Income Tax of Individuals

Tax Formula
24(A), NIRC
An income tax is hereby imposed:(a)
On the taxable income defined in Section 31 of this Code, other than income subject to taxunder Subsections (B), (C) and (D) of
this Section, derived for each taxable year from all sourceswithin and without the Philippines be every individual citizen of the
Philippines residingtherein;(b)
On the taxable income defined in Section 31 of this Code, other than income subject to taxunder Subsections (B), (C) and (D) of
this Section, derived for each taxable year from all sourceswithin the Philippines by an individual citizen of the Philippines who
is residing outside of the
Philippines including overseas contract workers referred to in Subsection(C) of Section 23hereof; and(c)
On the taxable income defined in Section 31 of this Code, other than income subject to taxunder Subsections (b), (C) and (D) of
this Section, derived for each taxable year from all sourceswithin the Philippines by an individual alien who is a resident of the
Philippines.The tax shall be computed in accordance with and at the rates established in the followingschedule:
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 + 34% of the excess over P500,000 in 1998.
Provided
, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%)and effective January 1, 2000, the said
rate shall be thirty-two percent (32%).For
married individuals
, the husband and wife, subject to the provision of Section 51 (D) hereof,shall compute separately their individual income tax
based on their respective total taxable income:Provided, That if any income cannot be definitely attributed to or identified as
income exclusivelyearned or realized by either of the spouses, the same shall be divided equally between the spousesfor the
purpose of determining their respective taxable income.
Final Income Tax Interests, Royalties, Awards, Dividends, Capital Gains onShares, Realty

24(B), NIRC
Rate of Tax on Certain Passive Income
.(1)
Interests, Royalties, Prizes, and Other Winnings
. - A final tax at the rate of twenty percent (20%)is hereby imposed upon the amount of interest from any currency bank deposit
and yield or anyother monetary benefit from deposit substitutes and from trust funds and similar arrangements;royalties,
except on books, as well as other literary works and musical compositions, which shall beimposed a final tax of ten percent
(10%); prizes (except prizes amounting to Ten thousand pesos(P10,000) or less which shall be subject to tax under Subsection
(A) of Section 24; and otherwinnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources
withinthe Philippines: Provided, however, That interest income received by an individual taxpayer (excepta nonresident
individual) from a depository bank under the expanded foreign currency depositsystem shall be subject to a final income tax at
the rate of seven and one-half percent (7 1/2%) ofsuch interest income: Provided, further, That interest income from long-term
deposit or investmentin the form of savings, common or individual trust funds, deposit substitutes, investmentmanagement
accounts and other investments evidenced by certificates in such form prescribed bythe Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed under this Subsection:Provided, finally, That should the holder of the certificate pre-terminate
the deposit or investmentbefore the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted
and withheld by the depository bank from the proceeds of the long-term deposit or investmentcertificate based on the
remaining maturity thereof:Four (4) years to less than five (5) years - 5%;Three (3) years to less than (4) years - 12%; andLess
than three (3) years - 20%(2)
Cash and/or Property Dividends
- A final tax at the following rates shall be imposed upon thecash and/or property dividends actually or constructively received
by an individual from a domesticcorporation or from a joint stock company, insurance or mutual fund companies and
regionaloperating headquarters of multinational companies, or on the share of an individual in thedistributable net income
after tax of a partnership (except a general professional partnership) ofwhich he is a partner, or on the share of an individual in
the net income after tax of an association,a joint account, or a joint venture or consortium taxable as a corporation of which he is
a memberor co-venturer:Six percent (6%) beginning January 1, 1998;Eight percent (8%) beginning January 1, 1999; andTen
percent (10% beginning January 1, 2000.Provided, however, That the tax on dividends shall apply only on income earned on
or after January1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declaredor
distributed on or after January 1, 1998, be subject to this tax.

24(C), NIRC
Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange
. - Theprovisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is herebyimposed upon the net
capital gains realized during the taxable year from the sale, barter, exchangeor other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed ofthrough the stock
exchange.Not over P100,000 5%On any amount in excess of P100,000 10%

24(D), NIRC
Capital Gains from Sale of Real Property
. -(1)
In General
. - The provisions of Section 39(B) notwithstanding, a final tax of
six percent (6%)based on the gross selling price or current fair market value
as determined in accordance withSection 6(E) of this Code, whichever is higher, is hereby imposed
upon capital gains presumed tohave been realized
from the sale, exchange, or other disposition of real property located in thePhilippines, classified as capital assets, including
pacto de retro sales and other forms of conditionalsales, by individuals, including estates and trusts: Provided, That the tax
liability, if any, on gainsfrom sales or other dispositions of
real property to the government
or any of its politicalsubdivisions or agencies or to government-owned or controlled corporations shall be determinedeither
under Section 24 (A) or under this Subsection, at the option of the taxpayer
.(2)
Exception
. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding,capital gains presumed to have been
realized from the
sale or disposition of their principalresidence by natural persons
, the proceeds of which is fully utilized in acquiring or constructing anew principal residence
within eighteen (18) calendar months from the date of sale
or disposition,shall be exempt from the capital gains tax imposed under this Subsection: Provided, That thehistorical cost or
adjusted basis of the real property sold or disposed shall be carried over to the newprincipal residence built or acquired:
Provided, further, That the Commissioner shall have been dulynotified by the taxpayer within
thirty (30) days from the date of sale or disposition
through aprescribed return of his intention to avail of the tax exemption herein mentioned: Provided, stillfurther, That the said
tax exemption can only be availed of
once every ten (10) years
: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of thegain
presumed
to have been realized from the sale or disposition shall be subject to capital gainstax. For this purpose, the gross
selling price
or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized
amount
bears to the gross selling pricein order to determine the taxable portion and the tax prescribed under paragraph (1) of
thisSubsection shall be imposed thereon.

Garrison vs. Court of Appeals

Several United States citizens, entered this country under 9(a) of the Philippine Immigration Act of1940, as amended, and are
all employed in the United States Naval Base, Olongapo City.For the year 1969
John L. Garrison
earned $15,288.00;
Frank Robertson
, $12,045.84;
Robert H.Cathey
, $9,855.20;
James W. Robertson
, $14,985.54;
Felicitas de Guzman

, $8,502.40; and
EdwardMcGurk
$12,407.99.They all received separate notices from the BIR RDO, Olongapo City, informing them that they hadnot filed their
respective income tax returns for 1969, as required by Section 45 of the NIRC. Thenotice directed them to file their returns
within ten days.The Americans refused to file their incomes, saying that they were special temporary visitors, havingentered
this country thanks to the Immigration Act, and that they fell under the ambit of 2 of theUS-RP Military Bases Agreement.
Was the mere fact of the physical presence of the Americans in the Philippines enough to
classifythem as resident aliens required to file income taxes notwithstanding their
employment by the USGovernment?
Notwithstanding the fact that the US-RP Military Bases Agreement clearly exempted theseAmericans from the payment of
income taxes, they were
not exempt from the duty to file their taxreturns
.In this case, the Americans fell under the codal precept that "alien[s] residing in the Philippines" areobliged "to file an income
tax return."RR 2, 1940 makes this clear:
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of
thePhilippines for purposes of income tax. Whether he is a transient or not is determined by his
intentionswith regards to the length and nature of his stay. A mere floating intention indefinite as to time,
to return to another country is not sufficient toconstitute him as transient. If he lives in the Philippines
and has no definite intention as to his stay, heis a resident. One who comes to the Philippines for a
definite purpose which in its nature may be promptly accomplished is a transient.But if his purpose is of
such a nature that an extended stay may be necessary to its accomplishment,and to that end the alien
makes his home temporarily in the Philippines, he becomes a resident,though it may be his intention at all
times to return to his domicile abroad when the purpose for which he came has been consummated or
abandoned.
As the tax exemption granted in the US-RP Military Defense Agreement is not absolute, the dutyrests on them to invoke and
prima facie
establish their tax-exempt status.It cannot simply be presumed that they earned no income from any other sources than
theiremployment in the American bases and are therefore totally exempt from income tax.Finally, they are not liable to pay
income tax does not exempt them from the duty to file an incometax return.

Tax on Non-Resident Aliens

Engaged in business in the Philippines
25(A), NIRC
(1)
In General
. - A nonresident alien individual engaged in trade or business in the Philippines shallbe subject to an income tax in the same
manner as an individual citizen and a resident alienindividual, on taxable income received from all sources within the
Philippines. A nonresidentalien individual who shall come to the Philippines and stay therein for an aggregate period ofmore
than one hundred eighty (180) days during any calendar year shall be deemed a'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Codenotwithstanding.(2)
Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company,
orInsurance or Mutual Fund Company or Regional Operating Headquarters or
MultinationalCompany, or Share in the Distributable Net Income of a Partnership (Except
a GeneralProfessional Partnership), Joint Account, Joint Venture Taxable as a
Corporation orAssociation., Interests, Royalties, Prizes, and Other Winnings

. - Cash and/or property dividendsfrom a domestic corporation, or from a joint stock company, or from an insurance or
mutualfund company or from a regional operating headquarters of multinational company, or theshare of a nonresident alien
individual in the distributable net income after tax of a partnership(except a general professional partnership) of which he is a
partner, or the share of anonresident alien individual in the net income after tax of an association, a joint account, or a joint
venture taxable as a corporation of which he is a member or a co-venturer; interests;royalties (in any form); and prizes (except
prizes amounting to Ten thousand pesos (P10,000) orless which shall be subject to tax under Subsection (B)(1) of Section 24)
and other winnings(except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax oftwenty
percent (20%) on the total amount thereof: Provided, however, that royalties on booksas well as other literary works, and
royalties on musical compositions shall be subject to a finaltax of ten percent (10%) on the total amount thereof: Provided,
further, That cinematographicfilms and similar works shall be subject to the tax provided under Section 28 of this
Code:Provided, furthermore, That interest income from long-term deposit or investment in the formof savings, common or
individual trust funds, deposit substitutes, investment managementaccounts and other investments evidenced by certificates in
such form prescribed by the BangkoSentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection:
Provided,finally, that should the holder of the certificate pre-terminate the deposit or investment beforethe fifth (5th) year, a
final tax shall be imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-term deposit or investmentcertificate based on the remaining
maturity thereof:Four (4) years to less than five (5) years - 5%;Three (3) years to less than four (4) years - 12%; andLess than
three (3) years - 20%.(3)

Capital Gains
. - Capital gains realized from sale, barter or exchange of shares of stock indomestic corporations not traded through the local
stock exchange, and real properties shall besubject to the tax prescribed under Subsections (C) and (D) of Section 24.
Not engaged in business in the Philippines
25(B), NIRC
There shall be levied, collected and paid for each taxable year upon the entire incomereceived from all sources within the
Philippines by every nonresident alien individual not engagedin trade or business within the Philippines as interest, cash
and/or property dividends, rents, salaries,wages, premiums, annuities, compensation, remuneration, emoluments, or other
fixed ordeterminable annual or periodic or casual gains, profits, and income, and capital gains, a tax equalto twenty-five percent
(25%) of such income. Capital gains realized by a nonresident alienindividual not engaged in trade or business in the

Philippines from the sale of shares of stock in anydomestic corporation and real property shall be subject to the income tax
prescribed underSubsections (C) and (D) of Section 24.

Special Aliens
25(C), NIRC
Alien Individual Employed by Regional or Area Headquarters and Regional
OperatingHeadquarters of Multinational Companies
. - There shall be levied, collected and paid for eachtaxable year upon the gross income received by every alien individual
employed by regional or areaheadquarters and regional operating headquarters established in the Philippines by
multinationalcompanies as salaries, wages, annuities, compensation, remuneration and other emoluments, suchas honoraria
and allowances, from such regional or area headquarters and regional operatingheadquarters, a tax equal to fifteen percent
(15%) of such gross income: Provided, however, Thatthe
same tax treatment shall apply to Filipinos employed and occupying the same position
as thoseof aliens employed by these multinational companies
. For purposes of this Chapter, the term'multinational company' means a foreign firm or entity engaged in international trade
withaffiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.
25(D), NIRC
Alien Individual Employed by Offshore Banking Units
. - There shall be levied,collected and paid for each taxable year upon the gross income received by every alien
individualemployed by offshore banking units established in the Philippines as salaries, wages, annuities,compensation,
remuneration and other emoluments, such as honoraria and allowances, from suchoff-shore banking units, a tax equal to
fifteen percent (15%) of such gross income: Provided,however, That the same tax treatment shall apply to Filipinos employed
and occupying the samepositions as those of aliens employed by these offshore banking units.

25(E), NIRC
-

Alien Individual Employed by Petroleum Service Contractor and Subcontractor

. - AnAlien individual who is a permanent resident of a foreign country but who is employed andassigned in the Philippines by a
foreign service contractor or by a foreign service subcontractorengaged in petroleum operations in the Philippines shall be liable
to a tax of fifteen percent (15%)of the salaries, wages, annuities, compensation, remuneration and other emoluments, such
ashonoraria and allowances, received from such contractor or subcontractor: Provided, however, Thatthe same tax treatment
shall apply to a Filipino employed and occupying the same position as analien employed by petroleum service contractor and
subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D)
and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

CIR vs. Manning

Under a trust agreement, Julius Reese who owned 24,700 shares of the 25,000 common shares ofMANTRASCO, and the
three private respondents who owned the rest, at 100 shares each, depositedall their shares with the Trustees. The trust
agreement provided that upon Reese's deathMANTRASCO shall purchase Reese's shares. The trust agreement was executed
in view of Reese'sdesire that upon his death the Company would continue under the management of respondents.Upon
Reese's death and partial payment by the company of Reeses's share, a new certificate wasissued in the name of
MANTRASCO, and the certificate indorsed to the Trustees. Subsequently, the
stockholders reverted the 24,700 shares in the Treasury to the capital account of the company asstock dividends to be
distributed to the stockholders. When the entire purchase price of Reese'sinterest in the company was paid in full by the latter,
the trust agreement was terminated, and theshares held in trust were delivered to the company.The Bureau of Internal
Revenue concluded that the distribution of the 24,700 shares of Reese asstock dividends was in effect a distribution of the
"assets or property of the corporation." Ittherefore assessed respondents for deficiency income taxes as well as for fraud penalty
and interestcharges.On a petition for review, the Supreme Court held that the newly acquired shares were not treasuryshares;
their declaration as treasury stock dividends was a complete nullity and that the assessmentby the Commissioner of fraud
penalty and the imposition of interest charges pursuant to theprovision of the Tax Code were made in accordance with
law.Where by the use of a trust instrument as a convenient technical device, respondents bestowedunto themselves the full
worth and value of a deceased stockholder's corporate holding acquiredwith the very earnings of the companies, such package
device which obviously is not designed tocarry out the usual stock dividend purpose of corporate expansion reinvestment, e.g.,
theacquisition of additional facilities and other capital budget items, but exclusively for expanding thecapital base of the
surviving stockholders in the company, cannot be allowed to deflect the latter'sresponsibilities toward our income tax laws. The
conclusion is ineluctable that whenever thecompany parted with a portion of its earnings "to buy" the corporate holdings of the
deceasedstockholders, it was in ultimate effect and result making a distribution of such earnings to thesurviving stockholders.
All these amounts are consequently subject to income tax as being, in truthand in fact, a flow of cash benefits to the surviving

stockholders.Where the surviving stockholders, by resolution, partitioned among themselves, as treasury stockdividends, the
deceased stockholder's interest, and earnings of the corporation over a period ofyears were used to gradually wipe out the
holdings therein of said deceased stockholder, theearnings (which in effect have been distributed to the surviving stockholders
when theyappropriated among themselves the deceased stockholder's interest), should be taxed for each ofthe corresponding
years when payments were made to the deceased's estate on account of hisshares. In other words, the Tax Commissioner may
not asses the surviving stockholders, for incometax purposes, the total acquisition cost of the alleged treasury stock dividends in
one lump sum.However, with regard to payment made with the corporation's earnings before the passage of theresolution
declaring as stock dividends the deceased stockholder's interest (while indeed thoseearnings were utilized in those years to
gradually pay off the value of the deceased stockholder'sholdings), the surviving stockholders should be liable (in the absence of
evidence that prior to thepassage of the stockholder's resolution the contributed of each of the surviving stockholder
rosecorresponding), for income tax purposes, to the extent of the aggregate amount paid by thecorporation (prior to such
resolution) to buy off the deceased stockholder's shares. The reason isthat it was only by virtue of the authority contained in said
resolution that the survivingstockholders actually, albeit illegally, appropriated and petitioned among themselves
thestockholders equity representing the deceased stockholder's interest.

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general

professional partnership as such shall not be subject to the income tax imposed under this Chapter.
Persons engaging in business as partners in a general professional partnership shall be liable for income
tax only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net income of the partnership shall
be computed in the same manner as a corporation.
Each partner shall report as gross income his distributive share, actually or constructively received, in the
net income of the partnership.