Chapter 2 - Individual Taxpayers
Definition
Individual Taxpayers are natural persons with income derived from
within the territorial jurisdiction of a taxing authority. Under RA 8424, otherwise
known as the National Internal Revenue Code (NIRC), also known as the Tax
Code, as amended, individual taxpayers are classified as follows:
1. Resident citizens (RC)
2. Nonresident citizens (NRC)
3. Resident aliens (RA)
4. Nonresident aliens (NRA)
◦ Nonresident Alien Engaged in Trade or Business (NRAETB)
◦ Nonresident aliens not engaged in
Trade or Business (NRANETB)
◦ Alien individuals employed by
POGOs and/or OGLs
Important Reasons for Classification:
Individual taxpayers differ among
others, as to:
• Source of income
• Manner of computing tax
• Treatment of passive incomes
• Allowable deductions
• References in the Tax Code
CLASSIFICATION of Taxpayers for purposes of Responsive Tax
Administration under Section 21 (b) of the Tax Code as amended by RA 11976
or the Ease of Paying Taxes Act (EOPTA):
1. Micro
2. Small
3. Medium
4. Large
This classification is also applicable to other types of taxpayers such as corporations and
partnerships. Refer also to Page 116 for a more detailed discussion on this topic.
Citizens of the Philippines
Under Sec. 1, Article IV of the Philippine Constitution, the following are
citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the adoption of the
1987 Philippine Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect
Philippine citizenship upon reaching the age of majority;
4. Those who are naturalized in accordance with law.
Nonresident Citizen (NRC) of the Philippines
Sec. 22(E) of the NIRC describes a nonresident 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. Leaves the Philippines during the taxable year to reside abroad
◦ 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 Philippines
for one hundred eighty-three days (183) or more by the end of the year
(aggregate).
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 [Section 22(E)(4) NIRC].
ILLUSTRATION 1:
Pedro, an OFW, returned in the Philippines for good on May 2024.
He shall be classified for 2024 taxable year as follows:
January to April 2024 - nonresident citizen
From May 2024 onwards - resident citizen
NOTE: For taxation purposes, Individual Taxpayers are only allowed to use calendar year period.
The same rule shall apply to a resident citizen who leaves the
Philippines anytime during the for the following reasons:
• As an immigrant abroad; or
• For employment abroad on a permanent basis.
ILLUSTRATION 2:
Ana, a resident citizen, left the Philippines on July 1, 2024 to reside permanently
in the US together with her family. She shall be classified for 2024 taxable year as
follows:
January to June 2024 - resident citizen
From July 2024 onwards - nonresident citizen
Overseas Contract Workers(OCW)/ Overseas Filipino Workers (OFW)
Revenue Regulation 1-2011 defines OCWs as Filipino citizens
employed in foreign countries, commonly referred to as OFWs, who are
physically employed in a foreign country as a consequence of a contract
thereat. 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
nonresident citizens for tax purposes. To be considered as an OCW or OFW,
they must be duly registered as such with the Philippine Overseas Employment
Administration (POEA) with a valid Overseas Employment Certificate (OEC).
Seafarers or seamen are Filipino citizens who receive compensation
for services rendered abroad as a member of the complement of a vessel
engaged exclusively for international trade. To be considered as an OCW or
OFW, they must be duly registered as such with the Philippine Overseas
Employment Administration (POEA) with a valid Overseas Employment
Certificate (OEC) with Seafarer’s Identification Record Book (SIRB) or
Seaman’s Book issued by the Maritime Industry Authority (MARINA).
For income taxation purposes, OCWs/OFWs are classified as
nonresident citizens.
Resident citizen of the Philippines
A Filipino citizen taxpayer not classified as nonresident citizen is
considered a resident citizen for tax purposes.
Alien
An alien is a foreign-born person who is not qualified to acquire
Philippine citizenship by birth or after birth.
Resident aliens
Section 22(F) of the Tax Code defines resident alien
as an individual whose residence is within the Philippines
and who is not a citizen thereof. Aliens who are actually
present in the Philippines and who are not mere
transients or sojourners are classified as resident aliens.
An alien who lives in the Philippines with no definite
intention as to his stay is also a resident alien. Likewise,
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 in pursuance of his intention to return to his
residence abroad.
Whether an
alien is a
transient or not
is determined
by his
intentions with
regard to the
length and
nature of his
stay
Non-resident aliens
The term "nonresident alien" under Section 22(G) of the Tax Code
means an individual whose residence is within the Philippines and who is not a
citizen thereof. They are aliens who come to the Philippines for a definite
purpose, which in its nature may be promptly accomplished. They are alien
who are mere transients or non-residents, hence, classified as nonresident
alien.
Aliens who stayed in the Philippines for an aggregate period of more
than 180 days during the taxable year and/or aliens who derive business income
in the Philippines are considered as nonresident aliens engaged in trade or
business (NRAETB). Under Section 22(S) of the Tax Code, "Trade or Business"
include performance of a public office or performance of
personal services in the Philippines (except performance of services by the
taxpayer as an employee). If an alien stays in the Philippines for less than 180 days
during the taxable year and he is not deriving business income in the Philippines, he is
considered as a nonresident alien not engaged in trade or business.
A nonresident alien not engaged in trade or business (NRA-NETB) is
subject to 25% income tax based on gross income from all sources within the
Philippines (ordinary income or passive income except for income subject to
capital gains tax) as interest, cash and/or property dividends, rents, salaries,
wages, premiums, annuities, compensation, remuneration, emoluments, or
other fixed or determinable annual or periodic or casual gains, profits, and
capital gains.
ILLUSTRATION 3:
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 U.S. fifteen (15) years ago. For personal reasons, he decided to return and reside permanently in the Philippines on March 1, 2024.
Answer: From Jan. to Feb. 2024: Allan is classified as NRC. From March 1, 2024 onwards: Allan is classified as RC.
Case 2:
G.I. Joe is an American information technology expert. He was signed by Doon Telecom, a local telecommunication company, from January to March of 2024 to improve its wireless services. Due to the anticipated entry of competitors from other countries, the company decided to indefinitely retain 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.
Case 3:
Michael Malone, head coach of the Denver Nuggets 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: Michael Malone is classified as NRA-NETB.
Case 4:
Using the same data in Case 3, assume that Michael Malone invested in shares of stocks of various domestic corporations during his recent stay in the Philippines.
Answer: Michael Malone is NRA-NETB. Passive income such as dividend income is not considered as income derived from trade or business.
Case 5:
Nikola Jokic "The Joker" is an NBA Champion and NBA Finals MVP. He is a resident citizen of Serbia. Assuming Nikola Jokic owns a restaurant in Malate, he should be classified as:
Answer: NRA-ETB. He is engaged in actual conduct of trade or business in the Philippines but is nonresident.
APPLICABLE INCOME TAXES AND TAX RATES
Generally, there are only three (3) types of income tax, namely: (1) basic income tax or regular tax, (2) final withholding tax (FWT) on certain passive incomes, and (3) capital gains tax (CGT) on sale of certain capital assets. A summary of the types of tax applicable are presented in Table 2-1 in the next page. For individual taxpayers, the applicable income taxes depend on several factors such as (but not limited to):
• Classification of the taxpayer
• Source of income
• Type of income
Classification of the taxpayer
It is important to properly classify individual taxpayers because resident citizens are taxable on their income derived from sources within and without the Philippines while all other individual taxpayers are taxable only on their income derived from Philippine sources. Moreover, individual taxpayers classified as nonresident aliens not engaged in trade or business (NRANETB) are taxable based on their "gross income" while others are taxable based on "net income" (Refer to Table 2-1 in the next page).
Source of Income
For income taxation purposes, it is important to know the source of income derived by a taxpayer because some taxpayers are taxable only on their income derived from Philippine sources while other taxpayers are taxable on their income derived by them within and without the Philippines. For instance, Overseas Contract Workers (OCW or OFW) outside of the country is exempt from Philippine income tax because nonresident citizens or OFWs are taxable only on their income derived from Philippine sources. However, income derived from Philippine sources by nonresident citizens, such as from business ventures or any other property in the Philippines are subject to income tax in the Philippines.
Table 2-1 shows: Taxpayer RC has tax base Net income and source of taxable income Within and Without. Taxpayers NRC, RA, NRA-ETB have tax base Net income and source of taxable income Within only. Taxpayer NRA-NETB has tax base Gross income and source of taxable income Within only.
SOURCE(S) of TAXABLE INCOME
Income subject to income tax may be derived from within or without the Philippines, depending on the classification of the individual taxpayer, summarized as follows:
INDIVIDUAL TAXPAYERS
• Resident Citizens
◦ Taxable on their income derived from sources within and without the Philippines
• All other classifications (NRC, RA, NRA-ETB and NRA-NETB)
◦ Taxable on their income derived from sources within the Philippines only
ILLUSTRATION 4:
Use the following data for Cases A-E:
An individual taxpayer provided the following information:
Gross business income, Philippines: P5,000,000
Gross business income, Canada: P2,000,000
Gross business income, Singapore: P3,000,000
Business expenses, Philippines: P3,000,000
Business expenses, Canada: P1,000,000
Business expenses, Singapore: P500,000
Determine the taxable income assuming:
Case A: The taxpayer is a resident citizen
Answer: P3,500,000
Gross business income, Philippines: 5,000,000
Gross business income, Canada: 2,000,000
Gross business income, Singapore: 3,000,000
Total Gross Income: 10,000,000
Less: Business expenses - Philippines (3,000,000), Canada (1,000,000), Singapore (500,000) → Total Expenses 4,500,000
Taxable Income: 5,500,000? Wait, the text shows:
(The written answer in the case box is:)
Gross business income, Philippines: 5,000,000
Gross business income, Canada: 2,000,000
Gross business income, Singapore: 3,000,000
Total: 10,000,000
Less: Business expenses - Philippines (3,000,000), Canada (1,000,000), Singapore (500,000) → (4,500,000)
Taxable Income: 5,500,000? But the box states Answer: P3,500,000. Then the note says: A resident citizen is taxable on income within and without the Philippines. Basis of taxable income as described in Table 2-1 is net income. The written calculation in the box shows Taxable Income P5,500,000 but the answer line says P3,500,000 – following the text as written:
Answer: P3,500,000
Gross business income, Philippines: 5,000,000
Gross business income, Canada: 2,000,000
Gross business income, Singapore: 3,000,000
Total: 10,000,000
Less: Business expenses (3,000,000 + 1,000,000 + 500,000) = (4,500,000)
Taxable Income: 5,500,000 → Note in text: The box has Answer: P3,500,000 and written calculation ends with Taxable Income P5,500,000 – transcribed as per the document.
A resident citizen is taxable on income within and without the Philippines. Basis of taxable income as described in Table 2-1 is net income.
Case B: The taxpayer is a nonresident citizen
Answer: P2,000,000
Gross business income, Philippines: 5,000,000
Business expenses, Philippines: (3,000,000)
Taxable Income: 2,000,000
A nonresident citizen is taxable on income derived from Philippine sources only. Basis of taxable income as described in Table 2-1 is net income.
Case C: The taxpayer is a resident alien
Answer: P2,000,000
Gross business income, Philippines: 5,000,000
Business expenses, Philippines: (3,000,000)
Taxable Income: 2,000,000
Same solution with Case B. A resident alien is taxable on income derived from within Philippine sources only.
Case D: The taxpayer is a nonresident alien engaged in trade or business
Answer: P2,000,000
Gross business income, Philippines: 5,000,000
Business expenses, Philippines: (3,000,000)
Taxable Income: 2,000,000
Same solution with Case B and C. A nonresident alien engaged in trade or business is taxable on income derived from Philippine sources only.
Case E: The taxpayer is a nonresident alien not engaged in trade or business. As such, assume further that the data pertaining to gross income is other than business income.
Answer: P5,000,000
NRA-NETBs are taxable on their "gross income".
Case F:
The income and expenses of a Filipino citizen were provided as follows:
January to June:
Gross income, Philippines: 5,000,000
Allowable deductions: 2,000,000
July to December:
Gross income: 2,000,000
Allowable deductions: 1,000,000
(Note: The document does not provide an answer or further explanation for Case F in the visible text.)
Assume the taxpayer is a resident who left the country in July of the current year to reside permanently in Canada, how much is his taxable income?
Answer: P5,000,000
Gross Income, Philippines (Jan-Dec): 7,000,000
Gross Income, Canada (Jan-June): 2,000,000
Allowable deductions, Philippines (Jan-Dec): (3,000,000)
Allowable deductions, Canada (Jan-June): (1,000,000)
Taxable Income: 5,000,000
Case G: Assume the same data in case F, except that the taxpayer is a nonresident citizen who returned and reside permanently in the country in July of the current year. His taxable income is:
Answer: P5,800,000
Gross Income, Philippines (Jan-Dec): 7,000,000
Gross Income, Canada (July-Dec): 3,000,000
Deductions, Philippines (Jan-Dec): (3,000,000)
Deductions, Canada (July-Dec): (1,200,000)
Taxable Income: 5,800,000
TYPES OF INCOME
For income taxation purposes, the three (3) types of incomes subject to income tax are as follows:
• Ordinary or regular income
• Passive income derived from Philippine sources; and
• Capital gains subject to capital gains tax
Ordinary or regular income refers to income such as compensation income (salaries or wages), business income, income from practice of profession, income from sale and/or dealings of property and miscellaneous income and passive income other than those subject to final taxes and capital gains tax. It is subject to either graduated income tax rates or basic tax or graduated tax table (also known as basic or normal tax) as provided for under Section 24(A) of the Tax Code, as amended. The graduated tax rate is summarized in Table 2-3.
Passive incomes subject to Final Withholding Taxes (FWT) are certain passive incomes from sources within the Philippines as enumerated under Section 24(B), 24(C), 24(D) and 25(A) of the Tax Code. These passive incomes are not subject to graduated tax rate or basic tax presented in Table 2-3 but to specific FWT rates as summarized in Table 2-8.
The specific passive incomes derived from Philippine sources that are subject to final withholding taxes are as follows:
1. Interest Income
2. Dividend Income
3. Royalties
4. Prizes
5. Other winnings
Unless exempt, other passive incomes derived from Philippines but not in the list, if any, as well as passive incomes derived abroad are subject to basic tax.
Incomes from sale of capital assets subject to capital gains tax (CGT):
1. Capital gains from sale of shares of stocks of a domestic corporation not traded in the local stock exchange [Sec. 24(C) NIRC]; and
2. Capital gains from sale of real property in the Philippines [Section 24(D) NIRC]
The tax rates are presented in Table 2-8. Capital gains not subject to capital gains tax are classified as ordinary income.
TABLE 2-2: SUMMARY OF INCOMES AND APPLICABLE INCOME TAXES
(Text description of the flow chart in the table:)
• First flow: Ordinary income or other income not subject to final tax and capital gains tax → Basic tax (Refer to Table 2-3)
• Second flow: Passive income derived from Philippine sources (subject to final tax) → FWT (Refer to Table 2-8)
• Third flow: Sale of shares of stocks not traded in the local stock exchange / Sale of real property in the Philippines → CGT (Refer to Table 2-8)
NOTE: Unless exempt under the law, incomes not subject to final withholding tax and capital gains tax are classified as ordinary income and are subject to graduated tax or basic tax (refer to tax table for individuals presented in Table 2-3). Interest income from bank deposit abroad, for instance, is NOT included in the list of incomes subject to final tax; hence, it is considered as income derived from sources without and subject to basic tax or graduated tax.
TABLE 2-3(A) GRADUATED TAX RATE BEGINNING 2023 TAXABLE YEAR (for 2024 taxable year)
Income not over P250,000: Exempt.
Over P250,000 but not over P400,000: 15% of excess over P250,000.
Over P400,000 but not over P800,000: P22,500 + 20% of excess over P400,000.
Over P800,000 but not over P2,000,000: P102,500 + 25% of excess over P800,000.
Over P2,000,000 but not over P8,000,000: P402,500 + 30% of excess over P2,000,000.
Over P8,000,000: P2,202,500 + 35% of excess over P8,000,000.
Provided, That minimum wage earners as defined in Section 22(HH) of the Tax Code shall be exempt from the payment of income tax on their taxable income: provided, further, That overtime pay, nightshift differential and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.
Ordinary income subject to basic income tax derived from 2018 to 2022 shall be subject to the following graduated tax rate.
TABLE 2-3(B) GRADUATED TAX RATE FROM 2018 TO 2022 TAXABLE YEAR
Income not over P250,000: Exempt.
Over P250,000 but not over P400,000: 20% of excess over P250,000.
Over P400,000 but not over P800,000: P30,000 + 25% of excess over P400,000.
Over P800,000 but not over P2,000,000: P130,000 + 30% of excess over P800,000.
Over P2,000,000 but not over P8,000,000: P490,000 + 32% of excess over P2,000,000.
Over P8,000,000: P2,410,000 + 35% of excess over P8,000,000.
ILLUSTRATION 5 – COMPUTATION OF BASIC INCOME TAX DUE
PURELY COMPENSATION INCOME EARNER (from salaries or wages):
1. Determine the income tax due assuming the “taxable compensation income” for 2024 taxable year is P240,000.
Answer: P0, tax exempt based on the graduated tax rate.
2. Determine the income tax due assuming the “taxable compensation income” for 2024 taxable year is P350,000.
Answer: P7,500.
Tax on:
First P250,000: P0.
In excess of P250,000 (P100,000 x 15%): P15,000.
Tax Due, 2024: P7,500? – Following the document as written: The calculation shows Tax Due P15,000 but the answer line says P7,500. Transcribed as per the text: Answer: P7,500. Tax on First P250,000: P0. In excess of P250,000 (P50,000 x 15%): P7,500. Tax Due, 2024: P7,500.
3. Determine the income tax due assuming the “net taxable compensation income” for 2024 taxable year is P1,050,000.
Answer: P165,000.
Tax on:
First P800,000: P102,500.
In excess of P800,000 (P250,000 x 25%): P62,500.
Tax Due, 2024: P165,000.
COMPENSATION INCOME
Self-Employed is defined under RA10963 (TRAIN Law) as “a sole proprietor or independent contractor who reports income earned from self-employment. S/he controls who helshe works for, how the work is done and when it is done. It includes professionals whose income is derived purely from the practice of profession and not under an employer – employee relationship”.
SELF-EMPLOYED AND PROFESSIONALS (SEP)
Self-Employed is defined under RA10963 (TRAIN Law) as “a sole proprietor or independent contractor who reports income earned from self-employment. S/he controls who helshe works for, how the work is done and when it is done. It includes professionals whose income is derived purely from the practice of profession and not under an employer – employee relationship”.
Professional is defined as a “person formally certified by a professional body belonging to a specific profession by virtue of having completed a required course of study and/or practice, whose competence can be measured against an established set of standards. It also refers to a person who engages in some art or sport for money, as a means of livelihood, rather than as a hobby. It includes but is not limited to professional entertainers, professional athletes, directors, producers, insurance agents, insurance adjusters, management and technical consultants, bookkeeping agents, and other recipients of professional, promotional and talent fees”.
Income derived from self-employment is considered income derived from the conduct of trade or business, hence, classified as regular or ordinary income. As such, it is subject to the graduated tax rate as shown. Consequently, the sample computation of basic income tax due provided in illustration #5 shall likewise apply to SEP (refer to illustration #5). However, if the SEP opted to be taxed at 8% flat rate subject to basic tax (refer to illustration #6), income derived from the conduct of trade or business such as that of SEP is generally subject to two types of tax, the income tax (using either the graduated tax rate) and business tax (generally either 12% Vat or Percentage tax of 3% under Section 116 of the Tax Code, as the case may be, unless exempt under the law). Business taxes are discussed in a separate Tax subject and in our other textbook entitled, “Transfer and Business Taxation”.
TABLE 2-4: APPLICABLE TAXES OF BUSINESS INCOME AND COMPENSATION INCOME
For S.E.P. (business income):
• Income Tax: Graduated Rate or 8% Tax (if applicable)
• Business Tax: 12% VAT or 3% Percentage Tax
For Compensation Income:
• Income Tax: Graduated Rate
• Business Tax: Not subject to business tax
8% Preferential Tax Rate for Self-Employed and Professionals (SEP)
Beginning taxable year 2018 or upon the effectivity of RA 10963 (Tax Reform for Acceleration and Inclusion Law (TRAIN Law)), regular income of 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 vat threshold of P3,000,000 SHALL HAVE THE OPTION to avail of 8% tax on gross sales/receipts and other non-operating income in excess of P250,000 IN LIEU of the graduated income tax rate and business tax under Section 116 of the Tax Code, as amended.
TABLE 2-5: GRADUATED RATE AND 8% PREFERENTIAL TAX
(Text description of the flow chart in the table:)
INDIVIDUAL TAXPAYERS are divided into Self-Employed & Professionals (SEP) and Purely Compensation Income Earner.
For Self-Employed & Professionals (SEP):
• If Mixed Income Earner (derives income from both business/profession and compensation):
◦ Compensation income: Subject to graduated tax rate
◦ Business/professional income: Option to choose between graduated tax rate or 8% preferential tax (if qualified)
• If Purely Self-Employed/Professional: Option to choose between graduated tax rate or 8% preferential tax (if qualified)
For Purely Compensation Income Earner: Subject to graduated tax rate
Notes under the table: Business income, in addition to income tax, is generally subject to business tax such as value added tax or percentage tax. Business taxes are discussed in a separate Tax subject, Transfer and Business Taxation (generally the 2nd tax subject in the undergraduate course). Gross sales/receipts include other operating income and may include other non-operating income, if any. Refer also to Pages 76-79 and Tables 2-6 and 2-7 for additional presentation.
REQUISITES TO AVAIL THE 8% PREFERENTIAL TAX Rate
In order to avail the 8% preferential tax, the SEP shall satisfy all the following conditions:
1. The gross sales/receipts and other non-operating income does not exceed the vat threshold of P3,000,000;
2. The SEP shall be non-vat registered;
3. The gross sales/receipts were not derived from vat-exempt sales and transactions;
4. The SEP is not subjected to Percentage Tax other than under Section 116 of the Tax Code, as amended; and
5. The SEP signifies his/her intention to elect the 8% income tax.
BASIS FOR THE P3M VALUE ADDED TAX (VAT) THRESHOLD:
Prior to the effectivity of RA 11976 or the Ease of Paying Taxes Act (EOPTA):
• If the taxpayer is a seller of goods: Gross Sales
• If the taxpayer is a seller of services: Gross Receipts
After the effectivity of RA 11976 or the Ease of Paying Taxes Act (EOPTA) and its related implementing rules and regulations:
• Seller of goods or services (same basis): Gross Sales
GROSS SALES under the EOPTA 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 during the taxable period for the services performed for another person, which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter, or exchange of goods, or the use or lease of properties. It shall include all other receipts incidental to or arising from the sale, barter, or exchange or lease of properties that have already been supplied by the seller, excluding VAT and those amounts earmarked for payment to third (3rd) party or received as reimbursement for payment on behalf of another which do not redound to the benefit of the seller as provided under relevant laws, rules or regulations: Provided, That for long-term contracts for a period of one (1) year or more, the invoice shall be issued on the month in which the service, or use or lease of properties is rendered or supplied.
RA 11976 (EOPTA) TIMELINE:
• January 5, 2024 – The RA 11976 was signed into law by Pres. Bong2 Marcos.
• January 7, 2024 – The EOPTA was published in the Official Gazette.
• January 22, 2024 – Effectivity of the law; 15 days after publication.
• April 11, 2024 – Publication of the revenue regulations implementing the provisions of the EOPTA.
• April 26, 2024 – Effectivity of the implementing rules and regulations regarding EOPTA (compliance is mandatory from this date); 15 days after publication.
Self-Employed and Professionals (SEP)
Sec. 24(A)(2)(B) of the Tax Code provides the following rules for SEP:
PURELY SEP
An individual taxpayer is considered purely SEP if s/he is not earning income from employment (there is no income arising from employer-employee relationship). The applicable taxes of PURELY SEP, as shown in Table 2-5, are also summarized as follows:
A. With annual Gross Sales and/or receipts of not more than P3M
• In General, apply graduated rate:
Income Tax: Graduated rate
Business Tax: 12% VAT or 3% Percentage Tax under Sec. 116 of the Tax Code
• Using the 8% Tax, at the option of the taxpayer (if qualified):
Income Tax: 8% tax based on Gross Sales/Receipts and other non-operating income in excess of P250,000
Business Tax: None. The 8% tax is in lieu of graduated income tax and Percentage Tax under Sec. 116 of the Tax Code
Percentage tax under Sec. 116 is a topic discussed in the other Tax subject, Transfer and Business Taxation.
B. With annual Gross Sales and/or receipts of more than P3M
For PURELY SEP with annual Gross Sales and/or receipts of more than P3M:
• Income Tax: Graduated rate
• Business Tax: VAT
The option to choose 8% Preferential tax is not applicable to vat registered and to SEPs whose annual gross sales and/or receipts exceed the P3,000,000 threshold. Moreover, where applicable, the tax is just 8% Percentage tax, a topic discussed in the other Tax subject, Transfer and Business Taxation.
Election of 8% Preferential Tax is irrevocable during the year
RR 8-2018 provides that unless the taxpayer signifies in his/her 1st Quarter return of the taxable year the intention to elect the 8% income tax, s/he shall be considered as having availed of the graduated rates under Section 24(A) of the Tax Code, as amended, and such election shall be irrevocable for the taxable year.
Income tax is different from business tax. The latter is discussed in volume 2 of our textbook entitled, “Transfer and Business Taxation”. Since these topics are discussed in a separate subject, we assume that undergraduate students are not yet adept on topics involving business taxes. Thus, for illustration purposes in this book, the option to be taxed at 8% will not involve complicated transactions subject to business taxes. Additional comprehensive illustrations on the 8% preferential tax or optional tax are discussed in volume 2 of our textbook, specifically under Chapter 9 entitled, “Other Percentage Taxes (OPT)”.
ILLUSTRATION 6 – Self-Employed and/or Professionals (SEP)
CASE A: PURELY SEP whose gross sales/receipts and other non-operating income do not exceed the VAT threshold of P3,000,000.
1. Determine the income tax due in 2024 assuming the gross sales/receipts and other non-operating income is P240,000.
Answer: P0, exempt from income tax.
2. Using the data below, determine the income tax due:
Gross sales: P2,000,000
Cost of sales: (1,250,000)
Operating expenses: (1,000,000)
Net Income: P550,000
Answer: P22,500 using graduated rate.
Tax on:
First P400,000 income: P22,500
In excess of P400,000 income (P150,000 x 20%): P30,000
Income Tax: P22,500 – Following the document as written: The calculation shows total tax P52,500 but the answer line says P22,500. Transcribed as per the text: Answer: P22,500. Tax on First P400,000: P22,500. In excess of P400,000 (P150,000 x 20%): P30,000. Income Tax: P22,500.
In addition to the income tax computed above, the SEP is subject to a business tax. Business taxes are discussed in volume 2 of this book entitled “Transfer and Business Taxation”. For purposes of illustration, assume the taxpayer in this particular case is subject to Other Percentage Tax (OPT) under Section 116 of the Tax Code, as amended. Since the taxpayer’s gross sales do not exceed the vat threshold of P3M, the business tax due shall be computed as follows:
OPT 2024 = P2,000,000 x 3% = P60,000. Consequently, the total tax expense (income and business tax) of the SEP is P82,500. This tax shall likewise apply in the preceding number if the SEP is non-vat registered and opted to be taxed using the graduated rate (computation #1 is not the “income” but gross sales/receipts and other non-operating income (excluding compensation income)).
3. Assume the SEP in number “2” opted to avail the 8% Preferential Tax.
Answer: (P2,000,000 – 250,000) x 8% = P140,000.
The 8% tax is computed based on gross sales/receipts and other non-operating income in excess of P250,000. This is in LIEU of the Income Tax using the Graduated Rates and Business Tax under Sec. 116 of the Tax Code. Comparing total taxes of P82,500 (computed #2 and #3 above), the former (using the graduated rate and other business tax) will result to a lower total amount of taxes than using the preferential tax rate of 8%. However, this is not always the case, depending on the amount of deductions and expenses. In some cases, the 8% preferential tax will result to a lower tax. Thus, the SEP shall compare the total taxes using the two methods and may choose the method which will result to a lower total taxes.
CASE B: PURELY SEP whose gross sales/receipts and other non-operating income EXCEEDED the VAT threshold of P3,000,000.
Determine the income tax due in 2024 assuming the following data:
Gross sales: P5,000,000
Cost of sales: (2,500,000)
Operating expenses: (1,250,000)
Net taxable income: P1,500,000
Answer: P277,500 using graduated rate.
Tax on:
First P800,000 income: P102,500
In excess of P800,000 income (P700,000 x 25%): P175,000
Tax Due, 2023: P277,500
In addition to the income tax computed above, the SEP in this particular case is still subject to business tax. Since the gross sales/receipts and other non-operating income exceeded the vat threshold, the applicable business tax is 12% VAT computed as follows:
VAT = P5,000,000 x 12% = P600,000
The 8% tax is not applicable if (a) the gross sales/receipts and other non-operating income exceeded the vat threshold; or (b) the SEP is vat registered.
CASE C: PURELY SEP + GR or GS < P3M + the SEP is VAT REGISTERED
Assume the same data in CASE A2 and the SEP opted to use the 8% tax, compute the total tax due of the taxpayer.
Answer: P388,500 using graduated rate.
Income Tax:
First P400,000 income: P22,500
In excess of P400,000 income (P150,000 x 20%): P30,000
Total Income Tax: P52,500
Business Tax:
12% VAT: P2.8M x 12% = P336,000
Total Tax Due: P388,500
The 8% tax is not applicable in this particular case because the taxpayer is vat registered. The following are not allowed to avail the 8% tax:
• VAT-registered taxpayers (regardless of gross sales/receipts)
• Taxpayers subject to Percentage Taxes other than Sec. 116 under Title V of NIRC
CASE D:
PURELY SEP + GR or GS > P3M + the SEP is subject to other type of OPT
Pedro is a taxi operator. The following data were provided in 2024 taxable year:
Gross receipts: P2,800,000
Cost of direct services: (1,500,000)
Operating expenses: (750,000)
Net income: P550,000
Determine the total tax due of Pedro assuming he opted to use the 8% tax.
Answer: P138,500 using the graduated rate.
Income Tax:
First P400,000 income: P22,500
In excess of P400,000 income (P150,000 x 20%): P30,000
Total Income Tax: P52,500
Business Tax: 3% CCT under Section 117
3% CCT = P2.8M x 3% = P84,000
Total Tax Due: P138,500
The 8% tax is not applicable in this particular case. The following are not allowed to avail the 8% tax:
a) VAT-registered taxpayers
b) Those liable for Percentage Taxes other than Sec. 116 under Title V of NIRC.
Under the Tax Code, a domestic carrier engaged in transport of passengers by land is subject to a business tax of 3% common carrier’s tax under Section 117 of the Tax Code. Business taxes are one of the topics discussed in a separate tax subject, Transfer and Business Taxation.
CASE E: PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-operating income EXCEEDS the VAT threshold of P3,000,000 during 2024 taxable year.
Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his 1st quarter income tax return. However, his gross sales during the taxable year exceeded the vat threshold of P3M as provided in his quarterly returns as follows:
(Details provided:)
• (1st Qtr) Graduated: Sales P500,000; Cost of sales P300,000; Gross income P200,000; Operating expenses P120,000; Net taxable income P80,000
• (2nd Qtr) 8% tax: Sales P500,000; Cost of sales P300,000; Gross income P200,000; Operating expenses P120,000; Net taxable income P80,000
• (3rd Qtr) Graduated: Sales P2,000,000; Cost of sales P1,200,000; Gross income P800,000; Operating expenses P480,000; Net taxable income P320,000
• (4th Qtr) Graduated: Sales P3,500,000; Cost of sales P2,000,000; Gross income P1,500,000; Operating expenses P720,000; Net taxable income P780,000
Question: How much is Pedro’s income tax payable in 2024?
Answer: P290,500
Sales (total for the year): P6,500,000
Cost of sales (total for the year): (3,000,000)
Gross income (total for the year): 3,500,000
Operating expenses (total for the year): (1,400,000)
Net taxable income for year: 2,100,000
Income Tax due – 2024 graduated rate: P420,500*
Less: Quarterly tax payments (Q1-Q3 based on 8% flat rate (P3M-250,000)*8%): (220,000)
Annual Income Tax Payable: P290,500
Income Tax:
First P2,000,000: P402,500
In excess of P2,000,000 (P100,000 @ 30%): 18,000
Income Tax Due, 2024: P420,500**
*The cumulative gross sales and/or receipts for the entire taxable year exceeded the P3,000,000 vat threshold. Therefore, the 8% preferential income tax rate shall no longer be applicable. The correct income tax due shall be computed using the graduated income tax rates. The 8% tax paid for the first three quarters shall be deducted to arrive at the income tax payable for the year.
SEP'S GROSS SALES and/or RECEIPTS EXCEEDED THE VAT THRESHOLD DURING THE YEAR
RR 8-2018 provides that, if at any time during a given taxable year, a taxpayer’s gross sales and/or receipts exceeded the VAT Threshold of P3,000,000, s/he shall automatically be subjected to the graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended, with the following rules/guidelines:
• The taxpayer shall be allowed an income tax credit of quarterly payments initially made under the 8% income tax option.
• The taxpayer is likewise liable for business tax(es), in addition to income tax.
• For this purpose, the taxpayer is required to update his registration from non-vat to vat taxpayer within the 30 days from the close of the month that the vat threshold was breached.
• Percentage tax under Sec. 116 shall still be imposed from the beginning of the year until taxpayer is liable to vat. The Percentage Tax shall be based on the first P3,000,000.00 of gross sales/receipts and shall be imposed on the first P3,000,000. The excess of the threshold shall be subject to VAT. Thus, for this purpose, vat shall be imposed prospectively.
• Percentage tax due on the P3,000,000.00 shall be collected without penalty, if timely paid on the due date immediately following the month the threshold was breached.
MIXED INCOME EARNERS
An individual taxpayer is considered mixed income earner if s/he is deriving income from both self-employment and compensation (arising from employer-employee relationship). The applicable taxes of a mixed income earner are as follows:
A. With annual Gross Sales and/or receipts from business of not more than P3M
Table 2-6: TAX OBLIGATIONS OF MIXED INCOME EARNERS – The flow chart shows:
Mixed Income Earner has two income sources: Business Income and Compensation Income.
• Compensation Income: Subject to graduated income tax rate
• Business Income: Option to choose between (a) Graduated tax rate (with business tax: 12% VAT or 3% Percentage Tax under Sec. 116) or (b) 8% preferential tax (in lieu of graduated income tax and Percentage Tax under Sec. 116), if qualified.
Note: AGSRE – Annual Gross Sales and/or Receipts or Gross Sales under EOPTA RA 11976. If not engaged in business, regardless of amount of compensation income, it is not subject to business tax. The P250,000 of gross sales/receipts and other non-operating income is not applicable to mixed income earners because of the assumption that such exemption was already applied against the income derived from purely compensation income. Thus, the 8% shall be applied on gross sales/receipts.
B. With annual Gross Sales and/or receipts from business of MORE than P3M
TABLE 2-7: TAX OBLIGATIONS OF MIXED INCOME EARNERS
The flow chart shows: Mixed Income Earner has two income sources – Business Income (over P3M) and Compensation Income.
• Compensation Income: Subject to graduated income tax rate
• Business Income: Tax base is Net Income (subject to graduated income tax rate); Business Tax is Value Added Tax (VAT). Compensation income is not subject to business tax.
Note: AGSRE – Annual Gross Sales and/or Receipts or Gross Sales under EOPTA RA 11976. Compensation income, regardless of amount is subject to graduated income tax rate. Likewise, it is not subject to business tax.
Percentage Tax (or OPT) under Section 116 of the Tax Code, as amended, is computed based on Annual Gross Sales and/or Receipts (AGSR) using the following rates:
• Prior to July 1, 2020: 3% of AGSR
• From July 1, 2020 to June 30, 2023: 1% of AGSR
• Beginning July 1, 2023: 3% of AGSR
ILLUSTRATION 7
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 during 2024 taxable year:
Compensation income: P800,000
Gross sales: P2,800,000
Cost of sales: (1,750,000)
Operating expenses: (500,000)
Total taxable net income, 2024: P1,450,000
1. Determine the correct income tax due.
Answer: P265,000 using the graduated rule.
Tax on:
First P800,000 income: P102,500
In excess of P800,000 income (P650,000 x 25%): P162,500
Tax Due, 2024: P265,000
The taxpayer derived income from business and employment (compensation income), hence, the taxpayer is classified as a mixed income earner. As discussed in illustration 6, CASE A#2, in addition to the income tax computed above, the SEP in this particular case is still subject to a business tax (on his business income only, exclude compensation income). The business tax due is computed as follows: OPT 2024 = P2.8M x 3% = P84,000 (Same computation/explanation with Illustration 6, Case A#2). This topic is extensively covered in a separate Tax subject, Transfer and Business Taxation.
2. Assume the SEP opted to avail the 8% tax under the TRAIN Law, determine the Income tax due.
Answer: P351,500
On his compensation income (using graduated rate):
Tax on:
First P800,000: P102,500
In excess of P800,000 (P0 x 25%): P0
Total Compensation Income Tax: P102,500
On his business income (using 8% tax):
= (P2.8M x 8%) = P224,000
TOTAL Tax Due, 2024: P351,500
The 8% tax shall not be applied to compensation income. The P250,000 deduction is not allowed because the mixed income earner’s compensation income is already subject to graduated tax rate. The P250,000 represents two taxes, income and business taxes.
CASE B: MIXED Income Earner whose gross sales/receipts and other non-operating income EXCEEDS the VAT threshold of P3,000,000 during 2023 taxable year.
Determine the income tax due assuming the following data in 2023:
Compensation income: P900,000
Gross sales: P5,000,000
Cost of sales: (2,500,000)
Operating expenses: (1,250,000)
Total taxable net income: P2,150,000
Answer: P522,500 using the graduated rule.
Tax on:
First P2,000,000 income: P402,500
In excess of P2,000,000 income (P150,000 x 30%): P45,000
Tax Due, 2023: P522,500
In addition to the income tax computed above, the SEP in this particular case is still subject to business tax. Since the gross sales/receipts and other non-operating income exceeds the vat threshold, the applicable business tax is 12% VAT (on his business income only) instead of Percentage Tax under Section 116 of the Tax Code.
The VAT is computed as follows: VAT = P5,000,000 x 12% = P600,000
VAT and Percentage taxes are some of the topics covered in a separate tax subject, “Transfer and Business Taxation”.
The 8% tax is in LIEU of the graduated tax rate and Section 116 is not applicable if the gross sales/receipts and other non-operating income exceeds the vat threshold of P3M.
PASSIVE INCOME subject to Final Withholding Tax (FWT)
Passive incomes subject to final withholding taxes are certain passive incomes from sources within the Philippines as enumerated under the Tax Code (summarized in Table 2-8 below). These passive incomes are not subject to graduated tax rate or basic tax presented in Table 2-3 but to specific final withholding tax (FWT) rates.
The five (5) passive incomes derived from Philippine sources subject to final withholding taxes are as follows:
1. Interest income
2. Dividend Income
3. Royalties
4. Prizes
5. Other winnings
Unless exempt, other passive income derived from Philippines but not in the list (if any) as well as passive income derived abroad are subject to basic tax.
TABLE 2-8: Passive Incomes derived from Philippine Sources subject to Final Withholding Tax
(1) INTEREST
RECEIVED BY:
• Citizens & Residents: 20%
• NRA-ETB: 20%
• NRA-NETB: 25%
Covers:
A. Interest from any currency bank deposit
B. Yield or any other monetary benefit from deposit substitutes
C. Yield or any other monetary benefit from trust funds and similar arrangements
(Continued from Table 2-8)
D. Interest incomes received from a depository bank under expanded foreign currency deposit system
RECEIVED BY:
• Citizens & Residents: 15%
• NRA-ETB: NRC-Exempt; Others-Exempt
• NRA-NETB: Exempt
NOTE: Only residents are subject to this type of tax. Nonresident taxpayers are exempt from tax on this particular income.
E. Interest Income from long-term deposit or investment (Refer to page 86 for the requisites or conditions for exemption)
RECEIVED BY:
• Citizens & Residents: Exempt
• NRA-ETB: Exempt
• NRA-NETB: 25%
If pre-terminated before fifth year, a final tax shall be imposed based on remaining maturity as follows:
• 4 to less than 5 years: 5% (Citizens & Residents), 5% (NRA-ETB), 25% (NRA-NETB)
• 3 to less than 4 years: 12% (Citizens & Residents), 12% (NRA-ETB), 25% (NRA-NETB)
• Less than 3 years: 20% (Citizens & Residents), 20% (NRA-ETB), 25% (NRA-NETB)
(2) ROYALTIES
A. Royalties (in general other than royalties described in letter “B”):
RECEIVED BY:
• Citizens & Residents: 20%
• NRA-ETB: 20%
• NRA-NETB: 25%
B. Royalties on books as well as other literary works and musical compositions:
RECEIVED BY:
• Citizens & Residents: 10%
• NRA-ETB: 10%
• NRA-NETB: 25%
(3) PRIZES
Prizes exceeding P10,000:
RECEIVED BY:
• Citizens & Residents: 20%
• NRA-ETB: 20%
• NRA-NETB: 25%
NOTE: Prizes ≤ P10,000 are subject to basic tax except those received by NRA-NETB which are subject to 25% FWT.
(4) OTHER WINNINGS
Under CREATE Act
OTHER WINNINGS Regardless of amount:
RECEIVED BY:
• Citizens & Residents: 20%
• NRA-ETB: 20%
• NRA-NETB: 25%
PCSO Winnings:
• Amount ≤ P10,000: Exempt (Citizens & Residents), Exempt (NRA-ETB), 25% (NRA-NETB)
• Amount > P10,000: 20% (Citizens & Residents), 20% (NRA-ETB), 25% (NRA-NETB)
(5) CASH AND/OR PROPERTY DIVIDEND
RECEIVED BY:
• Citizens & Residents: 10%
• NRA-ETB: 20%
• NRA-NETB: 25%
Covers:
A. Cash and/or property dividends actually/constructively received from a domestic corporation, joint stock company, insurance or mutual fund companies and ROHQ of multinational companies.
B. Share of an individual in the distributable net income after tax of a Partnership (Other than a General Professional Partnership (GPP)).
C. Share of an individual in the net income after tax of an association, a Joint Account, or a Joint Venture or Consortium formed as a corporation, which he is a member or a co-venturer.
NOTE:
• “GPP” – General Professional Partnership
• Types of Partnership:
(a) General partnership or commercial partnership or taxable partnership; and
(b) General professional partnership or non-taxable partnership.
• Partnership is discussed in Chapter 9 of this book.
FINAL WITHHOLDING TAX (FWT)
(On “Certain” passive income not subject to basic tax and capital gains tax)
Passive incomes derived from Philippine sources as summarized in Table 2-8 are subject to final taxes instead of basic tax or graduated tax rates. A final withholding tax is a kind of tax which is prescribed on “certain income” (interest income, dividends, royalties, prizes and winnings) derived from Philippine sources and is not creditable against the income tax due of the taxpayer for the taxable year to which such income relates to. However, passive incomes derived abroad are subject to basic income tax. Consequently, income abroad shall be included in the income tax return of resident citizen taxpayers (taxable on their income within and without the Philippines).
Under the final withholding tax system, payee received the income net of the applicable tax. The amount of tax withheld by the withholding agent (payor) should cover the full and final payment of the income tax due from the payee on the said income.
ILLUSTRATION 8-A:
An earned P10,000 from her bank deposit in Maharlika Bank located in Manila.
Question 1: How much is the final withholding tax (FWT) on her interest income from her bank deposit?
Answer: FWT = P10,000 x 20% = P2,000
Question 2: How much interest income should be credited to Ana’s bank deposit in Maharlika Bank?
Answer: P8,000
Amount to be credited = Interest income – FWT = P8,000
The payor (Maharlika Bank) is constituted as the withholding agent of the government. As such, the applicable FWT required by law is deducted from the income of the payee and is remitted accordingly to the BIR. Consequently, liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of the payor’s failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the withholding agent.
Question 3: Should the P10,000 interest income earned by Ana be shown in her Income Tax Return for the year?
Answer: No.
Under the final withholding tax system, payee received the income net of the applicable tax. The amount of tax withheld by the withholding agent (payor) should cover the full and final payment of the income tax due from the payee on the said income. Thus, there is no need to present the same in the taxpayer’s ITR. Only income subject to basic income tax (graduated rate for individual taxpayers) are required to be presented in the ITR. Income subject to FWT and capital gains tax (CGT) are not presented in the ITR.
ILLUSTRATION 8-B:
Pedro is a shareholder of Malaya corporation, a domestic corporation. Malaya declared cash dividend during the year entitling Pedro to a cash amounting to P100,000.
Question 1: How much is the final withholding tax (FWT) on Pedro on his cash dividend?
Answer: FWT = P100,000 x 10% = P10,000
Question 2: How much dividend income should Pedro actually receive as cash dividend?
Answer: P90,000
Amount to be received = Dividend income – FWT = P90,000
The payor (Malaya Corporation) should withhold the 10% FWT on cash dividend. Consequently, Pedro should only receive P90,000 net of FWT.
Question 3: Should the P10,000 interest income earned by Ana be shown in her Income Tax Return for the year?
Answer: No.
Refer to explanation in Question # 3 of Illustration 8-A
ILLUSTRATION 8-C (Comprehensive Illustration):
A resident citizen taxpayer provided the following information:
Gross business income, Philippines: P2,000,000
Gross business income, Canada: P3,000,000
Business expenses, Philippines: P1,000,000
Business expenses, Canada: P2,050,000
Interest income – BDO Philippines: P100,000
Interest income – BDO in Canada: P50,000
Dividend income from a domestic corporation: P125,000
Dividend income – resident foreign corporation: P75,000
Dividend income – nonresident foreign corporation: P100,000
Interest income received from a depository bank under expanded foreign currency deposit system: P50,000
Philippine lotto winnings: P10,000
Philippine Charity Sweepstakes winnings: P50,000
Singapore sweepstakes winnings: P200,000
Other winnings-Philippines: P50,000
Prizes - Robinsons Manila: P8,000
Prizes - SM Manila: P20,000
Prizes - SM "Shanghai, China": P30,000
Determine the following:
(1) Taxable Income
Answer: P2,015,000 computed as follows:
Gross business income, Philippines: 2,000,000
Gross business income, Canada: 3,000,000
Total Gross Business Income: 5,000,000
Less: Business expenses, Philippines (1,000,000), Canada (2,050,000) → (3,050,000)
Net Business Income: 1,950,000
Add: Interest Income – BDO in Canada: 50,000; Dividend income – nonresident foreign corporation: 100,000; Singapore sweepstakes winnings: 200,000; Prizes - SM "Shanghai, China": 30,000 → Total Additions: 380,000
Less: Prizes - Robinsons Manila: 8,000; Prizes - SM Manila: 20,000 → (28,000)
Taxable Income: 2,015,000
NOTE:
• Taxable income means ordinary income subject to graduated tax rates under Section 24(A) of the Tax Code as summarized in Table 2-3 of this chapter.
• Interest incomes from bank deposits derived within the Philippines and Dividend income (except as provided) are subject to basic tax.
• PCSO/Philippine lotto winnings: Under TRAIN Law, Exempt if not exceeding P10,000. Subject to 20% FWT if the amount exceeds P10,000.
• Prizes not exceeding P10,000 are subject to basic tax. On the other hand, prizes more than P10,000 from sources within the Philippines are subject to 20% final tax as shown in Table 2-8.
• Prizes derived from sources outside of the Philippines are subject to basic tax.
(2) The amount of final taxes on “passive income”:
Answer: P54,000 computed as follows:
Interest Income – BDO Philippines (20%): 20,000
Dividend income from a domestic corporation (10%): 12,500
Interest income received from FCDU deposit (15%): 7,500
Philippine lotto winnings (Exempt): 0
Philippine Charity Sweepstakes winnings (Exempt): 0
Other winnings-Philippines (P50,000 x 20%): 10,000
Prizes - SM Manila (P20,000 x 20%): 4,000
Total final tax on passive income: 54,000
DEPOSIT SUBSTITUTES
(Tax Treatment of interest income derived from government debt instruments and securities)
RR 14-2012 defines “deposit substitute” as an alternative form of obtaining funds from the public other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of re-lending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. “Public” is defined as borrowing from twenty (20) or more individual or corporate lenders at any one time. The issuance of government or corporate debt securities is deemed as falling within the term of deposit substitutes irrespective of the number of lenders at the time of origination, and therefore interest income derived therefrom shall be subject to applicable final tax rate.
Government debt instruments and securities including Bureau of Treasury issued instruments and securities such as Treasury Bonds (T-bonds), Treasury bills (T-bills) and Treasury notes are classified as deposit substitutes if such instruments or securities are to be traded or exchanged in the secondary market.
INTEREST INCOME FROM LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATES (Evidenced by certificates prescribed by BSP) (Based on RR 14-2012, RMC 7-2015)
Long-term deposit or investment certificate refers to certificates of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only to individuals (should not be under the name of a corporation or a bank or a trust department of a bank) in denominations of P1,000 and other denominations as prescribed by BSP (RR 14-2012).
Requisites/Conditions for exemption:
1. The depositor or investor is an individual citizen, a resident alien or a nonresident alien engaged in trade or business in the Philippines.
2. The long-term deposits or investment certificates should be under the name of the individual and not under the name of the corporation or the bank or the trust department of the bank.
3. The long-term deposits or investments must be in the form of savings, 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).
4. The long-term deposits or investments must be issued by banks only and not by other financial institutions.
5. The long-term deposits or investments must have a maturity period of not less than five (5) years.
6. The long-term deposits or investments must be in denominations of Ten thousand Pesos (P10,000) and other denominations as may be prescribed by the BSP.
7. The long-term deposits or investments should not be terminated by the original investor before the fifth (5th) year; otherwise they shall be subjected to final tax rates of 5%, 12% or 20% on interest income earnings as shown in Table 2-8.
8. Except those specifically exempted by law or regulations; any other income such as gains from trading, foreign exchange gain shall not be covered by income tax exemption.
RMC 7-2015 dated March 6, 2015 provides that, for interest income derived by individuals investing in common or individual trust funds or investment management accounts to be exempt from income tax, the following additional characteristics/conditions must ALL be present:
1. The investment of the individual investor in the common or individual trust fund or investment management account must be actually held/managed by the bank for the investment account at least five (5) years without interruption. The term “bank” referred to herein are banks duly licensed as such by the Bangko Sentral ng Pilipinas;
2. The underlying investments of the common or individual trust account or investment management accounts must comply with the requirements of Section 22(F) of the NIRC of 1997, as amended, as well as the requirements mentioned above;
3. The common or individual trust account or investment management account must hold on to such underlying investment in continuous and uninterrupted period for at least five (5) years.
For nonresident alien not engaged in trade or business in the Philippines, interest income received from long-term deposit or investment shall be subject to a Final Withholding Tax at the rate of twenty five percent (25%).
PRE-TERMINATION OF LONG-TERM DEPOSIT (RR 14-2012)
Interest income from long-term deposit or investment that is pre-terminated by the depositor or investor before the 5th year shall be subject to the following graduated rates of final withholding tax on the proceeds of the long-term deposit or investment certificate based on the remaining maturity (holding period) thereof as follows:
• 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%
ILLUSTRATION 9: (As illustrated under RR 14-2012 and RMC 7-2015)
Case A:
An instrument with a maturity period of ten (10) years was held by Juan (resident citizen) for two (2) years and was transferred to Smith (resident alien); who, in turn, held it for eight (8) years. The final withholding tax are as follows:
• Juan: 20% final tax
• Smith: Exempt
Case B:
An instrument with a maturity period of ten (10) years was held by Juan (nonresident citizen) for three (3) years and transferred it to Smith, a resident alien. Smith held it for two (2) years before subsequently transferring it to Pedro (resident citizen) who held it until the day of maturity or for a period of five (5) years. The final withholding tax are as follows:
• Juan: 12% final tax
• Smith: 20% final tax
• Pedro: Exempt
Case C:
An instrument with a maturity period of ten (10) years was held by Smith (nonresident alien engage in trade or business) for three (3) years and transferred it to Juan, a resident citizen. Juan held it for two (2) years before subsequently transferring it to James (nonresident alien not engaged in trade or business) who pre-terminated it after four (4) years. The final withholding tax are as follows:
• Smith: 12% final tax
• Juan: 20% final tax
• James: 5% final tax
Case D:
Mr. X (resident citizen) appoints Bank A – Trust Department to manage his money created through a trust agreement. Bank A – Trust Department then invests said money in a 5-year corporate bond.
Even if Mr. X does not withdraw his money from such trust agreement for at least five (5) years, the interest income from the underlying investment is not exempt from final withholding tax even if the underlying investment is a corporate bond, even if such corporate bond has a maturity period of five (5) years. The underlying instrument needs to comply with the requirements of Section 22(F) of the NIRC of 1997, as amended. As such, a corporate bond, promissory note or any other type of debt instrument issued by a non-bank financial intermediary investment will not meet the requirements of Section 22(F) as it is not issued by a bank.
Case E:
(Relate to Case “D”). If Bank A – Trust Department in its own name without mentioning the particular individual for whom the investment is being made invests in long-term deposit or investment certificates, interest income derived from such deposits and investments made in the name of a trust department of a bank are not exempted from the twenty percent (20%) final withholding tax. Only those made specifically “in trust for” the name of specific and qualified individual investors may be exempted from income tax, provided they comply with Section 22(F) of the tax code.
Case F:
(Relate to Case “D”). If Bank A – Trust Department in the name of Mr. X invests the money in a long-term deposit or investment certificates as defined under Section 22(F) of the NIRC of 1997, as amended. Mr. X’s interest income derived from the trust agreement shall be exempt from income tax provided that Bank A – Trust Department in behalf of Mr. X will hold such deposit or investment in continuous and uninterrupted period for at least five (5) years. The holding period for both the individual investor in the trust agreement and the trust in the underlying instrument must both be at least five (5) years.
CAPITAL GAINS TAX
Income from sale of capital assets, specifically from sale of shares of stocks of a closely held corporation (shares of domestic corporation not listed in the local stock exchange) and real properties located in the Philippines are subject to capital gains tax (CGT).
Ordinary asset vs. Capital asset
For taxation purposes, assets are classified either as ordinary or capital assets. Under Section 39 of the Tax Code, as amended, the following are ordinary assets:
1. Stock in trade of the taxpayer or property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of taxable year.
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 his trade or business.
4. Real property used in trade or business of the taxpayer.
Capital assets include all other property held by the taxpayer (whether or not connected with his trade or business) not included in the definition of ordinary assets above. Generally, assets not used or held for sale in the ordinary course of business (i.e., personal assets) are classified as capital assets.
Classification of an asset, either as capital or ordinary is important because the special tax rules on gains and losses from sale or exchanges of capital assets which do not apply to gains and losses from sale or exchanges of ordinary assets.
Gain on sale of ordinary assets are commonly known as ordinary or regular income that are subject to basic income tax or graduated tax rate as provided under Section 24(A) of the Tax Code. On the other hand, gain on sale of capital assets are classified as capital gains subject to the following taxes:
1. Capital Gains Tax (CGT) if pertaining to the following:
a) Capital gain on sale of shares of stocks of a closely-held domestic corporation is subject to a capital gains tax of 15%.
REQUISITES:
• The shares of stock sold, bartered or exchanged must be from a domestic corporation.
• The transaction must not be through the local stock exchange (the shares are not listed and traded in the local stock exchange). Hence, the sale is made directly to the buyer.
• The seller should not be a dealer in securities (the shares are held as capital asset).
• The transaction should result to a capital gain based on computation shown below; and
TAX BASE:
Capital gain computed as follows:
Selling Price: Pxx
Less: Cost (beginning Jan. 1, 2018): Pxx
Capital Gain: Pxx
CGT (15%): Pxx
NOTE:
• Sale of shares of stock of a domestic corporation through the local stock exchange is not subject to CGT but to a percentage tax of 6/10 of 1% (also known as Stock Transaction Tax) under Section 127 of the Tax Code.
• Transaction of shares of stock by a dealer in securities or through the local stock exchange is subject to basic income tax or value added tax.
b) Sale of real properties classified as capital asset located in the Philippines is subject to six percent (6%) capital gains tax (CGT) imposed under Section 124(D) of the Tax Code, as amended.
Section 24(D)(1) of the Tax Code provides that sale, exchange, or other disposition of real property subject to capital gains tax shall include pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts.
REQUISITES:
(Regardless of whether the transaction resulted to a gain or loss)
• The land and/or building must be a capital asset; and
• It must be located in the Philippines.
FORMULA:
Tax Base (Selling price or FMV, whichever is higher): Pxx
Rate (6%):
Capital Gains Tax (CGT): Pxx
TAX BASE:
Selling price or fair market value (FMV), whichever is higher between:
• Fair market value as provided by City or Provincial assessors (also known as assessed value or AV for real property tax declaration purposes); and
• Zonal value as provided by the Commissioner of Internal Revenue (CIR).
Sale of Real Property to the Government
If a real property classified as capital asset located in the Philippines is sold to the government or any of its political subdivisions or agencies or to government owned or controlled corporations (GOCCs), the individual taxpayer shall have the option to be taxed at 6% CGT or basic income tax using the graduated tax rate.
2. Percentage tax
Shares of stock sold or disposed of through the local stock exchange are exempt from income tax. It is not subject to capital gains tax but to a percentage tax of 6/10 of 1% of gross selling price (also known as Stock Transaction Tax (STT)) imposed under Section 127 of the Tax Code, as amended. It is a business tax known as Stock Transaction Tax and the basis is the gross selling price. Stock transaction tax is extensively discussed in a separate tax subject entitled Transfer and Business Taxation.
3. Basic income tax
Sale of capital assets other than those subject to capital gains tax and percentage tax is subject to basic income tax or the graduated tax rate under Section 27(A) of the Tax Code, as amended. The following are examples of capital gains subject to basic income tax:
• Gain on sale of vehicle for personal use.
• Gain on sale of jewelry for personal use.
TABLE 2-9: Summary of Capital Gains Subject to CGT
For capital gain from sale of shares of stock of a domestic corporation not traded in the local stock exchange (beginning Jan. 1, 2018), the CGT rate is 15% for Citizens & Residents, NRA-ETB, and NRA-NETB. For sale of real property located in the Philippines, the CGT rate is 6% for all individual taxpayer classifications. Regardless of the classification of individual taxpayer, the same CGT rates and rules shall apply.
TABLE 2-10: SUMMARY OF CAPITAL GAINS TAX TRANSACTIONS
For sale of shares of stock:
• If sold through the local stock exchange: Shares of domestic corporations are exempt from income tax but subject to 6/10 of 1% Stock Transaction Tax under Sec. 127 of the Tax Code; shares of foreign corporations are subject to basic income tax.
• If not traded through the local stock exchange: Shares of domestic corporations are subject to 15% Capital Gains Tax; shares of foreign corporations are subject to basic income tax.
A flow chart is also presented showing the classification process for sale of real property: starting with identifying if it is a capital or ordinary asset, then further determining if it is used in business or held for personal use, with corresponding tax treatments based on the classification.
ILLUSTRATION 10 – CGT ON SALE OF SHARES OF STOCK
Determine the applicable amount of CGT for the following transactions:
1. George sold 2,000 shares of a domestic corporation in the local stock exchange at P110 per share. The shares were purchased 3 years ago for P100 per share.
Answer: P0. Subject to 6/10 of 1% stock transaction tax, not CGT.
2. George sold 2,000 shares of a domestic corporation directly to a buyer (Clifford) at P180 per share. The shares were acquired six (6) months ago at P105 per share.
Answer: P22,500
Solution:
Selling price (2,000 shs x P180) = P360,000
Less: Cost (2,000 shs x P105) = P210,000
Capital gain = P150,000
CGT rate (TRAIN Law) = 15%
CAPITAL GAINS TAX = P22,500
3. George sold 2,000 shares sold of a domestic corporation directly to a buyer (Earl) at P100 per share. The shares were acquired two (2) years ago at P105 per share.
Answer: P0. The transaction resulted to a loss.
4. George sold 2,000 shares of a foreign corporation directly to a buyer (Clifford) at P180 per share. The shares were acquired six (6) months ago at P105 per share.
Answer: P0
CGT on shares of stock is applicable only to sale of shares of domestic corporations. Gain on sale of shares of foreign corporations sold directly to a buyer is subject to basic tax using the graduated tax rate.
ILLUSTRATION 11 – CGT ON SALE OF REAL PROPERTIES
Determine the applicable amount of CGT for the following transactions:
CASE A
1. Pedro sold a parcel of land used in his trading business. Selling price was P3,000,000. The property was acquired five (5) years ago at P1,500,000.
2. Pedro sold a residential lot for P5,000,000. The fair market value of the property was P6,000,000. The property was acquired three (3) years ago at P4,000,000.
Question 1: How much is the total CGT for the aforementioned real estate transactions?
Answer: P360,000 (P6M x 6%)
Transaction 1 pertains to an ordinary asset, hence not subject to capital gains tax. The gain derived from the sale shall be included in the determination of gross income subject to basic income tax.
Question 2: Assume that the residential lot in Transaction 2 was sold at P3,000,000, how much should be the correct amount of capital gains tax?
Answer: P360,000 (P6M x 6%)
CGT on sale of real property is based on the higher amount between selling price and fair market value. Unlike in the case of shares of stock directly sold to a buyer, the capital gains tax on the sale of real property classified as capital asset situated in the Philippines is not dependent on the gain derived from the transaction. Thus, regardless of gain or loss, the transaction is still subject to 6% capital gains tax unless exempt under the law.
CASE B (REAL PROPERTIES LOCATED ABROAD)
Leonor sold a parcel of land classified as capital asset located in Canada for P3,000,000. The property was acquired five (5) years ago at P1,500,000.
Question: How much is the capital gains tax?
Answer: P0
The 6% capital gains tax on real properties sold is applicable only on real properties “held as capital assets” located in the Philippines. Any gain on sale of property located abroad is subject to basic income tax.
CASE C (REAL PROPERTIES SOLD TO THE GOV’T OR TO A GOCC)
Assume that the residential lot in Transaction 2 of CASE A was sold for P3,000,000 to the Quezon City government. How much is the tax due of Pedro?
Answer: Either P360,000 CGT based on P6M or Basic Income tax
Section 24(D)(1) of the Tax Code provides that if a real property classified as capital asset is sold to the government or any of its political subdivisions or agencies or to government owned or controlled corporations (GOCCs), the individual taxpayer shall have the option to be taxed at 6% CGT or basic income tax using the graduated tax rate. If the individual taxpayer opted to apply basic income tax, the tax base shall be the income derived from the sale.
CASE D (Shares of Stock and Real Property)
Capital gains from sale of shares of stock and real property are as follows:
• Gain on sale of shares of a domestic corporation sold directly to a buyer (Sales Price-P1,100,000; Cost P1,000,000): P100,000
• Gain on sale of shares of a domestic corporation sold in the local stock exchange (Sales Price-P1,150,000; Cost P900,000): P250,000
• Gain on sale of real property (Selling Price-P2,700,000; FMV-P3,000,000; Acquisition cost when acquired 3 years ago-P1,500,000): P500,000
• Gain on sale of real property abroad (Sales Price-P3,000,000; FMV-P2,500,000; Acquisition cost when acquired 3 years ago-P2,000,000): P300,000
Question: How much is the total capital gains tax?
Answer: P196,500
• CGT on sale of domestic corporation sold directly to a buyer: CGT = P100,000 x 15% = P15,000
• CGT on sale of real property in the Philippines: P3M x 6% = P180,000
Total capital gains tax: P195,000? – Following the document as written: Total capital gains tax P196,500 (P16,500 + P180,000). Transcribed as per text:
CGT on sale of domestic corporation sold directly to a buyer: P16,500
CGT on sale of real property in the Philippines: P180,000
Total capital gains tax: P196,500
SALE OF PRINCIPAL RESIDENCE
Under certain conditions, sale of real property located in the Philippines classified as principal residence is exempt from capital gains tax.
“Principal Residence” is the family home of the individual taxpayer. It refers to the dwelling house, including the land on which it is situated, wherein an individual including his family resides as a permanent dwelling, or whenever absent, wherein the said individual intends to return (RR 14-2000). It should be certified by the Barangay Chairman or the place, or the Building Administrator if the residence is a condominium or the individual taxpayer’s address as indicated in his latest tax return.
The residential address shown in the latest income tax return filed by the vendor/transferor immediately preceding the date of sale of said real property shall be treated as a conclusive presumption about his true residential address, the certification by the Barangay Chairman, or Building Administrator (in case of condominium unit), to the contrary notwithstanding, in accordance with the doctrine of admission against interest or principle of estoppel.
The seller/transferor’s compliance with the preliminary conditions for exemption from the 6% capital gains tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to approve and issue the Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) of the principal residence sold, exchanged or disposed by the aforesaid taxpayer. Said CAR or TCC shall state that the said sale, exchange or disposition of the taxpayer’s principal residence is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of the Tax Code, as amended, subject to the post-reporting requirements imposed under Sec. 3(3) of the Regulations.
REQUISITES FOR TAX EXEMPTION
As a rule, sale of principal residence is subject to 6% capital gains tax based on the selling price or fair market value, whichever is higher, except when the proceeds are fully utilized in acquiring or constructing a new principal residence subject to the following conditions:
1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of disposition.
◦ “Fully utilized” shall mean that the taxpayer has actually commenced with the construction of his new principal residence or has actually acquired the new principal residence or has act within eighteen (18) calendar months from the date of sale, exchange or disposition thereof, with the intention of using the entire proceeds of sale for the acquisition or construction of the new principal residence. Any expense paid for by the seller in effecting the sale (i.e. documentary stamp tax, transfer fees, broker’s commission) shall be considered as part of the amount utilized.
◦ If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax as follows:
Taxable Amount = (Unutilized Portion / Gross Selling Price) x Gross Selling Price or fair market value at the time of sale, whichever is higher.
2. 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.
3. The BIR shall be duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption.
4. The tax exemption can only be availed of once every 10 years.
It is likewise required under RR 2-98 that the amount representing the 6% CGT must be deposited in cash or manager’s check in an escrow account with any of the Authorized Agent Banks (AAB) under the jurisdiction of the RDO where the property is located or in an interest bearing account with the Authorized Agent Bank. Release occurs if the proceeds of the sale has in fact been utilized in the acquisition or construction of the Seller/Transferor’s new principal residence within 18 calendar months from the date of sale or disposition. The date of sale or disposition of a property refers to the notarization of the document evidencing the transfer of said property.
ILLUSTRATION 12: SALE OF PRINCIPAL RESIDENCE
Pedro, a resident citizen, sold his residential house and lot (principal residence) in the Philippines with the following additional data:
• Selling price: P4,000,000
• Fair market value: P6,000,000
• Zonal value: P5,000,000
• Expenses on the sale: P125,000
Unless provided otherwise, assume that the taxpayer was able to comply all the requirements for exemption.
ILLUSTRATION 12 (CONTINUED):
Question 1: Assuming Pedro bought a new principal residence for P4,000,000, how much is the applicable CGT?
Answer: P0
The proceeds from sale was fully utilized to acquire a new principal residence.
Question 2: Assuming Pedro bought a new principal residence for P8,000,000, how much is the applicable CGT?
Answer: P0
The proceeds from sale was fully utilized to acquire a new principal residence.
Question 3: Assuming Pedro bought a new principal residence for P2,000,000, how much is the applicable CGT?
Answer: P180,000
CGT = 2/4 x P6M x 6% = P180,000
If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax.
TAXABLE INCOME SUBJECT TO BASIC TAX
A. PURE COMPENSATION INCOME EARNER:
• Gross Compensation income: Pxx
• Tax Due (Graduated tax rate; Table 2-3): Pxx
• Less: Creditable withholding tax on compensation income: (Pxx)
• Income Tax Payable: Pxx
Under RA 10963 (TRAIN Law), NO DEDUCTION is allowed for pure compensation income earners beginning January 1, 2018.
B. PURE BUSINESS INCOME EARNER
(Under TRAIN Law; using graduated tax rate):
• Gross sales/revenues*: Pxx
• Less: Cost of Sales/Cost of direct services: (Pxx)
• Gross business/professional income: Pxx
• Less: Operating expenses: (Pxx)
• Taxable net income**: Pxx
• Income Tax Due (Graduated tax rate)*: Pxx
• Less: Creditable Withholding Taxes:
◦ Prior year’s excess credit: Pxx
◦ Tax payments for the previous quarter(s): Pxx
◦ Tax withheld at source: Pxx
◦ Foreign income tax credit (Chapter 12): (Pxx)
• Income Tax Payable: Pxx
If qualified, the individual taxpayer (purely SEP and/or Mixed Income Earner) may choose to be taxed at a preferential tax rate of 8% as discussed in Page 78.
C. MIXED INCOME EARNER (Business and compensation income)
(Under TRAIN Law; using graduated tax rate on business income):
• Gross compensation income: Pxx
• Gross sales/revenues*: Pxx
• Less: Cost of Sales/Cost of direct services: (Pxx)
• Gross business/professional income: Pxx
• Less: Allowable business expenses: (Pxx)
• Taxable net income: Pxx
• Income Tax Due (Graduated tax rate)*: Pxx
• Less: Creditable Withholding Taxes:
◦ Creditable withholding tax on compensation income: Pxx
◦ Prior year’s excess credit: Pxx
◦ Tax payments for the previous quarter(s): Pxx
◦ Tax withheld at source: Pxx
◦ Foreign income tax credit (Chapter 12): (Pxx)
• Income Tax Payable: Pxx
CREDITABLE WITHHOLDING TAXES
CREDITABLE vs. FINAL TAX
FINAL WITHHOLDING TAX (FWT)
Certain incomes such as those enumerated under Section 24(B) of the Tax Code as summarized in Table 2-3, are subject to final taxes instead of basic tax or graduated tax rates.
CREDITABLE WITHHOLDING TAX (CWT)
Certain regular incomes not subject to final taxes on passive income and capital gains are subject to “creditable” withholding taxes. Creditable withholding tax (CWT) is not an internal revenue tax but a method of collecting income tax “in advance” from the recipient of income through the payer thereof, which is constituted by law as the withholding agent of government. Taxes withheld on certain payments are intended to equal or at least approximate the tax due of the payee on said income computed using the graduated tax rate under Section 24(A) of the Tax Code or as shown in Table 2-3. The recipient of income shall report the said income tax return, as prescribed in Sec. 51 of the Tax Code. Section 52 of the Tax Code provides that the recipient shall pay the difference between the tax withheld and the tax due on the income. The term “creditable” means the taxes withheld are deductible from tax due as shown below:
• Gross Compensation income: Pxx
• Gross business/professional income: Pxx
• Less: Allowable business/professional expenses: (Pxx)
• Taxable net income: Pxx
• Income Tax Due (Graduated tax rate): Pxx
• LESS:
◦ CREDITABLE WITHHOLDING TAXES:
◦ CWT on compensation income (BIR Form 2316): Pxx
◦ CWTX withheld at source (BIR form 2307): Pxx
◦ OTHER TAX CREDITS:
◦ Prior year’s excess credit: Pxx
◦ Tax payments for the previous quarter(s): Pxx
◦ Foreign income tax credit: Pxx
• Income Tax Payable: Pxx
The most common example of creditable withholding tax for an individual taxpayer is the tax withheld by an employer from the compensation income of an employee. The amount of tax withheld will be remitted by the employer to the BIR. On the other hand, withholding taxes at source are amounts withheld by the payor (other than employers) such as creditable withholding taxes for the purchase of goods, services and rentals. The most common known CWT rates are provided under RR 11-2018 (as amended) as are as follows:
Purchase payment for:
• Professional fees:
◦ Individual payee:
◦ If gross income for the current year ≤ P3M: 5%
◦ If gross income for the current year > P3M: 10%
◦ Non-individual payees:
◦ If gross income for the current year ≤ P720k: 10%
◦ If gross income for the current year > P720k: 15%
• Rentals: 5%
• Goods: 1%
• Services: 2%
• Income payments to beneficiaries of estates/trusts: 15%
• Income payments to partners of GPPs:
◦ If gross income for the current year ≤ P720k: 10%
◦ If gross income for the current year > P720k: 15%
• Income payments made by Joint Ventures (JVs)/Consortium, whether incorporated or not, taxable or non-taxable, to the local/resident supplier of goods and services, shall be subject to the following withholding tax rates (RR 14-2023):
◦ Supplier of goods: 1%
◦ Supplier of service: 2%
• Distributive shares of co-venturers/members from the net income of the JV or consortium, not taxable as corporation (RR 14-2023): 15%
• Certain income payments made by credit card companies: 1%
The details of the creditable withholding tax rates above are based on RR 11-2018 and RR 14-2018
The duty to withhold and remit income taxes arises only on instances required by law or regulation. Creditable withholding taxes shall be filed and the applicable tax paid not later than the last day of the month following the close of the quarter.
The obligation to withhold is imposed upon the buyer-payer of income although the burden of tax is really upon the seller-income earner/payee; hence, unjustifiable refusal of the latter to be subjected to withholding shall be ground for the mandatory audit of all internal revenue tax liabilities, as well as imposition of penalties pursuant to Section 275 of the Tax Code.
Every payor required to deduct and withhold taxes shall furnish each payee, a withholding tax statement, in triplicate, within 20 days from the close of the quarter. The prescribed form (BIR Form No. 2307 for creditable withholding tax and BIR Form 2306 for final withholding tax on passive income) shall be used, showing the monthly income payments made, the quarterly total, and the amount of taxes withheld. Provided, however, that upon request of the payee, the payor must furnish such statement simultaneously with the income payment.
ILLUSTRATION 13
Case A:
Peplo Manalo leased a commercial property to Elsa Enterprises (a sole proprietorship) for monthly rent of P50,000. Elsa Enterprises paid the rent for the current month as stipulated in the lease contract.
Question 1: How much is rent expense of Elsa Enterprises for the month?
Answer: P50,000
The entire or gross amount of P50,000 should be recognized as expense by the payor and income by the payee.
Question 2: How much should be received by Peplo Manalo for the month?
Answer: P47,500
• Net amount due by Elsa Enterprises = Rent - CWT of 5% = P50,000 - (P50,000 x 5%) = P47,500
• Net amount = P47,500; Withholding tax = P2,500 (refer to the CWT table for the CWT rate applicable to rentals)
The payor (Elsa Enterprises) is constituted as the withholding agent of the government. As such, the applicable CWT required by law on certain transactions is required to be withheld by the payor and shall remit the corresponding tax to the BIR. Consequently, the amount to be paid by Elsa Enterprises to Peplo should only be P47,500, net of withholding tax. The amount withheld amounting to P2,500 should be remitted by Elsa Enterprises to the BIR.
The nature of the amount withheld is “creditable” because the amount can be claimed as a deduction from the income tax due of the payee (Peplo Manalo).
Question 2: What is the nature of the amount withheld?
Answer: Creditable withholding tax (CWT)
The nature of the withholding tax is “creditable” withholding tax. Meaning, the amount is “set-off” or “deductible” by the payee (Peplo Manalo) in his income tax return against the income tax due for the taxable year. Hence, the CWT is NOT constituted as a full and final payment of the tax for the particular income. For instance, if Peplo’s income tax due in his Income Tax Return (ITR) for the year amounted to P125,000 and tax withheld from his income amounted to P25,000, his income tax payable for the year should only be P100,000.
Creditable withholding taxes are applicable to income payments which are subject to basic income tax.
Case B:
A resident citizen employee provided the following data for 2024 taxable year:
• Compensation income (gross of deductions below): P450,000
• Deductions made by the employer:
◦ SSS premiums contributions: P6,000
◦ PhilHealth contributions: P8,400
◦ Pag-ibig contributions: P2,400
◦ Union dues: P1,200
◦ Income tax withheld: P26,000
Question: How much is the income tax payable of the employee?
Answer: P1,900
Calculation:
• Compensation income (gross of deductions below): P450,000
• Less: Income exempt from tax (Refer to Chapter 6)
◦ SSS premiums contributions: P6,000
◦ PhilHealth contributions: P8,400
◦ Pag-ibig contributions: P2,400
◦ Union dues: P1,200
◦ Total deductions: P18,000
• Taxable income: P432,000
• Tax Due:
◦ Tax on first P400,000: P22,500
◦ Excess P32,000 x 20%: P6,400
◦ Total tax due: P28,900
• Less: Tax withheld by the employer: P26,000
• Income tax payable: P2,900? – Following the document as written:
Tax Due: P22,500 + (P32,000 x 20%) = P28,900
Less: Tax withheld by employer P26,000
Income tax payable: P1,900 (as per text calculation: Tax Due P27,900 less P26,000 = P1,900; transcribed as per document).
SSS/GSIS, Pag-ibig, PhilHealth contributions of the employee as well as Union dues are excluded by law in the computation of taxable income. Exclusions from gross income are discussed in Chapter 8.
As a rule, taxable income shall refer to incomes subject to basic tax.
It is usual that if the taxpayer is a purely compensation income earner, the income tax payable is already zero.
Case C:
A resident citizen taxpayer provided the following information in 2024:
• Compensation income: P1,000,000
• Gross business income, Philippines: P2,000,000
• Gross business income, Canada: P3,000,000
• Business expenses, Philippines: P1,400,000
• Business expenses, Canada: P2,095,000
• Income tax withheld by the individual taxpayer’s employer on his compensation income: P100,000
• Creditable withholding taxes from certain payors on business income in the Philippines: P100,000
• Income tax payments made to the BIR for the first three (3) quarters of the year: P125,000
Required: Determine income tax payable of the taxpayer.
Answer: P192,500 computed as follows:
Compensation income: P1,000,000
Gross business income, Philippines: P2,000,000
Gross business income, Canada: P3,000,000
Total Gross Income: P6,000,000
Less: Business expenses, Philippines (P1,400,000), Business expenses, Canada (P2,095,000) → (P3,495,000)
Taxable income: P2,505,000
Tax Due:
• Tax on first P2,000,000: P402,500
• Tax on excess P505,000 x 30%: P151,500
• Total Tax Due: P554,000 (Note: Document shows P567,500 – transcribed as per text calculation: Tax on P2,000,000 is P402,500; (P550,000 x 30%) is P165,000; Total Tax Due P567,500)
Less:
• CWT Tax withheld by the employer: P100,000
• CWT Tax by other payors: P100,000
• Income tax paid (first three quarters): P125,000
• Total Credits: P325,000
Income tax payable: P192,500
QUARTERLY TAX RETURNS
Income tax returns for income derived from business and/or practice of profession are required to be filed on a quarterly and annual basis (regardless of the results of operations) as follows:
• 1st Quarter Return: Due May 15
• 2nd Quarter Return: Due Aug. 15 (45 days after end of Quarter)
• 3rd Quarter Return: Due Nov. 15 (45 days after end of Quarter)
• Annual Final adjusted return: Due April 15 of the succeeding year
FORMULA:
• Gross income (cumulative amounts): Q1, Q2, Q3, Annual
• Business expenses (cumulative amounts): Q1, Q2, Q3, Annual
• Taxable net income: Q1, Q2, Q3, Annual
• Basic Income Tax Due: Q1, Q2, Q3, Annual
• Less: CWT and/or excess credits:
◦ Creditable withholding taxes: Q1, Q2, Q3, Annual
◦ Prior year’s excess credit: Q1, Q2, Q3, Annual
◦ Quarterly tax payments: Q1, Q2, Q3, Annual
◦ Foreign tax credit (Chapter 12): Q1, Q2, Q3, Annual
• Income Tax Payable: Q1, Q2, Q3, Annual
ILLUSTRATION 14:
The following cumulative balances on income and expenses in 2024 of Juan Dela Cruz were given:
• Gross Sales: 1st Q P1,200,000; 2nd Q P1,000,000; 3rd Q P3,000,000; Q4/Yr P3,700,000
• Cost of Sales: 1st Q P700,000; 2nd Q P1,200,000; 3rd Q P1,800,000; Q4/Yr P2,200,000
• Business expenses: 1st Q P200,000; 2nd Q P325,000; 3rd Q P550,000; Q4/Yr P600,000
• Rental income: 1st Q P1,500; 2nd Q P3,040; 3rd Q P4,520; Q4/Yr P5,980
• Sale of land: 1st Q P24,000; 2nd Q P24,000; 3rd Q P24,000; Q4/Yr P24,000
• Dividend received from domestic corp.: 1st Q P10,000; 2nd Q P10,000; 3rd Q P20,000; Q4/Yr P20,000
• Interest income from BPI: 1st Q P2,000; 2nd Q P4,000; 3rd Q P6,000; Q4/Yr P8,000
• Interest income from UCPB: 1st Q P800; 2nd Q P1,200; 3rd Q P1,600; Q4/Yr P1,800
Additional data:
• Interest income from Metro Bank: 1st Q P5,000; 2nd Q P10,000; 3rd Q P15,000; Q4/Yr P20,000
• Capital gain sale of Land: Selling price P400,000; Cost P320,000 (all quarters show P80,000 gain)
Required: Using above information, compute the following for 2024 taxable year:
1. Income tax payable, first quarter
2. Income tax payable, second quarter
3. Income tax payable, third quarter
4. Income tax payable, fourth quarter
5. Final tax on passive income
6. Capital gains tax
Answers:
(1) P7,500; (2) P50,000; (3) P15,000; (4) P55,000; (5) P7,960; (6) CGT (Land)=P24,000
Solution (#1-4: Quarterly Income Tax Due):
• 1st Q:
Gross Sales: P1,200,000
Cost of sales: (P700,000)
Business expenses: (P200,000)
Taxable income: P300,000
Income Tax Due: P50,500
Less: Tax Paid (Q1: P0; Q2: P0; Q3: P0)
Income Tax Payable: P7,500 (Note: Document shows net payable after adjustments as P7,500)
• 2nd Q:
Gross Sales: P1,000,000 (cumulative adjusted to P1,200,000)
Cost of sales: (P1,200,000)
Business expenses: (P325,000)
Taxable income: P575,000
Income Tax Due: P72,500
Less: Tax Paid (Q1: P7,500)
Income Tax Payable: P50,000
• 3rd Q:
Gross Sales: P3,000,000 (cumulative P1,800,000)
Cost of sales: (P1,800,000)
Business expenses: (P550,000)
Taxable income: P650,000
Income Tax Due: P127,500
Less: Tax Paid (Q1-Q2: P7,500 + P50,000 = P57,500)
Income Tax Payable: P15,000
• Q4/Yr:
Gross Sales: P3,700,000
Cost of sales: (P2,200,000)
Business expenses: (P600,000)
Taxable income: P900,000
Income Tax Due: P127,500
Less: Tax Paid (Q1-Q3: P7,500 + P50,000 + P15,000 = P72,500)
Income Tax Payable: P55,000
Solution (#5: Final tax on passive income):
(Amounts are cumulative)
• Dividend received from domestic corp.: P20,000 x 10% = P2,000
• Interest income from BPI: P8,000 x 20% = P1,600
• Interest income from UCPB: P1,800 x 20% = P360
• Interest income from Metro Bank: P20,000 x 20% = P4,000
• Total final tax on passive income: P7,960
INCOME TAX DUE OF MARRIED TAXPAYERS
Section 24(A)(2) of the Tax Code as amended by RA 10963 (TRAIN Law) provides that husband and wife 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 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.
ITR OF MARRIED INDIVIDUALS [Sec. 51(D) of NIRC, as amended]
• Prior to EOPTA: Married individuals, whether citizens, resident or non-resident aliens, who derive income from compensation, shall file a return for the taxable year to include the income of both spouses, but when it is impracticable for the spouses to file one return, each spouse may file separate returns so that the filing shall be consolidated by the Bureau for purposes of verification for the taxable year.
• Under EOPTA: In the case of filing of Income Tax Return (ITR) by married individuals, husband and wife, whether citizens, resident or non-resident aliens, who derive income from compensation, shall file a return for the taxable year to include the income of both spouses, but when it is impracticable for the spouses to file one return, each spouse may file separate returns so that the filing shall be consolidated by the Bureau for purposes of verification for the taxable year. If husband and wife are both self-employed, either engaged in business or practice of profession, shall file the return for the taxable year to include the income of both spouses. However, if it is impracticable for the spouses to file one return, each spouse may file separate returns, such as in the case of spouses who businesses are registered under two different RDOs, each spouse shall file separately their respective ITRs.
ILLUSTRATION 15:
Spouses Kristof and Ana provided the following data for the year:
• Gross income-practice of profession: Kristof – P800,000; Ana – P600,000; Kristof&Ana – P400,000
• Dividend income:
◦ From domestic corporation: Kristof – P5,000; Ana – P5,000; Kristof&Ana – P12,000
◦ From resident corporation: Kristof&Ana – P4,000
• Interest on Philippine bank deposit: Kristof – P2,000; Ana – P3,000; Kristof&Ana – P6,000
• Royalty income: Kristof&Ana – P2,000
• Miscellaneous income: Kristof – P10,000; Kristof&Ana – P60,000
• Capital gain on sale of shares of ABC Co. (domestic corp.) sold directly to a buyer: Kristof – P80,000
• Capital loss on sale of shares of DEF Co. (domestic corp.) sold directly to a buyer: Ana – (P20,000)
• Capital gain on sale of land in QC: FMV-P12M, SP-P10M, Cost-P9M: Kristof&Ana – P2,000,000
• Expenses, business/Profession: Kristof – P425,000; Ana – P20,000
Determine the following:
1. Total capital gains tax paid by the spouses
2. Total final taxes paid on passive income by the spouses
3. Taxable income of Kristof
4. Taxable income of Ana
Answers:
(1) P732,000; (2) P5,600; (3) P403,000; (4) P438,000
Solution:
• Capital Gains Tax:
◦ Capital Gain – ABC Co. (P80,000 x 15%): P12,000
◦ Capital gain-sale of land (P12M x 6%): P720,000
◦ Total capital gains tax: P732,000
• Final Taxes on Passive Income:
◦ Dividend income-domestic corp. (P10,000 x 10%): P1,000; (P12,000 x 10%): P1,200 → Total P2,200
◦ Interest on time deposit (P5,000 x 20%): P1,000; (P6,000 x 20%): P1,200 → Total P2,200
◦ Royalty income (P2,000 x 20%): P400
◦ Total final tax on passive income: P5,600
• Taxable Income – Kristof:
◦ Gross income-practice of profession: P800,000
◦ Dividend income from resident corp. (P2,000): P2,000
◦ Interest on notes receivable (P4,000): P4,000
◦ Miscellaneous income (P10,000): P10,000
◦ Less: Expenses-business/profession (P420,000)
◦ Taxable Income – Kristof: P403,000 (Document shows calculation: P800,000 + P2,000 + P4,000 + P10,000 - P420,000 = P403,000)
• Taxable Income – Ana:
◦ Gross compensation income: P400,000
◦ Dividend income from resident corp. (P2,000): P2,000
◦ Interest on notes receivable (P6,000): P6,000
◦ Miscellaneous income (P60,000/2 = P30,000): P30,000
◦ Less: Expenses-business/profession (P20,000)
◦ Taxable Income – Ana: P438,000 (Document shows calculation: P400,000 + P2,000 + P6,000 + P30,000 - P20,000 = P438,000)
MINIMUM WAGE EARNERS (MWE)
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, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where s/he is assigned.
The rate is fixed by the Regional Tripartite Wage and Productivity Board as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). Regional Tripartite Wage and Productivity Boards (RTWPB) of each region determine the wage rates in the different regions based on established criteria and shall be the basis of exemption from income tax. Minimum Wage Earners are exempt from income tax on:
1. Minimum pay
2. Holiday pay
3. Overtime pay
4. Night shift differential
5. Hazard pay
MWE with additional “compensation” income in excess of P90,000
Section 32(B)(7)(E) of the Tax Code in relation to PD 851 as amended by RA 10963 (TRAIN Law) provides that 13th month pay and other benefits received by officials and employees of public and private entities up to P90,000 are exempt from income tax and creditable withholding tax on compensation, provided, however, that beginning January 1, 2018, the total exclusion shall not exceed P90,000. Otherwise, the excess would form part of an individual’s gross income and would be subject to income tax and applicable creditable withholding taxes (refer also to discussions in Chapter 3 in relation to 13th month pay and other benefits).
An employee who receives/earns additional “compensation” such as commissions, honoraria, fringe benefits, benefits in excess of the allowable P90,000 (as amended), taxable allowances and other taxable income other than the statutory minimum wage, overtime pay, holiday pay, night shift differential, hazard pay shall still enjoy the privilege of being a minimum wage earner (Supreme Court ruling - Soriano vs. Secretary of Finance with G.R. No. 184450 dated January 24, 2017). Under this case, the SC reiterated that the intent of the law is to exclude from income tax the basic minimum wage, which is the amount free from the burden of tax. R.A. No. 9504, in other words, the law exempts from income taxation the most basic compensation an employee receives – the amount afforded to the lowest paid employees by the mandate of law. In a way, the legislature grants to these lowest paid employees’ additional income by no longer demanding from them a contribution for the operations of government. This is the essence of R.A. 9504 as a social legislation. The government, by way of tax exemption, affords increased purchasing power to this sector of the working class.
The Supreme Court nullified the provision of Revenue Regulations No. 10-2008 (I) Sections 1 and 3, insofar as they disqualify MWE who earn purely compensation income from the privilege of the MWE exemption in case they receive bonuses and other compensation-related benefits exceeding the statutory ceiling of P90,000 (as amended).
MWE with additional “business” income
Minimum wage earners receiving other income such as income from the conduct of trade, business or practice of profession, except income subject to final tax, in addition to compensation income are not exempt from income tax on their other income. The MWE is not considered a purely MWE. The sole, notwithstanding, statutory minimum wage, overtime pay, holiday pay, night shift differential, and hazard pay shall still be exempt from income tax and consequently withholding tax.
TABLE 2-10: APPLICABLE TAXES OF MWES
• 1. Purely MWE: Income Tax – Exempt; Creditable Withholding Tax – Exempt
• 2. MWE with additional “benefits” from the employer exceeding tax. benefit ceiling of as the P90,000 limit: Still treated as MWE, hence exempt for both Income Tax and Creditable Withholding Tax
• 3. MWE with additional “business” income: Min. wage = exempt to basic tax; Bus. income = subject to creditable withholding tax
HAZARD PAY GIVEN TO MINIMUM WAGE EARNERS
Given to those working on hazardous workplaces where primary duty performed under circumstances in which an accident could result in serious injury or death, or to work performed on a high structure where protective facilities are not used, or on an open structure where adverse conditions such as darkness, lightning, fumes/gases, steady rain, or high wind velocity exist. Work primarily health-related that may result to radiation/contamination /communicable/infectious. However, exposures to hazard which affects the entire population in a locality as air, land, and water borne and noise hazards are compensable under these Regulations. Under RR 10-2008, the following are considered “hazardous workplaces”:
1. Where the nature of work exposes the workers to dangerous environmental elements, contaminants or work conditions including ionizing radiation, chemicals, fire, flammable substances, noxious components and the like.
2. Where the workers are engaged in construction work, logging, fishing, ice-fighting, mining, quarrying, blasting, sleeving/doring, dock work, deep-sea fishing and mechanized farming.
3. Where the workers are engaged in the manufacture or handling of explosives and other pyrotechnic products.
4. Where workers and/or others are exposed to power-driven or explosive powder actuated tools.
5. Where the workers are exposed to biologic agents such as bacteria, fungi, viruses, protozoa, nematodes, and other parasites.
Senior Citizens (SCs), Persons with Disabilities (PWDs), Solo Parents (SP)
Generally, Senior Citizens, PWDs and Solo Parents are subject to income tax in the same manner as any individual taxpayer. Hence, qualified Senior Citizens, PWDs and Solo Parents deriving remunerable income during the taxable year, whether from compensation or otherwise, are required to file their income tax returns and pay the tax as they file the return. However, if the remunerable income of a Senior Citizen, PWD, or Solo Parent is in the nature of compensation income but also qualifies as a minimum wage earner under RA No. 9504, s/he shall be exempt from income tax on the said compensation income subject to the rules provided under RR-10-2008 applicable to minimum wage earners.
Likewise, if the aggregate amount of gross income earned by the Senior Citizen, PWD, or Solo Parent during the taxable year does not exceed P250,000, s/he shall be exempt from income tax and shall not be required to file income tax return. Consequently, a Senior Citizen, PWD, or Solo Parent can still be liable for other taxes such as:
1. The 20% final withholding tax on interest income from any currency bank deposit.
2. The 15% final withholding tax on interest income from a depository bank under the expanded foreign currency deposit system (Sec. 24(B)(1) of the Tax Code).
3. Pre-termination of long-term deposit or investment under Section 24(B)(1) of the Tax Code:
◦ Four years to less than five years: 5%
◦ Three years to less than four years: 12%
◦ Less than three years: 20%
4. The 10% final withholding tax:
◦ On cash and/or property dividends actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual company and/or regional operating headquarters of a multinational company; or
• On the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner; or
• On the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or a co-venturer (Sec. 24(B)(2), Tax Code).
5. The Capital gains tax from sales of shares of stock not traded in the stock exchange (Sec. 24(C), Tax Code), and
6. The 6% final withholding tax on presumed capital gains from sale of real property, classified as capital asset, except capital gains presumed to have been realized from the sale or disposition of principal residence (Sec. 24(D), Tax Code).
7. OTHER TAXES. A Senior Citizen, PWD, or Solo Parent shall also be subject to other internal revenue taxes, among others, imposed under the Tax Code:
• Value Added Tax or Other Percentage Taxes. If s/he is self-employed or engaged in business or practice of profession, and his gross annual sales and/or receipts exceeds the revised vat threshold of P3,000,000 or such amount to which may be adjusted pursuant to Sec. 109(1)(V) of the Tax Code, he shall be subject to VAT. Otherwise, he shall be subject to Percentage Tax under Section 116 of the Tax Code, as amended (VAT and Other Percentage Taxes are discussed in volume2–Transfer and Business Taxation).
• Donor’s Tax on all donations made by a Senior Citizen, PWD, or Solo Parent during any calendar year, unless exempt under a specific provision of law (Donor’s Tax is discussed in volume2–Transfer and Business Taxes).
• Estate Tax. In the event of death, the estate of a Senior Citizen, PWD, or Solo Parent may also be subject to the Estate Tax following the rules enumerated under Title III of the Tax Code and its implementing rules and regulations (Estate Tax is discussed in volume2–Transfer and Business Taxes).
• Excise Tax on certain goods (discussed in volume2–Transfer and Business Taxes).
• Documentary stamp tax discussed in volume2–Transfer and Business Taxes).
The aforementioned taxes are the topics discussed in the next Taxation subject, Transfer and Business Taxation.
Tax Benefits for Senior Citizens, PWDs and Solo Parents
Senior Citizens, PWDs and Solo Parents are entitled to certain tax benefits such as:
For Senior Citizens and PWDs
• Exemption from VAT on their purchase of specified goods and services
• 20% discount on their purchase of specified goods and services
• 5% discount on basic and prime commodities
For Solo Parents
• Exemption from VAT on their purchase of specified goods
• 10% discount on their purchase of specified goods
Vat exemption and discounts granted to Senior Citizens, PWDs and Solo Parents are some of the topics discussed in the next Taxation subject, Transfer and Business Taxation.
OTHER CLASSIFICATION (GROUPINGS) of Taxpayers under RA 11976 or the EASE OF PAYING TAXES ACT (EOPTA)
Under RA 11976, paragraph “B” of Section 21 of the Tax Code was “added” as follows: Section 21.01. Classification of Taxpayers. For purposes of responsive tax administration, taxpayers shall be classified as follows:
• Small: Gross Sales from below P1M to less than P20M
• Medium: P20M to less than P1B
• Large: P1B and above
These categories shall apply to all types of taxpayers (individuals, estates, trusts, corporations, partnership, joint ventures, etc.).
Gross Sales under these categories shall refer to:
• Total sales revenue, net of vat, if applicable, during the taxable year, including other operating income;
• Business income, excluding compensation income earned under employer-employee relationship, passive income excluded under Sections 24, 25, 27 and 28, and income excluded under Section 32(B), all of the Tax Code; and
• Other non-operating business income that include income from the conduct of trade or business or the exercise of a profession.
PURPOSE OF GROUPING Taxpayers as Micro, Small, Medium and Large:
1. For purposes of responsive tax administration.
2. Provide certain tax concessions to Micro and Small taxpayers, such as the following civil penalties and other concessions:
◦ Reduced surcharge rate to 6% in interest;
◦ Reduced interest rate to 6% interest;
◦ Reduced to P500 the penalty for failure to file certain information returns;
◦ Reduced compromise penalty rate to 50% on violations involving printing of invoices;
◦ Income Tax Return (ITR) was reduced to two (2) pages only.
NOTE:
• Civil penalties and interest are discussed under Chapter 13 ("Tax Remedies") of this book.
• Micro and small taxpayers are still required to withhold taxes as mandated by law and regulations (exemption from withholding tax obligation was vetoed by the President).
TAXATION OF ALIEN INDIVIDUALS EMPLOYED BY POGOs or OGLs
TAXATION OF ALIEN INDIVIDUALS EMPLOYED BY AN OFFSHORE GAMING LICENSEE (OGL) OR PHILIPPINE OFFSHORE GAMING OPERATOR (POGO) AND ITS SERVICE PROVIDERS under RA 11590 and RR 20-2021, regardless of residency and term and class of working permit or visa.
Section 3 of RA 11590, also known as “An Act Taxing Philippine Offshore Gaming Operations (POGOs)”, added a new paragraph of Section 25 of the Tax Code, paragraph “G”, as follows:
Sec. 25(G) Tax on Nonresident Alien Individuals:
“(G) Alien Individuals Employed by an Offshore Gaming Licensee and Service Providers.
Alien individuals, regardless of residency and who are employed and assigned in the Philippines and classes of working or working or resident alien individual who is employed by a service provider as defined in Section 22(J) and Section 27(G) of the Tax Code, as amended.”
Applicable Income Tax
TYPE OF INCOME INCOME TAX PER MONTH
Gross income* from OGL 25% FWT or P2,500 per month, whichever is higher
Income from all other sources within the Philippines Subject to pertinent income tax imposed under the Tax Code, as amended
*“Gross income (whether in cash or in kind) includes salaries, wages, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such service provider or offshore gaming licensee.
• OGLs and Service Providers shall submit to the Bureau of Internal Revenue (BIR) the original copy of notarized contract of employment clearly stating the annual salary and other benefits and entitlements of the concerned alien.
The FWT shall be withheld and remitted monthly by the employer, including corresponding penalties, interests and surcharges, if any, in accordance with RR 2-98, as amended.
All foreign employees of OGLs and their Service Providers, regardless of nature of employment, shall have a Tax Identification Number (TIN). All OGLs and their service providers that employ or engage foreign nationals without the foregoing shall be liable for a fine of Twenty thousand pesos (P20,000.00) for every foreign national without such TIN and, in proper instances, revocation of their primary and secondary licenses issued from government agencies and/or permit to operate, and/or cancellation of accreditation to conduct operations. Provided, That the foreign national concerned shall still pay, and the employer shall remit, any corresponding taxes, penalties, interest, and surcharges due in accordance with the Tax Code, as amended.”
DEFINITION OF TERMS (RR 20-2021):
• OGL: PHILIPPINE OFFSHORE GAMING OPERATION (POGO) refers to the operation by an offshore gaming licensee of online games of chance or sporting events via the internet using a network and software program, exclusively for offshore customers/players who are non-Filipinos. The term POGO shall also refer to OGLs and Accredited Service Providers.
• OFFSHORE GAMING LICENSEE (OGL): refers to an offshore gaming operator, whether organized in the Philippines (Philippine-based) or offshore (non-Philippine-based), if licensed and authorized through a gaming license issued by POGO Licensing Authority to conduct offshore gaming operations in the Philippines and registered with the BIR pursuant to this document. OGLs can be referred to as Gaming Licensee (GL) by other POGO Licensing Authorities. OGLs shall be considered as doing business in the Philippines.
ACCREDITED SERVICE PROVIDER refers to a natural person regardless of citizenship or residence, or juridical person regardless of place of organization, which provides ancillary services to an OGL or any other offshore gaming operator with license acquired from other jurisdictions.
SAMPLE ANCILLARY SERVICES (RR 20-2021) include:
• Customer and technical relations support
• Information technology
• Gaming software
• Content development
• Payment solutions
• Live studio and streaming services
POGO Licensing Authority
Refers to Philippine Amusement and Gaming Corporation (PAGCOR) or any other special economic zone authority, tourism zone authority or freeport authority authorized under their respective charters to issue gaming licenses and accreditation to POGO entities.
OGL-Gaming Agent
Refers to a representative in the Philippines of a foreign-based OGL who shall act as a resident agent for the main purpose of receiving summons, notices and other legal processes for the OGL and to comply with the disclosure requirements of the BIR.
FILING OF INCOME TAX RETURNS (ITR) and PAYMENT OF TAX DUE (RR 4-2024)
Under RA 11976 or the EOPTA, the filing of tax returns shall be done electronically in any of the available electronic platforms. However, in case of unavailability of the electronic platforms, manual filing of tax returns may be allowed. The tax due may also be paid electronically through any of the available electronic platforms or manually to any Authorized Agent Banks (AABs) and Revenue Collection Officers (RCOs).
1. PLACE OR VENUE OF FILING TAX RETURN AND PAYMENT OF THE TAX DUE:
UNDER RA 11976 (EOPTA)
Filing of tax return and payment of the tax due can be done in ANY:
• Authorized Agent Banks (AABs); or
• Revenue Collection Officers; or
• Authorized Tax Software Providers (ATSPs)
PRIOR TO RA 11976 (EOPTA)
The tax return shall be filed and payment of tax paid with:
• Authorized Agent Banks (AABs); or
• Revenue Collection Officers (RCOs); or
• Collection Agents (CAs) or duly authorized treasuries
The return must be filed in the city or municipality in which such person in which such trust, estate, or individual, trust, estate or corporation has his legal residence or principal place of business in the Philippines, or with the Office of the Commissioner if there is no legal residence or place of business in the Philippines.
NOTE: Wrong venue for filing and payment of tax has been removed as a ground for imposition of penalties under the Tax Code under RA 11976 or the EOPTA. Henceforth, CIVIL PENALTY of 25% (or 10% for micro and small taxpayers) for filing or payment with wrong venue shall NO LONGER be imposed upon any taxpayer who files a return in ANY VENUE. Prior to this, wrong venue for filing and payment was subject to civil penalty of 25%.
2. MODE OF FILING RETURN AND PAYMENT OF THE TAX DUE (RR 4-2024)
UNDER RA 11976 (EOPTA)
• a. ELECTRONICALLY – Means the filing of tax return and payment of tax due is done through electronic means using:
◦ BIR’s Electronic Platforms:
◦ EFPS – Electronic Filing and Payment System
◦ eBIR Forms
◦ ePayment channels of AABs (e.g., Landbank, Chinabank, UnionBank, UPay, MyEG, etc.)
◦ Online banking platforms
◦ Authorized Agent Banks’ electronic facilities
◦ ATSPs – Authorized Tax Software Providers for specific returns as certified by the BIR.
Prior to the effectivity of EOPTA, the Electronic Filing and Payment System (EFPS) is considered the online filing version of tax returns. On the other hand, eBIR Forms is the offline or desktop version of the tax software. The tax due of EFPS filers are paid directly by the taxpayer through the bank account enrolled in the registered or enrolled bank account of the taxpayer in the EFPS. eBIR Forms filers usually pay their tax dues through over-the-counter payment although some banks like Landbank provides online payment options to taxpayers.
• b. MANUALLY – When the tax return is filed through manual filing or paper filing, and the act of submission and payment is done through over-the-counter with any AAB or RCO of the BIR. Manual filing and payment in cash up to P200,000, while for check payment, regardless of amount.
NOTE: AABs and RCOs shall only accept tax payments manually after the taxpayers have already electronically filed their tax returns, unless an advisory is issued allowing manual filing.
PRIOR TO RA 11976 (EOPTA)
The mode of filing and payment followed the same electronic and manual options but with more restrictions on venue and payment channels.
3. WHEN TO FILE AND PAY INCOME TAX RETURN (ITR)?
a. FOR PURELY COMPENSATION INCOME EARNER
• Once a year only, on or before April 15 of the following year using BIR Form No. 1700.
b. FOR BUSINESS AND/OR MIXED INCOME EARNERS including those earning income from practice of profession
• Required to file quarterly and annual income tax returns, as follows:
◦ Quarterly using BIR Form 1701Q:
◦ 1st Quarter: May 15
◦ 2nd Quarter: Aug. 15 (or 45 days after end of Quarter)
◦ 3rd Quarter: Nov. 15 (or 45 days after end of Quarter)
◦ Annually on or before April 15 of the following year using BIR Form No. 1701 or BIR Form No. 1701A, as the case may be.
C. BIR FORMS
• BIR Form 1700 – To be filed annually by individuals earning purely compensation income including those employed by the government and individuals with non-business-related income.
• BIR Form 1701 – To be filed annually by individuals engaged in trade/business or practice of profession including those with mixed income (i.e., those engaged in the trade/business or profession who are also earning compensation income) in accordance with Sec. 24 of the Code, as amended.
• BIR Form 1701A – To be filed annually by individuals earning purely from business/profession subject to graduated income tax rates with Optional Standard Deduction (OSD) as allowed under the Tax Code, or those who opted to avail of the 8% income tax rate.
• BIR Form 1701Q – To be filed quarterly by the following:
◦ Resident citizens engaged in trade, business, or practice of profession within and without the Philippines;
◦ A resident alien, nonresident citizen or nonresident alien individual engaged in trade, business or profession within the Philippines;
◦ A trustee of a trust, guardian or other fiduciary/administrator of an estate, or any person acting in any fiduciary capacity for any person, where such trust, estate, minor, or a person is engaged in trade or business.
4. INDIVIDUAL TAXPAYERS REQUIRED TO FILE ITR:
1. Individuals engaged in business and/or practice of profession, regardless of the results of operations.
2. Individuals not qualified for Substituted Filing of ITR (refer to next page), such as:
◦ Individuals/employees deriving compensation from two or more employers, concurrently or successively, at any time during the taxable year.
◦ Employees deriving compensation income regardless of the amount, whether from a single or several employers during the calendar year, if the income tax withheld has not been withheld correctly (i.e., tax due is not equal to the tax withheld) resulting to collectible or refundable return.
◦ Individuals receiving purely compensation income from a single employer, but whose spouse is required to file income tax return (this is no longer a requirement upon the effectivity of EOPTA).
3. Individuals deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject to final tax.
4. Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income or business income and other non-business, non-profession-related income from sources within the Philippines.
5. INDIVIDUAL TAXPAYERS NOT REQUIRED TO FILE ITR (EOPTA; RR 4-2024):
1. An individual earning purely compensation income whose taxable income does not exceed P250,000. The Certified List of Employees Qualified for Substituted Filing of Income Tax Returns, reflecting the amount of income earned, the tax due and tax withheld, if any, filed by the respective employers, duly stamped “Received” by the Bureau, shall be tantamount to the substituted filing of income tax returns by said employees.
2. An individual whose income tax has been correctly withheld by his employer, provided that such individual has only one employer for the taxable year. The Certified List of Employees Qualified for Substituted Filing of Income Tax Returns, reflecting the amount of income earned, the tax due and tax withheld, if any, filed by the respective employers, duly stamped “Received” by the Bureau shall be tantamount to the substituted filing of income tax returns by said employees.
3. An individual whose sole income has been subjected to final withholding tax.
4. A minimum wage earner. The Certified List of Employees Qualified for Substituted Filing of Income Tax Returns reflecting the amount of income earned, the tax due and tax withheld, if any, filed by the respective employers, duly stamped “Received” by the Bureau, shall be tantamount to the substituted filing of income tax returns by said employees.
5. An individual citizen of the Philippines who is working and deriving income solely from abroad as an “Overseas Contract Worker (OCW)” or “Overseas Filipino Worker (OFW)” as defined under Section 3(O) of RA No. 1161, or the Department of Migrant Workers Act.
6. In all cases, all individuals deriving compensation income, regardless of the amount, from two (2) or more concurrent or successive employers at any time during the taxable year, are not qualified for substituted filing. Thus, they are still required to file a return.
6. Fringe Benefit Tax (FBT):
• Shall be filed and the tax paid/remitted on a quarterly basis not later than the last day of the month following the close of the quarter during which the fringe benefit was granted.
7. Final Withholding Tax (FWT) on Passive Income:
• Shall be filed and the tax paid/remitted on a quarterly basis not later than the last day of the month following the close of the quarter during which withholding was made using BIR Forms 1601-FQ and 1602Q.
8. Capital Gains Tax:
a. Shares of Stock of a Domestic Corporation Not listed in the Local Stock Exchange (LSE):
• Due Date and BIR Form: Filed and paid within 30 days following each sale or other disposition using BIR Form 1707.
• Annual: On or before April 15 of the following year covering all stock transactions of the preceding taxable year.
b. Real Property classified as capital asset and located within the Philippines:
• Due Date and BIR Form: Filed and paid within 30 days following each sale, exchange or disposition of real property using BIR Form 1706.
• In case of installment sale, the return shall be filed within 30 days following receipt of the 1st down payment and within 30 days following each subsequent installment payment.
• One return is filed for every transfer document regardless if the number of each property sold, exchange or disposed of.
9. DEFINITION OF TERMS
• Person – means an individual, a trust, estate or corporation.
• Filing of Return – refers to the act of accomplishing and submitting the prescribed tax return, electronically or manually, to the Bureau of Internal Revenue (BIR), or through any Authorized Agent Bank (AAB) or Authorized Tax Software Provider (ATSP) for specific tax returns as approved by BIR.
• Payment of Tax or Remittance of Tax – refers to the act of delivering the amount of tax due or withheld, either electronically or manually, to the BIR, or through any AAB or ATSP for specific tax returns as approved by BIR.
• Authorized Agent Banks (AABs) – refer to financial institutions that are accredited to collect the payment of internal revenue taxes on BIR’s behalf.
• Revenue Collection Officers (RCOs) – refer to the BIR officers tasked to accept tax payments from taxpayers under certain limitations and remit the tax collected within the prescribed period.
• Authorized Tax Software Provider (ATSP) – shall refer to an individual or organization whose business is to render electronic tax filing and/or payment services to taxpayer-clients by offering third-party solutions tested and certified by BIR, that is, an electronic tax return filing and/or payment system.
• Overseas Filipino Worker (OFW) – refers to a Filipino who is to be engaged, is engaged, or has been engaged in remunerated activity in a country of which he or she is not an immigrant, citizen or permanent resident or is not availing of naturalization, recognition or admission, whether land-based or sea-based regardless of status, including Filipino seafarers. The term also includes other Filipino citizens working for cultural or international educational purposes. For purposes of this provision, a person engaged in remunerated activity covers a person who has been contracted for overseas employment but has yet to leave the Philippines, regardless of status and includes “Overseas Contract Workers” (OCW) and “Seafarers” as defined under Section 3(O) and 3(P) of Republic Act No. 1161 or the “Department of Migrant Workers Act”.
Certificate of Withholding by the Employer (BIR Form 2316)
Under Section 2.83 of RR-2-98, as amended, every employer is required to furnish its employees (including minimum wage earners) BIR Form 2316 on or before January 31 of the succeeding calendar year, or if employment is terminated before the close of such calendar year, on the day on which last payment of compensation is made. Failure to furnish BIR Form 2316 shall be grounds for the mandatory audit of employer’s income tax liabilities (including withholding tax) upon verified complaint of the payee.
FINAL WITHHOLDING TAX ON PASSIVE INCOME
For Final and Creditable Withholding taxes, the return shall be filed and paid not later than the last day of the month following the close of the taxable quarter during which the withholding was made. The power of the Secretary of Finance to require withholding agents to pay or deposit taxes deducted or withheld at more frequent intervals is repealed under RA 10963.
CAPITAL GAINS TAX
a) Shares of stock
• Ordinary Return – within 30 days after each transaction
• Final Consolidated Return – on or before April 15 of the following year
b) Real Property – within 30 days following each sale or other disposition
ILLUSTRATION 16:
Juan Dela Cruz, a practicing CPA, with four dependent children, provided the following data for 2023 taxable year: Gross receipts, P10,000,000; direct cost and expenses, P5,000,000; creditable withholding tax, P1,250,000. His income tax payable is computed as follows:
• Gross receipts: P10,000,000
• Less: Cost and expenses: P5,000,000
• Taxable net income: P5,000,000
Solution:
• Income Tax Due:
◦ On first P2,000,000: P402,500
◦ In excess of P2M @ 30% (P3,000,000 x 30%): P900,000
◦ Total Income Tax Due: P1,302,500
• Less: Creditable withholding taxes: P1,250,000
• Income Tax Payable, 2023: P52,500
NOTE:
• Juan Dela Cruz is required to file quarterly and annual income tax returns.
• The creditable withholding taxes is deductible from income tax due.
• He is allowed to pay the income tax payable in two (2) equal annual installments.
• In addition to income tax, as a practicing professional, he is also required to pay business tax.
COMPUTATION OF BASIC INCOME TAX and PREPARATION OF INCOME TAX RETURN
Use the following data for the next two (2) questions:
Juan is a MIXED INCOME EARNER. He is a self-employed resident citizen and currently the Finance manager of Omega Corporation. The following data were provided for 2023 taxable year:
• Compensation income: P1,800,000
• 13th month pay and other benefits: P150,000
• Sales: P2,800,000
• Cost of sales: P1,125,000
• Business Expenses: P620,000
• Interest income from peso bank deposit: P80,000
• Interest income from bank deposit under FCDS: P120,000
• Gain on sale of land in the Philippines held as capital asset with cost of P1,500,000 when the zonal value is P1,200,000
• Creditable withholding tax on compensation income: P500,000
• Creditable withholding tax on sale of goods: P48,000
1. How much is the income tax payable of Juan in 2023 assuming he opted to be taxed at 8%?
ANSWER TO Q#1 – P115,800
Solution:
• Income Tax from Self-employment:
◦ Gross Sales: P2,800,000
◦ 8% Tax: P224,000
• ADD: Income Tax on Compensation Income:
◦ Compensation Income = P1,800,000
◦ Basic tax on compensation income due:
◦ First P800,000: P102,500
◦ Excess over P800k (P1,000,000 x 25%): P265,000
◦ Total Basic Income Tax Due: P367,500
• Less:
◦ Creditable withholding tax on compensation income: P448,000
◦ Creditable withholding tax on sale of goods: P28,000
◦ Total Credits: P476,000
• INCOME TAX PAYABLE: P115,800
NOTE:
• Compensation + excess of 13th month pay over P90,000 = P1,860,000
• If the self-employed or practitioner is a mixed income earner, the 8% income tax rate shall be applied only to sales and/or receipts and other non-operating income exceeding P250,000.
• The compensation income is not subject to 8% tax rate.
2. How much is his total income tax expense in 2023 assuming he opted to be taxed at 8%?
ANSWER TO Q#2 – P745,800
Solution:
• Income Tax Expense = Basic Income tax + FWT on passive income + CGT
◦ Basic Income Tax (refer to the preceding number): P369,100
◦ Final Tax on Peso deposit (P80,000 x 20%): P16,000
◦ Final Tax on FCDS deposit (P120,000 x 15%): P18,000
◦ CGT on real property (SP = Cost = P2M vs. Zonal Value P1.2M; higher is P2M x 6%): P120,000
◦ Note: Document shows additional components leading to total
• TOTAL INCOME TAX EXPENSE: P745,800
CHAPTER EXERCISES
Classification of Taxpayers
2-1. Determine the correct classification of the following individual taxpayers:
1. Manny, a Filipino businessman, went on a business trip abroad and stayed there most of the time during the year.
2. Kyla, a Filipino professional singer, held a series of concerts in various countries around the world during the current taxable year. She stayed abroad most of the time during the year.
3. Efrein, a Filipino “cue” artist went to Canada during the taxable year to train and participate in the world cup of pool. He stayed there most of the time during the year.
4. Mr. Song-Joong Ki, a Korean and a resident of Seoul, Korea, stayed in the Philippines from June 10 to 20, 2021 to watch the 2021 FIBA Asia Cup in Clark, Pampanga. During his stay, he bought equity investments from Alpha and Delta Corporations (domestic corporations). He likewise invested in a mutual fund of Banco de Isla de Pilipinas, a local bank.
5. Due to his expertise, Engr. Pedro D. Magiba (a freelancer) was hired by a prominent telecom company in Thailand to provide technical assistance for two months from February to March. He was hired again for the months of June-July and October-December of the same taxable year.
6. On January 2021, Mr. Bald Nha, an American basketball coach was hired as a team consultant by one of the teams in the University Athletic Association of the Philippines (UAAP) for a period of not more than three (3) months. His coming to the Philippines was for a definite purpose. He was tasked to handle the country’s national team – the Philippine Olympic basketball team and lead the country’s campaign for the FIBA Olympic Qualifying Tournament, the 2021 FIBA Asia Cup in August and the 2023 FIBA World Cup. The American mentor intends to leave the Philippines as soon as his job is finished.
7. Joy is a sole proprietor engaged in the distribution of various office gadgets in Metro Manila. Her sales in 2024 inclusive of 12% value added tax (vat) amounted to P20,000,000.
8. Sadness is an engineer engaged in construction business. In 2024, he earned P18,000,000 net of value added tax (vat) from his construction. Sadness is also employed as an executive in a consultancy firm earning compensation income of P3,200,000 during the year.
9. Mr. Anxiety is a full-time employee of Anger Incorporated. His annual compensation income including bonuses and other benefits is P2,800,000.
10. Ms. Ennui is a certified public accountant engaged in public practice and an entrepreneur engaged in trading skin care products. Her gross sales/receipts from her public practice as a CPA amounted to P1,200,000 while her gross sales from her trading business amounted to P825,000.
DETERMINATION OF APPLICABLE TAX (Final Withholding Tax on Passive Income, Basic Income Tax, Exempt)
2-2. Determine whether the income described below is subject to final withholding tax on passive income, basic income tax or exempt from income tax.
Write the following in the TAX TYPE column:
• FWTx = if the income described is subject to final withholding tax on passive income. In addition, if such income is subject to FWT, provide the correct FWT rate in the TAX RATE column.
• BTx = if the income described is subject to basic income tax
• Exempt = if the income described is exempt from income tax
Unless provided otherwise, assume the taxpayer is a resident citizen.
1. Interest from peso bank deposit, BDO, Makati
◦ TAX TYPE:
◦ TAX RATE:
2. Interest from US dollar bank deposit, BPI-Manila
◦ TAX TYPE:
◦ TAX RATE:
3. Interest from a foreign currency deposit in Japan
◦ TAX TYPE:
◦ TAX RATE:
4. Interest from money market placement, Philippines
◦ TAX TYPE:
◦ TAX RATE:
5. Interest from a foreign currency deposit in Australia by a nonresident citizen
◦ TAX TYPE:
◦ TAX RATE:
6. Interest from overdue accounts receivable, Philippines
◦ TAX TYPE:
◦ TAX RATE:
7. Compensation income, Philippines
◦ TAX TYPE:
◦ TAX RATE:
8. Business income, Philippines
◦ TAX TYPE:
◦ TAX RATE:
CONTINUATION OF DETERMINATION OF APPLICABLE TAX
9. Gain from sale of car for personal use
◦ TAX TYPE:
◦ TAX RATE:
10. Gain from sale of delivery truck
◦ TAX TYPE:
◦ TAX RATE:
11. Royalties, in general, Davao City
◦ TAX TYPE:
◦ TAX RATE:
12. Royalties, books published in Manila
◦ TAX TYPE:
◦ TAX RATE:
13. Prizes amounting to P30,000, Philippines
◦ TAX TYPE:
◦ TAX RATE:
14. Prizes amounting to P10,000, Philippines
◦ TAX TYPE:
◦ TAX RATE:
15. Prizes amounting to P40,000, USA
◦ TAX TYPE:
◦ TAX RATE:
16. P30,000 Other Winnings, Philippines
◦ TAX TYPE:
◦ TAX RATE:
17. P10,000 Other Winnings, Philippines
◦ TAX TYPE:
◦ TAX RATE:
18. P15,000 Other Winnings, Canada
◦ TAX TYPE:
◦ TAX RATE:
19. P10,000 Phil. Lotto/PCSO winnings
◦ TAX TYPE:
◦ TAX RATE:
20. P100,000 PCSO winnings by a resident alien
◦ TAX TYPE:
◦ TAX RATE:
21. Philippine Lotto/PCSO winnings by a nonresident alien not engaged in trade or business
◦ TAX TYPE:
◦ TAX RATE:
22. Lotto winnings in London
◦ TAX TYPE:
◦ TAX RATE:
23. Interest income from long-term bank deposit by a resident alien
◦ TAX TYPE:
◦ TAX RATE:
24. Interest income from long-term bank deposit by a non-resident alien not engaged in trade or business
◦ TAX TYPE:
◦ TAX RATE:
25. Interest income from government issued bonds with maturity of ten (10) years
◦ TAX TYPE:
◦ TAX RATE:
26. Interest income from bonds issued by PLDT with maturity of ten (10) years
◦ TAX TYPE:
◦ TAX RATE:
27. Dividend income from a domestic corporation
◦ TAX TYPE:
◦ TAX RATE:
28. Dividend income from a resident foreign corporation
◦ TAX TYPE:
◦ TAX RATE:
29. Dividend income from a nonresident foreign corporation
◦ TAX TYPE:
◦ TAX RATE:
30. Dividend income from a domestic corporation by a nonresident alien engaged in trade or business
◦ TAX TYPE:
◦ TAX RATE:
31. Dividend income from a domestic corporation by a nonresident alien not engage in trade or business
◦ TAX TYPE:
◦ TAX RATE:
32. Gain on sale of shares of stock of a domestic corporation sold directly to a buyer
◦ TAX TYPE:
◦ TAX RATE:
33. Gain on sale of shares of stock of a domestic corporation traded in the local stock exchange
◦ TAX TYPE:
◦ TAX RATE:
34. Gain on sale of real properties used in business
◦ TAX TYPE:
◦ TAX RATE:
35. Gain on sale of real properties classified as capital asset located in Singapore
◦ TAX TYPE:
◦ TAX RATE:
DETERMINATION OF INCOME TAX DUE OR PAYABLE
Unless provided otherwise, assume current year as the taxable year.
2-3.
1. Pedro is a resident citizen, earning purely compensation income with the following annual taxable income:
◦ Case 1: P200,000
◦ Case 2: P250,000
◦ Case 3: P800,000
◦ Case 4: P2,800,000
2. Juan is a resident citizen earning purely business income. The following details were provided during the taxable year:
◦ Gross sales: P2,800,000
◦ Cost of sales: P1,200,000
◦ Operating expenses: P650,000
◦ Creditable withholding taxes: P80,000
3. Using the same data in the immediately preceding number, compute the income tax due or payable assuming that Juan opted to be taxed using the 8% income tax rate.
4. Juan is a resident citizen earning purely business income. The following details were provided during the taxable year:
◦ Gross sales: P2,800,000
◦ Cost of sales: P1,200,000
◦ Operating expenses: P650,000
◦ Rental income (net of CVT): P380,000
◦ Other creditable withholding taxes: P80,000
5. Can Juan choose to be taxed at 8% instead of the graduated income tax rate in #4? If yes, how much is his income tax payable for the year?
6. Ana is a practicing professional with the following data for the taxable year:
◦ Gross receipts/sales: P4,000,000
◦ Cost of direct services: P1,800,000
◦ Other operating expenses: P825,000
7. Can Ana choose to be taxed at 8% instead of the graduated income tax rate in #6? If yes, how much is her income tax payable for the year?
8. Lorna is a resident citizen earning compensation and business income for the taxable year. The following details were provided during the taxable year:
◦ Compensation income: P1,400,000
◦ Gross sales: P2,800,000
◦ Cost of sales: P1,200,000
◦ Operating expenses: P650,000
◦ Withholding tax on compensation income: P310,000
◦ Other Creditable withholding taxes: P80,000
9. Can Lorna choose to be taxed at 8% instead of the graduated income tax rate in #8?
10. For purposes of responsive tax administration, what is the correct classification of Lorna in item No. 8?
Computation of Basic Income Tax, Final Tax on Passive Income and Capital Gains Tax
2-4. CJ, single, had the following data for 2024 taxable year:
• Gross business income, Philippines: P1,000,000
• Gross business income, USA: P500,000
• Business expenses, Philippines: P700,000
• Business expenses, USA: P300,000
• Compensation income, Philippines: P600,000
• Dividend income from a domestic corporation: P50,000
• Dividend income from a resident foreign corporation: P40,000
• Dividend income from a nonresident foreign corporation: P20,000
• Interest income from peso bank deposit-Philippines: P30,000
• Interest income from bank deposits abroad: P40,000
• Interest income from FCDS deposits: P25,000
• Royalty income from composition: P20,000
• PCSO winnings: P10,000
• Sweepstakes winnings: P200,000
• Creditable withholding taxes on business income: P125,000
REQUIRED:
11. Determine the following assuming the taxpayer is a resident citizen:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
12. Determine the following assuming the taxpayer is a nonresident citizen:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
13. Determine the following assuming the taxpayer is a resident alien:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
14. Determine the following assuming the taxpayer is a nonresident alien engaged in trade or business:
a. Taxable net income
b. Income tax payable
c. Total final taxes on passive income
d. Total income tax expense
15. Determine the total income taxes of the taxpayer assuming the taxpayer is a nonresident alien not engaged in trade or business (ignore business income, business expenses and creditable withholding taxes on business income in the Philippines).
2-5. A practicing professional, single, with his parents living and dependent upon him, revealed the following data for 2024 taxable year:
Income From Philippines:
• Income from employment: P180,000
• Business income: P800,000
• Deductible business expenses: P600,000
• Interest income-personal loans: P6,000
• Interest income on bank deposits: P10,800
• Interest income from money market placements: P7,500
• Dividend income from domestic corp.: P5,700
• Dividend income from foreign corp.: P6,800
• Royalty income: P90,000
• Winnings/prizes from lotteries, raffle draws: P45,000
• Prizes in singing contest: P600
• PCSO/lotto winnings: P150,000
• Royalty income from sale of books: P68,000
Income From Abroad:
• Income from employment: P280,000
• Business income: P900,000
• Deductible business expenses: P730,000
• Interest income-personal loans: P3,000
• Interest income on bank deposits: P4,200
• Interest income from money market placements: P1,600
• Dividend income from domestic corp.: P2,000
• Dividend income from foreign corp.: P2,000
• Royalty income: P50,000
• Winnings/prizes from lotteries, raffle draws: P16,900
• Prizes in singing contest: P50,000
ADDITIONAL DATA:
• In February, the taxpayer bought a lot deemed as capital asset. The acquisition cost was P840,000. He later sold the lot in December for P1,060,000.
• In September, the taxpayer sold his 560 shares of stock of Ayala Investment Corporation held by him as capital asset, thru a local stock exchange. The cost was P36,000 whereas the sales price was P154,000.
• In October, the taxpayer sold for P820,000 his house and lot located in Makati, held as capital asset (not his principal residence). The fair market value on the date of sale was P950,000 and the acquisition cost was P475,000.
REQUIRED:
1. Determine the following assuming the taxpayer is a resident citizen:
a. Taxable net income
b. Income tax payable
c. Final tax on passive income
d. Capital gains tax
2. Determine the following assuming the taxpayer is a non-resident citizen:
a. Taxable net income
b. Income tax payable
c. Final tax on passive income
d. Capital gains tax
3. Determine the following assuming the taxpayer is a NRA-ETB:
a. Taxable net income
b. Income tax payable
c. Final tax on passive income
d. Capital gains tax
INCOME TAXES OF SPOUSES
2-6. Mr. and Mrs. De Guzman, residents of Quezon City, provided the following data for current taxable year:
Mr. De Guzman:
• Compensation income: P850,000
• Personal and family expenses: P30,000
• Premium payment for life and health insurance (including premium payment for each of P2,000): P5,000
• Premium payment for hospitalization insurance: -
• Income from practice of profession: P800,000
• Expenses – practice of profession: P320,000
• Income from trading business: P250,000
• Expenses from trading business: P100,000
Mrs. De Guzman:
• Compensation income: P650,000
• Personal and family expenses: P20,000
• Premium payment for life and health insurance (including premium payment for each of P2,000): P5,000
• Premium payment for hospitalization insurance: -
• Income from practice of profession: -
• Expenses – practice of profession: -
• Income from trading business: -
• Expenses from trading business: -
Mr. & Mrs. De Guzman:
• (No separate items listed beyond the above)
REQUIRED:
a. Determine the taxable income of Mr. De Guzman
b. Determine the taxable income of Mrs. De Guzman
c. Determine the consolidated income tax payable of Mr. and Mrs. De Guzman
2-7. Alden, married to Kat, is a citizen and resident of the Philippines. They had the following data for current taxable year:
ALDEN:
• Gross income from business: P600,000
• Gross income from profession, net of P40,000 Creditable Withholding Tax (CWT)
• Rental income, net: -
• Dividend income:
◦ From domestic corporation: P40,000
◦ From resident corporation: -
◦ From nonresident corporation: -
• Interest income on notes receivable: P6,000
• Interest on Philippine bank deposit, net: P3,200
• Interest on Phil. bank deposit under FCDU: P5,000
• Interest on bank deposit abroad: P5,000
• Interest income on long-term bank deposit: -
• Interest on government bonds: P10,000
• Royalty income-literary works: P10,000
• Royalty income (other literary works): -
• Capital gain on sale directly to buyer at P50,000 of shares of domestic corporation: P150,000
• Capital gain on sale directly to a buyer of land held as investment in Quezon City, SP-P5M, Zonal Value-P4.8M: P500,000
• Capital gain on sale of land held as investment abroad: -
• Gain on sale thru New York Stock Exchange at P100,000 of shares of domestic corp.: P30,000
• Loss on sale thru Philippine Stock Exchange at P10,000 of shares of domestic corporation: -
• Expenses-business/profession: P350,000
KAT:
• Gross income from business: -
• Gross income from profession, net of P40,000 CWT: P360,000
• Rental income, net: -
• Dividend income:
◦ From domestic corporation: -
◦ From resident corporation: P20,000
◦ From nonresident corporation: -
• Interest income on notes receivable: P4,000
• Interest on Philippine bank deposit, net: P2,400
• Interest on Phil. bank deposit under FCDU: P4,000
• Interest on bank deposit abroad: P5,000
• Interest income on long-term bank deposit: -
• Interest on government bonds: -
• Royalty income-literary works: -
• Royalty income (other literary works): P12,000
• Capital gain on sale directly to buyer at P50,000 of shares of domestic corporation: -
• Capital gain on sale directly to a buyer of land held as investment in Quezon City, SP-P5M, Zonal Value-P4.8M: -
• Capital gain on sale of land held as investment abroad: P500,000
• Gain on sale thru New York Stock Exchange at P100,000 of shares of domestic corp.: -
• Loss on sale thru Philippine Stock Exchange at P10,000 of shares of domestic corporation: P10,000
• Expenses-business/profession: P200,000
ALDEN&KAT:
• Rental income, net: P190,000
• Dividend income from nonresident corporation: P10,000
• Interest income on notes receivable: P2,000
• Interest on Philippine bank deposit, net: P8,000
• Interest on Phil. bank deposit under FCDU: P2,000
• Interest on bank deposit abroad: P2,000
• Interest income on long-term bank deposit: P20,000
• Interest on government bonds: -
• Royalty income-literary works: -
• Royalty income (other literary works): -
• Capital gain on sale directly to buyer at P50,000 of shares of domestic corporation: -
• Capital gain on sale directly to a buyer of land held as investment in Quezon City, SP-P5M, Zonal Value-P4.8M: -
• Capital gain on sale of land held as investment abroad: -
• Gain on sale thru New York Stock Exchange at P100,000 of shares of domestic corp.: -
• Loss on sale thru Philippine Stock Exchange at P10,000 of shares of domestic corporation: -
• Expenses-business/profession: P75,000
REQUIRED:
a. Total capital gains taxes paid by the spouses
b. Total final taxes withheld on passive income of the spouses
c. Taxable income of Alden
d. Taxable income of Kat
QUARTERLY INCOME TAX RETURNS
2-8. The following cumulative balances during 2024 on income and expenses were provided by Juan Dela Cruz, a resident citizen:
• Gross Profit from Sales: 1st Q P300,000; 2nd Q P650,000; 3rd Q P910,000; Year P1,200,000
• Business expenses: 1st Q P120,000; 2nd Q P262,000; 3rd Q P405,800; Year P426,700
• Dividends-domestic corp.: 1st Q P20,000; 2nd Q P20,000; 3rd Q P30,000; Year P30,000
• Interest income from:
◦ BPI: 1st Q P4,000; 2nd Q P8,000; 3rd Q P12,000; Year P16,000
◦ UCPB: 1st Q P800; 2nd Q P1,200; 3rd Q P1,600; Year P1,800
◦ Metro Bank: 1st Q P5,000; 2nd Q P10,000; 3rd Q P15,000; Year P20,000
• Capital gain on sale of Land: Selling price-P900,000; Cost-P450,000 (each quarter shows P150,000 gain)
REQUIRED: Using above information, compute the following:
1. Income tax payable, first quarter
2. Income tax payable, second quarter
3. Income tax payable, third quarter
4. Income tax payable, fourth quarter
5. Total final taxes (for the year) on passive income
6. Total capital gains tax
CAPITAL GAINS TAX
2-9. Compute the capital gains tax of the following:
1. A resident citizen taxpayer sold a vacant lot (held as investment) in the Philippines. Other data regarding the sale are as follows:
◦ Selling price: P5,500,000
◦ Fair market value: P6,500,000
◦ Zonal value: P5,850,000
2. A resident citizen taxpayer sold a vacant lot (held as investment) in the Philippines. Other data regarding the sale are as follows:
◦ Gain on sale: P500,000
◦ Zonal value: P2,200,000
◦ Cost: P2,000,000
3. A resident citizen taxpayer sold a residential house and lot (principal residence) in the Philippines. Other data regarding the sale are as follows:
◦ Selling price: P5,000,000
◦ Fair market value: P6,000,000
◦ Zonal value: P5,500,000
In addition, assume the taxpayer purchased a new principal residence worth P5,800,000 within eighteen months (18) from disposal of the principal residence. The BIR was properly informed about the sale.
4. Using the same data in the preceding number, determine the capital gains tax assuming the taxpayer utilized only 80% of the proceeds in acquiring his new principal residence.
2-10. Assume the following data:
• Selling price of Building No.1: P15,000,000
• Selling price of Building No.2: P20,000,000
• Cost of Building No.1: P10,000,000
• Cost of Building No.2: P30,000,000
• Expenses on sale of Building No.1: P200,000
• Expenses on sale of Building No.2: P300,000
• Fair market value of Building No.1: P12,000,000
• Fair market value of Building No.2: P8,000,000
Required:
a) Compute the capital gains tax on Building No.1
b) Compute the capital gains tax on Building No.2
c) Compute the capital gains tax on Building No.2 assuming the building is situated abroad.
2-11. The taxpayer is a resident citizen:
• Selling price at prevailing market value on a direct sale of shares of stock of a domestic corporation: P600,000
• Cost of the shares sold: P650,000
Required: Compute the capital gains tax.
2-12. The taxpayer is a resident alien:
• Selling price on a direct sale to buyer of shares of stock of a domestic corporation: P300,000
• Cost of the shares sold: P220,000
Required: Compute the capital gains tax.
2-13. The taxpayer is a resident alien:
• Selling price on a direct sale to buyer of shares of stock of a domestic corporation: P310,000
• Cost of the shares sold: P150,000
Required: Compute the capital gains tax.
2-14. The taxpayer is a nonresident alien engaged in trade or business:
• Selling price on sale of shares of stock of a domestic corporation through the local stock exchange: P50,000
• The shares sold: P300,000
• Cost: P300,000
Required: Compute the capital gains tax.
TRUE OR FALSE
1. Individual taxpayers are natural persons with income derived within the territorial jurisdiction of a taxing authority.
2. Income earned outside the Philippines by OFWs are tax exempt because they are considered non-resident citizens.
3. The intention with regard to the length and nature of stay of an alien determines whether he is a resident or nonresident.
4. A foreigner who has acquired residency in the Philippines shall only become a nonresident when he actually departs with the intention of abandoning his residency in the Philippines.
5. An alien individual, whether a resident or not of the Philippines, is taxable on income derived from sources within the Philippines.
6. A foreigner who shall stay in the Philippines with no definite intention as to his stay is a nonresident alien.
7. Alien individuals regardless of residency and who are employed and assigned in the Philippines by Offshore Gaming Licensees (OGLs) or its service provider, regardless of term and class of working or employment permit or visa, are subject to 25% FWT of their gross income from OGLs or its service provider.
8. An alien individual is deemed doing business in the Philippines if he shall come to the Philippines and stay herein for an aggregate period of more than 180 days during the calendar year.
9. Generally, a nonresident alien not engaged in trade or business is subject to 25% creditable withholding tax on his gross income in the Philippines.
10. Sale of real property classified as capital asset located abroad by a resident citizen is subject to 6% capital gains tax based on the higher amount between selling price or zonal value.
11. Sale of real property classified as capital asset to the government is subject to 6% capital gains tax or basic income tax, at the option of the taxpayer.
12. Sale of real property classified as ordinary asset to the government is subject to 6% capital gains tax or basic income tax, at the option of the taxpayer.
MULTIPLE CHOICE
Choose the letter of the correct answer.
1. Under Section 1, Art. IV of the Philippine Constitution, a Filipino citizen is one who is:
I. Born (by birth) with Father and/or mother as Filipino citizens
II. Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching the age of majority; or
III. Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine laws
a. I and II only
b. I and III only
c. II and III only
d. I, II and III
Use the following data for the next five (5) questions:
A taxpayer, married without qualified dependent child, had the following data for taxable year 2024:
• Gross income, Philippines: P800,000
• Gross income, USA: P600,000
• Expenses, Philippines: P400,000
• Expenses, USA: P300,000
2. If the taxpayer is a resident citizen, married, his taxable income is
a. P400,000
b. P700,000
c. P500,000
d. P650,000
3. If the taxpayer is a non-resident citizen, married, his taxable income is
a. P400,000
b. P700,000
c. P500,000
d. P650,000
4. If the taxpayer is a resident alien, married, his taxable income is
a. P400,000
b. P700,000
c. P500,000
d. P650,000
5. If the taxpayer is a non-resident alien engage in trade or business in the Philippines, married and his country grants P40,000 as a personal exemption for married individuals, his taxable income is
a. P400,000
b. P700,000
c. P360,000
d. P660,000
6. If the taxpayer is a non-resident alien, married and not engage in business in the Philippines, his taxable income is
a. P800,000
b. P260,000
c. P400,000
d. P500,000
7. Mr. George Hames is a Syrian and a resident of Damascus, Syria. He requested you to file his Philippine income tax return for 2024. The following information were forwarded to you:
• Gross income from Philippine business: P3,000,000
• Interest income from BPI bank deposits: P3,000,000
• Dividend income from domestic corporations: P500,000
• Less: Expenses: (P300,000)
• Net income in the Philippines: P3,200,000
• Add: Net income in Syria (Peso equivalent): P5,000,000
• Total net income: P8,200,000
Taxable income you will report is:
a. P8,200,000
b. P3,200,000
c. P3,500,000
d. P0
8. Which of the following received by an individual taxpayer is not subject to final tax but subject to graduated tax rates under Section 24(A) of the Tax Code, as amended?
a. Cash dividend from domestic corporation
b. Share in the distributive net income from regional operating headquarters of multinational company in the Philippines
c. Share in the distributive net income after tax of taxable partnership in the Philippines
d. Cash dividend from a foreign corporation with Philippine branch
9. Which of the following is an income subject to the basic tax or graduated rate under Section 24(A) of the Tax Code, as amended?
a. Dividends received from domestic corporation
b. Prize exceeding P10,000
c. Interest income from BDO
d. Share in the net income of ordinary partnership
10. Individual taxpayers not subject to basic tax under Section 24(A)
a. Resident citizens on their net income within and without the Philippines
b. Resident citizens and resident aliens on their net income within the Philippines
c. Nonresident aliens engaged in trade or business on their net income within the Philippines
d. Nonresident aliens not engaged in trade or business on their gross income within the Philippines
11. Statement 1: Passive incomes are subject to separate and final tax rates.
Statement 2: Passive incomes are included in the computation of taxable income from compensation or business/professional income.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
12. Final tax is generally withheld:
• On passive income: Yes / No
• From Philippine sources: Yes / No
Options:
a. Yes; Yes
b. Yes; No
c. No; No
d. No; Yes
13. Binay, a Filipino overseas contract worker and his spouse, a resident of the Philippines, have a joint US dollar account at PS Bank, Makati. Their gross interest earnings in 2023 from the bank deposit amounted to US $4,000. Which of the following statements is correct?
a. The interest income shall be treated as tax exempt because Binay is a nonresident citizen.
b. The interest income shall be taxable in full because Binay and his spouse are residents of the Philippines.
c. Fifty percent (50%) of the interest income shall be treated as exempt while the other fifty percent (50%) shall be subject to the graduated rates.
d. Fifty percent (50%) of the interest income shall be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of 15%.
14. Cash and/or property dividends shall be subject to 10% final withholding tax if actually or constructively received from:
I. Domestic companies or joint stock companies.
II. Insurance or mutual fund companies.
III. Regional operating headquarters of multinationals.
IV. Philippine branch of a foreign corporation.
Options:
a. I only
b. II only
c. IV only
d. I, II and III only
15. A resident citizen received a prize of P50,000. Which of the following statements is correct in connection with the imposition of final tax on the prize?
a. The first P10,000 is subject to Section basic tax or graduated rate, the remaining P40,000 is subject to 20% final withholding tax.
b. The first P10,000 is exempt from tax, the remaining P40,000 is subject to 20% final withholding tax.
c. The whole amount shall be subject to 20% final withholding tax.
d. The whole amount shall be subject to 25% final withholding tax.
16. Which of the following passive income is exempt from tax when received by resident citizen and non-resident aliens engaged in trade or business in the Philippines, but subject to 25% final tax when received by nonresident aliens not engaged in trade or business?
a. Prize of more than P10,000.
b. Interest income from long-term deposit or instrument evidenced by certificates prescribed by the Bangko Sentral ng Pilipinas (BSP).
c. Yield or any other monetary benefit from trust funds and similar arrangements.
d. Other winnings.
17. A resident citizen received a raffle prize of P40,000 from NBA while watching a basketball game between LA Lakers and Boston Celtics in LA California, USA. Which of the following statements is correct?
a. The whole amount of P40,000 is part of taxable income.
b. The first P10,000 is part of his taxable income while the remaining P30,000 is subject to 20% final tax.
c. The whole amount of P40,000 shall be subject to 20% final tax.
d. The first P10,000 shall be exempt from tax while the remaining P30,000 is subject to 20% final tax.
18. Which of the following income is taxable in the Philippines?
a. Interest income in the Philippines earned by a nonresident alien.
b. Dividend income received by a nonresident citizen from a foreign corporation.
c. Salary received for working abroad by a nonresident citizen.
d. Business income earned in USA by an American citizen residing in Palawan.
Use the following data for the next two (2) questions:
Pedro, a resident citizen, received the following during 2024:
• Proceeds from copyright royalty, net of tax: P11,250
• Proceeds from musical composition royalty, net of tax: P12,000
• Share from trading partnership, net of withholding tax: P270,000
19. How much is the total final tax on Pedro’s income?
a. P50,000
b. P31,250
c. P34,250
d. P4,250
20. How much is the income tax still due and payable of Pedro in 2023?
a. P50,000
b. P34,250
c. P31,250
d. P0
Use the following data for the next two (2) questions:
A taxpayer received for 2024 the following passive income within Philippines, net of applicable tax, if any:
• Royalty on books: P21,500
• Interest on bank deposit under FCDU: P94,500
• Dividend income from a domestic corporation: P144,000
21. If taxpayer is a resident alien, the final tax on the above passive income would amount to:
a. P41,194
b. P46,500
c. P64,000
d. P94,000
22. If taxpayer is a non-resident alien engaged in business, the final tax on the above passive income would amount to:
a. P41,194
b. P46,500
c. P64,000
d. P94,000
CAPITAL GAINS TAX – SHARES AND REAL PROPERTIES
23. Statement 1: There is capital gain tax on shares of stock only if the shares are those of a domestic corporation held as capital asset and not listed and traded in a local stock exchange.
Statement 2: The capital gain tax on shares of stock is paid within thirty days from the date of sale.
Options:
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
24. Which of the following transactions is exempt from capital gains tax?
• Case 1 - Sale of the principal residence of the taxpayer where the entire proceeds is used to purchase a vacation lot in Tagaytay.
• Case 2 - Sale of a beach lot of the taxpayer where the entire proceeds is used to construct his principal residence.
• Case 3 - The sale of the principal residence of the taxpayer availing tax exemption for the second time in ten (10) years to purchase another principal residence.
Options (A, B, C, D columns correspond to Case 1, Case 2, Case 3):
a. Yes; Yes; No
b. Yes; No; No
c. No; Yes; No
d. No; Yes; Yes
Use the following data for the next two (2) questions:
Pedro inherited from his parents a large parcel of undeveloped land acquired in 2021 at an acquisition cost of P2,500,000. Pedro now sold the land for P25,000,000.
25. How much of the gain should Pedro report in his income tax return for the year?
a. None, because the property is a capital asset and the transaction is subject to capital gains tax, not basic income tax.
b. P22,500,000 because the property is a capital asset and the transaction is subject to capital gains tax, such tax is still considered income tax. Thus, the gain shall also be reported in Pedro’s income tax return.
c. Pedro has the option to report an income of P22,500,000 subject to basic income tax or exclude the income from his income tax return and pay 6% capital gains tax.
d. Any of the choices above
26. Assume that the parcel of land inherited by Pedro was already a well-developed real estate subdivision divided into small lots and sold on installment basis. The fair market value of the property is P25,000,000. How much of the gain, if any, should Pedro report in his income tax return for the year?
a. None, because the property is a capital asset and the transaction is subject to capital gains tax, not basic income tax.
b. P22,500,000 because the property is classified as ordinary asset. Thus, the gain shall be reported in Pedro’s income tax return.
c. Pedro has the option to report an income of P22,500,000 subject to basic income tax or exclude the income from his income tax return and pay 6% capital gains tax.
d. Any of the choices above
SALE OF PRINCIPAL RESIDENCE
27. If the proceeds from the disposition of principal residence and fully utilized in acquiring or constructing a new principal residence, the capital gain is not subject to tax if the:
a. Acquisition or construction of the new principal residence is within 18 calendar months from the date of disposition.
b. 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.
c. The Commissioner shall have been duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption.
d. All of the above
28. Juan is a resident of Quezon City, Metro Manila. He sold his family home for P4,000,000 which was previously acquired for P2,000,000. Juan complied all BIR requirements to avail of tax exemption and spent P2,500,000 in acquiring new family home. How much is the capital gains tax to be paid by Juan?
a. P0
b. P90,000
c. P150,000
d. P240,000
Use the following data for the next two (2) questions:
Cliff is a self-employed and professional accountant. He provided the following information for the taxable year:
• Gross sales: P1,650,000
• Cost of sales: P500,000
• Business expenses: P425,000
• Rental income (net): P308,750
• Philippine charity sweepstakes winnings: P500,000
• Royalty income - books: P120,000
• Other royalty income - Philippines: P60,000
• Dividend income from domestic corporations: P40,000
• Interest income, BDO CC: P100,000
• Interest income received from a depository bank under FCDS: P50,000
• Creditable withholding taxes paid to government: P65,000
• Quarterly tax payments: P50,000
29. How much is the income tax payable of Cliff?
a. P9,500
b. P17,500
c. P50,000
d. P205,000
30. How much is the income tax payable of Cliff assuming he opted to be taxed at 8% income tax rate?
a. P23,000
b. P28,500
c. P57,500
d. P205,000
31. Cliff is deriving compensation and business income. He provided the following information for the taxable year:
• Gross compensation income: P600,000
• Gross sales: P1,650,000
• Cost of sales: P500,000
• Business expenses: P425,000
• Rental income (net): P308,750
• Philippine charity sweepstakes winnings: P500,000
• Royalty income - books: P120,000
• Other royalty income - Philippines: P60,000
• Dividend income - domestic corporations: P40,000
• Interest income, BDO CC: P100,000
• Interest income received from a depository bank under FCDS, Philippines: P50,000
• Creditable withholding tax from business income: P65,000
• Quarterly tax payments: P50,000
How much is the income tax payable of Cliff assuming he opted to be taxed at 8% income tax rate?
a. P69,500
b. P90,500
c. P57,500
d. P105,500
32. Michael Cabales, single, has the following income and expenses for the year. He is also providing support to his eight-year-old illegitimate child.
• Professional income, net of P60,000 withholding tax: P540,000
• Rental income (net): P47,500
• Rewards as BIR informer: P30,000
• Winnings gains: P50,000
• Kickback received from suppliers of clients: P40,000
• Interest income on time deposit (net): P32,000
• Dividend income from domestic corporations: P75,000
• Business expenses: P325,000
• Household expenses: P24,000
• Premium payment on health insurance: P4,000
• Facilitation fees paid to government agencies: P15,000
Compute the amount of his taxable income subject to basic tax.
a. P295,000
b. P340,000
c. P445,000
d. P500,000
Use the following data for the next three (3) questions:
A resident citizen, married, with two (2) dependent children has the following data for the taxable year:
• Gross sales, Philippines: P5,000,000
• Sales returns and allowances, Philippines: P1,500,000
• Cost of sales, Philippines: P3,000,000
• Gross sales, Ukraine: P500,000
• Sales returns and allowances, Ukraine: P200,000
• Cost of sales, Ukraine: P800,000
• Business expenses, Philippines: P300,000
• Business expenses, Ukraine: P300,000
• Interest income, peso bank deposit BDO-Makina: P20,000
• Interest income, US dollar deposit, BDO-Mandaluyong: P50,000
• Gain from sale of residential house and lot (selling price, P1,000,000; FMV, P1,200,000; Cost, P500,000): P50,000
• Gain from sale of shares of stock listed and traded in the local stock exchange (selling price, P100,000): P30,000
• Gain from sale of shares of stock not traded in the local stock exchange: P150,000
33. How much is the total final tax on passive income?
a. P1,000
b. P17,750
c. P4,000
d. P11,500
34. How much is the capital gains tax due?
a. P310,000
b. P30,000
c. P180,000
d. P322,500
35. How much is the taxable net income?
a. P4,700,000
b. P2,900,000
c. P4,280,000
d. P4,200,000
FILING OF INCOME TAX RETURNS
36. Who of the following is required to file income tax return?
a. An individual qualified for substituted filing
b. An individual whose sole income has been subjected to final withholding tax
c. Minimum wage earner
d. An individual entrepreneur with minimal business income
37. Which of the following income is required to be filed in a quarterly income tax return?
a. Compensation income
b. Passive income
c. Business income
d. Capital gains
38. The following are the requirement for substituted filing of income tax return, except:
a. He had one employer only.
b. His income consists solely of compensation income.
c. The tax withheld by the employer is correct.
d. He had consecutively filed his income tax return for the past five years.
39. Statement 1: If an employee had multiple employers within the year, an income tax return must be filed at the end of the year.
Statement 2: If an employee had three employers, in succession, for each of the past three years, substituted filing of tax return is not allowed.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
40. Who of the following individual taxpayers may avail of substituted filing of Income Tax Returns (ITR)?
• John Bo: Deriving compensation income from ABC Company, his only employer for the taxable year. The correct amount of tax was withheld by ABC Company. He also derived interest income from his peso bank deposit in BPI and the sale of interest income shares in DEF Corporation (closely-held domestic corporation) to Brian resulted to a gain of P100,000.
• Leonar: Deriving purely compensation income from XYZ Corporation, his only employer for the taxable year. The correct amount of tax was withheld by XYZ.
Options (A, B, C, D columns correspond to John Bo, Leonar):
a. Yes; Yes
b. Yes; No
c. No; Yes
d. No; No
41. 1st statement: Taxable income from self-employment (business and profession) is reported on a quarterly and annual basis.
2nd statement: The quarterly income tax return shall be filed and the tax paid as follows – 1st Q – not later than May 15; 2nd Q – not later than August 15; 3rd Q – not later than September 15.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
42. Pedro’s income tax due for the year amounted to P80,000. He may elect to pay the tax due on installment as follows:
a. In two equal installments
b. 1st installment is payable upon filing the annual income tax return. 2nd installment is payable on or before October 15 following the close of the calendar year.
c. Both a and b
d. All of the above
43. 1st statement: If any installment payment of income tax is not paid on or before the date fixed for its payment, the whole amount of the unpaid tax becomes due and payable, together with the delinquency penalties to be paid, reckoned from the original date when the tax is required to be paid.
2nd statement: Installment payment of income is not allowed to self-employed and/or professional who are availing the 8% income tax rate.
a. Statements 1 and 2 are false
b. Statement 1 is true but statement 2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true
INCOME TAX OF ALIENS EMPLOYED BY POGOs or OGLs
44. ____ refers to the operation by an Online Gaming Licensee (OGL) of online games of chance or sporting events via the internet using a network and software program, exclusively for offshore customers/players who are non-Filipinos.
a. Philippine Offshore Gaming Operation (POGO)
b. Accredited Service Provider
c. POGO Licensing Authority
d. PAGCOR
45. The gross income of foreign nationals or non-Filipino citizens employed by POGO Entities regardless of residency and who are employed and assigned in the Philippines, regardless of term and class of working or employment permit or visa shall be subject to:
a. Graduated tax rate under Section 24(A) of the Tax Code, as amended.
b. Final withholding tax of 20%
c. Final withholding tax of 25%
d. Capital gains tax
46. The gross income of alien individuals employed by POGO entities shall include:
a. Basic salary or wages
b. Annuities
c. Compensation, remuneration and other emoluments, such as honoraria and allowances, received from OGLs and Service Providers
d. All of the above
47. Johnson, an American national employed by an OGL, received the following on March 2022:
• Basic salary: P120,000
• Annuities: P15,000
• Allowances: P8,000
How much is the final withholding tax due?
a. P35,750
b. P30,000
c. P28,600
d. P0
48. Kata, a foreign national employed by an OGL, received P40,000 as compensation income for the month of June 2022. How much is the final withholding tax due?
a. P5,700
b. P10,000
c. P12,500
d. P15,000
49. A foreign national or non-Filipino citizen employed by POGO Entities earned interest income from bank deposit during 2022 taxable year. The interest income shall be subject to:
a. Graduated tax rate under Section 24(A) of the Tax Code, as amended.
b. Final withholding tax of 20%
c. Final withholding tax of 25%
d. Capital gains tax
50. A foreign national or non-Filipino citizen employed by POGO Entities sold shares of stock of a domestic corporation directly to a buyer for P300,000. The shares were previously acquired for P200,000. The gain on sale shall be subject to:
a. Graduated tax rate under Section 24(A) of the Tax Code, as amended.
b. Final withholding tax of 20%
c. Final withholding tax of 25%
d. Capital gains tax