Individual Income Tax

 

INDIVIDUAL INCOME TAX I. 

Classes of Individual Taxpayers 1.  Citizens

  Those who are citizens of the Philippines at the time of the adoption of the Constitution (on February 2,1987);   Those whose fathers or mothers are citizens of the Philippi Philippines; nes;   Those born before January 17, 1973 of Filipino mothers who elect Philippine Citizenship upon reaching the age

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of majority

  Those who are naturalized in accordance with law

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 is a citizen of the Philippines who has a permanent or perpetual home in the Philippines Philippines to   Resident Citizen  –  –  is

a.

which he plans or intends or return whenever he is away or out of the country b. 

Nonresident Citizen 1)  A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical  presence abroad with with a definite intention intention to reside therein 2)  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 3)  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 4)  A citizen who has been previously pr eviously considered as nonresident citizen and who arrives in the Philippines at any an y time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident 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

2.  Aliens a.  Resident alien  –  –  an  an individual whose residence is within the Philippines and who is not a citizen thereof thereof..  b.  Nonresident alien  –   an individual whose residence is not within the Philippines and who is not a citizen thereof. 1)  Nonresident Alien –  Alien  –  ETB –    ETB  –  a nonresident alien who has stayed stayed in the Philippines for an aggregate period of more than 180 days during any calendar year.  2)  Nonresident Alien –  Alien  –  NETB –    NETB  –   aa nonresident alien who has stayed in the Philippines for an aggregate period of not more than 180 days during any calendar year. 

Taxpayers Classification Classification

Tax Base

Tax Rate

a.  Resident Citizen b.  Nonresident Citizen c.  Resident alien d.  Nonresident Alien –  Alien –  ETB  ETB e.  Nonresident Alien –  Alien –  NETB  NETB

II. 

Kinds of Income a.  Subject to 24a 1.  Compensation Income -  “Those arises from arises from employer-employee employer-employee relationship relationship” ”  -  Includes salaries, wages, emoluments and honoraria, h onoraria, commissions, commissions, taxable bonuses and fringe benefits, taxable allowances, non-monetary non-monetary compensation, compensation, director’s fees an and d the like, taxable pensions and retirement pay, amounts drawn as salaries by partners of a partnership and other incomes of a similar nature unless specifically exempted by the Tax Code. 2.  Business Income -  These are incomes from business such as a s incomes from manufacturing and selling goods, incomes from buying and selling goods, incomes, fees from the exercise of profession, gains from sale or exchange of assets other than inventories, commission, rental income, and other incomes not covered by compensation income  3.  Mixed Income b.  Subject to other rate 1.  Passive Income -  Consist of interest from currency deposits, yields and other m monetary onetary benefits from deposit substitutes, trust fund and similar arrangements arrangements,, royalties, prizes, winnings, interest from foreign currency deposits, share in a  business partnership income, divide dividends nds in a domestic ccorporation, orporation, interest interest on long term de deposits. posits. 2.  Capital Gains Tax

 

 

Include capital gains from sales of shares of stock and sales of real r eal property 3.  Fringe Benefit Tax c.  Excluded or exempted -

Format of Computation of Taxable Income A. Gross Compensation Income

P xxx

Less: Non-taxable/Exempt Income xxx Taxable Compensation Income P xxx  Non-Taxable/Exempt  Non-Taxable/Exem pt Income includes: includes: 1.  SMW, holiday pay, overtime pay, night shift differential, and hazard pay of an MWE; 2.  First P90,000 of 13th Month Pay and other benefits; 3.  De minimis fringe benefits; 4.  Employee’s share of SSS, GSIS, PhilHealth,and Pag-ibig Pag-ibig Contributions; and 5.  Union dues. B. Sales/Re Sales/Receipts, ceipts, net of returns, allowances and discounts Less: Cost of Sales/ Cost of Services Gross Income from Operations Less: Itemized Deductions or OSD  Net Income from from Operations Add: Non-operating income P xxx Share in GPP net income xxx Taxable Net Income C. Purely self-employed self-employed in individuals dividuals or mixed earners can avail of the th e 8% income tax rate if the gross sales/receipts from their  business/profession  business/profe ssion plus non-operating income does not exceed the VAT threshold of P3,000,000.

P xxx xxx P xxx xxx P xxx xxx P xxx

The 8% tax is in lieu of (1) graduated rates and (2) the OPT under section 116 of the Tax Code. However, this option is not available to the ff individual taxpaye taxpayers: rs:

 

1.  2. 3.  4.  5. 

VAT-registered VAT-registe red taxpayers; Taxpayers subject to OPT other than the 3% OPT under section 116; Partners of General Professional Partnerships (GPP’S); (GPP’S);   Individuals enjoying income tax exemption (e.g. those registered as BMBEs); and Taxpayers who fail to signify their intention to avail of the 8% income tax rate in the First (1 st) Quarter Income Tax Return, or in the First (1 st) Quarter Percentage Tax Return, or in the initial quarterly return of the taxable year upon the commencement of a new business or practice of profess profession. ion.

D. Net of P250,000 if individual taxpayer taxpayer is a self-employ self-employed ed individual earning income purely from self-employment or practice of  profession. Mixed income earners are not allowed this P250,000 deduction.  

Passive Income RC 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

NRC

RA

NRA-ETB

NRA-NETB

 

Exercise # 1

Classify each individual taxpayer: 1.  2.  3.  4.  5.  6. 

Anette B., a citizen, stayed in Japan for more than one hundred eighty days. Hilary S., an alien, stayed in the Philippines for more than one year. Meryll S., citizen, maintained her residence in Australi Australia. a. Sigourney W., departed from the Philippines to work as a physical therapist in the U.S. Melanie G., a Filipino overseas contract worker, on vacation in the Philippines for one month. Winora R., non-resident citizen, after two years of working as entertainer en tertainer under contract in Japan, returns during the year to reside in the Philippines. 7.  Cindy C., a Filipino singer, visited Canada for three days to sing s ing for cousin’s wedding.  wedding.   8.  Angelina J., a non-resident alien, finding the beauty of the th e Philippines, stayed therein for more than on onee hundred eighty days. 9.  Jims., a non-resident alien, stayed in the Philippi Philippines nes as manager of a domestic airline for January to September. 10.  Anthony H., a British, left Manila for Europe for vacation. He has a re re-entry -entry permit.

Exercise # 2

The Taxpayer Taxpayer is a Resident Resident cit citizen, izen, unless otherwise stated. Identify whether tthe he following following are subje subject ct to final tax tax or not. Place ( on the space space pro provide vided d if it is subject subject to ffinal inal tax aand nd state tthe he rate rate,, othe otherwis rwisee place (

).

Final Tax?

1.  Interest from peso bank deposit, BDO Manila 2.  Interest from US dollar bank deposit, BPI-Morayta 3.  Interest from US dollar bank deposit, Bank of New York USA 4.  Interest from US dollar bank deposit, Bank of New York USA 5.  Interest from money market placement, pl acement, BDO Philippines 6.  Interest from overdue notes receivable receivable,, Philippines 7.  Royalties, in general, g eneral, Philippines 8.  Royalty, literary work, Philippines 9.  Prize, P10,000, Philippines 10.  Prize, P100,000, Philippi Philippines nes 11.  Prize, P10,000, USA 12.  Prize, P20,000, USA

 

13. Winnings, P10,000, Philippi Philippines nes 14.  Winnings, P50,000, Philippi Philippines nes 15.  Winnings, P10,000, USA 16.  Winnings, P50,000, USA 17.  Philippines Lotto winnings 18.  USA Lotto winnings 19.  Interest Income received from depository bank under expanded foreign currency deposit system 20.  Interest Income from long-term deposit or investment evidenced by certificates issued by BSP 21.  Dividend from a domestic corporation 22.  Dividend from a resident foreign corporation 23.  Dividend from a non-resident foreign corporation 24.  Share in Distributive net income of business partnership in the Philippines 25.  Share in Distributive net income of general professional partnership in the Philippines

Rate

)

 

26.  Share in net income after tax of an association, a joint account, or a joint venture or consortium 27.  Interest Income under expanded foreign currency deposit system received by a Non-resident Non -resident alien engage in trade or business individual 28.  Interest Income under expanded foreign currency deposit system received by a Non-resident Non -resident citizen individual 29.  Dividend received by a non-resident alien not engage in business in the Philippines from a domestic corporation 30.  Dividend received by a non-resident alien engage in business in the Philippines from a domestic corporation 31.  Interest income under expanded foreign currency deposit system received by Non-resident Non-r esident alien not engaged in trade or business individual

Exercise # 3

Determine the basic personal and additional exemptions of the taxpayers described. They shall be assumed a ssumed resident citizens citizens earning earn ing  purely compensation compensation income unless otherwise otherwise indic indicated. ated. Assume also that the spous spouse, e, if applicab applicable, le, is employed employed unless otherw otherwise ise stated, lastly assume 2015 as the taxable year. Basic

1.  Woody A. married Diane K. 2 years ago. Diane gave birth to their second  baby on April 15,2015. 15,2015. 2.  George C. is single, self-supporting student. His working mother and unemployed father lives in Pasay City. He lives in Quezon City. Occasionally,, he gives his parents money. Occasionally 3.  Brooke S., Single, resigned from government service to try her luck in the US early 2011. Her employment contract as personnel officer was for 5 years. In 2015, she was earning 1,250 US dollars a month. She sends 20% income to her parents who are ar e based in Pangasinan. Assume an exchange rate of P43 per dollar. 4.  Marlon B. married Phoebe C. in a civil wedding in 2008 after a month of courtship. In 2015 they took Phoebe’s niece under und er their care thinking that they may not be blessed anymore with a baby. The child’s mother verbally assented to this. 5.  Jack N. was employed in 2010. He left 2 sons, aged 14 and 12 by his  previous paramour in Quezon. In early early 2013, he courted courted his long-time long-time officemate Tina T. in August 2013, they got married. As of December 2015, they still did not have a child 6.  Helen H. works for a family-owned family-owned publishing business being managed by her husband. On Jan 25, 2015 she gave birth to their 3 rd child after 6 years of marriage. Her husband waived his right to t o claim for exemptions  pertaining to their their children. children. 7.  In 2015, Josie B. was 3 months pregnant with her live-in partner. Everything was planned for the wedding but even before the wedding day came, he acquired a serious illness and died days after. Presently she is employed as executive secretary and raising her son all by herself. 8.  Julia R. married Mel G. in 2001. After years of troublesome marriage, they had it annulled in 2015. They gave a son and daughter, now aged 9 and 5, respectively.. Presently, Julia is running her small bakeshop while Mel respectively  practices his profession profession as civil engineer. The ccourt ourt awarded Julia Julia custody of their daughter, while Mel, the custody of their son. 9.  Prof. Kevin B., a teacher works as part-time consultant in a government office. His wife, a teacher like him, gave birth to their only daughter after 10 years of marriage. Since Mrs. B. is already in her fifties, they no longer expect to have another child. They were very happy that in 2015, their daughter, right after finishing college at 20, decided to get married. Before the year ended, she gave birth to a baby boy. The new family lives in Prof B’s home.  home.  10.  Atty. Christopher R., UCPB’s corporate lawyer, married to Tiffany, Full time housewife, has a minor son. 11.  Anita P., separated from her husband since 2010m has ha s 2 children by him. The older one, 25 is married while the younger, 17, lives with his father. Both refuse to file for a legal separation up to now. 12.  Debra W., practicing lawyer, is married to a non-resident n on-resident citizen whose sources of income are his investments in vestments abroad. They have 3 children. 13.  Dr. James S., owner of PMA computer College a sole-proprietorship, is married whose wife operates a pawnshop, with 5 children. children. 14.  Liz T., married, assigned in Davao City branch of a Quezon City-based government agency, has 2 children. 15.  Cheryl L., married, with 2 children.

Additional

 

  Exercise # 4 

1.  A single resident citizen has (2) qualifie qualified d dependent brothers. During a particular year, he earns and spends the following: Gross Income from practice of profession Income from trading business Expenses in connection with the: Practice of profession Trading business Hospitalization insurance premium paid

P 200,000 100,000 20,000 20,000 2,000

Required: a.  Compute the deductible hospitalization insurance premium paid.  b.  Compute the taxable net income c.  Compute the tax due 2.  A married resident citizen has (5) children. All his children are study studying ing in London. He has the following data on income and expenses for the year 2016: Salary. Philippines, net of withholding tax of P 2,000,000 Rental income, Philippi Philippines nes Expenses in relation to rental income, Philippines Gross business income, USA Business Expenses, USA Hospitalization insurance premium paid

P 7,000,000 2,000,000 500,000 3,000,000 1,500,000 1,500,00 0 10,000

Required: a.   b.  c.  d. 

Compute his taxable net income in the Philippines Assuming the taxpayer is a non-reside n on-resident nt citizen. Compute his taxable net income in the Philippines Assuming the taxpayer is a resident r esident alien. Compute his taxable net income in the Philippines Assuming the taxpayer is a non-reside n on-resident nt alien doing in the Philippines, and his country allowed P80,000 basic  personal exemption exemption to married Fil Filipinos ipinos not residing residing there, and P40 P40,000 ,000 additional exemption exemption for eeach ach dependent child. Compute his taxable net income in come in the Philippines e.  Assuming the taxpayer is a non-reside n on-resident nt alien n not ot doing business in the Philippines. Compute his taxable net income in the Philippines

3.  A husband and wife wife,, resident citizens with 1 qualified dependent child, had the following information on their income and expenses for the year 2016: Salary of the husband, net of P50,000 witt wittholding holding tax Salary of the wife wife,, gross of P60,000 withholdi withholding ng tax Professional income, husband, net of 10% withholdi withholding ng tax Expenses, practice of profession Premium payment for health Gross business income, wife insurance paid by the wife Business Expenses, wife Rent income, lease of common property gross of 5% withholding tax Expenses, leased commo common n property The husband waived the additional exemption in favor of his hi s wife Required: a.  How much was the taxable income of the th e husband?  b.  How much was the taxable income of the wife?

P 450,000 600,000 900,000 300,000 5,000 500,000 100,000 700,000 200,000