Chapter 3 Taxation of Individuals

 Classification of Taxpayers
1. Individuals
2. Corporations
3. Partnerships
4. Estates and Trusts

 Classification of Individuals
For purposes of income tax, individual taxpayers are classified as follows:
1. Resident Citizen. An individual whose residence is within the Philippines and who is a citizen
thereof.

2. Non-resident Citizen. A citizen of the Philippines who shall have stayed outside the
Philippines for one hundred eighty-three (183) days or more by the end of the year shall be
considered a non-resident citizen by the mere fact of his length of stay abroad.

Illustration 1
Mr. Binay a citizen of the Philippines went to Saudi Arabia for a one-year employment
contract on June 1, 2018. He returned to the Philippines on December 20, 2018 for one
week Christmas vacation. For the year 2018 Mr. Binay would be considered a non-resident
citizen.

3. Resident Alien. An individual whose residence is within the Philippines and who is not a
citizen thereof. An alien who shall have stayed in the Philippines for more than one (1) year
by the end of the calendar year is a resident alien.

Illustration 2
Mr. De Leon an alien came to the Philippines on June 5, 2017. He stayed in the Philippines
until February 2, 2019. For the year 2018 Mr. De Leon was a resident alien.

4. Non-resident Alien. An individual whose residence is not within the Philippines and who is
not a citizen thereof. A non-resident alien is further classified into:

a. Engaged in Trade or Business in the Philippines – an alien who comes and stays in
the Philippines for an aggregate period of more than 180 days during any calendar year.

b. Not engaged in Trade or Business in the Philippines – an alien whose stay in the
Philippines is 180 days or less.

Illustration 3
Mr. Fernandez an alien came to the Philippines on January 1, 2018 as a tourist. He stayed
up to September 1, 2018. During his stay in the Philippines his activities were spending
except on August 31, 2018, when he sold his laptop for P50,000 for a gain of P6,000. Mr.
Fernandez would be considered a non-resident alien engaged in business in the
Philippines for the year 2018.

Illustration 4
Mr. Esteban an alien came to the Philippines on January 1, 2018 and stayed up to
February 1, 2018. During his stay in the Philippines he was actively in commerce with a
gross income of P1,000,000 and expenses related to the income of P200,000. Mr. Esteban
would be considered a non-resident alien not engaged in business in the Philippines for
the year 2018.

1
Chapter 3 Taxation of Individuals

 Sources of Income
Table 3-1 Taxable sources of income for individuals
Individual Within the Philippines Without the
Philippines
Resident Citizen Taxable Taxable
Non-resident Citizen Taxable
Resident Alien Taxable
Non-resident Alien (ETB) Taxable
Non-resident Alien (NETB) Taxable

 Classification of Income and Tax Rates

1. Capital gains from sale of shares of stock of a domestic corporation not listed and
traded thru a local stock exchange, held as capital asset.
Table 3-2 Uniform rules for individuals: Capital gains tax (RA 10963)

On the net Capital gain*: 15%

* Net capital gain is selling price less cost.
Note: if the shares of stocks are listed and traded in the stock exchange the sale is
subject to other percentage tax (stock transaction tax) at a rate if 6/10 of 1% of the
gross selling price.

2. Capital gains from sale of real property in the Philippines held as capital asset
Table 3-3 Uniform rules for individuals: Capital gains tax

On the gross selling price or current fair market value at the

time of sale or zonal value whichever is higher Final tax of 6%

3. Passive income. Income in which the taxpayer merely waits for the amount to come in.
Examples of passive income are interest, royalties, prizes, winnings, and dividends. Tax rates
see table 3-5

4. Compensation income. Income derived from employer-employee relationship.

5. Business income. Income derived from the conduct of trade or business or the exercise of
profession.
Table 3-4 Tax rates for individuals: Compensation/Business income/Others
TAX TABLE (January 1, 2018 until December 31, 2022)
ANNUAL TAXABLE INCOME TAX RATE
Not over 250,000 0%
Over 250,000 but not over 400,000 20% of excess over P 250,000
Over 400,000 but not over 800,000 30,000 + 25% of excess over 400,000
Over 800,000 but not over 2,000,000 130,000 + 30% of excess over 800,000
Over 2,000,000 but not over 8,000,000 490,000 + 32% of excess over 2,000,000
Over 8,000,000 2,410,000 + 35% of excess over 8,000,000
a. For Purely Self-Employed Individuals and/or Professionals Whose Gross
Sales/Receipts and Other Non-Operating Income Do Not Exceed the VAT Threshold of
₱3,000,000, the tax shall be, at the taxpayer’s option:
i. 8% Income Tax on Gross Sales or Gross Receipts in Excess of ₱250,000 in Lieu of
the Graduated Income Tax Rates and the Percentage Tax; Or

2
Chapter 3 Taxation of Individuals

ii. Income Tax Based on the Graduated Income Tax Rates

b. For Individuals Earning Both Compensation Income and Income from Business
and/or Practice of Profession, their income taxes shall be:
i. For Income from Compensation: Based on Graduated Income Tax Rates; and
ii. For Income from Business and/or Practice of Profession:
(1) If the total Gross Sales/Receipts Do Not Exceed VAT Threshold of ₱3,000,000,
the Individual Taxpayer May Opt to Avail:
a) 8% Income Tax on Gross Sales/Receipts and Other Non-Operating Income in
Lieu of the Graduated Income Tax Rates and the Percentage Tax; Or
b) Income Tax Based on Graduated Income Tax Rates
(2) If the total Gross Sales/Receipts Exceed VAT Threshold of ₱3,000,000
a) Income Tax Based on Graduated Income Tax Rates

6. Fringe benefits. Any good, service or other benefit furnished or granted in cash or in kind
by an employer to an individual employee (except rank and file employees). In general, final
tax of 35% on the grossed-up monetary value of fringe benefits.

Table 3-5 Passive income: Final tax (RA 10963)

From sources within the Philippines, Resident Non- Resident Non- Non-
on passive income of: Citizen resident Alien resident resident
Citizen Alien (ETB) Alien
(NETB)
a. Interest under the expanded 15% Exempt 15% Exempt Exempt
foreign currency deposit system
b. Royalty from books, literary 10% 10% 10% 10%
works and musical compositions
c. Dividend from a domestic 10% 10% 10% 20%
corporation, or from a joint stock
company, and insurance or
mutual fund company, and
regional operating headquarters
of multinational company, or
share in the distributive net
income after tax of a partnership
(except a general professional
partnership), joint or joint 25%
venture or consortium taxable as
a corporation
d. Interest on any currency bank 20% 20% 20% 20%
deposit, yield or other monetary
benefits from deposit substitute,
trust fund and similar
arrangement; royalty other than
(b) above; Prizes* exceeding
P10,000 and other winnings**,
Philippine Charity Sweepstakes
Office and lotto winnings
exceeding ₱10,000
e. Interest on long-term deposit or Exempt Exempt Exempt Exempt
investment in banks (with
maturity of 5 years or more)***
*Prize is the result of an effort (e.g. prize in a beauty contest).

3
Chapter 3 Taxation of Individuals

**Winning is the result of a transaction where the outcome depends upon chance (e.g. betting).
Prizes and other winnings amounting to ₱10,000 or less shall be subject to tax under
(tax table 0% to 35% ITR)
PCSO and Lotto amounting to ₱10,000 or less is exempt from income tax
***Upon pre-termination before the fifth year, there should be imposed on the entire income
from the proceeds of the long-term deposit based on the remaining maturity thereof:
Holding Period
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%

 Capital Gains on Shares of Stock and Real Property

To recognize capital gain or loss it is necessary to have a sale or exchange of a capital asset.
Capital asset is (a) an asset not used in business (b) an assets held as investment. The capital
gain tax is per transaction basis.

Illustration 5
Mr. Allan Angeles, a resident citizen of the Philippines had shares of stock of a domestic
corporation held as investment that he acquired for a purchase price of ₱338,750. The
shares were not listed and traded in a local stock exchange He sold the shares directly to
a buyer for a selling price of ₱625,000. How much is the capital gain tax?

Illustration 6
Mr. Jhonny Lajom is a citizen and resident of the Philippines who owns a piece of land and
building thereon (real property) in the Philippines that he acquired for ₱3,750,000,
expenses of acquisition included. He sold this for a selling price net of selling expenses of
₱3,500,000. The fair market value (after deducting selling expenses) was ₱3,625,000.
How much is the capital gain tax?

 Passive Income
Passive incomes are income subject to final withholding tax and shall not be included in the gross
income of the taxpayer. Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as a full and final payment of the income tax due from the
payee on the said income. The liability for payment of the tax rests primarily on the payor as a
withholding agent. Thus, in case of his failure to withhold the tax or in case of under-withholding,
the deficiency tax shall be collected from the payor/withholding agent. The payee is not required
to file an income tax return for the particular income.

Illustration 7
Mr. Menard Oberes, a resident citizen of the Philippines had the following income items:
Interest on Philippine peso savings deposit in Allied Bank…………………. ₱12,500
Interest on Philippine peso time deposit with maturity of five years……… 37,500
Interest on U.S. dollar deposit in Banco De Oro (under the expanded
foreign currency deposit system)…………………....................................... 6,250
Royalty from book copyrighted in the Philippines……………………………. 18,750
Dividend from a domestic corporation…………………………………………. 25,000
How much is the total amount of final withholding tax on passive income?

4
Chapter 3 Taxation of Individuals

Passive Rate Final tax

income
Interest on ₱ savings deposit………………….. 12,500 20% 2,500.00
Interest on ₱ time deposit – 5 years maturity... 37,500 Exempt --
Interest on U.S. $ deposit…………………….. 6,250 15% 937.50
Royalty from book………………………………….. 18,750 10% 1,875.00
Dividend from a domestic corporation……………. 25,000 10% 2,500.00
Total……………………………………………………………………………………….. 7,812.50

 Compensation Income
In general, the term "compensation" means all remuneration for services performed by an
employee for his employer under an employer-employee relationship (whether monetary or
non-monetary), such as:
1. Salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation,
representation, entertainment and the like);
2. Fees including director's fees, if the director is, at the same time, an employee of the
employer/corporation;
3. Taxable pensions and retirement pay;
4. Other income of a similar nature;
5. Fringe benefits except those which are subject to the fringe benefits tax.

 Exclusion from Gross Income of Special Significance to an Employee

1. 13th month pay and other benefits such as Christmas bonus, productivity incentive bonus,
loyalty award, gifts in cash or in kind and other benefits of similar nature actually received by
officials and employees of both public and privates entities. Provided that the total exclusion
shall not exceed ₱90,000 (RA10963)
2. GSIS, SSS, Philhealth and Pag-ibig contributions, and union dues of individuals.
3. Benefits received from or enjoyed under the Social Security System (SSS) or benefit received
from Government Service Insurance System (GSIS), including the retirement gratuity received
by government officials and employees.

 De Minimis Benefits
De minimis benefits are facilities or privileges furnished or offered by an employer to his
employees, that are of relatively small value and are offered or furnished by the employer merely
as a means of promoting the health, goodwill, contentment, or efficiency of his employees. The
following are considered as de minimis benefits granted to each employee:
1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days
during the year
2. Monetized value of vacation and sick leave credits paid to government officials and employees
3. Medical cash allowance to dependents of employees, not exceeding ₱1,500 per employee
per semester or ₱250 per month (RR 11-2018 on TRAIN RA 10693)
4. Rice subsidy of ₱2,000 or one (1) sack of 50 kg. rice per month amounting to not more than
₱2,000 (RR 11-2018 on TRAIN RA 10693)
5. Uniform and clothing allowance not exceeding ₱6,000 per annum; (RR 11-2018 on TRAIN RA
10693)
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity assistance, and routine consultations, not
exceeding ₱10,000 per annum
7. Laundry allowance not exceeding ₱300 per month
8. Employees achievement awards, e.g., for length of service or safety achievement, which must
be in the form of a tangible personal property other than cash or gift certificate, with an annual
monetary value not exceeding ₱10,000 received by the employee under an established written
plan which does not discriminate in favor of highly paid employees

5
Chapter 3 Taxation of Individuals

9. Gifts given during Christmas and major anniversary celebration not exceeding ₱5,000 per
employee per annum
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a per region basis.
11. Benefits by an employee by virtue of a collective bargaining agreement (CBA) and productivity
incentive schemes provided that the total monetary value received from both CBA and
productivity incentive schemes combined do not exceed ₱10,000 per employee per taxable
year.
If the employee is given benefits that exceed the maximum limits, the excess is added to the 13th
month pay, productivity incentives and Christmas bonus if the total of the computation is greater
than ₱90,000, it becomes taxable as part of the employee's gross income.

 Minimum Wage Earner (MWE)

Minimum Wage Earner refers 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 he/she is assigned." (R.A. 9504 Sec. 1)
The term ‘statutory minimum wage’ shall refer to the rate 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).

Minimum wage earners shall be exempt from the payment of income tax on their taxable income:
Provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard
pay received by such minimum wage earners shall likewise be exempt from income tax. (RA
9504 Sec. 2)

Illustration 8
Mr. Santos a minimum wage earner works for Sunrise Company. He is not engaged in
business nor has any other source of income other than his employment. For 2019 he
earned a total compensation income of ₱135,000 inclusive of 13th month pay, additional
pay of ₱140,000 which consists of the overtime pay ₱80,000, night shift differential
₱30,000, hazard pay ₱15,000 and holiday pay ₱15,000. The taxpayer contributed to the
SSS, Philhealth and HDMF amounting to ₱5,000 and has received 13th month pay of
₱11,000. How much is the income tax of Mr. Santos.

Gross Compensation Income 135,000

Add: Overtime, night shift differential, hazard, and holiday pay 140,000
Total Income 275,000
Less: Mandatory contributions 5,000
Non-taxable benefits 11,000 (16,000)
TAXABLE COMPENSATION INCOME 259,000
INCOME TAX DUE EXEMPT

Illustration 9
Mr. Gimpes is citizen and resident of the Philippines with three minor children he works
as a concierge in a hotel. He had the following data during the calendar year:
Gross salaries………………………………………….. ₱300,000
Overtime pay…………………………………………… 9,000
Night shift differential pay…………………………….. 2,700
Payroll deductions:
SSS contribution……………………………………. 6,975
Philhealth contribution……………………………… 5,250
Pagibig contribution………………………………… 1,200
Labor union dues…………………………………… 1,500

6
Chapter 3 Taxation of Individuals

Advances from employer …………………………. 12,000

Thirteenth month pay………………………………….. 25,000
Productivity incentive pay………………………….. 70,000
Rice subsidy……………………………………………. 21,000
How much is the income tax of Mr. Gimpes?

Gross Salaries 300,000

Add: Overtime & night shift differential 11,700
Less: Mandatory contributions (SSS, Philhealth, Pag-ibig, Union) (14,925)
Add: Non-taxable benefits (13th Month, Productivity incentive) 95,000
De minimis (Rice subsidy 27,000 – 24,000) 3,000
Exempt benefit (90,000) 8,000
TAXABLE COMPENSATION INCOME 304,775
INCOME TAX PAYABLE 10,955

 Married Individuals
The husband and wife shall accomplish one income tax return (BIR Form 1701) only. Where it is
impracticable for the spouses to file one return, each spouse may file a separate return of income.
They compute the income tax separately on their respective incomes. The two taxes will be added
to arrive at a single income tax still due or refundable. Income which is clearly joint or which cannot
be identified as exclusively of one spouse with the related deduction will be divided equally.

 Compensation and Business Income Tax Formula – Graduated Tax Rate

1. Resident Citizen
Gross compensation income - within & without the PH. ₱ xx
Add: Gross income* from business/profession - within & without the PH xx
Less: Deductions for expenses - within & without the PH ( xx )
Taxable income xx
X Tax rate (0% - 35%) %
Income tax due xx
Less: Tax credit / payment / withheld (per BIR From 2316/2304) ( xx )
Income tax payable xx
*Sales/revenues/receipts/fees – Sales returns & discounts - Cost of sales/services

2. Non-resident Citizen, Resident Alien, and Non-resident Alien ETB

Gross compensation income - within the PH ₱ xx
Add: Gross income* from business/profession - within the PH xx
Less: Deductions for expenses - within the PH ( xx )
Taxable income xx
X Tax rate (0% - 35%) %
Income tax due xx
Less: Tax credit / payment / withheld (per BIR From 2316/2304) ( xx )
Income tax payable xx

3. Non-resident Alien NETB

Gross income - within the PH ₱ xx
X Tax rate 25%
Final tax xx

7
Chapter 3 Taxation of Individuals

Illustration 10 Total Gross Sales/Receipts Exceed VAT Threshold of ₱3,000,000 –

Graduated Tax Rate
An individual taxpayer has the following income and expenses during the year:
Compensation income, Philippines………….. ₱1,135,000
Business income, Philippines………………… 1,270,000
Business income, Singapore..……………….. 1,221,760
Business income, USA……………………….. 1,360,000
Expenses from business, Philippines………. 701,000
Expenses from business, Singapore……….. 593,560
Expenses from business, USA……………… 644,000
Interest on Peso bank deposit with BDO…… 93,600
The income tax on compensation and business income at the end of the year if the
taxpayer is:
1. Mr. Inductivo, Filipino, residing in Bulacan.
2. Mr. Joaquin, Filipino, married, working in Saudi.
3. Mr. Richard Paul, American residing in Makati City.
4. Mr. Masaaki Imai, Japanese, residing in Tokyo doing business in the Philippines.
5. Mr. Ian Fleming, British, married, residing in London not doing business in the
Philippines. Assume that his incomes in the Philippines are the business income and
interest on bank deposit.

1. Resident Citizen
Compensation income, Philippines 1,135,000
Business income, Philippines 1,270,000
Business income, Singapore 1,221,760
Business income, USA 1,360,000
Total 4,986,760
Less: Expenses, Philippines 701,000
Expenses, Singapore 593,560
Expenses, USA 644,000 (1,938,560)
TAXABLE INCOME 3,048,200
INCOME TAX 825,424

2. Non-resident Citizen
Compensation income, Philippines 1,135,000
Business income, Philippines 1,270,000
Total 2,405,000
Less: Expenses, Philippines (701,000)
TAXABLE INCOME 1,704,000
INCOME TAX 401,200

3. Resident Alien
TAXABLE INCOME 1,704,000
INCOME TAX 401,200

4. Non-resident Alien Engaged in Trade/Business

TAXABLE INCOME 1,704,000
INCOME TAX 401,200

5. Non-resident Alien Not engaged in Trade/Business

Gross income, Philippines 1,363,600
Rate of tax 25%
FINAL TAX 340,900

8
Chapter 3 Taxation of Individuals

 Income Earned by Alien Individuals Employed by Regional Headquarters (RHQ) or Area

Headquarters and Regional Operating Headquarters (ROH) of Multinational Companies,
Offshore Banking Units (OBUs), Petroleum Service Contractor and Subcontractor
All salaries, wages, annuities, compensation, remuneration and other emoluments, such as
honoraria and allowances received by the following alien individual shall be subject to Graduated
Income Tax Rates (tax table 0% to 35%). GI=Salaries, Wages, Annuities, etc.

 Quarterly Income Tax of Individuals

Resident Citizen in business or practice of profession, Non-resident Citizen, Resident Alien and
Non-resident Alien Engaged in trade, business or practice of profession in the Philippines, must
file three quarterly income tax returns (BIR Form 1701Q) and final income tax return (BIR Form
1701) on their taxable income and pay the income tax not later than:

First quarterly return : May 15 of the current year

Second quarterly return : August 15 of the current year
Third quarterly return : November 15 of the current year
Final or annual return : April 15 of the succeeding year

Illustration 11 Pure Business Income – Graduated Tax Rate

A resident citizen of the Philippines had the following non-cumulative data on his practice of
profession in 2018.
1st Q 2nd Q 3rd Q 4th Q
Gross revenues ₱125,000 ₱162,500 ₱175,000 ₱162,500
Interest on bank deposit 2,500 5,000 7,500 10,000
Direct cost of services 37,500 48,750 51,250 50,000
Other costs/expenses 12,500 16,250 17,500 16,250
How much is the income tax still due at the end of the year?
1st Q 2nd Q 3rd Q 4th Q
Gross revenues 125,000 287,500 462,500 625,000
Less: Direct cost (37,500) (86,250) (137,500) (187,500)
Gross income 87,500 201,250 325,000 437,500
Less: Other costs/expenses (12,500) (28,750) (46,250) (62,500)
TAXABLE INCOME 75,000 172,500 278,750 375,000
Income tax due 25,000
Less: Income tax paid
First quarter
Second quarter
Third quarter (5,750)
INCOME TAX PAYABLE 0 0 5,750 19,250

 Optional Standard Deduction

In lieu of itemized deductions, an individual taxpayer other than a nonresident alien may elect a
standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross
receipts, as the case may be. A taxpayer who elected to avail of the OSD shall signify in his return
such intention otherwise he shall be considered as having availed himself of the itemized
deductions. Once the election to avail the OSD is signified in the return, it shall be irrevocable for
the taxable year for which the return is made. This means that a taxpayer who initially filed a return
availing OSD is precluded from amending said return in order to shift to the itemized deductions.
An individual taxpayer who is entitled to and claimed the OSD shall not be required to submit with
his tax return such financial statements otherwise required under the Code provided, that, except
when the Commissioner otherwise permits, the said individual shall keep such records pertaining
to his gross sales or gross receipts.

9
Chapter 3 Taxation of Individuals

Illustration 12 – Pure Business Income – Graduated Tax Rate

Jeremiah, a resident citizen of the Philippines had the following business income and expenses
during the year:
Gross sales…………………………………… ₱ 960,000 RC NRA ETB

Cost of sales…………………………………. 640,000 NRC NRA NETB

Expenses……………………………………. 160,000 RA (25% x GI)

How much is the income tax of Jeremiah assuming he availed the optional standard
deduction? TB Ampongan
Itemized Optional
Gross sales…………..…………................. 960,000 960,000
Less: Cost of sales……….………………… (640,000) ----0----
Gross income...……………………………. 320,000 960,000
Less: Expenses / OSD 40%..................... (160,000) (384,000)
TAXABLE INCOME…………………….... 160,000 576,000
INCOME TAX DUE……………………….. -0- 74,000

 Individual Income Tax Returns (ITR)

1. Who are required to file
a. Individuals
i. Filipino citizen residing in the Philippines
ii. Filipino citizen residing outside the Philippines, on his income from sources within the
Philippines
iii. Alien residing in the Philippines, on income derived from sources within the Philippines
and
iv. Nonresident alien engaged in trade or business or in the exercise of profession in the
Philippines. (Sec. 51 A, NIRC)
2. Who are not required to file
a. An individual whose taxable income does not exceed ₱250,000 based on the tax schedule
for compensation income earners shall not be required to file an ITR.
b. However, a citizen of the Philippines and any alien individual engaged in business or
practice of profession within the Philippines shall file an income tax return, regardless of
the amount of gross income.
c. Sec. 51-A an individual receiving purely compensation income from one employer wherein
the tax of which has been correctly withheld shall not be required to file an annual ITR.
The certificate of withholding, filed by the employer and stamped “received” by the BIR,
shall be tantamount to the substituted filing of income tax return of the employees.
d. However, if an individual derives compensation concurrently from two or more employers
at any time during the taxable year shall file an income tax return.
e. An individual whose sole income has been subjected to final withholding tax pursuant to
Section 57(A) of this Code.
f. An individual who is exempt from income tax pursuant to the provisions of this Code and
other laws, general or special.
g. A minimum wage earner
Substituted Filing of Income Tax Returns by Employees Receiving Purely
Compensation Income, Requisites:
i. The employee receives purely compensation income (regardless of amount) during
the taxable year.
ii. The employee receives the income only from one employer during the taxable year.
iii. The amount of tax due from the employee at the end of the year equals the amount of
tax withheld by the employer.
iv. The employee’s spouse also complies with all 3 conditions stated above.
v. The employer files the annual information return (BIR Form 1604-CF)
vi. The employer issues BIR Form 2316

10
Chapter 3 Taxation of Individuals

Note: Any individual not required to file an income tax return may be required to
file an information return.
3. Where to file
a. With any Authorized Agent Bank (AAB) located within the territorial jurisdiction of the
Revenue District Office where the taxpayer is required to register/where the taxpayer has
his legal residence or place of business in the Philippines.
b. In places where there are no AABs, the returns shall be filed with the Revenue Collection
Officer or duly Authorized City or Municipal Treasurer of the Revenue District Office where
the taxpayer is required to register/where the taxpayer has his legal residence or place of
business in the Philippines.
c. In case taxpayer has no legal residence or place of business in the Philippines, the return
shall be filed with the Office of the Commissioner or Revenue District Office No. 39, South
Quezon City.
4. When to file (See discussion on quarterly income tax of individuals)
5. Husband and Wife (See discussion on married individuals)
6. Return of Parent to include income of Children
The income of unmarried minors derived from property received from a living parent shall be
included in the return of the parent except a) when the donor’s tax has been paid on such
property, b) when the transfer of such property is exempt from donor’s tax.
7. Return of persons with disability
If the taxpayer is unable to make his own return, the return may be made a) by his duly
authorized agent or representative or b) by the guardian or other person charged with the care
of his person or property, where the principal and his representative or guardian assuming the
responsibility of making the return and incurring penalties provided for erroneous, false or
fraudulent returns.
8. Installment of Payment
When the tax due is in excess of Two thousand pesos (₱2,000), the taxpayer other than a
corporation may elect to pay the tax in two (2) equal installments in which case, the first
installment shall be paid at the time the return is filed and the second installment, on or before
October 15 following the close of the calendar year. If any installment is not paid on or before
the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable,
together with the delinquency penalties. (Sec. 56 A[2], ibid.)

PROBLEM 1
Joyce had the following data from her employment during the year:
Monthly salary…………………………………… ₱ 24,000
Pag-ibig fund contributions……………………. 3,000
Union dues…………………………………..….. 4,800
Philhealth contributions………………………... 1,440
SSS premiums………………………………..... 960
13th month pay……………………………........ 24,000
Mid-year bonus……………………………....... 24,000
Loyalty award………………………………...... 10,000

Compute the following:

1. Which portion of compensation is excluded from the gross compensation income?
2. The taxable compensation income.
3. The income tax payable.
Gross Compensation Income (24,000 x 12) 288,000
Less: Mandatory contributions (Pag-ibig, Union, Philhealth, SSS) (10,200)
Add: Non-taxable benefits ( 58,000
Exempt benefit (90,000) 0
TAXABLE COMPENSATION INCOME 277,800
INCOME TAX PAYABLE 5,560

11
Chapter 3 Taxation of Individuals

PROBLEM 2 Mix Income - 8% Tax Rate

Mrs. Gan, a Financial Comptroller of BASS Company, earned annual compensation of in 2019 of
₱1,500,000 inclusive of 13th month and other benefits in the amount of ₱120,000 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, she owns a
convenience store, with gross sales of ₱2,400,000. Her cost of sales and operating expenses are
₱1,000,000 and ₱600,000, respectively, and with non-operating income of ₱100,000.
Required: Compute the income tax payable of Mrs. Gan if she opted to be taxed at 8%.
a.
Total Compensation Income 1,500,000
Less: Non-taxable benefits (90,000)
TAXABLE COMPENSATION INCOME 1,410,000
INCOME TAX DUE & PAYABLE 313,000
b.
Gross Sales – Convenience Store 2,400,000
Add: Non-Operating Income 100,000
TAXABLE BUSINESS INCOME 2,500,000
INCOME TAX DUE & PAYABLE (2,500,000 x 8%) 200,000
TOTAL INCOME TAX DUE & PAYABLE 513,000
(Compensation & Business)

PROBLEM 3 Mix Income - Graduated Tax Rate

Mrs. Gan, a Financial Comptroller of BASS Company, earned annual compensation of in 2019 of
₱1,500,000 inclusive of 13th month and other benefits in the amount of ₱120,000 but net of
mandatory contributions to SSS and Philhealth. Aside from employment income, she owns a
convenience store, with gross sales of ₱2,400,000. Her cost of sales and operating expenses are
₱1,000,000 and ₱600,000, respectively, and with non-operating income of ₱100,000.
Required: Compute the income tax payable of Mrs. Gan if she did not opt for the 8%.

Total Compensation Income 1,500,000

Less: Non-taxable benefits (90,000)
TAXABLE COMPENSATION INCOME 1,410,000
Add: Taxable Business Income
Gross Sales – Convenience Store 2,400,000
Less: Cost of Sales (1,000,000)
Gross Income 1,400,000
Less: Operating Expenses (600,000)
Net Income from Operation 800,000
Add: Non-Operating Income 100,000 900,000
TOTAL TAXABLE INCOME 2,310,000
INCOME TAX DUE & PAYABLE 589,200

12
Chapter 3 Taxation of Individuals

PROBLEM 4 Pure Business Income - 8% Tax Rate

Mrs. Bantog operates a convenience store while she offers bookkeeping services to her clients. In
2018 her gross sales amounted to ₱800,000, in addition to her receipts from bookkeeping services
of ₱300,000. She incurred cost of sales and operating expenses amounting to ₱600,000 and
₱200,000 respectively. She already signified her intention to be taxed at 8% income tax rate in her
1st quarter return.
Required: Compute the income tax of Mrs. Bantog.

Gross Sales – Convenience Store 800,000

Gross Receipts - Bookkeeping 300,000
Total Sales/Receipts 1,100,000
Less: Amount allowed as deduction Sec 24(A)(2)(b) (250,000)
TAXABLE INCOME 850,000
INCOME TAX DUE & PAYABLE (850,000 x 8%) 68,000

PROBLEM 5 Pure Business Income – Graduated Tax Rate

Mrs. Bantog operates a convenience store while she offers bookkeeping services to her clients. In
2018 her gross sales amounted to ₱800,000, in addition to her receipts from bookkeeping services
of ₱300,000. She incurred cost of sales and operating expenses amounting to ₱600,000 and
₱200,000 respectively. She failed to signify her intention to be taxed at 8% income tax rate in
her 1st quarter return.
Required: Compute the income tax of Mrs. Bantog.

Total Sales/Receipts 1,100,000

Less: Cost of Sales (600,000)
Gross Income 500,000
Less: Operating Expenses (200,000)
TAXABLE INCOME 300,000
INCOME TAX DUE & PAYABLE 10,000

PROBLEM 6 Pure Business Income – Graduated Tax Rate

Mr. Ray is a prominent independent contractor who offers architectural and engineering services.
Since his career flourished, his total gross receipts amounted to ₱4,250,000 for taxable year 2019.
His recorded cost of service and operating expense were ₱2,150,000 and ₱1,000,000 respectively.
Required: Compute the income tax of Mr. Ray.

Gross Receipts – (Architectural and Engineering Services) 4,250,000

Less: Cost of Service (2,150,000)
Gross Income 2,100,000
Less: Operating Expenses (1,000,000)
TAXABLE INCOME 1,100,000
INCOME TAX DUE & PAYABLE 220,000

– NOTHING FOLLOWS –

13