal (tabular) tax. Deductions
and exemptions do not apply to items subject to final tax. Passive income is
classified as follows:
a. Interest, prizes, royalties, etc.,
b. Cash or property dividends

37. CAPITAL GAINS TAX

38. GAIN ON SALE OF ASSETS (Ordinary
Gain)
Under tax code, the following are ordinary assets:
1. Stock in trade of the taxpayer or other property of a kind
2. Property used in trade or business subject to depreciation
3. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of business
4. Real property used in trade of the taxpayer
NOTE: Gain on sale of ordinary assets are commonly known as ordinary or regular
income, subject to graduated tax rate.

39. • The term “statutory minimum wage earner (SMW)” or “minimum wage earner
(MWE)” under RA 9504 shall refer to a worker in the private sector paid the
statutory minimum wage. The rate is fixed by the Regional Tripartite Wage and
Productivity Board as defined by the Bureau of Labor and Employment Statistics.
MWE are exempt from income tax on:
1. Minimum wage
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay

40. APPLICABLE TAXES OF MWEs
Taxpayer Income Tax
1. Purely MWE Exempt
2. MWE with additional “benefits”
from the employer exceeding tax-
exempt thresholds such as the
P90,000 limit
Still treated as MWE, hence, exempt
3. MWE with additional “business”
income
Minimum wage – exempt
Business income – subject to basic
tax

41. FILING OF INCOME TAX RETURNS
BASIC TAX
➔ For Purely Compensation Income Earners
On or before April 15 of the succeeding year
➔ For Business Income Earners
The individual taxpayer is required to file a quarterly tax return ( May 15, Aug
15, Nov 15, and April 15)

42. FILING OF INCOME TAX RETURNS
FINAL WITHHOLDING TAX ON PASSIVE INCOME
• Prior to 2018:
January to November – 10th day of the month following the month the
withholding was made
December – January 15 of the succeeding year
• 2018 – not later than the last day of the month following the close of the taxable
quarter during which the withholding was made.

43. FILING OF INCOME TAX RETURNS
CAPITAL GAINS TAX
a. Share of Stock
Ordinary Return – 30 days after each transaction
Final Consolidated Return – on or before April 15 of the following year
b. Real Property – 30 days following each sale or other disposition

44. MANNER OF FILING AND PAYMENT
a. Manual Filing
b. Electronic Filing and Payment System (EFPS)
c. eBIR Forms
Payment – PAY AS YOU FILE
1st installment: at the time of filing the annual ITR
2nd installment: on or before October 15 following the close of the calendar year

45. PLACE OF FILING INCOME TAX RETURN
1. Authorized Agent Banks
2. Revenue District Officer
3. Collection Agent
4. Duly Authorized City or Municipal Treasurer

46. PERSONS REQUIRED TO FILE INCOME
TAX RETURN
1. Individuals engaged in business and/or practice of profession
2. Individuals deriving compensation from two or more employers concurrently at
any time during the taxable year
3. Employees deriving compensation income, the income tax of which has not been
withheld correctly
4. Individuals deriving other non-business, non-professional-related income in
addition to compensation income not otherwise subject to final tax
5. Individuals receiving purely compensation income from a single employer
6. Non-resident alien engaged in trade or business in the Philippines deriving purely
compensation income

47. PERSONS NOT REQUIRED TO FILE
INCOME TAX RETURN
1. An individual earning purely compensation income whose taxable income does
not exceed 250,000.
2. An individual whose income tax has been correctly withheld by his employer
3. An individual whose sole income has been subjected to final withholding tax
4. Minimum wage earners, the Certificate of Withholding filed by the respective
employers, duly stamped “Received” by the Bureau

48. SUBSTITUTED FILING OF INCOME TAX
RETURNS (ITR)
Under RA 9504 and RR 10-2008, individual taxpayers may no longer file
income tax return provided he has (all the requirements must be satisfied):
1. Receiving purely compensation income, regardless of amount
2. The amount of income tax withheld by the employer is correct (Tax due = Tax
withheld)
3. Only one employer during taxable year
4. If married, the employee’s spouse also complies with all the three
aforementioned conditions, or otherwise receives no income.

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