Chapter 2 - Income Taxation

Individual Income Tax

Individual Income Tax Administrative Provisions

Compliance Requirements

Any merchant or business organization in whatever form or nature, if liable for any national tax as provided by the Tax Code, are mandated to comply

Compliance Requirements

1. Registration with BIR

2. Keeping of accounting records and books

3. Issuance of sales invoice and official receipts

4. Filing of tax returns and payment of related taxes

5. Witholding of taxes on specified payment to suppliers-sellers.

Required to File Income Tax Returns

A. Individuals

B. Non-Individuals / Juridical Person

Individuals

• Resident citizens receiving income from sources within or outside the Philippines

• Employees deriving purely compensation income from two or more employers, concurrently or successively at any time during the taxable year

• Employees deriving purely compensation income regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return

• Self-employed individuals receiving income from the conduct of trade or business and/or practice of profession

• Individuals deriving mixed income, i.e., compensation income and income from the conduct of trade or business and/or practice of profession

• Individuals deriving other non-business, non-professional related income in addition to compensation income not otherwise subject to a final tax

• Individuals receiving purely compensation income from a single employer, although the income of which has been correctly withheld, but whose spouse is not entitled to substituted filing

• Non-resident citizens receiving income from sources within the Philippines

• Aliens, whether resident or not, receiving income from sources within the Philippines

Non-Individuals / Juridical Person

• Corporations including partnerships, no matter how created or organized.

• Domestic corporations receiving income from sources within and outside the Philippines

• Foreign corporations receiving income from sources within the Philippines

• Estates and trusts engaged in trade or business

Persons who are Not required to file Income Tax returns

1. An individual earning purely compensation income whose taxable income does not exceed P250,000.000

2. An individual whose income tax has been withheld correctly by his employer, provided that such individual has only one employer for the taxable year

3. An individual whose sole income has been subjected to final withholding tax or who is exempt from income tax pursuant to the Tax Code and other special laws.

4. An individual who is a minimum wage earner

5. Those who are qualified under “substituted filing”.

Requirements for substituted filing

• the employee received purely compensation income (regardless of amount) during the taxable year;

• the employee received the income from only one employer in the Philippines during the taxable year;

• the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer;

• the employee’s spouse also complies with all 3 conditions stated above;

• the employer files the annual information return (BIR Form No. 1604-CF); and

• the employer issues BIR Form No. 2316 (Oct 2002 ENCS version) to each employee.

Substituted Filing

An individual taxpayer will no longer have to personally file his own Income Tax Return (BIR Form 1700) but instead the employer's Annual Information Return on Income Taxes Withheld (BIR Form No. 1604-C) filed will be considered as the "substitute" ITR of the employee.

Requisites for Individuals Qualified for Substituted Filing of BIR Form No. 1700

• Receives purely compensation income regardless of amount;

• Compensation from only one employer in the Philippines for the calendar year;

• Income tax has been withheld correctly by the employer (tax due equals tax withheld);

• the employee's spouse also complies with all the three conditions stated above;

• Employer files the BIR Form No. 1604-C; and

• The employer issues each employee BIR Form No. 2316 (latest version)

Amended Income Tax Returns

The individual income tax return maybe amended on any day within 3 years from its filing or from the last day prescribed by law for filing, provided that no notice of assessment or tax audit has been actually served to the taxpayer in the meantime.

Individuals Date of Filing

before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

From the sale or exchange of shares of stock not traded thru a local stock exchange

within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year

From the sale or disposition of real property

within thirty (30) days following each sale or other disposition.

Section 24: Filing of Husband and Wife

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: Provided, That 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.

Section 51: Filing of Husband and Wife

(D); 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. 

Section 51: Parent and Child

(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax. 

(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.

Taxable year

1. Calendar year

2. Fiscal year

Calendar year

Jan 1 to Dec 31

Fiscal year

(Q) means an accounting period of twelve (12) months ending on the last day of any month other than December

Calendar Year

Filing of ITR of an individual taxpayer

Methods of Accounting Allowed by law

1. Cash basis

2. Accrual basis

3. Installment basis method

4. Accounting for Long term Contracts

Section 48.

Accounting for Long-term Contracts. - Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means building, installation or construction contracts covering a period in excess of one (1) year.

1. Persons whose gross income is derived in whole or in part from long-term contracts shall report such income upon the basis of percentage of completion

2. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract.

3. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied.

4. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.

Accounting for Long-term Contracts

Long-term contracts mean building, installation, or construction contracts covering a period in excess of one (1) year.

Percentage of Completion

Must use method to recognize income of Accounting for Long-term Contracts

Income Tax

a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions if any, authorized for such types of income, by the Tax Code, as amended, or other special laws

Characteristics of Philippine Income Tax

1.A national tax= collected by National Govt

2.A general tax= levied without specific purpose

3. An excise tax= imposed on right or privilege of person to receive income

4. A direct tax= cannot be shifted to others

5. A progressive tax= based on ability to pay

6. Income tax system is comprehensive system

7. Semi Global and Semi Schedular

Requisites of Taxable Income

There must be a profit or gain

The gain or profit must be realized or received actually or constructively.

The gain or profit must not be excluded or exempted by law from income taxation.

Taxation

is an act of levying a tax or the process by which government raises revenue to defray expenses of government.

Income Tax

is imposed on income earned by taxpayer.

Theory of Separability or Severance Test of Income

Under this doctrine, in order that income exist, it is necessary that there is separation from capital of something of exchangeable value.

The concept of income requires realization.

Types of Taxable Income

Returnable Income

Passive Income (Final Tax)

Capital Gains (Final Tax)

Classification of Individual Taxpayers

Ordinary Individual taxpayer

Special Individual taxpayer

Ordinary Individual taxpayer

Those individuals whose income are subject to income tax and required to file Income tax return

A resident citizen

on his income from all sources

A Filipino individual with residence in the Philippines

Persons Considered Citizen of the Philippines are natural born citizen of the Philippines, naturalized citizen of the Phil and Citizen of the Philippines at the time of adoption of the Philippine Constitution.

A nonresident citizen

on his income derived from sources within the Philippines

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 during the taxable year.

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.

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 for purpose of this Section

Example are OFW or OCW (Overseas Contract Worker). Who stayed outside the Philippines for equal or more than 183 days.

A resident alien (RA)

on his income derived from sources within the Philippines; means an individual whose residence is within the Philippines and who is not a citizen thereof. 

also refers to a foreigner who come to the Philippines for definite purpose which requires extended stay.

who actually present in Philippines and are not mere transients or sojourners. (One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient)

lives in Philippines with no definite intention as to his stay.

A nonresident alien (NRA)

an individual whose residence is not within the Philippines and who is not a citizen thereof is taxable only on income from sources within

A nonresident alien engaged in trade or business in the Philippines (NRA-ETB)

on his income derived from sources within the Philippines. An alien who is not resident of the Philippines but authorized to engaged in trade / business therein. Taxable based on its income less allowed deductions.

individual who is not citizen of Philippines and is not resident thereof but has a business operating and established within the Philippines AND;

individual who come to the Philippines and stay therein for an aggregate period of more than 180 days during the calendar year.

A nonresident alien not engaged in trade or business in the Philippines (NRA-NETB)

taxable at Gross income (without allowed deductions).

an alien whose stay in the Philippines is 180 days or less.

Special Individual taxpayers

a. Special Aliens

b. Nonresident alien not engaged in business in the Phil (NRANEBP)

c. MIE (Minimum Wage Earner)

d. Non resident alien cinematographic film owner, lessor or distributor

e. Subcontractor, whether citizen, RA or NRAETN, of service contractors engage din petroleum operations

f. Registered in BMBE

g. PEZA registered

A nonresident alien not engaged in business in the Philippines (NRA-NEBP)

means foreigners who are resident of foreign country and who are not authorized to engage in business in the Philippines. Also refers to aliens who shall come to the Philippines for definite purpose which in nature maybe accomplished promptly.

MIE (Minimum Wage Earner)

refers to worker in private or public sector receiving compensation of not more than the statutory minimum wage in agricultural and non agricultural sector where he is assigned.

Taxable Income

means the pertinent items of gross income specified in tax Code less allowed deductions as authorized by law or special laws.

Minimum wage earners

as defined in Section 22(HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, pay received by such minimum wage earners shall likewise be exempt from income tax.

Income items (Statutory minimum Wage Items) of MWE that are exempt from income tax

1. Basic pay / Daily minimum wage including COLA

2. Holiday pay

3. Hazard pay

4. Overtime pay

5. Night shift differential

Basic income tax rates

0% to 35%

Section 79 of Tax Code

Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher.

Minimum Wage Earner Rules

receiving purely compensation income is exempted from Income tax and not subject to creditable withholding tax

receiving compensation income AND additional benefits from employer exceeding the tax exempt thresholds such as the 90,000 limit are still exempt from Income tax (still treated as MWE) and still, not subject to withholding tax.

earning compensation income and business income; For COMPENSATION income, it is exempt from income tax and not subject to withholding tax WHILE the BUSINESS INCOME is subject to income tax (GTR or 8%) and subject to creditable withholding tax.

Taxation on Passive Income (Final Tax) For Individual Requisites

1. Income earned within the Philippines

2. Passive income under the Tax Code

3. Not exempted / excluded by law

4. Not subject to basic income tax (not included in the ITR of taxpayer).

The income subject to FINAL Withholding tax

not Returnable and to be subjected to FINAL withholding tax

CREATE LAW – RA 11534

Corporate Recovery and Tax Incentives for Enterprises Act

Became effective April 11, 2021