INCOME TAXATION Taxation of Individuals Learning Objectives: After studying this chapter, you should be able to: Identify the individual income taxpayers. Define the individual taxpayers and the related terms used. Illustrate the different classification of individual taxpayers. State the sources of income of individual taxpayers. Recognize the categories of income and state the tax rates to be used by each type of individual taxpayer. 6. List the sources of passive income and state the final tax rates to be used by each type of individual taxpayer. 7. Discuss the treatment of passive income in the computation of taxable income from compensation or business/professional income. 8. Define the allowable deductions from gross income. 9. Define and compute taxable income and tax due for each type of individual taxpayer depending on income category. 10. Explain the taxation of income received by social media influencers. 11. Be familiar with individual taxpayers exempt from income tax. yey The Code directs that a tax shall be imposed on the taxable income of every individual. Our present tax system imposes progressive rates of income taxes on citizens and resident aliens. This system equitably distributes the tax burden by recognizing the paying ability of the individual taxpayer. likewise, the global treatment in taxing compensation and business income has been restored from the previous schedular treatment. In a schedular system, the income tax treatment varies depending on.the kind of taxable income of the taxpayer. A schedular system of taxation provides for a different tax treatment of different types of income so that a separate tax return is required to be filed for each type of income and the tax is Computed on a per return or per schedule basis.A t, on the other hand, is a system where the tax treatme, Global treatin base and generally treats in common all categories o inafferently the payer A global system of taxation is one where the ta a He pup all items of income earned during a taxable period and pay ae ee tax rules on these different items of income. Under this sy eae an is the aggregate of the gross compensation income business or professional income less the allowable deductions. unitary but progressive, graduated rates. Nt View, f taxabj, Payer i, Y Under stem, the and gros, Is being subjected tg, Unlike financial accounting, tax law does not distinguish between a unincorporated business. If one person engages in several different bu: his or her total taxable income is determined by aggregating income and various sources. If two or more individuals-professionals form a gene partnership, there is no income tax imposed on the entity. Rather, include their respective shares of the Partnership's income, other sources, in determining their individual taxable incom Person and ay SINESS activitio, losses from th, al professions the partners mug along with income from an es. While all individuals are subject to tax on their respective taxable incomes, all taxed at the same rate for two reaso1 levels of income. Second, even at the sa they are not fer for higher CLASSIFICATION OF INDIVIDUAL INCOME TAXPAYERS 1. Citizen a. Resident b. Non-resident 2. Alien a. Resident b. Non-resident 1. Engaged in trade orb 2. Not engaged in trade 3. Employed by a usiness in the Philippines Or business in the Philippines b. Offshore banking units, Petroleum contractors and sub-contractors, 34 | Income Taxation 2023 Edition by Prof win p01.Definition of Terms 3. Citizen. The following shall be considered citizens of the Philippines: «Those who are citizens of the Philippi Constitution; ' Philippines at the time of the adoption of the Feb. 2, 1987 Those whose fathers or mothers are citizens of the Philippines; «Those born before Jan. 17, 1973, Filpin mothers the date of the adoption of the 1973 Constitution, of tir fron '0 elect Philippine citizenship upon reaching the age of majority; and * Those who are naturalized in accordance with law. Resident Citizen is a Filipino citizen who permanently resides in the Philippines. Non-Resident Citizen means: + Acitizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis © A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. “Most of the time” is interpreted to mean presence abroad for at least 183 days during the taxable year (BIR Ruling 128-99, Aug. 18, 1999). © Acitizen who has been previously considered as non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. © The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines, as the case may be. Resident Alien. An individual whose residence is within the Philippines and who is not a citizen thereof. He is one who is actually present in the Philippines and who is not a mere transient or sojourner. But residence does not mean mere physical presence. An alien is considered a resident or a non-resident depending on his intention with regard to the length and nature of his stay. Non-Resident Alien. An individual whose residence is not within the Philippines and who is not a citizen thereof. ls | 35 Chapter 2: Taxation of individual |6. Non-Resident Alien Engaged in Trade and Business (NRAETB) refers to , resident alien who shall come to the Philippines and stay for an agaregate nen ts more than one hundred eighty (180) days during any calendar year. & what s actual 7. Non-Resident Alien Not Engaged in Trade and Business (NRANETB) refers to, perfor resident alien who shall come to the Philippines and stay for an aggregate pe," work, one hundred eighty (180) days or less during any calendar year. “ee en 4. Fring 8. Compensation Income. In general, means all remuneration for services perfor, al by an employee for his employer under an employer-employee relationship, uni: aie specifically excluded by the Code. : The name by which the remuneration for services Is designated Is immaterial. Th, t salaries, wages, emoluments and honoraria, allowances, commissions (ey ‘ transportation, representation, entertainment and the like); fees including direst, fees, if the director is, at the same time, an employee of the employer/corporatig, taxable bonuses and fringe benefits, except those which are subject to the fringe benefits tax under Sec. 33 of the Code and the allowable "de minimis" benef taxable pensions and retirement pay; and other income of a similar natyy constitute compensation income. 9. Compensation Income Earners. Individuals whose source of income is Purely derived from an employer-employee relationship. 10, Employee. An individual performing services under an employer-employe 15. Mit relationship. The term covers all employees, including officers and employees wit whether elected or appointed, of the Government of the Philippines; or any politics wit subdivision thereof or any agency or instrumentality. the mir 11, Rank and File Employee refers to an employee holding neither managerial rx cov supervisory position as defined under existing provisions of the Labor Code of the ear Philippines, as amended. Ace erd 12. Employer. Any person for whom an individual performs or performed any senitt of whatever nature, under an employer-employee relationship. It is not necessat! 17. that the services be continuing at the time the wages are paid in order that the status of employer may exist. Thus, for purposes of withholding, a person for who" Sol an individual has performed: past services and from whom he is still receiié compensation is an "employer." 18. OC . fs 13. Employer and Employee Relationship exists when a person for whom services Vet ie Performed (employer) has the right to control and direct an. individual W° OF Performs the services (employee), not only as to the result of the work t0 accomplished but also as to the details, methods and means by which accomplished. An employee is subject to the control of the employer not only 5" 36 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballada15. 16. 17. 18, What shall be done, but how it shall be done. It is not necessary that the employer actually exercises the right to direct or control the manner in which the services are performed. It is sufficient that there exists a right to control the manner of doing the work Fringe Benefits means any good, service or other benefit furnished or granted in cash or in kind other th an the basic compensation, by an employer to an individual employee (except rank and file employee as defined herein) such as, but not limited to the following: a. Housing; b. Expense account; €. Vehicle of any kind; d. Household personnel, such as maid, driver and others; @. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; Expenses for foreign travel; Holiday and vacation expenses; i. Education assistance to the employee or his dependents; and j. life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. azo Minimum Wage Earner (MWE) refers to a worker in the private sector who is paid with a statutory minimum wage (SMW) rates, or to an employee in the public sector with compensation income of not more than the statutory minimum wage rates in the non-agricultural sector where the worker/employee is assigned. Such statutory minimum wage rates are exempted from income tax. Likewise, the exemption covers the holiday pay, overtime pay, night shift differential pay, and hazard pay earned by an MWE. Marginal Income Earner refers to an individual whose business does not realize gross sales or receipts exceeding P100,000 in any 12-month period. ‘Mixed Income Earner. An individual earning compensation income from employment, and income from business, practice of profession and/or other sources aside from employment. OCWs or OFWs refer to Filipino citizens employed in foreign countries who are physically present in a foreign country as a consequence of their employment thereat. Their salaries and wages are paid by an employer abroad and are not borne by any entity or person in the Philippines. To be considered as an OCW or OFW, they must be duly registered as such with the Philippine Overseas Chapter 2: Taxation of individuals | 3719. 20. 21, 22, nt Adminis a ‘seas Employment Cg, POEA), with a valid Oversea: : istration (POEA), wi yyiment Admit Employ - cive ensatio seamen are Filipino citizens who receive compensation for se, Seafarers or sea broad as a member of the complement of a vessel engaged Xclusive ered abroad as a me a altrade. They must be duly registered as such with the POEA with aya international trade u A GEC and Seafarers Identification Record Book (SIRB) or Seaman's Book issueq, Maritime industry Authority (MARINA) (Revenue Regulations 1-2011, Feb, 24 2011, Self-employed. A sole proprietor or an independent contractor who reports incom, earned from self-employment. S/he controls who s/he works for, how the Work done and when it is done. It includes those hired under a contract of service OF jg order, and professionals whose income is derived purely from the Practice 9, profession and not under an employer-emoloyee relationship. Professional. A person formally certified by a professional body belonging toa Specific profession by virtue of having completed a required examination OF course of studies and/or practice, whose competence can usually be measured against a, established set of standards. It also refers to a person who engages in some art g Sport for money, as a means of livelihood, rather than as a hobby. It includes but i not limited to doctors, lawyers, engineers, architects, CPAs, professiona| entertainers, artists, professional athletes, directors, Producers, insurance agents, insurance adjusters, management and technical consultants, bookkeeping agents, and other recipients of professional, promotional and talent fees. Gross Receipts 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, and deposits and advance Payments actually or constructively received during the taxable period for the services performed or to be Performed for another Person, except returnable Security deposits for purposes of these regulations. In the case of VAT taxpayer, this shall exclude the VAT component.14. Taxable Income refers to the pertinent items of grass income specified in the Code Code or ather less deductions, if any, authorized for such types of income by the special laws A VAT Threshold refers to the ceiling fixed by law to determine VAT re taxpayers. The VAT threshold is curre ntly set at three million pesos (P3,000,000) and tax liability of self-employed 1d 24(A)(2)(c){2) of the the same shall be used to determine the income and/or professionals under Sections 24(A)(2)(b) individu Tax Code, as amended. Yy Hegional or Area Headquarters (RHQs) shall mean a branch established in the nd which headquarters do not earn or Phitippin by multinational companie supervisory, communications s, or branches in the Asia- derive income from the Philippines and which act as and coordinating center for their affiliates, subsidian Pacific Region and other foreign markets, 26. Regional Operating Headquarters (ROHQs) shall ynean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance ‘advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development. 27. Deposits, in connection with offshore banking, shall mean funds in foreign currencies which are accepted and held by an Offshore Banking Unit or Foreign Currency Deposit Unit in the regular course of business, with the obligation to return an equivalent amount to the owner thereof, with or without interest. 28. Deposit Substitutes shall mean an alternative from of obtaining funds from the public (the term ‘public’ means borrowing from twenty (20) or more individual or Corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. Chapter 2: Taxation of Individuals | 39oN Foreign Currency Deposit System (FCDS) shall refer to the conduct ofp, transactions whereby any person, whether natural or juridieal, may deposi 2% currencies forming part of the Philippine international reserves, in accordan(o? the provisions of R.A. 6426 entitled “An Act Instituting a Foreign Currency <2 system in the Philippines, and For Other Purposes.” Po, 29. Foreign Currency Deposit Unit (FCDU) shall refer to that unit ofa local bang loca branch ofa foreign bank authorized by the Bangko Sentral ng Plipina gg” engage in foreign currency-denominated transactions, pursuant to the Provision R.A, 6426, as amended. Local bank shal refer toa thrift bank or acommervian organized under the laws of the Republic of the Philippines. Local branche foreign bank shall refer to a branch of a foreign bank doing business int, Philippines, pursuant to the provisions of R.A. 337, as amended, ; 30. 31. Offshore Banking System shall refer to the conduct of banking transaction i foreign currencies involving the receipt of funds principally from external ang internal sources and the utilization of such fund pursuant to Presidential Decre: 1034 as implemented by Central Bank (now Bangko Sentral ng Pilipinas (B59) Circular 1389, as amended. 32. Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the BSP to transact offshore banking business in the Philippines in accordance with the provisions of Presidential Decree 1034 as implemented by Central Bank (now BSP) Circular 1389, as amended Mlustrations: 1. A British computer expert was hired by a Philippine corporation to assist in ts computer system installation for which he had to stay in the Philippines for & months. Is he a resident alien? Answer: One who comes to the Philippines for a definite purpose which in its nature would require an extended stay and to that end makes his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to retu™ to his domicile (place of habitual or permanent residence) abroad when the purpos? for which he came has been accomplished. 2. A British cultural performer was engaged to perform in the Philippines for t*? weeks after which he returned to his country. Is he a resident alien? Answer: No. One who comes to the Philippines for a definite purpose which ins nature may be promptly accomplished is a transient. , in ‘An alien owns shares of stock in the Philippines. Is he considered as engaged business or trade in the Philippines? 40 | Income Taxation 2023 Edition by Prof. WIN Balada and Susan Ballada‘Answer: No, mere ownership of shares of stock in the Philippines is not enough to constitute as engaging in trade or business in the Philippines. 4. An alien temporarily serves as executive manager of an airline in Manila. Is he considered engaged in trade or business in the Philippines? ‘Answer: Yes, because he is performing the functions of a public office. 5. Aresident alien left the Philippines and abandoned his residency thereof without any intention of returning. May he still be considered a resident alien? ‘Answer: No, because he has no intention at all to return to the Philippines. 6. A resident alien left the Philippines with a re-entry permit. Is he still a resident alien? ‘Answer: Yes, his re-entry permit proves that he has not abandoned his residence in the Philippines. ‘A non-resident citizen went to Manila under the Balikbayan Program. Does his return to Manila interrupt his residence abroad? Answer: No, his trip to Manila did not interrupt his residence abroad. The phrase “uninterrupted period” should not be interpreted literally. His trip to Manila did not affect the continuity of his residence abroad. Illustration, Source: BIR Ruling 053-2010, Sept. 14, 2010 An alien who holds a Special Retiree Residents Visa is considered a resident alien subject to Philippine income tax under Section 24(A) of the Tax Code. Illustration. Source: BIR Ruling DA-290-2008, June 27, 2005 ‘an alien is a stockholder of a PEZA-registered enterprise. He has been involved in the company since its incorporation in 1996, has obtained a special non-immigrant visa and was required 25 company president to be in the Philippines most of the time to manage the day-to-day operations of the company. This alien qualifies asa resident alien for Philippine income tax purposes. His dividend income shall be subject tothe 410% final tox imposed under Section 24(8)(2) ofthe Tax Code to be withheld by the payor-company. SOURCES OF INCOME but the property, activity or service that produced the derived from labor, it is the place where the labor is .d from the use of capital, it is the place where ¥ profits from the sale or exchange of capital Source of income is not a place income. In the case of income performed; in the case of income derive the capital is employed; and in the case o' assets, its the place where the sale or transaction occurs. Chapter 2: Taxation of Individuals | 41It is important to know the source of income of an individual taxpayer—whether fron within the Philippines or without—because not all individual taxpayers are taxed on income. The following rules apply: 1, Resident citizens are taxable on all income derived from sources within ang without. 2. Non-resident citizens and alien individuals—resident and non-resident—ary taxable only on income derived from sources within the Philippines. An overseas contract worker is taxable only on his income from sources within. Individual Source of Income Within the Phils. Without the Phils, 1. Resident Citizen V v 2. Non-Resident Citizen y 3. Resident Alien v 4, Non-Resident Alien v CATEGORIES OF INCOME AND TAX RATES 1, Compensation Income. Individuals earning purely compensation income shall be taxed based on the graduated income tax rates (from 20% to 35% effective Jan. 1, 2018 to Dec. 31, 2022; from 15% to 35% effective Jan. 1, 2023 onwards) prescribed under Sec. 24(A) of the Tax Code. Total Compensation Income Pxxx. Less: Mandatory Contributions/Non-Taxable Benefits xx, Net Taxable Income PXXX 2. Business Income arises from self-employment or practice of profession. This shall not include income from performance of services by the taxpayer as an employee. Individuals earning income purely from self-employment and/or practice of profession whose gross sales/receipts and other non-operating income (GSRONO!) do not exceed the P3.0M VAT threshold, shall have the option to avail of: a. the graduated rates under Section 24(A) of the Tax Code, as amended; or b. 8% tax of GSRONOI in excess of P250,000* in lieu of the graduated income t&X rates under Section 24(A) and the percentage tax under Section 116 all under the Tax Code, as amended. Gross Sales/Receipts Prox Less: Cost of Sales ie Gross Income Pas Less: Operating Expenses oe Taxable Income (if graduated rates) P xx Ballad 42 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballada* oned i The 250,000 mentioned is not applicable to mixed income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. 3, Mixed Income Earners. There are individuals who earn income both from compensation and from self-employment (business or practice of profession). They shall be subject to the following taxes: a. Oncompensation income — at graduated rates; plus b. On income from business or practice of profession shall be subject to the following: b.1. If GSRONOI do not exceed the VAT threshold - * either at graduated rates or * 8% of GSRONOI in lieu of graduated rates and percentage tax, at the option of the taxpayer. b.2. 1f GSRONOI exceed the VAT threshold — at graduated rates. These will be illustrated later. 4, Passive Income. Passive income is subject to a separate and final tax. Examples of passive income are interests, royalties, prizes, winnings and dividends. A table showing the passive income and the corresponding tax rates is provided later. Ilustration: Helena Dela Cruz, single and a resident citizen, has the following passive income for the year 2018: Interest from BPI Savings Deposit P75,000 Royalty from Invention 80,000 Prize in a Painting Competition 50,000 Dividends Received from a Domestic Corporation 30,000 Computation of Final Tax: Interest (P75,000 x 20%) 15,000 Royalty (P80,000 x 20%) 16,000 Prize (P50,000 x 20%) 10,000 Dividends (P30,000 x 10%) 3,000 44,000 Total For this illustration, it is assumed that the passive income are all gross of final taxes (FT) or final withholding taxes (FWT). Chapter 2: Toxation of Individuals | 43“OTT "285 Japun asoys ydaaxa saxe) aBeiUaosag say0 04 Dalqns suaAedxe) -z pue ‘siohedxe3 pasaysifas vA“ 301 aiqeyrene Jou s1 xe3 968 241 “papualue se ‘apo xe] a3 Jo OTT “22S JapUN xe| aBeyUaDAg pue (Y)pz "2a Jo NAY] UL , suse Une 22s) 3eu 8200 ((v)ez “Wvlve 295) Sos ondosee cov'osz4 03093 sid.a394/s9}¢5 $8013 ‘w024 uysidiaoay/sayes oon isto sr 9woouraigexe $8008 5 atuoouy ‘g sidianay/sayes A we aigeren A $5015 UO x81 568 xo x0 “syauaa/awoour “siyauag/ewoout exer-UoU $59) aigexer-uou s53) ‘2uioout uso ss018 ‘swioou}reu | awoaul‘duloa 55008 : Wea Jo ploysauyy rn _ a (vive 95 sapun noes ge an ewooulsieeres | srawosurayeney | stowoouaygexey | (V2 295 9Pun a (re 5209 (IONO¥SD) (2 a a a payenpes IN3WOAWS-FS Nouvsnaawoo INaWAOTEN swoon saya xvi 3wooMI “mas 3nd Nousn3awoo sung a wow Huog I Nv LN3GIS3Y GNY N3ZILID TYNGIAIGNI NO S3LVY XL 3WOONI 40 AYVWIWNS Mada 44 | Income Taxation 2023 Edition by Prof. WIN Balada and Susan BallaFinal tax imposed on income or gain shall no longer be included as taxable incom 4 without any deduction and 5 net of the subject to the graduated rates. The final tax is imp is withheld at source. The amount received by p: final tax. The final tax on passive income is remitted by the payor who serves as the withholding agent! to the BIR. For example, if the prize in a painting competition is 50,000, the amount to be received by the winner wil only be P40,000 sive income earner Capital Gains from Sale of Shares of Stock, Not Traded through the Local Stock Exchange. Taxed at 15% final tax on a per transaction basis, IMustration: in 2018, Uri Dangal, a resident citizen, owns and holds as capital assets, shares of stocks of Prudential Guarantee and Assurance, Inc., a domestic corporation, costing P40,000. He sold all the shares directly to Lilibeth Buen for 160,000. How much final tax must be paid? Selling Price P160,000 Cost 40,000 Capital Gains 00 Capital Gains Tax (P120,000 x 15%) P18,000 6. Capital Gains from Sale of Real Property. Taxed at 6% final tax on the gross selling price or current fair market value at the time of sale, whichever is higher. In 2018, Nicos Luna, a resident citizen, sold his residential house and lot in Singalong, Manila for P2,500,000. The cost of the house and lot three years ago when he acquired the property was P1,500,000 and the fair market value at the time of sale is P2,300,000. How much is the capital gains from the sale? Illustration: Selling Price 2,500,000 Tax Rate 6% P 150,000 Final Tax 7. Fringe Benefits. Means any good, service, or other benefit furnished or granted by an employer in cash or in kind in addition to basic salaries, to an individual employee (except rank-and-file employee) under an employer-employee relationship. ed up monetary value granted to 2018. The grossed-up monetary value of the fringe by dividing the actual monetary value of the fringe monetary value is not to be included in the gross Taxed at 35% final tax based on the gross! employee beginning Jan. 1, benefit shall be determined benefit by 65%. The grossed up old any *¥x under the provisions of Sec. 57 of the Tax Code. 1 any person required to deduct ‘and withh Chapter 2: Taxation of Individuals | 45ON Income Secti of the taxpayer for purposes of computing the income tax abi (A). The tax imposed is payable by the employer. im tustration: In June 2018, Bor's Del Pilar, a resident citizen, recived fi employer, fringe benefit of P65,000. This fringe benefit is subject to the x benefit tax, Compute the tax that shall be paid by Boris’s employer ™ Monetary Value of the Fringe Benefit P65,000 Divide by 65% Grossed-up Monetary Value ~P100,000° Multiply by 35% Fringe Benefit Tax The categories of income and the tax rates applicable for each type of indivig taxpayer are presented below: : | “Resident” INCOME | citizen — LON TAXABLE INCOME as, a | detined in Sec. 31 the tox 20% to 35% 20% - 35% computed under the (eff. Jan. 1, 2018 to Dec. 31, 2022) FB. revised See. 24(A), except 15% to 35% 15% - 35% for NRANETD (eff. Jan. 1, 2023 onwards) ON PASSIVE INCOME ali ea 2ingeneral, interests, royalties, prizes and other 20% 20% =| FrasK. winnings Cash and/or property dividends - ONCAPITALGAIN___| 4, Sale of shares of stock not traded in stack exchange _| 5. Sale of real pre Notes: 1. The taxable income referred to in the table (no. 1) is discussed later in this chaps, hereon, any reference to Section 24(A) means the revised Section 24(A)(2)a) per TA for simplicity. R.A, 10963, Tax Reform for Acceleration and Inclusion Act (TRAIN): effect on Jan. 1, 2018, a val, Non-Resident Allen Engaged in Trade or Business Within the Philippines. In seit income tax rates applicable to this taxpayer shall be the rates imposed on indivi i and a resident alien individual on the taxable income derived within the Philippines. 1 i Upo! 3. Non-Resident Allen Not Engaged in Trade or Business Within the Philippines. entire income received from all sources within the Philippines by this taxPaVer “ye interest, cash and/or property dividends, rents, salaries, wages, Ler annual compensation, remuneration, emoluments, or other fixed or determinadl hs periodic or casual gains, profits, and income, and capital gains—income ta ptt 46. | Income Taxation 2023 Edition by Prof. WIN Ballada and susan Balada .4, Before TRAIN, all income received by a non-resident alien employed by: ° ay or area headquarters (RHOz) and regional operating headquarters (ROHQs) of FR es engaged in international trade haa and subsidiary branch offices in the Asia-Pacific region and other foreign b. Offshore banking units (OBU), c. Petroleum service contractors and sub-contractors (PSS), were included as gross income taxed at 15% final tax. This same tax treatment applied toa Filipino employed by such firms. But such Filipinos have the option to be taxed at either 15% or under Section 24(A). This preferential tax treatment no longer applies for employees of RHQ, ROHO, copy, and p86 beginning Jan, 1, 2018, without prejudice to the application of preferential tax rates under existing international tax treaties, if warranted. Thus, all concerned employees shall be subject to the regular income tax rate under Sec. 24(A) of the Tax Code, as amended. Illustration, Ms. CCF, an alien employed in MCUD Corporation that Is @ Petroleum Service Contractor, received compensation income of P5,000,000 for 2018, inclusive of P400,000 13th month pay and other benefits. Total Compensation Income 5,000,000 Less: Non-Taxable 13th Month Pay and Other Benefits (Max) 90,000 Taxable Compensation Income 4,910,000 Tax Due: On 2,000,000 490,000 * On Excess (P4,910,000 - P2,000,000) x 32% 931,200 P1,421,200 Total Income Tax Due 5, Revenue Memorandum Circular 31-2013 prescribes the guidelines on the taxation of compensation income of Philippine nationals ‘and alien individuals employed. by foreign governments, embassies, diplomatic missions, and international organizations situated in the Philippines. 6. Revenue Regulations 5-2013 prescribes the tax treatment of the sale of jewelry, gold and other metalic minerals to a non-resident alien individual not engaged in trade or business within the Philippines, or to a non-resident foreign corporation. gold, and other metallic minerals are required to pay business tax (VAT or percentage tax), income and excise tax, if applicable, in advance through the assigned Revenue Collection Officers of the Revenue District Office (RDO) having jurisdiction over the place where the subject transaction occurs, regardiess of whether the sellers are duly Sellers of jewelry, registered with the BIR: a. Advance payment of 12% VAT on gross selling price, or percentage tax 2t the rate of 3% on gross sales, as the case may be; Chapter 2: Taxation of individuals | 47buyer to the seller. PASSIVE INCOME Passive income is subject to a separate and final tax at fixed rates ranging from 5; 25% (for NRA-NETB). They are not included in the computation of taxable incomes. compensation or business/professional income, the tax due on which is ci accordance with the graduated income tax schedule for individuals in Sectioi ON PASSIVE INCOME Advance payment of income tax at the rate of 5% on gross payment; Actual payment of 23 excise tax based on either the actual market value of output at the time of removal, in the case of those locally extracted or produesr® value used by the Bureau of Customs (BOC) in computing tariff and duties, in tha” importations. Actual market value shall refer to the actual consideration paig’® Vs, Resident Citizen Non-Resident Citizen Resident Alien in the ME fren OMPuteg ». n 24(A), Non-Resident Aig Engaged in Trade or Business in the Philippines wages Interests Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements 20% 20% Interest income from a depository bank under the Expanded Foreign Currency Deposit System (FCDS) 15% (TRAIN) Non-resident citizen is tax exempt. Exempt Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitute, investment management accounts (IMA) and other investments evidenced by certificates in such form prescribed by the BSP with five-year term or longer. If deposit is pre-terminated before the fifth year, the corresponding final tax shall be: 4 years to less than 5 years 3 years to less than 4 years Less than 3 years Exempt 5% 12% 20% Exempt 5% 12% 20%, aman Cditinn hy Denf WIM Bailnda and Ccan BelleacdeNon-Resident Alien | | © _ Resident Citizen_ . ON PASSIVE INCOME [+ Non-Resident Citizen | Engaged in Trade | . int Alien or Business in the _ Philippines (NRA-ETB) Royalties Royalties, in general 20% 20% Royalties on books, literary works and |__ musical composition 10% 10% | Prizes | prizes, in general 20% 20% Prizes amounting to P10,000 or less are subject to the graduated income tax | schedule in Sec. 24(A). Winnings Winnings, in general 20% 20% Philippine Charity Sweepstakes Office (PCSO) Winnings Under TRAIN Law: More than 10,000 20% Exempt* | (Amended in CREATE) 10,000 or less Exempt Exempt | , | Under CREATE Act: More than P10,000 20% 20%* (Sec. 5, CREATE; eff. Apr. 11, 2021) 10,000 or less Exempt Exempt Cash and/or Property Dividends actually or constructively received from a domestic corporation, joint stock company, insurance, mutual fund companies and regional operating headquarter of a | |__ multinational company of ___| | Share of an individual in the 10% 20% distributable net income after tax of | apartnership (except 2 general |__ professional partnership) or Chapter 2: Taxation of Individuals | 49Share of an individual in the net 10% 20% income after tax of an association, joint account or a joint venture or consortium taxable as a corporation of which he is a member or co- venturer, — Notes: zh; eee Government Debts and Securities: Government Debt Instry re ine as cgi of Treasury (BTr) issued instruments and securities ned ieee pa fs), Treasury bills (T-bills) and Treasury notes, are considers deposi es, itrespective of the number of lenders at the time of origination, i, struments and securities are to be traded or exchanged on the secondary market The mere issuance of government debt instruments and securities is considered as fy within the coverage of ‘deposit substitutes irrespective ofthe number of lenders thes! of origination; therefore, interest income derived shall be subject to 20% FWT imposes deposit substitutes (Sec. 2, Revenue Regulations 14-2012, Nov. 7, 2012). a In the case of zero-coupon instruments and securities, the FWT is payable upon their orgy issuance. In the case of interest-bearing instruments and securities, the FWT is payable uy, payment of the interest (RMC 77-2012, Nov. 22, 2012). Interest income derived from any other debt instrument not within the coverage of depo: substitutes — The 20% Creditable WT shall apply to each interest payment to be met beginning on Nov. 23, 2012, irrespective of when the instruments or securities were isust This covers interest income from current outstanding instruments, securities, or accouns of Nov. 23, 2012 (Sec. 7, Revenue Regulations 14-2012, Nov. 7, 2012 and RMC 77-2012, No 22, 2012). 2. Interest Income from Long-Term Deposits or Investment Securities: The depositor # investor ig an individual citizen (resident or non-resident) or resident alien or non-residet tert alien engaged in trade or business in the Philippines and not a corporation. The long: hould be under the name of the individual and ‘he bank or the trust department/unit of the bank. deposits or investments certificates s! under the name of the corporation or t! sits or investments must be issued by banks only and not by obs its or investme ation does 14-2012," The long-term depo: financial institutions. Only the interest income from long-term deposi centficates is covered by the income tax exemption. The income tax exer cover any other income such as gains from trading, foreign exchange gain (RR 22, 2012; RMC 18-2011, Apr. 12, 2011; BIR Ruling 84-2012, Feb. 15, 2012). t income from long-term deposit or investment shall be subject to 25% i the Philippine’ Interes' received by a non-resident alien not engaged in trade or business in NETB). 50 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballada 4On investments of individuals in long-term trust invested by a bank's trust department in five-year corporate bond ~ Even if the individual does not withdraw his money from the trust ‘agreement for at least five years, his interest income from the trust agreement will not be exempt from the FWT as the underlying instrument is a corporate bond, even if such corporate bond has a maturity of five years. Corporate bonds or any other debt instrument issued by a non-bank corporation as underlying instrument will not meet the requirements of Section 22(FF) of the Tax Code since it is not issued by a bank. iduals in long-term trust invested in long-term deposits placed under name of a bonk’s trust department ~ if a bank's trust department invests a fund in a long- term deposit or investment certificate in its own name without mentioning the particular individual for whom the investment is being made, this long-term deposit and investment gre not exempt from the 20% FWT. Only those made specifically in trust for the name of Specific qualified individual investors may be exempt from income tax under the Tax Code (RMC 81-2012, Dec. 10, 2012). On investments of indi lent alien not engaged in Income from cinematographic films and similar works by a non-re: trade or business in the Philippines is taxed at 25% final tax. PCD) Nominees: If the PCD Nominee \dividual subject to the 10% final tax the actual 4, Dividend Payments to Philippine Central Depository ( is a Filipino, the income recipient is deemed to be an in pursuant to Sec. 24(B)(2) of the Tax Code, unless it is satisfactorily shown that ¢ equity investor is a domestic corporation. the income recipient is deemed to be a non-resident foreign corporation subject to the 30% final tax under Sec. 28(8)(1) of the Tax Code, unless it is satisfactorily shown that the actual equity investor is a resident alien, non-resident alien whether engaged or not engaged in trade or business in the Philippines or resident foreign corporation (Revenue Memorandum Circular 73-2014, Sept. 12, 2014). If the PCD Nominee is not a Filipino, Illustration, Source: BIR Ruling DA (FIT-016) 492-2009, Sept. 4, 2009 trust or long-term investment management arrangements with a ling is based on the following facts: Interest income from long-term individual bankis exempt from the 20% final WT. This BIR rul ( intends to launch new products or accounts namely: 8 Co. Personal Retirement Account and B Co. Personal Pension Account. These are long-term individual trust or long-term investment management arrangements. Under these arrangements, the client, as trustor or principal, contributes funds to an account and B Co., as the trustee or investment manager, holds and manages the fund for the future needs of the client/trustor/principal, particularly at retirement. The objective of the accounts is primarily to provide supplemental funds to individuals for thelr retirement in addition to government or company retirement plans. 8 Co, a domestic universal bank, The pertinent features of the new products or accounts are: .d to individuals who are Filipino citizens or resident a. Eligible trustors/prineipals are Ii aliens; b. The underlying agreements are non-negotiable and non-transferrable and will comply with the BSP requirements for long-term trust and investment management accounts; c. There will be a five-year holding period for the amounts contributed into the accounts; Chapter 2: Taxation of Individuals | 51SS hI ihe Principal's withdrawn within the five-year holding period, interest in Subject to a final WH atthe applicable rates depending on the holding pera COME shal, Section 24 (1) (1) and 25 (A) (2) of the Tax Code, as follows SPeCifed ung Holding period Four years to less than five years | - Three years to less than four years [Less than three years The exemption continues regardless o the long-term deposit or investment principal deposit/investment before th ‘on the holding period of the instrument # the terms of the investment or maturity 's subsequently invested (see (e) above). fe fifth year will subject the entire earnings itn accordance with the above schedule 0.2 final WT depecs, TAXABLE INCOME AND TAX DUE? Taxable Income refers to the pertinent items of deductions, if any, authorized for such types laws. f gross income specified in the Code of income by the Code or other spe; INDIVIDUAL CITIZEN AND INDIVIDUAL RESIDENT ALIEN OF THE PHILIPPINES? | general, the income tax on the individual's taxable income shall be computed based o, the following schedules as provided under Sec. 24(A) of the Tax Code, as amended; (A) Income Tax Rates Effective Jan. 1, 2018 until Dec. 31, 2022: RANGE orrataele a INC BASIC] ADDITIONAL |” oFexcess | nate OVER jorover | AMOUNT a . (a) (b) () = | 250,000.00 ; x 00, 250,000.00 | 400,000.00 - 20% 200% a 400,000.00 | 800,000.00 30,000.00 | 25% son 0008 00,000.00 | 2,000,000.00 | 130,000.00 | 30% sone 000,000.00 | 8,000,000.00 | 490,000.00 | 32% 21 ons ,000,000.00 : 210,000.00 | 35% | _8,000,000.00. e tax a it the from income and/or tax credit is deducted from fit id 2 Cregtable withholding tax withheld fom (These are discussed in later chapters.) penalties, if any shall be added to the tax 3 por Rev. Reg. 8-2018 Implementing TRAIN. Susan Balada 52 | Income Taxation 2023 Edition by Prof. WIN Ballada and Su’Effective Jan. 1, 2023 and onwards: TAX DUE =a + (b xc) BASIC | ADDITIONAL | OF EXCESS OVER NOT OVER AMOUNT RATE OVER —— | |) | te : [250,000.00 | - __250,000. 400,000.00 - 15% 250,000.00 | 400,000, 800,000.00 22,500.00 | 20% ‘400,000.00 | 800,000.00 | 2,000,000.00 | 102,500.00 25% 00,000.00 _| 8,000,000.00 | 402,500.00 30% 2,000,000.00 = ___|_2,202,500.00 35% 8,000,000.00 Individuals earning purely (8) Individuals Earning Purely Compensation Income. come tax rates prescribed compensation income shall be taxed based on the in under subsection (A) hereof. ‘Taxable income for compensation earners is the gross compensation income less nontaxable income/benefits such as but not limited to the Thirteenth (13") ject to limitations, see Section 6(G)(e) of these month pay and other benefits (subj Regulations), de minimis benefits, and employee's share in the $55, GSIS, PHIC, Pag-IBIG contributions and union dues. Total Compensation Income Prox Less: Mandatory Contributions/Non-Taxable Benefits xx Prox Net Taxable Income Husband and wife shall compute their individual income tax separately based on their respective taxable income; if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income. all be exempt from the payment of income tax based im wage rates. The holiday pay, overtime pay, night ich earner are likewise exempt. Minimum wage earners shi on their statutory minimu ‘Shift differential pay and hazard pay received by su 4. Mr. C50, 2 minimum wage earner, works for G.0.D., Ine. He is not has any other source of income other than his 0 earned a total compensation income of Mustration engaged in business nor employment. For 2018, Mr. 135,000. .e $55, Philhealth, and HOMF amounting to a, The taxpayer contributed to th ‘onth pay of P11,000. His income tax liability 5,000 and has received 13th m will be computed as follows: Chapter 2: Taxation of individuals | 53os Total Compensation Income P135,000 Less: Mandatory Contributions PS,000 Non-Taxable Benefits 11,000 16,000 Taxable income a ~Pi19,000~ —tHe.000 * Taxpayer is exempt since he is considered a minimum income earner, b. The following year, Mr. cso earned, aside from his basic wage, Pay of P140,000 which consists of the overtime pay - P80,000, ae differential - P30,000, hazard pay - P15,000, and holiday pay . pis 00. has the same benefits and contributions as above, a Total Compensation Income . Add: Overtime, Night Shift Differential, Hazard and nae Holiday Pay 140,000 Total Income ~~ P275,000" Less: Mandatory Contributions P5,000 Non-Taxable Benefits 11,000 16,000 Net Taxable income 259,000 —2259,000° : Tax Due EXEMPT * Taxpayer is tax exempt as an MWE. The statutory minimum wage as well as the holiday pay, overtime pay, night shift differential pay and hazard pay received by such MWE are specifically exempted from income tax under the law. (Cc) Self-Employed Individuals Earning Income Purely from Self-Employment o Practice of Profession. Individuals earning income purely from self-employmenl and/or practice of profession whose gross sales/receipts and other not operating income (GSRONOI) do not exceed the P3.0M VAT threshold, shall havt the option to avail of: 1. the graduated rates under Section 24(A) of the Tax Code, as amended; or ‘2. 8% tax of GSRONOI in excess of P250,000* in lieu of the graduated ah tax rates under Section 24(A) and the percentage tax under Section 11 under the Tax Code, as amended. Pxxx xx Gross Sales/Receipts Less: Cost of Sales ae Prxxx Gross Income Less: Operating Expenses Taxable Income (if graduated rates, option 1) itt a sine * The P250,000 mentioned is not applicable to mixed income earner ada 54 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballacalready incorporated in the first tier of the graduated income tax rates applicable to compensation income. Unless the taxpayer signifies the intention to elect the 8% income tax rate in the 1st Quarter Percentage and/or Income Tax Return, or on the initial quarter return of the taxable year after the commencement of a new business/practice of profession, the taxpayer shall be considered as having availed of the graduated rates under Section 24(A) of the Tax Code, as amended. Such election shall be irrevocable and no amendment of option shall be made for the said taxable year. The option to be taxed at 8% income tax rate is not available to the following: 1. AVAT-registered taxpayer, regardless of the amount of gross sales/receipts. 2. A taxpayer wha is subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the same Title. 3. Partners of a General Professional Partnership (GPP) by virtue of their distributive share from GPP which is already net of cost and expenses. A taxpayer who signifies the intention to avail of the 8% income tax rate option, and is conclusively qualified for said option at the end of the taxable year [annual gross sales/receipts and other non-operating income did not exceed the VAT threshold (P3,000,000)] shall compute the final annual income tax due based on the actual annual gross sales/receipts and other non-operating income. The said income’tax due shall be in lieu of the graduated rates of income tax and the percentage tax under Sec. 116 of the Tax Code, as amended. The Financial Statements (FS) is not required to be attached in filing the final income tax return, However, existing rules and regulations on bookkeeping and invoicing/receipting shall still apply. Taxable income for individuals earning income from self-employment/practice of profession shall be the net income, if taxpayer opted to be taxed at graduated ignify the chosen option, However, if the option availed of rates or has failed to si is the 8% income tax rate, the taxable base is the gross sales/receipts and other non-operating income. 2. Ms. EBQ 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 P300,000. She already signified her intention to be taxed at 8% income tax rate in her 1st quarter return. Her income tax liability for the year will be computed as follows: Illustration Chapter 2: Taxation of Individuals | 55Gross Sales — Convenience Store 800,000 Gross Receipts — Bookkeeping 300,000 Total Sales/Receipts 1,100,000 Less: Amount Allowed as Deduction under Sec. 24(A)(2)(b) 250,000 Taxable Income P850,000 — Tax Due: 8% x P850,000 68,000 * The total of gross sales and gross receipts is below the VAT threshold of P3,000,000. * Taxpayer's source of income is purely from self-employment, thus she jg gntitled to the amount allowed as deduction of P250,000 unde, car 24(A)(2)(b) of the Tax Code, as amended, * Income tax imposed herein is based on the total of Bross sales and grog receipts. * Income tax payment is in'liew of the graduated income tax rates Under subsection (A) hereof and percentage tax due, by express provision of law. A taxpayer subject to the graduated income tax rates (either selected this a the income tax regime, or failed to signify chosen intention or failed to qualify to be taxed at the 8% income tax rate) is also subject to the applicable business ty i any. Subject to the provisions of Section & of these Regulations, an FS shall te required as an attachment to the annual income tax return even if the gros sales/receipts and other non-operating income is less than the VAT threshol However, the annual income tax return of a taxpayer with gross sales/recept and other non-operating income of more than the said VAT threshold shal be accompanied by an audited FS: Illustration 3. Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on gross sales in her initial Quarterly Income Tax Return, ani she incurred cost of sales and operating expenses amounting to P600,000 atl P200,000, respectively, or a total of P800,000; the income tax shall be compute! as follows: Gross Sales/Receipts P1,100,000 Less: Cost of Sales 600,000 Gross Income 500,000 Less: Operating Expenses 200,000, Taxable Income <1 Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballada eTax Due: (On Excess (P300,000 - P250,000) x 20% 10,000 * Aside from income tax, Ms. EBQ is likewise liable to pay business tax. A taxpayer shall automatically be subject to the graduated rates under Section 24(A) of the Tax Code, as amended, even if the flat 8% income tax rate option is initially selected, when taxpayer's gross sales/receipts and other non-operating income exceeded the VAT threshold during the taxable year. In such case, his income tax shall be computed under the graduated income tax rates and shall be allowed a tax credit for the previous quarter/s income tax payment/s under the 8% income tax rate option. Illustration 4. Mr. JMLH signified his intention to be taxed at 8% income tax rate on gross sales in his 1st Quarter Income Tax Return. He has no other source of income. His total sales for the first three (3) quarters amounted to P3,000,000 with 4th quarter sales of 3,500,000. Ast Qtr. 2nd Qtr. 3rd Qtr. 4th tr. (g%Rate) (8%Rate) (8% Rate) 500,000 P500,000 2,000,000 3,500,000 Gross Sales/Receipts Less: Cost of Sales 300,000 300,000 1,200,000 _1,200,000 Gross Income 200,000. 200,000 800,000 2,300,000 Less: Operating Expenses 120,000 120,000 480,000 720,000 Taxable Income 80,000, 80,000 320,000 _P1,580,000 Tax due shall be computed as follows: Total Sales 6,500,000 Less: Cost of Sales 3,000,000, Gross Income 3,500,000 Less: Operating Expenses 1,440,000 Taxable Income 2,060,000 ‘Tax Due Under the Graduated Rates P509,200 [P490,000 + (P60,000 x 32%)] Less: 8% Income Tax Previously Patd (Q1 to Q3) (P3,000,000 - P250,000) x 8% ‘Annual Income Tax Payable 220,000 289,200 eded the VAT threshold of P3,000,000. Taxpayer shall » The gross receipts exce tax under graduated rates pursuant to Section 24(A) be liable to pay income of the Tax Code, as amended. + Taxpayer shall be allowed an income tax credit of quarterly payments initially Chapter 2: Taxation of individuals | 57oF made under the 8 eAax option computed net of the allo % income ta t deduction of P250,000 granted for purely b siness income. " : * Taxpayer is likewise liable for business tax(es), in addition to inc this purpose, the taxpayer is required to update his registration fon 2% For £0 VAT taxpayer. Percentage tax pursuant to Section 116 of the ty on VAT amended, shall be imposed from the beginning of the year until toe liable to VAT. VAT shall be imposed prospectively. wPayer is * Percentage tax due on the non-VAT portion of the sales/receipts shall b. collected without penalty, if timely paid on the due date immediate: following the month/quarter when taxpayer ceases to be a non.VAT . Mlustration 5. Ms. RPSV is a prominent independent contractor who offers architectural and engineering services. Since her career flourished, her tota ross receipts amounted to P4,250,000 for taxable year 2018. Her recorded cost of service and operating expenses were P2,150,000 and 1,000,000, respectively. Her income tax liability will be computed as follows: ' Gross Receipts — Architectural & Engineering Services 4,250,000 Less: Cost of Service 2,150,000 2,100,000 Gross Income Less: Operating Expenses Taxable Income 1,000,000 P1,100,000 Tax Due: (On P800,000 130,000 On Excess (P1,100,000 - P800,000) x 30% 90,000 Income Tax Due P220,000 * The gross receipts exceeded the VAT threshold of P3,000,000; subject to graduated income tax rates; liable for business tax - VAT, in addition to income tax. Illustration 6. In 2018, Mr. GCC owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000. His cost of sales and operating expenses afé P1,000,000 and P600,000, respectively, and with non-operating income of P100,000. His tax due for 2018 shall be computed as follows: Gross Sales 2,500,000 Less: Cost of Sales 1,000,000 Gross Income 1,500,000 Less: Operating Expenses 600,000 Net Income from Operation 900,000 Add: Non-Operating Income 100,000 P 1,000,000 Taxable Income 58 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan BalladaTax Due: On P800,000 P130,000 On Excess (P1,000,000 - P800,000) x 30% 60,000 Total Income Tax 0 . The taxpayer has no option to avail of the 8% income tax rate on his income from business since his business income is subject to Other Percentage Tax under Section 125 of the Tax Code, as amended. * Aside from income tax, taxpayer is liable to pay the prescribed business tax, which in this case is percentage tax of 18% on the gross receipts as prescribed under Sec. 125 of the Tax Code, as amended. (0) Individuals Earning Income Both from Compensation and from Self- Employment (business or practice of profession). — For mixed income earners, the income tax rates applicable are: \ 1. On compensation income ~ at graduated rates; plus 2. On income from business or practice of profession shall be subject to the following: 2.a. If GSRONO! do not exceed the VAT threshold of P3.0M — * cither at graduated rates or © 8% of GSRONOI in lieu of graduated rates and percentage tax, at the option of the taxpayer. 2.b. If GSRONO! exceed the VAT threshold — at graduated rates. The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of 8% income tax rate on gross sales/receipts and other non- operating income in excess of P250,000 is available only to purely self-employed individuals and/or professionals. The P250,000 mentioned is not applicable to mixed income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income. Under the said graduated rates, the excess of the P250,000 over the actual taxable compensation income is not deductible against the taxable income from business/practice of profession under the 8% income tax rate option. x due shall be the sum of: (1) tax due from compensation, computed income tax rates; and (2) tax due from self- fession, resulting from the multiplication of the 8% f the gross sales/receipts and other non- The total ta using the graduated employment/practice of pro! income tax rate with the total of operating income. Chopter 2: Taxation of Individuals | 59oN vad income earner who opted to be taxed under the graduated | rates for income from business/practice of profession, shall combine the % income tram be ‘ompensation and business/practice of profess) ia he total taxable income and consequently, the income tax qo, ue eer a Financial Comptroller of JAB Company, earned any, iaTieTancenrTerlea of P1,500,000, inclusive of 13th month and other bene, Ae 20,000 but net of mandatory contributions to sss 7 ae employment income, he owns a convenience store, na P1,000,000 and papa His cost of sales and operating expenses 5, Picanol ,000, respectively, and with non-operating income , a. His tax due for 2018 shall be computed as follows if he opted to be tay 8% income tax rate on his gross sales for his income from business: Total Compensation Income 1,500,009 Less: Non-Taxable 13th Month Pay and Other Benefits (Max) 90,000 Taxable Compensation Income ~P1,410,000 Tax Due: — On Compensation: On P800,000 130,000 On Excess (P1,410,000 - 800,000) x 30% 183,000 Tax Due on Compensation Income ~P313,000_ On Business Income: Gross Sales 2,400,000 Add: Non-Operating Income 100,000 Taxable Business Income 2,500,000 Multiplied by Income Tax Rate 8% 200,000 Tax Due on Business Income Total Income Tax Due (Compensation and Business) 513,000 applicable only to taxpayer's incor? lieu of the income tax under the ection 116¢ & The option of 8% income tax rate is from business, and the same is in graduated income tax rates and the percentage tax under Si the Tax Code, as amended. * The amount of P250,000 allows iy from self-employment/practice of (pr d income earner under the 8% income red as deduction under the law for taxpartt ofession, is ™ earning solel i tax rate oti" applicable for mixet : i i tier * The P250,000 mentioned above is already incorporated in the first tes applicable to compensation income. the graduated income tax rat come Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballada 60 | Inb. His tax due for 2018 shall be i incoraer ta ae omputed as follows if he a id not opt tor the 8% 1d on gross sales/receipts Lopt for the 8 and other non-operating income Total Compensation Income 1,500,000 Less: Non-Taxable tral Compensation neon fone Hes on 6000 Add: Taxable Income from Business iene es ales 2,800,000 25: Cost of Sales 41,000,000 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 P2,310,000 Tax Due On P2,000,000 490,000 On Excess (P2,310,000 - P2,000,000) x 32% 99,200 Total Income Tax Due 589,200 * The taxable income from both compensation and business shall be combined for purposes of computing the income tax due if the taxpayer chose to be subject under the graduated income tax rates. * In addition to the income tax, Mr. MAG is likewise liable to pay percentage tax of P72,000, which is 3% of P2,400,000. On February 2019, taxpayer tendered his resignation to concentrate on his business. His total compensation income amounted to P150,000, inclusive of benefits of P20,000. His business operations for taxable year 2019 remains the same. He opted for the 8% income tax rate. Total Compensation Income P1S0,000 Less: Non-Taxable Benefits 20,000 Taxable Compensation Income 130,000 Tax Due: On Compensation: vo ‘On P130,000 (not over P250,000) me: On — Incor v.40. 00 Gross Sales 100,000 ‘Add: Non-Operating Income __ lense Taxable Business Income caus Multiplied by Income Tax Rate — sac ‘Tax Due on Business Income be , and Business) 200,000 Total Income Tax Due (Compensation Chapter 2: Taxation of Individuals | 61+ The option of 8% income tax rate is applicable only to taxpayer's, from business, and the same is in lieu of the income tax nq graduated income tax rates and the percentage tax under Section the Tax Code, as amended. 4 te * The amount of P250,000 which is allowed as deduction under the, taxpayers earning solely from self-employment/practice of profeg not applicable for mixed income earner under the 8% income > option. : + The P250,000 mentioned above is already incorporated in the first, the graduated income tax rates applicable to compensation income excess of the P250,000 over the actual taxable compensation income), creditable against the taxable income from business/practice of profey, under the 8% income tax rate option. Illustration 8, Mr. WBV, an officer of AMBS International Corp., earney 2018 an annual compensation of P1,200,000, inclusive of 13th month other benefits in the amount of P120,009. Aside from employment incor he owns a farm, with gross sales of P3,500,000. His cost of sales » operating expenses are P1,000,000 and P600,000, respectively, and with n operating income of P100,000. His tax due for 2018 shall be computed follows: Total Compensation Income Less: Non-Taxable 13th Month Pay and Other Benefits (Max) Taxable Compensation Income P1100 ‘Add: Taxable Income from Business Gross Sales 3,500,000 Less: Cost of Sales 1,000,000 Gross Income 2,500,000 Less: Operating Expenses 600,000 Net Income from Operation P1,900,000 Add: Non-Operating Income 100,000 2,000,000 Total Taxable Income 3,110,000 Tax Due: ‘On P2,000,000 490,000 ‘On Excess (P3,110,000 - P2,000,000) x 32% 355,200_ Total Income Tax Due 845,200 pelle * The taxpayer has no option to avail of the 8% income tax rate on his incor from business since his gross sales exceeds the VAT threshold. Howev®" still not subject to business tax since the nature of his business transact”! VAT exempt. 62 | Income Taxation 2023 Edition by Prof. WIN Balada and Susan BalladaTAXATION OF INCOME RECEIVED BY SOCIAL MEDIA INFLUENCERS Definition of Social Media Influencers the term “social media influencers” referred to in the Revenue Memorandum Circular 97-2021 includes all taxpayers, individuals or corporations, receiving income, in cash or in kind, from any social media sites and platforms (YouTube, Facebook, Instagram, quitter, TikTok, Reddit, Snapchat, etc.) in exchange for services performed as bloggers, video bloggers or “vloggers” oF as an influencer, in general, and from any other activities performed on such social media sites and platforms Liability for Income Tax and Percentage or Value-Added Tax ursuant to the provisions of the National Internal Revenue Code 4 and other existing laws,° social media influencers shall be e or value-added tax,° as shown below: Unless exempted pt (NIRC) of 1997, as amended, liable to income tax and percentage Income Tax Social media influencers other than corporations and partnerships are classified for tax purposes as self-employed individuals or persons ‘engaged in trade or business as sole proprietors, and therefore, their income is generally considered business income. ources: Social media influencers derive their income from the following s 1. YouTube Partner Program — this allows an influencer to make money from~ le — the influencer gets ad revenue from display, overlay, and video a. advertising revenu ads. b. channel membership ~ the influencer makes recurring monthly payments in exchange for special perks that he/she/it offers. .d buy official branded merchandise from the merch shelf — followers can browse an influencer’s watch pages. dd, super chat and super stickers ~ fol streams. ue — the influencer gets @ part of a YouTube Premium e. YouTube Premium Reven subscriber's subscription fee when followers watch his/her/its contents. lowers pay to get their messages highlighted in chat 2, sponsored social and blog posts ~ an Influencer features a product or concept he/she/it is paid to promote. sitios 4 Republic Act (RA) 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Act, exempts from sean iavidual taxpayers earning 2 taxable annua) ear not exceeding P250,000. SRA 9178, or the Barangay Micro Business Enterprises (BMBES) Act of 2002, incentives, tax exemption, are available to BMBES: Chore with gross revenues not exceeding P3 Millon 2 year are to percentage tax. including income exempt from VAT. They are, however, liable Chapter 2: Taxation of Individuals | 6310. podcasts and webinars - these may include sponsored ads that generate mone 3 display advertising ~ influencers also have the v to earn money pass display advertising. Here, the ad is similar to radia commercials be i 4. becoming a brand representative/ambassador — the influencer would cts on his/her/its social media account in excha rea rede brands may pay an additional fe Influencer creates or drives affiliate marketing - In this type of arrangeme! influencer would be provided with a unique link or code that w/ conve n affiliate marketer for the sions. For every conversion resulting from the earn a commission 6. co-creating product lines ~ a brand would for their brand and the latter, in turn, gets paid ba 7. promoting own products - the influencer may come up with his/her own line of p 8. photo and video sales - influencers may create and sell frame-worthy pictures, hn videos, or the rights over them as well ~ 9. digital courses, subscriptions, e-books ~influencer: with an influencer to ¢o ed on a certain per To constitute gains or profits from the conduct of trede or business, the paym: be received by a social media influencer in consideration for services rendered or rendered, irrespective of the manner or form of payment. Therefore, if a social influencer receives free products in exchange for the promotion thereof on his/; YouTube channel or other social media accounts, he/she/it must declare the fair m value of such products as income. Except for certain passive income derived from sources within the Philippines, ez: gains from the sale of shares not traded in the stock exchange and from the sale crs property classified as capital assets, the income tax shall be imposed on the tax: income of resident citizens, aliens, partnerships, domestic and resident corporations doing business as a social media influencer and shall be based on= schedular tax rates under Section 24(A)(2)(a) of the NIRC or on the corporate incom rate under Sections 27 and 28 thereof, depending on the type of taxpayer. Income treated as royalties in another country, including payments under the You! Partner Program, shall likewise be included in the computation of the gross incom: the social media influencer and shall be subjected to the schedular or corporste rates. For resident aliens, any income derived from Philippine-based contents shall ene be taxable. Thus, the burden of proof that the income was derived from sources “ae the Philippines lies upon the resident alien. Absent such proof, the income assumed to have been derived from sources within the Philippines. 64 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan BalladaBusiness Tax Besides income tax, social media infl . srther be percentage or VAT. ee Habe ei bates tax, which may receipts and other non-operating income do not exceed th Sadie shold. of 3,000,000 shall have the option to avail of the 8% tax on gross cea sos ae and other non-operating income in excess of P250,000 in lieu of the ed eae tax rates under Section 24(A)(2)(a) and percentage tax under Section 116 of the NIRC. Mixed income earners or those who are earning both compensation income and income from business and/or profession shall be taxable under Section 24(A)(2)(a) for all income earned from compensation and income earned from business or practice of profession may be taxed at the same graduated rates or 8% income tax based on gross sales or gross receipts provided that the total gross sales and/or gross receipts and other non-operating income do not ‘exceed the VAT threshold as discussed in the preceding paragraph. However, if the total gross sales and/or gross receipts and other non-operating income exceed the VAT Threshold, the graduated rates under Section 24(A)(2)(a) shall apply and they shall likewise be liable for VAT. Allowable Deductions section 34 of the NIRC states that in computing taxable income subject to income tax tinder Sections 24(A); 25(A); 26; 27(A), (B), and (C); and 28(A)(1), there shall be allowed as deduction from gross income, among others, all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation ‘and/or conduct of the trade, business or exercise of a profession. The expenses enumerated from Section 34(A) to (1) constitute the itemized deductions. These may be claimed as deductions provided that they are tly and exclusively related to the pr jon or realization of the income and can ‘oducti ifficient evidence, 's and invoices. dire such as BIR-registered receipt: be substantiated with suf the common business expenses that may be rs for instance, ut not limited to, the following: In the case of YouTube me include, bt deducted from their gross incor filming expenses (cameras, smartphones, microphone and other filming equipment); computer equipment - subscription and software licensing fees; internet and communication expenses: home office expenses (ex. proportionat office supplies; / business expenses (eg. travel or transportation expense related to YouTube business, payment to an independent contractor OF company for video editing, costume designer, aa eisng and marketing costs (cost oF ‘contests and giveaway prizes, etc); 8, depreciation expense; and 9, _ bank charges and shi e rent and utilities expenses); Newsene fees. Chapter 2: Toxation of Individuals | 65| In How of the itemized deductions, the taxpayer may elect Optional Standard Deductig, (OSD) or a ard deduction not exceeding 40% of gross sales/receipts in the cagq Individual taxpayers, or 40% of its gross income in the case of corporations, is janttation Is required for the OSD. To be entitled to OSD, however, the taxpay, tnust signify in the return the intention to elect OSD; otherwise, he/she/it shajy be Jered as having availed of the itemized deductions. con Income from YouTube Farly this year, Google LLC, the owner of YouTube, informed the public that any payments from YouTube through any other agreement between the content Creato, and YouTube (e.g, through the YouTube Partner Program) will be treated as royale starting June 1, 2021 and that Chapter 3 of the United States (US) Internal Revenye Code requires Google to collect tax information, withhold taxes, and report to the Us tax authority when a creator on YouTube earns royalty revenue from viewers in the Us Creators outside the US were thus advised to submit tax information to Google LLC. For the purpose of fixing the withholding tax rate to be applied on all income payments from YouTube, social media influencers residing in the Philippines are hereby advised to submit their tax information to Google to be eligible to claim treaty benefits under the tax treaty between the Philippines and the US. Avoidance of Double Taxation In order to avoid the risks of double taxation, a social media influencer receiving income from a nonresident person residing in a country with which the Philippines has a tar treaty must inform the latter that he/she/it is a resident of the Philippines, and is, therefore, entitled to claim treaty benefits provided under the relevant tax treaty. Where the nonresident requires the presentation of proof of residency, the influencet must obtain a Tax Residency Certificate (TRC) from the International Tax Affairs Division (ITAD) of the BIR and submit the same to the former. The influencer shall exert a efforts to obtain treaty benefits in the state of source. If the influencer did not avail of the treaty benefits and was, in fact, subjected to regulé! tax in the state of source, he/she/it shall not be allowed to claim foreign tax credits" excess of the appropriate amount of tax that is supposed to be paid in the source stat? had the income recipient invoked the Provision/s of the treaty and proved his/het/i residency In the Philippines. A more detailed discussion on this can be found in Section’ of Revenue Memorandum Order 43-2020, M1, on the other hand, the influencer is denied treaty benefits despite being able to prow entitlement thereto, he/she/it must file an application for Mutual Agreement Proce (MAP) with ITAD following the guidelines and-procedures set out in the peti" revenue Issuance for MAP assistance, 66 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan BalladaBenefits of Obtaining a TRC A TRC is an official document issued by the BIR, through the ITAD, that certifies the tax residency of a certain taxpayer in the Philippines pursuant to the residency provision of the relevant tax treaty. This document is presented to the foreign country to prove that the taxpayer named therein is a resident of the Philippines and may, therefore, claim the benefits provided under the tax treaty. Failure to prove the residency in the philippines is fatal to the taxpayer's claim for treaty benefits. To date, the Philippines has 43 valid and effective tax treaties. ration. In 2020, GBG, a Filipino social media influencer residing in the Philippines, received USD200,000 or P10 Million from Google LLC, an enterprise resident of the US, as her share from advertising revenues. Under the US tax law, payments from YouTube through the YouTube Partner Program are considered royalties which are generally subject to tax at 24%, GBG did not receive any other income during the year. When she filed her tax return, she claimed P1 Million as deductions and opted to avail of tax credit for taxes paid in the US. Ilusti +, What is the tax implication if GBG does not inform the income payor that she is @ resident of the Philippines? be subjected to tax at the maximum rate of 24% if she GBG’s earnings from YouTube will hold USD48,000 or P2.4 does not claim treaty benefit. Google LLC should therefore wit Million before remitting the royalties to GBG. b. What is the tax implication if GBG submits her tax information to Google LLC and proves that she is a resident of the Philippines? Philippines-US tax treaty, royalties derived by a resident of the US but such tax shall not exceed 15% of the gross amount isions of the treaty and claims treaty benefit, Google LLC 1.5 Million) on her royalty payments from viewers Under Article 13(2)(a) of the Philippines may be taxable in the of royalties. If GBG invokes the provi will only impose 15% tax (USD30,000 or P: inthe US. eHow much should be allowed as credit for taxes paid in the US? Generally, credit for taxes paid in 2 foreign country shall be limited to that paid or accrued in the said foreign country. ween the source state and the Philippines, but the hereof, the tax credit that may be claimed by the ‘ave been paid by the taxpayer had he/she/it Where, however, a treaty exists bet taxpayer fails to invoke the provisions tl taxpayer shall be limited to the tax that should hi claimed the benefits under the said treaty. BG shall only be allowed to claim as credit against her tax due in the In this case, 1.5 Million. Philippines the amount of P: Chapter 2: Taxation of Individuals | 67Jaws muh weld he He ta pnyabte of GG in the Philippi it deny bm a hs odd er cea ye vnyaliios earned from toutube and pay the remaining income tax due, i.e, ney Mlowalte Hee eredit, as computed helow: Hees Allowable eduction Tawable Income Conmitation of Tax stil bie and Payable: On PAL Mittin On the Fares Pa mittion Van tone Voes Fareign Tay Credit Jay Ml be and Payable DECLARATION OF INCOME TAX FOR INDIVIDUALS Sell enyployed tndiv jduals are required to file a declaration of their estimated income for (he currant (axalie year on or bofore April 15 of the same taxable year. Generally, st J incante consists of the earnings derived by the individual from the practice ‘oy business carried on by him as a sole proprietor or by 1c is a member. This estimated tax shall be eiyploy at profession er eonducl oft ade 4) professional partnership of which hi allows, F iystalnvents as. instalment pate Hust April 1S Serond August 15) Thint November 15 Fourth April 15 xd income tax return ts supposed to be filed and paid in time for the « of the following calendar year. In the quartet omputed on a cumulative basis. ts are poste astalanent on oF before April 1S drivel HN and deductions shall be c Sorsenal avenptions shall be allowed in the final return only. Financial statement issions on the Ist, Ind and 3rd instalments. Seunns, FOSS INCOME sot required subi veined Bax ppeans the amount which the individual declared as income taxin his fin! saul ineome tax return for the preceding taxable year minus the credit bly expects to pay > ieee” al of instalmet be paid inthe f business © al isted #0 5. suring the taxable year, the taxpayer reasona} whe vhall fle an amended declaration during any intery The return shall be filed with and the income tax shall + the eity Or municipality where the principal place o 6 ta, SAVPONE BATES Beene Dak keated by Prof. WIN Ballade end Susan Bollada S| nsanne Tanta 2028 EaltionNon-resident Filipino citizens, wi Won resident Pino citizens, with respect to Inconne from without the Fi pe jens not engaged in trade or business in the Philippine ET Tae to render a declaration of estimated income tax. are not required INDIVIDUALS EXEMPT FROM INCOME TAX ‘A. Non-resident citizen who is: Philippines who establis al presence abroad with definite intention to re 1. Acitizen of t fact of his phys ide therein, far to reside: 2, Acitizen of the Philippines who leaves the Philippines during the tazab abroad, either as an immigrant or for employment on a permanent bast who works and derives Income from abroad and whove t abroad most of the time 3, Accitizen of the Philippines employment thereat requires him to be physically pres during the taxable year. a5 a non-resident citizen and who arrives, to reside permanently in the Philippines tazable year in which he abroad until 4, Acitizen who has been previously conside in the Philippines at any time during the year will likewise be treated as a non-resident citizen during the arrives in the Philippines, with respect to his Income derived from source the date of his arrival in the Philippines. 2, Overseas Contract Worker, Including Overseas Seaman ing and deriving income from 5 who is worki sources fer is taxable only on income from 2 citizen of the Philippines and who d abroad as a member of the. ade will be treated as ‘An individual citizen of the Philippine: abroad as an overseas contract work within the Philippines. A seaman who is receives compensation for services rendere plernent of a vessel engaged exclusively in international tr: comy orker. an overseas contract w Consulate service personnel of 1d as Philippine Embassy/ ed as a non-resident citizen, Note that a Filipino employe ulate is not to be treat the Philippine Embassy/Cons hence his income is taxable. C. Barangay Micro Business Enterprises (R.A. 9178 or BMBE Law) he Act, the Department of Finance (DOF) 4—the Guidelines to Implement the Micro Business Enterprises and the Availment of Tax ‘Act 9178 or The Barangay Micro Business Enterprises ww on Nov. 13). 00 17-2004 took effect on May fe through RMC 40-2004 dated May 26, 2004. er the passage of t More than two years aft der (DO) 17-200+ issued Department Or Registration of Barangay Incentives under Republic (aMBEs) Act of 2002 (passed into fay 14, 2004; the BIR circularized the 59m Chapter 2: Taxation of individuals | 69BMBEs refer to any business enterprise engaged in the production, process manufacturing of products or commodities, including agro-processing, ty eSsin, services, whose total assets including those arising from loans but exclusna hy ‘ ‘ , eee ive land on which the particular business entity's office, plant and eaiipmeny situated, should not be more than P3 milion. Services shall exclude the ue licensed profession. Practicg a It is believed that BMBES like small sari-sari stores, bakeries, and handle will boost the economic development of the country, hence, BMBEs ae So incentives and benefits. One incentive is the exemption from income tar st arising from the registered BMBEs operations. The Act also ecennetins : commissions and discounts derived from loans by credit institutions to BMBE the gross receipts tax (GRT). est All the BMBEs need to do is to register =< a BMBE with the Office of the City 9 Municipal Treasurer. The certificate of authority issued to the BMBE is valid fort years and may be renewed for the same period. 7 D. Expanded Senior Citizens Act of 2010 The exemption from the payment of individual income taxes is available to seni Citizens who are considered to be minimum wage earners in accordance vit Republic Act 9504, Senior citizens are also exempted from value-added tax (VAT) certain goods and services as discussed in Chapter 10. E. Personal Equity and Retirement Account Act of 2008 (R.A. 9505) The BIR has issued the Revenue Regulations 17-2011 implementing the provisions of Republic Act 9505, Personal Equity and Retirement Account Act 2008, which provides the legal and regulatory framework for the establishment! personal equity retirement account (PERA). This law aims to promote tt development of the capital market by tapping into the savings of its residents z overseas citizens. Personal equity and retirement account (PERA) shall refer to an individu voluntary retirement account established from his PERA contributions andlor employer contributions, for the purpose of being invested solely in an eligible! investment product (e.g. unit investment trust fund, mutual fund, annuity on pension plan, shares of stock traded in the local stock exchange, exchange oh bonds, government securities) duly approved by the concerned regulatory 2 (ie., BSP, SEC, Office of the Insurance Commission). 70 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan BalladaTax Treatment of PERA Investment Income ee income of the contributor consisting of all income earned from the investments and reinvestments of his PERA assets in the maximum amount will be exempt from the following taxes: 1, The FWT on interest from any currency bank deposit, yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, including a depository bank under the expanded foreign currency deposit system; 2. The capital gains tax (CGT) on the sale, exchange, retirement or maturity of bonds, debentures or other certificates of indebtedness; 3, The 10% tax on cash and/or property dividends actually or con: a domestic corporation, including a mutual fund company; 4, the CGT on the sale, barter, exchange or other disposition of s! domestic corporation; and 5, Regular income tax. istructively received from hares of stock in a he concerned regulatory authority Each specific investment product must be approved by t ives and privileges. before its income or distribution can be granted tax incenti VAT, stock transactions tax on the sale, However, non-income taxes (e.g. percentage tax, and DST) inherent in the investment barter or exchange or through initial public offering, transaction are imposable. Revenue Memorandum Circular 31-2013, amended by Revenue Memorandum Circular 73-2013, prescribe the guidelines on the taxation of compensation income of Philippine nationals and alien individuals employed by foreign governments, embassies, diplomatic missions, and international organizations situated in the Philippines. International organizations maintaining offices, headquarters or operation in the Philippines and/or their respective ‘employees claiming exemptions pursuant to the terms and provisions of international agreements or iaws granting privileges to employees of international organizations shall file an application for confirmation of tax exemption/tax treatment with the International Tax Affairs Division (ITAD) of the Bureau of Internal Revenue. Chapter 2: Taxation of Individuals | 71wu. 12. 13. 14, 15. 16. 17. 18. Xt views indifferently the tax b: ase and generally treats in ¢o sole income of a taxpayer, MMO, Tessive rates of income taxes are imposed on citizens » s\ssver whose father or mother is a Filipino citizen is likewise a Filipino city “1S an individual whose residence is not within the Philippines 2 ‘sident thereof, 's an individual whose residence is within the Philippines but Who en thereof, als are taxable on income derived jg ippines, ens are taxable only on income derived from sources Within s all remuneration for services performed bye employee for his employer not necessarily under an employer. relationship, Generally, self-employment in indivi come consists of the ear nings derived by th rofession or conduct of trad. le or business carried he is amember. tax base upon which tax rate is applied to art the tax due. If any income cannot be definitely attributed to or identified as income exclusive) earned or realized by either of the spouses, the same shall be divided equal) between the spouses for the Purpose of determining their respective taxatl income. Passive income is included in the computation of taxable income fio" compensation or business/professional income. Passive income is subject to a separate and final tax, Estimated tax means the amount which the individual declared as income taxinh final adjusted and annual income tax return for the Preceding taxable year mic the credits allowed, Non-resident Filipino citizens, with respect to income from without the Philipain® and non-resident aliens not engaged in trade ‘or business in the Tequired to render a declaration of estimated income tax, : Self-employed and professionals are required to file a declaration of their estat income for the current taxable year on or before April 15 of the same taxable ¥ Philippines, are ™ 72 | Income Taxation 2023 Edition by Prof. WIN Ballade and Susan BalladaNAME: SCORE: 1 SECTION: PROFESSOR: 4 qrue or False 4, For compensation earners, taxable income is gross compensation income less non- taxable income and benefits subject to limitations, and employee's mandatory contributions. 2, Minimum wage earners are exempt from payment of income tax. 3, The holiday pay of a minimum wage earner is subject to income tax. 4, Purely self-employed individuals whose gross sales/receipts and other non- operating income do not exceed the \VAT threshold under Section 109(88) may avail of the graduated rates under Section 24(A), both of the Tax Code. 5, The default income tax rate for an individual purely in business who failed to signify his intention to avail of the 8% income tax rate is the said 8% tax. 6, Apurely self-employed taxpayer who is subject to the graduated income tax rates is no longer subject to the applicable business tax. 7, Taxable income for purely practicing professionals, if the graduated rates applies, shall be the net income. 8, If the option availed of by an individual taxpayer who is purely in business Is the 8% income tax rate, taxable base is the gross sales/receipts and other non-operating income. 9, An individual earning compensation income fromm employment, and income from business, practice of profession and/or other sources aside from employment is. mixed income earner. 10. The compensation of a mixed income earner shall be subject to the 8% income tax rate. 11, The taxable income from both compensation and business shall be combined if the taxpayer is subject to the graduated income tax rates. . 12. The mixed income earner has the option to avail of the 8% income tax rate on his xceeds the VAT threshold. income from business if his gross sales & Chapter 2: Taxation of Individuals | 73__|score: PROFESSOR: —S Ss Multiple Choice - Theory 1. Which statement is not true regarding our present tax system? a. The taxable income is subject to a unitary but progressive, Braduateg ret ._ Itimposes progressive rates of income taxes on citizens and resident © Tax treatment views indifferently the tax base and generally treats all categories of taxable income of the taxpayer. d. Regressive rates of income taxes may apply depending on the king Oty income of the taxpayer. : alg, inca 2. Which statement is false? In taxing ‘individuals’ tax rates are generally higher for higher levels of income. b. if a person engages in different business activities, his taxable incom determined by aggregating income and losses. © _ Iftwo or more individuals-professionals form a general professional partne there is no income tax imposed on the entity. d. all of the above 3. Which of the following is not true about source of income? 2. In case of income derived from labor, source is the place where the kt performed, b. In case of income derived from the use of capital, source is the place whee capital is employed. c. In the case of profits from the sale or exchange of capital assets, source’s place where the sale or transaction occurs. d. None of the above. 4. _ Allstatements except one are correct. Which is it? a. Non-resident alien is taxable on income derived within the Philippines. b. Non-resident citizen is taxable on income derived within the Philippines c. Resident alien is taxable on income derived within and without the Philo? d. . Resident citizen is taxable on income derived within and without the Phil? 5. Which of the following definitions does not apply to a Filipino citizen? a. Those who are naturalized not in accordance with law b. Those whose fathers or mothers are citizens of the Philippines son ott Those who are citizens of the Philippines at the time of the adoptio 2, 1987 Constitution 74 | Income Taxation 2023 Edition by Prof. WIN Ballada and Susan Ballada4, Those born before Jan. 17, 1973, the date of the adoption of the 1973 Constitution, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority 6. Federico, a Filipino citizen, migrated to the United States some six years ago and got a permanent resident status or green card. He should pay his Philippine income taxes on a. the gains derived from the sale in California, U.S.A. of jewelry he purchased in the Philippines. b. the proceeds he received from a Philippine insurance company as the sole beneficiary of life insurance taken by his father who died recently. c. the gains derived from the sale in the New York Stock Exchange of shares of stock in PLDT, a Philippine corporation. d. dividends received from a two year old foreign was derived solely from Philippine sources. corporation whose gross income 7. Which of the following statements is never true? Business income may arise from self-employment or practice of profession. ‘An individual taxpayer who earns compensation income is an employee. Business income may arise from self-employment or compensation income. An individual taxpayer may earn both compensation income and business income. eaooce lent citizen in 2018. On May 15, 2019, he 8, Acitizen of the Philippines was a non-resid ently in the Philippines. His income for arrived in the Philippines to reside perman‘ the year was: ‘A=From Jan. 1, 2019 to May 14, 2019 B—From May 15, 2019 to Dec. 31, 2019 Which of the following is wrong? his “A” income. sident citizen on his “B” income. n-resident citizen on his “A” income. his “A” and “B” income. a. He is not taxable on b. He is considered a re c. Heis considered a nor d. He is considered a resident citizen on 9. Which of the following is not true about a resident alien? a. His residence is b. His income is subject to the sam within the Philippines but is nota citizen thereof. e treatment as a resident citizen’s in all respects. c. He is one who is actually present in the Philippines and who is not a mere transient or sojourner. d. An alien is considered a resident or a non-resident depending on his intention with regard to the length and nature of his stay. Chapter 2: Taxation of individuals | 75