GOVERNING LAW

National Internal Revenue Code of 1997 (Republic Act No. 8424, as further amended by Republic Act
No. 10963 or the Tax Reform for Acceleration and Inclusion [TRAIN] Law).
EFFECTIVITY DATE
January 1, 1998
REPUBLIC ACT NO. 10963 or
TAX REFORM FOR ACCELERATION AND INCLUSION (TRAIN) LAW
- amended several provisions of Republic Act No. 8424 or the National Internal Revenue Code of 1997
- a consolidation of House Bill No. 5636 and Senate Bill No. 1592.
- passed by Congress on December 13, 2017
- approved by President Rodrigo Duterte on December 19, 2017
- took effect on January 1, 2018.

DECLARATION OF POLICY (TRAIN LAW)

a. To enhance the progressivity of the tax system through the rationalization of the Philippine
internal revenue tax system, thereby promoting sustainable and inclusive economic growth
b. To provide, as much as possible, an equitable relief to a greater number of taxpayers and
their families in order to improve levels of disposable income and increase economic activity
c. To ensure that the government is able to provide for the needs of those under its jurisdiction
and care through the provision for better infrastructure, health, education, jobs, and social protection
for the people.

NATIONAL INTERNAL REVENUE TAXES

1. Income Tax
2. Estate Tax
3. Donor’s Tax
4. Value-Added Tax
5. Other Percentage Taxes
6. Documentary Stamp Taxes
7. Such other taxes as are or hereafter may be imposed and collected by BIR

INCOME TAX
It is a tax on all yearly profits arising from property, professions, trades or offices or as a tax on a
person’s income, emoluments, profits and the like.
It is an excise tax and not a tax on property as it is levied upon the privilege of receiving income or
profit.
Types of Philippine Income Tax
1. Graduated Income Tax on Individuals
2. Normal Corporate Income Tax
3. Minimum Corporate Income Tax
4. Capital Gains Tax on Sale or Exchange of Real Property
5. Capital Gains Tax on Sale or Exchange of Shares of Stock of a Domestic Corporation
6. Final Tax on Certain Passive Income
7. Final Tax on Income of Non-Residents
8. Fringe Benefit Tax
9. Branch Profit Remittance Tax
10. Improperly Accumulated Earnings Tax
11. Gross Income Tax

Classification of Taxpayers
1. Individuals
a. Resident Citizen
b. Non-Resident Citizen
c. Resident Alien
d. Non-Resident Alien
i. Engaged in Trade or Business
ii. Not Engaged in Trade or Business
2. Corporations, including Partnerships except General Professional Partnerships
a. Domestic Corporation
b. Resident Foreign Corporation
c. Non-Resident Foreign Corporation
3. Estates and Trusts

Summary of Income Source of Income Tax Base Tax Rate

Tax Treatment of
Individual and
Corporate
Taxpayers
Classification
Resident Citizen Within and Without Net Income Graduated
Non-Resident Citizen Within Net Income Graduated
Resident Alien Within Net Income Graduated
Non-Resident Alien Within Net Income Graduated
Engaged
Non-Resident Alien Within Gross Income Final Tax of 25%
Not Eng.
Within & Without Net Income or Gross 30% of Net Income or
1. Domestic Income if MCIT is 2% of Gross Income,
Corporation applicable whichever is higher

Within Net Income or Gross 30% of Net Income or

2. Resident Foreign Income if MCIT is 2% of Gross Income,
Corporation applicable whichever is higher

Within Gross Income Final Tax of 30%

3. Non-Resident
Foreign Corporation

Tax Rates (Normal Income Tax) The Tax Shall Be

(Graduated Rates Up to 2017) Taxable
Income
Not over P10,000 5%
Over P10,000 but not over P30,000 P500 + 10% of the excess over P10,000
Over P30,000 but not over P70,000 P2,500 + 15% of the excess over
P30,000
Over P70,000 but not over P140,000 P8,500 + 20% of the excess over
P70,000
Over P140,000 but not over P250,000 P22,500 + 25% of the excess over
P140,000
Over P250,000 but not over P500,000 P50,000 + 30% of the excess over
P250,000
Over P500,000 P125,000 + 32% of the excess over
P500,000

Income Tax Schedule Effective Jan. 1, The Tax Shall Be

2023 and onwards Taxable Income
Not over P250,000 0%
Over P250,000 but not over P400,000 15% of the excess over P250,000
Over P400,000 but not over P800,000 P22,500 + 20% of the excess over
P400,000
Over P800,000 but not over P2,000,000 P102,500 + 25% of the excess over
 P800,000
Over P2,000,000 but not over P8,000,000 P402,500 + 30% of the excess over
P2,000,000
Over P8,000,000 P2,202,500 + 35% of the excess over
P8,000,000

d. Individuals whose gross sales or receipts, regardless of amount, are subject to other
percentage taxes (other than the 3% percentage tax on VAT-exempt persons like common carrier’s
tax and amusement tax).
e. Self-employed individuals and mixed income earners whose gross sales or receipts and non-
operating income do not exceed P3,000,000, but are registered as VAT taxpayers.
f. Partners in a general professional partnership
OPTIONAL 8% INCOME TAX RATE
- 8% tax on gross sales or receipts and other non-operating income in excess of P250,000, in lieu of
the graduated income tax rates and the 3% percentage tax on VAT-exempt persons
Persons Who May Avail
a. Non-VAT Self-employed Individuals whose gross sales or receipts and other non-operating
income do not exceed P3,000,000.
b. Non-VAT Mixed income Earners whose gross sales or receipts and other non-operation
income do not exceed P3,000,000, but only with respect to income from business. Income from
employment shall be subjected to income tax using the graduated income tax rates.

– 8% x [Gross sales or receipts and other non-operating income (not exceeding P3,000,000) less
P250,000].
Gross sales or receipts =
Total sales or amount of money received, Net of
i. Sales Returns and Allowances
ii. Sales Discounts, subject to following conditions:

b. Mixed Income Earners

Tax on Income From Employment
– Use graduated income tax rates
Plus,
Tax on Income From Business
– 8% x Gross sales or receipts and other non-operating income (not exceeding P3,000,000)
Graduated Income Tax Rates Vs. 8% 8% Income Tax Rate
Income Tax Rate Graduated Income
Tax Rates
Applicability Applicable to all Individual May be availed of by
Taxpayers in general qualified self-employed
individuals and mixed
income earners whose
gross sales or receipts
and non-operating income
do not exceed
P3,000,000.
Tax Base Net Taxable Income Gross sales or receipts
and
other non-operating
income
Deduction Itemized Deductions or P250,000 from gross only
Optional Standard for self-employed
Deduction individuals.
Business Tax Percentage Tax or VAT Not Subject to Percentage
Tax
Solution:
a. If Mr. Reyes fails to file his 1st quarterly return, his income tax due will be P160,000.

Taxable Income = P900,000 (P1,250,000+800,000-750,000-400,000)

Tax = P160,000 [P130,000+[(P900,000-800,000) x 30%]]
 b. If Mr. Reyes files the said return and elects to be taxed at 8%, income tax due will be
P144,000.

Tax Base = P1,800,000 (P1,250,000+800,000-250,000)

Tax = P1,800,000 * 8% = P144,000
Sample Problem:
In 2019, Mr. Uy, a mixed income earner, has taxable compensation income of P2,000,000, gross
receipts from practice of profession of P2,000,000 and non-operating income of P300,000. His cost of
services and operating expenses are P500,000 and P200,000, respectively.
a. If he has opted to be taxed using the graduated rates, his income tax due is
_____________________.
b. If he has opted to be taxed at 8% income tax rate, his income tax due is
_____________________.

Solution:
a. If he has opted to be taxed using the graduated rates, his income tax due is P1,002,000.

Taxable Income = P3,600,000

(P2,000,000+P2,000,000+300,000-500,000-200,000)
Tax = P1,002,000 [[P490,000+[[P3,600,000-P2,000,000]x32%]]
b. If he has opted to be taxed at 8% income tax rate, his income tax due is P674,000
(P490,000+184,000).

Tax on Compensation Income = P490,000 (Tax Base of P2,000,000)

8% income tax = P184,000 [(P2,000,000+300,000) x 8%]

Sample Problem:
Mr. Cruz is a minimum wage earner and a part-time real estate agent for a real estate broker. In
addition to the statutory minimum wage of P180,000, he likewise earns P100,000 as commission from
his real estate dealings for the year 2018.
a. If he has opted to be taxed using the graduated rates, his income tax due is
_____________________.
b. If he has opted to be taxed at 8% income tax rate, his income tax due is
_____________________.

Solution:
a. If he has opted to be taxed using the graduated rates, his income tax due is P0.

Taxable Income = P100,000

Tax = 0 (P100,000 x 0%)
b. If he has opted to be taxed at 8% income tax rate, his income tax due is P8,000.

Tax on Compensation = P0 (P180,000 is tax-exempt being a MWE)

Tax on Practice = P8,000 (P100,000 x 8%)
When to Avail
The qualified taxpayer can avail of the 8% income tax rate by signifying his intention to avail of the
same as soon as possible through the filing of any of the following:
1. For New Business Registrants
a. Application for Registration (BIR Form No. 1901), or
b. Initial quarterly percentage or income tax return after commencement of a new business or practice
of profession
2. For Existing Individual Business Taxpayers
a. Application for Registration Information Update (BIR Form No. 1905)
b. 1st Quarterly Percentage Tax Return; and/or,
c. 1st Quarterly Income Tax Return
The option to avail of the 8% income tax must be signified annually on or before May 15. Such election is
deemed irrevocable for the entire taxable year, unless the taxpayer has exceeded the VAT threshold during the
year, in which case he shall be taxed using the graduated income tax rates.

In case of breach, the taxpayer is liable for percentage tax computed from the start of the year until the
month in which the threshold was breached, and thereafter he is liable for VAT.
In case of failure to file the said return, he is deemed to have chosen the graduated income tax
rates.
Corporations and Partnerships, except General Professional Partnerships
Tax rate is 30%, but beginning in the 4th year following the year the taxpayer commenced its business
operations, MCIT shall be applicable and paid if it is higher than the Normal Corporate Income Tax
Income
Gain derived from capital, from labor, or both combined, provided it is understood to include profit
gained through a sale or conversion of capital assets.
Requisites for Taxable Income
1. There must be gain or profit.
2. The gain must be realized or received.
3. The gain must not be excluded by law or treaty.

Gross Income
The term means all income of whatever kind and derived by taxpayer from whatever source, including
but not limited to compensation for services, gross income derived from conduct of trade or business
or exercise of a profession, gains derived from dealings in property, interests, rents, royalties,
dividends, annuities, prizes and winnings, pensions, and partner’s distributive share from the net
income of a general professional partnership
Types of Taxable Income
1. Compensation Income
2. Professional/Business Income
3. Passive Income
4. Capital gain

Exclusions
Items of income exempt from tax by law or treaty
Receipts not considered income

Examples:
a. Proceeds of life insurance
b. Compensation for Injuries
c. Value of property acquired by inheritance or donation
d. Christmas bonus, 13th month pay, productivity incentives and other benefits up to a
maximum of P90,000.
e. Lotto winnings

Deductions
Items or amounts which the law allows to be subtracted from gross income in order to arrive at the
taxable income.
They may either be itemized or optional standard deductions.
Itemized Deductions (Business Expenses)
Conditions for Deductibility of Expenses
1. They must be connected in trade or business
2. They are for the account of the taxpayer
3. They are reasonable, ordinary and necessary
4. They are incurred or paid during the taxable year
5. They are not illegal, immoral, not against public policy or public order
6. They must be substantiated.
7. The corresponding withholding tax thereon had been duly made.

Examples of Deductible Business Expenses

1. Salaries and Wages
2. Rentals
3. Repairs
4. Interest
5. Taxes
6. Losses
7. Bad Debts
8. Entertainment, Amusement and Recreation (Shall not exceed 1/2% of Net Sales for Sale of Goods,
and 1% of Net Revenues for Sale of Services)
9. Depreciation
10. Other business expenses