INCOME TAXATION

Block B
Saturday 1:00PM-4:00PM
Room 301

Eugene Rey D. Taer, CPA, CTT, CFMP, MBA, MRITax

Head, Accounting Department
Municipal Government of Lagonglong
Lagonglong, Misamis Oriental
 CONCEPT OF INCOME
Income – refers to all earnings derived from service rendered
(labor), from capital (business or investment), or both including gain
derived from sale of personal or real property.

Net Worth, ending P xx

Less: Net Worth, beginning xx
Increase (decrease) in net worth P xx
Add: Nondeductible items xx
Total P xx
Less: Nontaxable items P xx
Personal exemptions xx xx
NET TAXABLE INCOME P xx
 TAXATION OF INDIVIDUALS
Individual Taxpayers – are natural persons with income derived within the
territorial jurisdiction of a taxing authority. They are classified as:

a) Citizens – (1) born with fathers and/or mothers as Filipino citizens,

(2) born before January 17, 1973 of Filipino mother who elects
Philippine citizenship upon reaching the age of majority, (3)
acquired Philippine citizenship after birth (naturalized) in
accordance with Philippine laws.

b) Aliens – a foreign-born person who is not qualified to acquire

Philippine citizenship by birth or after birth.
 TAXATION OF INDIVIDUALS
Classification of Citizens
a) Resident Citizen (RC) – is a Filipino citizen who stayed
permanently in the Philippines or stayed outside the Philippines for
less than 183 days during the taxable year. All income derived
within & without the Philippines are TAXABLE.

b) Nonresident Citizen – a Filipino citizen who stayed outside the

Philippines for 183 days or more during the taxable year & has
established proof to the BIR Commissioner of his definite intention
to reside outside the Philippines on a permanent basis as an
immigrant or employee. Income taxable ONLY within.
 TAXATION OF INDIVIDUALS
Classification of Aliens

a) Resident Aliens (RA) – persons who are not citizens but are
residing within the Philippines including foreigners who have
stayed in the Philippines for more than 1 year from date of arrival.

b) Nonresident Aliens (NRA) – are foreign individuals whose

residences are not in the Philippines.
 TAXATION OF INDIVIDUALS
Classification of Nonresident Aliens

a) Those engaged in trade or business within the Philippines

(NRAETB) – those who have stayed within the Philippines for
more than 180 days & those engaged in trade or business and has
business income in the Philippines belongs to this group.

b) Those not engaged in trade or business within the Philippines

(NRANETB) – those who have stayed within the Philippines for
only 180 days or less and have no business income derived within
the Philippines.
 TAXATION OF INDIVIDUALS
Special Taxpayers – are those alien individuals or Filipino citizens
who are taxed with a 15% tax rate based on their gross
compensation income when the ff. conditions are met:
a) They are employed occupying managerial and/or technical positions
with regional area headquarters of multi-national corporations, etc.
b) If the special taxpayer is an alien, all of his gross compensation
income received is subject to 15% final tax.

c) If the taxpayer is a Filipino citizen, he has the option to be taxed at

15% based on GCI or the regular rate based on NTC if his annual
GCI is at least P975,000.00.
 TAXATION OF INDIVIDUALS
SITUS OF INCOME
Taxpayers
Within Without
Citizens      
  Resident citizen Taxable Taxable
  Nonresident citizen Taxable Nontaxable
Aliens      
  Resident alien Taxable Nontaxable
  NRAETB Taxable Nontaxable
  NRANETB Taxable Nontaxable

Special Taxpayers      

  Citizens Taxable Taxable

  Aliens Taxable Nontaxable
 TAXATION OF INDIVIDUALS

Personal Exemptions – are arbitrary amounts allowed by law as a

deduction from the gross compensation income and/or net business
income and/or professional income for personal, living or family
expenses.

Legal Basis: Section 35, National Internal Revenue Code of 1997

 TAXATION OF INDIVIDUALS
Kinds of Personal Exemptions:
a) Basic Personal Exemption – a deductible allowance granted by the
law to reduce the taxable income of an individual amounting to
P50,000.00 whether he/she is married, head of family of single.
b) Additional Exemption – a deductible allowance in addition to the
basic personal exemption allowed for qualified dependent children
of an individual taxpayer amounting to P25,000.00 per qualified
dependent child not exceeding four.
 TAXATION OF INDIVIDUALS

Taxpayers Allowed for Personal Exemption:

a) Citizens of the Philippines, whether resident or
nonresident;
b) Resident Aliens
c) Estates and Trusts; and
d) Nonresident alien engaged in trade or business within
(NRAETB) in certain cases.
 TAXATION OF INDIVIDUALS
Requisites before a NRAETB may be granted Personal
Exemption:
a) The country of which the NRA is a subject or citizen has an income
tax law;
b) Such income tax law allows personal exemptions to Filipino citizens
deriving income therefrom but not residing therein;
c) The NRA files an income tax return in the Philippines in due time;
d) Such ITR is true and accurate, covering all income received from
sources within the Philippines.
 TAXATION OF INDIVIDUALS

Taxpayers Not Allowed for Personal Exemption:

a) NRAETB not enjoying reciprocity clause;
b) NRANETB
c) Corporations
d) Partnerships
 TAXATION OF INDIVIDUALS
What is Principle of Reciprocity?

In international relations and treaties, the principle of reciprocity

states that favours, benefits, or penalties that are granted by one
state to the citizens or legal entities of another, should be returned in
kind.
For example, reciprocity has been used in the reduction of tariffs,
the grant of copyrights to foreign authors, the mutual recognition
and enforcement of judgments, and the relaxation of travel
restrictions and visa requirements.
 TAXATION OF INDIVIDUALS
Problem:
Mr. Smith, single and a nonresident American doing business in the
Philippines, asks you to determine his personal exemption for 2010.

Assume that the American Government allows a Filipino Citizen a personal

exemption amounting to P20,000.00 and the Philippine Government allows
P50,000.00. How much is the allowable personal exemption of Mr. Smith in
the Philippines?
 TAXATION OF INDIVIDUALS

Requisites for Additional Exemptions:

a) A taxpayer’s child, whether legitimate, illegitimate or legally
adopted;
b) Chiefly depending for support on the taxpayer;
c) Living with the taxpayer;
d) Not more than twenty-one (21) years of age, unmarried and not
gainfully employed or if such dependent, regardless of age, is
incapable of self-support because of mental or physical defect.
 TAXATION OF INDIVIDUALS
Problem:
Compute the personal exemption of Mr. Weygan, a Filipino, legally separated
with the following dependents:
a) Children
1. Mr. A – 30 y.o. and jobless
2. Mr. B – 19 y.o. student but gainfully employed
3. Mr. C – 22 y.o. mentally retarded
b) 55-year old father
c) 12-year old illegitimate son
d) Supporting a senior citizen (60 years old)
 TAXATION OF INDIVIDUALS
Rules in Claiming Additional Exemptions:
a) If only one spouse is deriving taxable income, only said spouse may
claim the additional exemption;
b) If both the spouses earn income during the taxable year, only one of
the spouses can claim additional exemptions for dependent qualified
children;
c) If legally separated with a qualified dependent child, the additional
exemption shall be allowed to the spouse who has the custody of the
child or children;
d) An unmarried individual with a child out of wedlock can claim
additional exemptions.
 TAXATION OF INDIVIDUALS
Change of Status:
 TAXATION OF INDIVIDUALS
UPDATE!!!

Section 12 of the TRAIN LAW states that:

“Section 35 of the NIRC, as amended, is hereby REPEALED.”

Which only means that starting January 01, 2018, personal and
additional exemptions are no longer allowed as a deduction from
taxable income.
 TAXATION OF INDIVIDUALS

CLASSIFICATION OF TAXES ON INDIVIDUALS:

a) Normal (Tabular) Graduated tax
b) Passive Income tax
c) Capital Gains tax
 TAXATION OF INDIVIDUALS
Normal (Tabular) Tax
This the tax rate to be used in computing income tax due of an individual
taxpayer.
 TAXATION OF INDIVIDUALS
Taxable Income Formula:
Compensation Income P xxx
Less: Tax-exempt compensation P xxx
Personal Exemptions xxx
Health/hospitalization insurance paid xxx xxx
Net Taxable Compensation P xxx
Add:
Business Income P xxx
Less: Business expenses allowed xxx
Net Business Income P xxx xxx
Add:
Capital gains, not subjected to final tax P xxx
Passive income without (for resident citizen) xxx
Total P xxx xxx
TOTAL TAXABLE INCOME P xxx
 TAXATION OF INDIVIDUALS
Passive Income
An income earned from allowing others to use one’s rights, or game of chance
of investment, which the taxpayer merely waits for the income to come in.
The law subjects passive income to FINAL TAX. Once subjected to final tax,
it is no longer included in the taxable income subject to the normal (tabular)
tax.
These are as follows:
1. Interest, prizes, royalties, etc.
2. Cash or property dividends
 TAXATION OF INDIVIDUALS

Capital Gains Tax

These are taxes imposed on sales or exchanges of properties not used in the
business.
 TAXATION OF INDIVIDUALS

Nonresident Aliens’ (NRA) Income Taxes

1. NRAEBT – shall be taxed in the same manner as a Nonresident

Citizen.

2. NRANETB – 25% final tax based on his gross income.