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Capital

the original investment or fund used in order to generate earnings which is called
"Capital is a wealth, while income is the service of wealth. The fact is that property
is a tree, income is the fruit; labor is a tree, income is the fruit."

h is called

at property

income

Eminent Domain
the power of the sovereign state to take private property for public purpose
founded upon the idea that the common necessities and interests of the community
transcend individual rights in property

The State may expropriate private property when it is necessary in the interest of nationa
welfare

The Constitution limits the exercise of the power by providing that "Private property may
not be taken for public use without just compensation." (Art. III, Sec. 9, 1987 Philippine
Constitution)
"Just compensation" means paying the owner the full monetary equivalent of the
property taken for public use

lic purpose

s of the community

sary in the interest of national

at "Private property may


Sec. 9, 1987 Philippine

etary equivalent of the

Gross Income

1
2
3
4
5

Gross Income Components


Salary
Wages
Backwages
Honoraria
Fixed or variable allowances
a. Transportation and cell phone allowances given
to call center employees
b. Transportation and night shift allowances to night
shift employees
Mean and/or Out-of-Town Allowances to field
work employees
c. Taxi/transportation allowance of P100 per day
given to BPO Company servicing global
businesses 24 hours a day to employees who work
overtime beyond 10 P.M. or whose work shift
starts at 10 P.M. onwards
d. Commission
e. Fees
f. Tips and gratuities
g. Hazard and Emergency Pay
*Hazard, overtime and night differential and
holiday pay of a minimum wage earner (MWE)
is nontaxable, as long as the MWE has no other
reportable income
h. Retirement Pay (generally taxable)
SSS or GSIS retirement pays
Retirement due to old age w/ the ff. requisites:
a. Retirement program approved by BIR
Commissioner
b. Must be a reasonable profit pla
c. Retiree should have been employed for
more than 10 years
d. Retiree should be 50 years old at the time of
retirement
e. It should have been availed for the first time
i. Separation Pay - not taxable if involuntary
Examples of involuntary separation:
1. Death
2. Sickness
3. Disability
4. Reorganization/merger of company
5. Company at the brink of bankruptcy
j. Pension

Income Tax

Withholding
Tax

N
N

N
N

Gross Income
Fringe
Benefits
Tax
1
2
3
4
5

N
N

Gross Income Components


Backwages
Honoraria
Salary
Wages
Fixed or variable allowances
a. Awards for special services
b. Beneficial payments
c. Commission
d. Fees
e. Fringe benefits and de minimis
f. Hazard and Emergency Pay
*Hazard, overtime and night differential and
holiday pay of a minimum wage earner (MWE)
is nontaxable, as long as the MWE has no other
reportable income
g. Overtime pay
h. Pension
i. Profit Sharing
j. Retirement Pay (generally taxable)
SSS or GSIS retirement pays
Retirement due to old age w/ the ff. requisites:
a. Retirement program approved by BIR
Commissioner
b. Must be a reasonable profit pla
c. Retiree should have been employed for
more than 10 years
d. Retiree should be 50 years old at the time of
retirement
e. It should have been availed for the first time
k. Separation Pay - not taxable if involuntary
Examples of involuntary separation:
1. Death
2. Sickness
3. Disability
4. Reorganization/merger of company
5. Company at the brink of bankruptcy
l. Thirteenth month pay and other benefits
m. Tips and gratuities
n. Transportation and cell phone allowances given
to call center employees
o. Transportation and night shift allowances to night
shift employees
Mean and/or Out-of-Town Allowances to field

p.

q.

work employees
Taxi/transportation allowance of P100 per day
given to BPO Company servicing global
businesses 24 hours a day to employees who work
overtime beyond 10 P.M. or whose work shift
starts at 10 P.M. onwards
Vacation and Sick Leave
if paid or availed of as salary of an employee who is
on vacation or no sick leave not withstanding his
absence from work
monetized value of vacation and sick leave credits
of 10 days or less which were paid to private
employees during the year
monetized value of vacation and sick leave credits
paid to government officials and employees

ome

Taxable
Y
Y
Y
Y
Y
Y
Y
Y
N
N

Y
y
Y
N
N

Y - voluntarily availed
N - involuntary

N if the amount is P82,000 or less


Y (not subject to withholding tax)
N
N

Income
all earnings derived from service rendered (labor), from capital (business or investment), or
both including gain derived from sale or exchange of personal or real property classified as
either ordinary or capital asset
Situation
Increase in the Value of Property

Tax Treatment
Not Income

*An increase in the book value of real property and other fixed assets of a corporation as a
result of their re-appraisal is not income.
earnings from individual persons, partnership, corporation or estate and trust whether or
not subject to t See: Revenue
amount after excluding capital invested, cost of goods sold and other deductions allowed by
law
See: Receipts

Nontaxable Income

In order for an income to be classified as nontaxable, it should be excluded by law or treaty


from taxation
Examples of nontaxable income:
1) Winnings from sweepstakes
2) Winnings from lotto
3) 13th month pay
4) Other benefits not exceeding eighty-two thousand pesos (P82,000.00) beginning taxable
year 2015

Taxable Income
synonymous to the term "net income"

Net Income = gross income - statutory deductions - additional or personal exemption


amout of income upon which the tax rate orescribed by law is applied to obtain the amount
of income tax payable

ess or investment), or
property classified as

of a corporation as a

nd trust whether or

deductions allowed by

luded by law or treaty

0.00) beginning taxable

al or personal exemptions
to obtain the amount

Inherent Powers
naturally exist as essential force in order that a government can command, maintain peace
and order, and survive, irrespective of any Constitutional provision
3 inherent powers of the state
1) Police Power
2) Eminent Domain Power
3) Taxation Power
Where:
Police Power - the power to protect citizens and provide for safety and welfare for society
Eminent Domain Power - the power to take private property (with just compensation)
for public use
Taxation Power - the power to enforce contributions to support the government, and
other inherent powers of the State

d, maintain peace

fare for society


pensation)

ment, and

Police Power
inherent power of the sovereign state to legislate for the protection of health, welfare,
morals of the community
Exercised usually to guard against excesses or abuses of individual liberty
Restricted by the "due process clause" of the Constitution which provides that "No person
shall be deprived of life, liberty, or property without due process of law, nor shall any
person be dened the equal protection of the laws." (Art. III, Sec. 1, 1987 Philippine
Constitution)
may be exercised through taxation because taxes may be levied for the promotion of the
welfare of the public
Examples:
1) Preservation of natural resources
2) Segregation of lepers from the public
3) Imprisonment of convicted criminals
4) Regulation of various professionals

alth, welfare,

that "No person


or shall any

romotion of the

Receipts
cash collected over a business period and may include capital as well as its earnings

s its earnings

Revenue

all funds accruing to the treasury of the government derived from tax, donation, grants an
any other source

x, donation, grants and

Taxation

a power by which an independent State, through its law-making body, raises and accumulates
revenue from its ihabitants to pay for the necessary expenses of the government
a process or act of imposing a charge by governmental authority on property, individuals or
transactions to raise money for public purposes

aises and accumulates


e government

perty, individuals or

TAX RATES (FINAL TAX)


Capital Gains Tax
Royalty Income (general)
Royalty on Literature

6%
20%
10%

Summary of Tax Base and Tax Rates on Individual Taxpayers


Resident
Citizen
Alien

1.
2.
3.
4.

Category of Income
Compensation, Business/Profession
Prizes of P10,000 or less
Cinematographic Film & the like
Interest, Royalty, Winnings/Prizes

except Prizes of P10,000 & below


5. Royalties - books, literary, musical
6. Interest (long term investment)
- savings, common or individual trust
funds, deposit substitute investment
management account in denomination
of P10,000 or as prescribed by the BSP
7. Cash/ Property Dividends
8. Interest (Foreign Curreny Deposit System)
9. Capital Gains in Sale of Shares (not traded
-stock exchange)
10. Sale of Shares (traded in stock exchange
11. Capital Gains on Sale of Real Property
12. Winnings on Philippine Sweepstakes/
Philippine Lotto
*GIW - Gross Income Within
*FWT - Final Withholding Tax

Nonresident
NRAEBT

Citizen

All
Within
sources
Philippines
Based on Taxable Income

Within
Philippines

NRANEBT

Within
Philippines

Within
Philippines

Schedular Normal Tax Rate: NIRC Sec. 24

GIW 25%

GIW 25%
GIW 20% FWT
GIW 10% FWT
EXEMPT
In case of pre-termination, remaining maturity of:
4 years to less than 5 years
- 5%
3 years to less than 4 years
- 12%
less than 3 years
- 20%

GIW 10% FWT


GIW 7.5% FWT

GROSS INCOME
WITHIN
(GIW) 25%

GIW 20% FWT


X
E
M
P

Net capital gains within: 5% (Not over P100,000); 10% (in excess of P100,000

1/2 of 1% of the Selling Price, Business tax


Gross sales of FMV, whichever is higher: 6%
E

Personal Exemptions
Personal exemptions include both:
1. Basic personal exemptions
2. Additional personal exemptions
Taxpayers entitled to personal exemptions:
1. Resident citizens
2. Non-resident citizens
3. Resident aliens
4. Non-resident aliens engaged in trade or business (NRA-ETB) if there is reciprocity clause
5. Estates and trust
Taxpayers not entitled to personal exemptions:
1. Non-resident aliens
a. not engaged in trade or business in the Philippines (NRA-NETB)
b. engaged in trade or business in the Philippines but not enjoying reciprocity clause
2. Corporations
3. Partnerships.

procity clause

city clause

Taxation of Resident Citizens, Non-resident Citizens


and Resident Aliens
A. General Rule
Resident citizens are taxable on income from all sources within and without the Philippines

"An income tax is hereby imposed: (A) On the taxable income defined in Section 31 of this Code, other tha
subject to tax under Subsections (B) tax on certain passive income, (C) tax on capital gains from sale of s
stock not traded in the stock exchange, and (D) tax on capital gains from sale of real property, derived for
taxable year from all sources within and without the Philippines on every individual citizen of the Philippin
residing therein."
Non-resident citizens

"On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsec
(C ) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an ind
citizen of the Philippines who is residing outside of the Philippines including overseas contract workers ref
Subsection (C) of Section 23 thereof."
Classification of non-resident citizens:

a. OCW or OFW
b. Seafarers or seamen
A seaman who is a citizen of the Philippines and who receives compensation for services rendered a
member of the complement of a vessel engaged exclusively in international trade shall be treated as a
contract worker (OCW).
Tax treatment of the income of non-resident citizens:
An OCW or OFW's income arising out of his overseas employment is exempt from income tax
Taxable only on income derived from sources within the Philippines examples:
- earnings from business activities within the Philippines
- earnings from properties within the Philippines

Income derived from sources within the Philippines


Regular income
Tax rate of 5% - 32% of taxable income
Passive income
20%
Final tax on interest income from any currency bank deposit and yie
monetary benefit from deposit substitutes and from trust funds and
arrangements
20%
Final tax on any royalties (royalties in general)
10%
Final tax on any royalty related on books, as well as literary works a
musical compositions
20%
Final tax on prizes (except prizes amounting to P10,000 or less whic

subject to regular income tax rate of 5% - 32% and other winnings


Philippine Charity Sweepstakes and Lotto Winnings)
Exempted from 7.5% final tax in interest income from a depository bank under t
expanded foreign currency deposit system upon presentation of proof of non-res
such as OEC or Seaman's Book.
However, if the acount is jointly in the name of the overseas contract worker or
seaman and an individual (spouse or dependent) (JOINT BANK ACCOUNT) who is
the Philippines, 50% of the interest income from such bank deposit will be treate
exempt while the other 50% will be subject to a final withholding tax of 7.5%

27

COMPLETE: SEE PRINITED "Final Tax Rates on Certain Passive Income from Philip
Sources"

28

Taxpayers earning purely compensation income

The only deductions allowed from gross compensation income allowed to RC, NRC
a. Basic personal and additional exemptions
b. Premium payments on health and/or hospitalization insurance
- the amount of premiums should not exceed P2,400 per family or P200 a m
Philippines
- for health and/or hospitalization insurance taken by the taxpayer himself,
a) such familu has a gross income of not more than P250,000 for a tax
on 31 of this Code, other than income
b) in the case of married taxpayers, only the spouse claiming the addi
capital gains from sale of shares of
be entitled to this exemptions
of real property, derived for each
dual citizen of the Philippines
Basic wage - considered the gross income of an individual from which the person
health and hospital insurance are deducted to arrive at the income

subject to tax under Subsections (B)


in the Philippines by an individual
erseas contract workers referred to

Deductions not allowed for individuals earning purely compensation income:


1. Optional standard deduction
2. Itemized deductions such as expenses, interests, taxes, losses, depreciation, c
business expenses allowed as deduction under Sec. 34, NIRC of 1997
*these are disallowed because there items are not necessary for the taxpayer to
which arose out of an employer-employee relationship

Compensation income earners NOT entitled to certain deductions

1) Non-resident alien individual not engaged in trade or business within the Philip
tion for services rendered aboard as a
compensation income - subject to a final tax of 25% on such income
l trade shall be treated as an overseas2) Alien individuals or Filipinos employed and occupying the same position as alie
compensation, remuneration and other emoluments such as honoraria and all
a. Regional or area headquarters and regional operating headquarters estab
multinational companies
b. Offshore banking units
om income tax
c. Foreign service subcontractor engaged in petroleum operations in the Ph
- subject to final tax equal to fifteen percent (15%)

Taxpayers not earning purely compensation income

The deductions allowed from gross compensation income and other similar incom
a. Basic personal and additional exemptions
b. Premium payments on health and/or hospitalization insurance
rrency bank deposit and yield or any
- the amount of premiums should not exceed P2,400 per family or P200 a m
es and from trust funds and similar
- for health and/or hospitalization insurance taken by the taxpayer himself,
a) such family has a gross income of not more than P250,000 for a tax
b) in the case of married taxpayers, only the spouse claiming the addi
, as well as literary works and
be entitled to this exemptions
c. Optional standard deduction or the itemized deductions
ting to P10,000 or less which shall be

- 32% and other winnings (except


o Winnings)
m a depository bank under the
entation of proof of non-residency

verseas contract worker or a Filipino


NT BANK ACCOUNT) who is living in
bank deposit will be treated as
withholding tax of 7.5%

Compensation income NOT entitled to certain deductions and rea

1. Taxpayer: Resident citizens deriving compensation income from sources within


Resident alien individuals deriving purely compensation income fro
Deduction: Only personal and additional exemptions
Not allowed to deduct itemized deductions except premium paym
insurance subject to certain conditions
Reason: They are subject to tax on their taxable compensation income

2. Taxpayer: Nonresident citizens deriving compensation income from sources wit

29

Passive Income from Philippine

Deduction: Only personal and additional exemptions


Not allowed to deduct itemized deductions except premium paym
insurance subject to certain conditions
Reason: They are subject to tax on their taxable compensation income

30

me allowed to RC, NRC and RA are:

per family or P200 a month during the taxable year


the taxpayer himself, including his family, provided that:
han P250,000 for a taxable year and
ouse claiming the additional exemption for dependents shall

rom which the personal and additional exemptions and the


to arrive at the income subject to tax

3. Taxpayer: Compensation income received by alien indi


a. Regional or area headquarters and regio
Philippines by multinational companies
b. Offshore banking units
c. Foreign service subcontractor engaged in
Deduction: Not allowed any deductions including (1) b
exemptions (3) premium payments for he
standard deductions and (5) itemized ded
Reason: They are taxed at 15% of gross income
The disallowed items are not necessary for the taxpayer
out of an employer-employee relationship

FORMU
RESIDENT CITIZEN (Purely compensation income)

ensation income:

losses, depreciation, charitable and other contributions and


NIRC of 1997

Gross compensation income derived from all so


within and without the Philippines
Less: Personal and additional exemptions
Insurance premium from health and hosp
Taxable Compensation Income
Multiplied by schedular tax rate

ry for the taxpayer to earn the pure compensation income

certain deductions because they are suject to final tax

Income tax due


siness within the Philippines (NRA-NETB) on their
Less: Taxes withheld on the compensation incom
such income
Tax credits
e same position as aliens, on their salaries, wages, annuities,
Net income tax payable
ch as honoraria and allowances from:
ing headquarters established in the Philippines by
RESIDENT CITIZEN (Mixed income)
Mixed income - derived from both compensation and from
business
m operations in the Philippines
"Mixed income. - An individual receiving a comb
professional income shall first deduct the allowa
sation income, only the excess therefrom can b
nal income. In the case of husband and wife, th
nd other similar income allowed to RC, NRC and RA are:
of the exemptions unless he waives it in favor o

per family or P200 a month during the taxable year


the taxpayer himself, including his family, provided that:
han P250,000 for a taxable year and
ouse claiming the additional exemption for dependents shall

eductions and reasons

me from sources within and without the Philippines


mpensation income from within the Philippines

s except premium payments on health and/or hospitalization

nsation income

come from sources within the Philippines

31

Formula 1 Computation of income tax payable in mixed


income

Gross compensation income derived from all so


within and without the Philippines
Less: Personal and additional exemptions
Insurance premium from health and hosp
Taxable Compensation Income

Plus: Net income derived from the exercise of a


or engaging in trade or business (compu
Total mixed taxable income
Multiplied by schedular tax rate
Income tax due
Less: Taxes withheld on the compensation incom
Quarterly income taxes paid
Tax credits
Net income tax payable on mixed income

s except premium payments on health and/or hospitalization

nsation income

32

on income received by alien individuals or Filipinos employed by:


l or area headquarters and regional operating headquarters established in the
nes by multinational companies
e banking units
service subcontractor engaged in petroleum operations in the Philippines
ed any deductions including (1) basic personal exemptions (2) additional personal
ns (3) premium payments for health and/or hospitalization insurance, optional
deductions and (5) itemized deductions
ed at 15% of gross income

*Computation of net income de

e not necessary for the taxpayer to earn the pure compensation income which arose
oyee relationship

FORMULAS
urely compensation income)

OR

ation income derived from all sources from


thout the Philippines
and additional exemptions
ce premium from health and hospitalization
nsation Income
chedular tax rate

xxx
(xxx)
(xxx)
xxx
x%
xxx
(xxx)
(xxx)
xxx

hheld on the compensation income

ixed income)
rom both compensation and from exercise of profession or from engaging in trade or

. - An individual receiving a combination of compensation and business/


come shall first deduct the allowable personal exemptions from compenonly the excess therefrom can be deducted, from business or professiothe case of husband and wife, the husband shall be the proper claimant
ons unless he waives it in favor of his wife.
of income tax payable in mixed compensation income and business/professional

ation income derived from all sources from


thout the Philippines
and additional exemptions
ce premium from health and hospitalization
nsation Income

xxx
(xxx)
(xxx)
xxx

me derived from the exercise of a profession


ging in trade or business (computation*)
able income
chedular tax rate

xxx
xxx
x%
xxx
(xxx)
(xxx)
(xxx)
xxx

hheld on the compensation income


y income taxes paid
payable on mixed income

33

Formula 2 Computation of inco

It is a case where the compensa


regional operating headquarter
service contractor and subcontr

34

omputation of net income derived from exercise of a profession or engaging in trade or business
Total receipts from all sources from within and without
the Philippines
Less: Exclusions from GI (Income subject to final taxes)
Gross income derived from all sources from wihin and
without the Philippines
Less: Excess personal and additional exemptions
Insurance premium for health and hospitalization
Optional standard deduction
Net income derived from exercise of a profession or engaging
in trade or business
Total receipts from all sources from within and without
the Philippines
Less: Exclusions from GI (Income subject to final taxes)
Gross income derived from all sources from wihin and
without the Philippines
Less: Personal and additional exemptions
Itemized deductions includng the premiums for
hospitalization and health insurance
Net income derived from exercise of a profession or engaging

xxx
(xxx)
xxx
(xxx)
(xxx)
(xxx)
xxx

xxx
(xxx)
xxx
(xxx)
(xxx)
xxx

in trade or business

ormula 2 Computation of income tax payable on mixed compensation income and business/professional income,
where the compensation income is subject to final tax

is a case where the compensation income is derived from employment in a regional or area headquarters and
gional operating headquarters of multinational companies, or from an offshore banking unit, or a petroleum
rvice contractor and subcontractor, the basic formula is:
COMPENSATION INCOME
Gross compensation income
Multiplied by
Income tax due
Less: Withheld taxes on the compensation
Tax credits
Net income tax payable on compensation income
BUSINESS, TRADE OR PROFESSIONAL INCOME
Gross income derived from all sources from within
and without the Philippines
Less: Personal and additional exemptions
Premiums for health and hospitalization
Optional standard deduction
Itemized deductions inclusing the premiums for
hospitalization and health insurance
Taxable income
Multipied by the schedular rate
Income tax due
Less: Quarterly income tax payments
Withheld taxes on the income
Tax credits
Net income tax payable on the income derived from the

xxx
x 15%
xxx
(xxx)
(xxx)
xxx

xxx
(xxx)
(xxx)
(xxx)

OR

35

(xxx)
xxx
x%
xxx
(xxx)
(xxx)
(xxx)
xxx

exercise of a profession from trade or business

36

The personal and additional exemptions, and premiums for health and hospitalization insurance
previously deducted from the compensation income that was subject to final tax of 15% on its
rightfully deducted from the business, trade or professional income.
MIXED INCOME
Net income tax payable on compensation income
Net income tax payable on business, trade or professional income
Total income tax payable on the mixed income derived from
compensation and exercise of a prifession, trade or business
NONRESIDENT CITIZEN (Purely compensation income)
Gross compensation income derived from all sources
from within the Philippines
Less: Personal and additional exemptions
Insurance premium for health and hospitalization
Taxable income
Multiplied by the schedular rate
Income tax due
Less: Taxes withheld on the compensation income
Tax credits
Net income tax payable
NONRESIDENT CITIZEN (Mixed income)

ss/professional income,

ea headquarters and
nit, or a petroleum

Formula 1 Computation of income tax payable in mixed compensation income and business/p
income
Gross compensation income derived from all sources from
within the Philippines
Less: Personal and additional exemptions
Insurance premium from health and hospitalization
Taxable Compensation Income
Plus: Net income derived from the exercise of a profession
or engaging in trade or business (computation*)
Total mixed taxable income
Multiplied by schedular tax rate
Income tax due
Less: Taxes withheld on the compensation income
Quarterly income taxes paid
Tax credits
Net income tax payable on mixed income

*Computation of net income derived from exercise of a profession or engaging in trade or busin
Total receipts from all sources from within the Philippines
Less: Exclusions from GI (Income subject to final taxes)
Gross income derived from all sources from wihin the Philippines
Less: Excess personal and additional exemptions
Insurance premium from health and hospitalization
Optional standard deduction
Net income derived from exercise of a profession or engaging
in trade or business

37

38

and hospitalization insurance that were not


ect to final tax of 15% on its gross can be

ional income

OR

Total receipts from all sources from within the Philippines


Less: Exclusions from GI (Income subject to final taxes)
Gross income derived from all sources from within the Phi
Less: Excess personal and additional exemptions
Itemized deductions includng the premiums for
hospitalization and health insurance
Net income derived from exercise of a profession or engag
in trade or business

xxx
xxx
xxx

Formula 2 Computation of income tax payable on mixed compensatio


where the compensation income is subject to final tax

xxx
(xxx)
(xxx)
xxx
x%
xxx
(xxx)
(xxx)
xxx

It is a case where the compensation income is derived from employme


regional operating headquarters of multinational companies, or from a
service contractor and subcontractor, the basic formula is:
COMPENSATION INCOME
Gross compensation income
Multiplied by
Income tax due
Less: Withheld taxes on the compensation
Tax credits
Net income tax payable on compensation income

BUSINESS, TRADE OR PROFESSIONAL INCOME


Total receipts from all sources from within the Philippines
Less: Exclusions from gross income (incomes subject to fin
Gross income derived from all sources from within the Phi
Less: Personal and additional exemptions
Premiums for health and hospitalization
Optional standard deduction
OR
Itemized deductoions including the premiums for
hospitalization and health insurance
Taxable income
Multipled by the schedular tax rate
Income tax due
Less: Quarterly income tax payments
Taxes withheld on the income
Tax credits
Net income tax payable on the income derived from the
exercise of a profession from trade or business

sation income and business/professional

xxx
(xxx)
(xxx)
xxx
xxx
xxx
x%
xxx
(xxx)
(xxx)
(xxx)
xxx

MIXED INCOME
Net income tax payable on compensation income
Net income tax payable on business, trade or professiona

or engaging in trade or business

Philippines

xxx
(xxx)
xxx
(xxx)
(xxx)
(xxx)
xxx

Total income tax payable on the mixed income derived fro


compensation and exercise of a prifession, trade or busi

39

40

es from within the Philippines


come subject to final taxes)
all sources from within the Philippines
dditional exemptions
includng the premiums for
d health insurance
ercise of a profession or engaging

xxx
(xxx)
xxx
(xxx)

RESIDENT ALIEN (Purely compensation

(xxx)
xxx

payable on mixed compensation income and business/professional income,


ncome is subject to final tax

ome is derived from employment in a regional or area headquarters and


national companies, or from an offshore banking unit, or a petroleum
e basic formula is:

compensation

compensation income

ESSIONAL INCOME
es from within the Philippines
income (incomes subject to final tax)
all sources from within the Philippines
al exemptions
and hospitalization
including the premiums for
health insurance

the income derived from the


om trade or business

compensation income
business, trade or professional income

n the mixed income derived from


e of a prifession, trade or business

xxx
x 15%
xxx
(xxx)
(xxx)

Gross compensation income de


from within the Philippines
Less: Personal and additional e
Insurance premium for h
Taxable income
Multiplied by the schedular rate
Income tax due
Less: Taxes withheld on the com
Tax credits
Net income tax payable

Compensation income is derived from empl


headquarters of multinational companies, o
and subcontractor, the basic formula is:

Gross compensation income


Multiplied by
Income tax due
Less: Taxes withheld on compe
Tax credits

xxx

Net income tax payable

xxx
(xxx)
xxx
(xxx)
(xxx)
(xxx)
(xxx)
xxx
x%
xxx
(xxx)
(xxx)
(xxx)
xxx

xxx
xxx
xxx

41

42

IEN (Purely compensation income)

oss compensation income derived from all sources


from within the Philippines
ss: Personal and additional exemptions
Insurance premium for health and hospitalization
xable income
ultiplied by the schedular rate
come tax due
ss: Taxes withheld on the compensation income
Tax credits
et income tax payable

xxx
(xxx)
(xxx)
xxx
x%
xxx
(xxx)
(xxx)
xxx

income is derived from employment in a regional or area headquarters and regional operating
f multinational companies, or from an offshore banking unit, or a petroleum service contractor
ctor, the basic formula is:

oss compensation income


ultiplied by
come tax due
ss: Taxes withheld on compensation income
Tax credits

xxx
15%
xxx
(xxx)
(xxx)

et income tax payable

xxx

43

44

Taxation of Non-resident Aliens

Individual Taxpayers
Resident Citizens
- citizens of the Philippines who stay in the Philippines without the intention of transferring their physical
presence abroad whethere to stay permanently or temporarily as an overseas contract worker

Non-resident citizens
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his
presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as
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 considered as nonresident 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
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.
Jan. 1 to date of arrival
Non-resident citizen
(5) 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 for purpose of
this Section.

Alien individuals and Filipinos employed by Regional or Area Headquarters and Regional Operati
quarters of Multinational Companies
"There shall be levied, collected and paid for each taxable year upon the gross income received by every alie
individual employed by regional or area headquarters and regional operating headquarters established in the
Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other
emoluments such as honoraria and allowances, from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent (15%) of such gross income. Provided that the same ta
treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by
these multinational companies.
Multinational company - foreign firm or entity engaged in international trade with affiliates or subsidiaries
branch offices in the Asia-Pacific Region and other foreign markets

transferring their physical


s contract worker

issioner the fact of his physical

ar to reside abroad, either as an

whose employment thereat


he taxable year.
ho arrives in the Philippines at
hall likewise be treated as a
es with respect to his income

of leaving the Philippines to


he case may be for purpose of

rters and Regional Operating Head-

income received by every alien


eadquarters established in the
ation, remuneration and other
dquarters and regional
ome. Provided that the same tax
s those of aliens employed by

ith affiliates or subsidiaries


oreign markets

Final Tax Rates on Certain Passive Income from Philippine Sources


I. Interest, Royalties, Prizes, and Other Winnings
RC
a. Interest from any currency bank deposit
20%
b. Yield or any other monetary benefit from deposit substitute
20%
c. Yield or any other monetary benefit from trust funds and similar arrangements
20%
d. Prizes (except prizes amounting to P10,000 or less which shall be subject to tax und
20%
Section 24 (A ) -Graduated tax table)
e. Other winnings (except Philippine Charity Sweepstakes and Lotto Winnings)
20%
f. Royalties in general
20%
g. Royalties on books, as well as other literary works and musical compositions
10%
h. Interest income received from a depositary bank under expanded foreign currency
7.5%
deposit system
i. Interest income from long-term deposit or investment evidenced by certificates
Exempt
prescribed by BSP (5 years or more)
If predetermined before fifth year, a final tax shall be imposed based on remaining
maturity;
(a) 4 years to less than 5 years
5%
(b) 3 years to less than 4 years
12%
(c ) less than 3 years
20%
II. Cash and/or Property Dividends
a. Cash and/or property dividends actually or constructively received from a DOMESTIC
CORPORATION or from JOINT STOCK CORPORATION, INSURANCE or MUTUAL FUND
COMPANIES and REGIONAL OPERATING HEADQUARTERS of multinationals (beginning
January 1, 2000)
b. Share of an individual in the distributable net income after tax of PARTNERSHIP
(OTHER THAN a general professional partnership) of which he is a partner (beginning
January 1, 2000)
c. 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 member or co-venturer (beginning January 1, 2000)

NRC
20%
20%
20%
20%

RA
20%
20%
20%
20%

20%
20%
10%
Exempt

20%
20%
10%
7.5%

Exempt

Exempt

5%
12%
20%

5%
12%
20%

RC
10%

NRC
10%

RA
10%

10%

10%

10%

10%

10%

10%

NRA-ETB NRA-NETB
20%
25%
20%
25%
20%
25%
20%
25%
20%
20%
10%
Exempt

25%
25%
25%
Exempt

Exempt

25%

5%
12%
20%

25%
25%
25%

NRA-ETB NRA-NETB
20%
25%

20%

25%

20%

25%

Taxation of Compensation Income

Compensation income - all remuneration for services performed by an employee for his employer under an
employer-employee relationship unless exempted under the provisions of the NIR
2 types of compensation income
1. Basic compensation income - which is first subject to allowable deductions and is then subjected to the
schedular rate
Allowable deductions include:
a. Basic personal exemptions
b. Additional personal exemptions
c. Premium payments for health and/or hospitalization insurance
2. Certain fringe benefits - subject to a fringe withholding tax
Fringe benefits exempted from the payment of fringe benefits tax still form part of the
employee's basic compensation income

The NIRC of 1997 provides for a uniform tax rate imposed on individuals irrespective of whether the income i
derived from compensation or from business, trade or exercise of a profession. The difference is that certain
deductions are not allowed for compensation income.

ee for his employer under an


under the provisions of the NIRC

nd is then subjected to the

still form part of the

ective of whether the income is


The difference is that certain

Gross Income
Gross income, for tax purposes, means all income derived from whatever source*, including (but
not limited to) the following items:
a. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
b. Gross income derived from the conduct of trade or business or the exercise of a profession;
c. Gains derived from dealings in property;
d. Interests;
e. Rents;
f. Royalties;
g. Dividends;
h. Annuities;
i. Prizes and winnings;
j. Pensions; and
k. Partner's distributive share from the net income of the general professional partnership
*Gross income (from whatever source) would include the ff.:
a. Income from illegal business and criminal activities - subject to tax
b. Income from forgiveness of indebtedness in certain instances
c. Under the so-called "tax benefit" rule where there is recovery of written-off debts, or refund of
tax payments

Gross income - net income - taxable income


Gross income = All income derived from whatever source - exclusions (prior to deduction of items
subjected to final taxes)
Net income = All income derived from whatever source - exclusions - items subjected to final taxes
Taxable income = Pertinent items of gross income specified in the Code - deductions - personal and
additional exemptions, if any, authorized for such types of income
Gross Income (All income from whatever source - exclusions)
Items subjected to final taxes
Pertinent items of gross income/net income
Deductions and/or additional exemptions, if any, authorized for
such types of income
Taxable income/income subject to tax

xxx
(xxx)
xxx
(xxx)
xxx

Classification of income as to source


A. Gross income and taxable income from sources within the Philippines
The following items of gross income shall be treated as gross income from sources within the
Philippines:
a. Interests - interests derived from sources within the Philippines and interests on bonds,
notes or other interest-bearing obligation of residents, corporate or otherwise
b. Dividends - The amount received as dividends:
1. From a domestic corporation
2. From a foreign corporation, unless less than 50% of the gross income of suc
foreign corporation for the 3-year period ending with the close of its taxab

year preceeding the declaration of such dividends or for such part of such
period as the corporation has been in existence was derived from sources

r source*, including (but

mited to fees, salaries,

ercise of a profession;

ional partnership

n-off debts, or refund of

rior to deduction of items

ms subjected to final taxes


- deductions - personal and

from sources within the

and interests on bonds,


s, corporate or otherwise

of the gross income of such


with the close of its taxable

within the Philippines as determined under the provisions of t


but only in an amount which bears the same ratio to such div
gross income of the corporation for such period from sources
Philippines bears to its goss income from all sources
c. Services - compensation for labor or personal services performed
d. Rentals and royalties from properties located in the Philippines or
in such property, including rentals and royalties for:
1. The use of or right or privilege to use in the Philippines any
design, or model, plan, secret formula or process, goodwil,
brand or other like property or right;
2. Continue from page 143 II-A Domondon

ds or for such part of such


was derived from sources

ed under the provisions of this Section;


s the same ratio to such dividends as the
or such period from sources within the
me from all sources
ersonal services performed in the Philippines
ocated in the Philippines or from any interest
d royalties for:
to use in the Philippines any copyright, patent,
ormula or process, goodwil, trademark, trade

Minimum wage earners


The term minimum wage earner shall refer to:
a. a worker in the private sector paid the statutory minimum wage
b. an employee in the public sector with compensation income of not more than the statutory
minimum wage in the non-agricultural sector where he/she is assigned
Statutory minimum wage - rate fixed by the Regional Tripartite Wage and Productivity Board, as
defined by the Bureau of Labor Employment Statistice (BLES) of the
Department of Labor and Employment (DOLE)
The Regional Tripartite Wage and Productivity Board (RTWPB) shall determine the wage
rates in the different regions based on established criteria and shall be the basis of
exemption from income tax for this purpose.
"An employee who receives/earns additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable
allowances and other taxable income other than the night shift differential pay, overtime pay,
holiday pay and hazard pay (exempted) shall not enjoy the privelege of being an MWE"
Compensation income of MWEs who work in the private sector and being paid the statutory
minimum wage as fixed by the RTWPB/National Wages and Productivity Commission (NWPC) EXEMPTED FROM INCOME TAX

an the statutory

ductivity Board, as
stice (BLES) of the

determine the wage


ll be the basis of

ons, honoraria,
00.00, taxable
y, overtime pay,
an MWE"

d the statutory
mission (NWPC) -

Capital Gains Tax


Sale of shares of stock not traded in the Stock Exchange
RC/NRC/RA/NRA
Tax Base: Net capital gain
Tax Rates: Not over P100,000
In excess of P100,000

5%
10%

Sale of shares of stock traded in the Stock Exchange


RC/NRC/RA/NRA-ETB
Sales, barter, transfer and/or assignment of shares of
publicly listed companies (not compliant with mandatory
minimum public ownership of 10% of the publicly-listed
companies issued and outstanding exclusive of any
treasury shares

5% and 10%

Sale of real property classified as capital assets (located in the Philippines)


RC/NRC/RA/NRA-ETB
Tax base: Highest of (1) Selling Price
(2) Fair Market Value
6%
(3) Zonal Value
Real property is sold to the government or any of its political 6% capital gains tax or
subdivisions or agencies or GOCCs
Sec. 24(A) graduated tax
table, at the option of
the taxpayer

Exempted from Capital Gains Tax


Capital gains from the sale or disposition of the principal residence of a natural person, fully utilized in acquir
or constructing a new principal residence shall be exempt from capital gains tax if:
a. The proceeds of the sale or disposition is fully utilized within 18 months from the date of sale or
disposition
b. The Commissioner has been duly notified by the taxpayer within thirty (30) days from the date of sa
or disposition through a prescribed return of his intention to avail of the tax exemption
*The historical cost or adjusted basis of the real property sold or disposed shall be carried
over to the new principal residence built or acquired
*The said tax exemption can only be availed of once every 10 years
Computation of adjusted cost basis of the new principal residence (full utilization)
Historical cost of old principal residence
Additional Cost to acquire new principal residence:
Cost to acquire new principal residence
xxx
Less: Gross selling price of old principal residence
(xxx)
Adjusted cost basis of the new principal residence

PARTIAL UTILIZATION
"If there is partial utilization of the proceeds of sale or disposition, the portion of the gain presumed to have
been realized from sale or disposition shall be subject to capital gains tax. For this purpose, the gross selli
price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which t
unutilized amout bears to the gross selling price in order to determine the taxable portion and the tax
prescribed under paragraph (1) of this Subsection shall be imposed thereon."
Taxable portion = Unutilized Selling Price x Higher of SP or FMV (time of sale)
Gross Selling Price
Capital gains tax computation:

Not sold to government CGT = Taxable portion x 6%


Sold to government
CGT = Taxable portion x Schedular rates/6% (at the option of the taxpayer)

Sale or exchange of Real Property used in Business


Disposition of Real Property
If real property is used in business
If real property NOT used in business
Txx on real property used in business - Inventory
- an ordinary asset transaction therefore subject to normal tax

NRA-NETB

5% and 10%

NRA-NETB
6%

al person, fully utilized in acquiring

ths from the date of sale or

rty (30) days from the date of sale


the tax exemption

sed shall be carried

utilization)
xxx

xxx
xxx

on of the gain presumed to have


For this purpose, the gross selling
multiplied by a fraction which the
taxable portion and the tax

If the seller/transferor is exempt from creditable withholding


tax in accordance with the BIR Revenue Regulations
if the seller/transferor is not exempt and is habitually engaged
in the real estate business

(at the option of the taxpayer)

n of Real Property
Inventory or not
Capital Asset

EXEMPT
1. With a selling price of P500,000
or less
2. With a selling price of more than
P500,000 but not more than
P2,000,000
3. With a selling price of more than
P2,000,000

1.5%
3%

5%

Tax on Corporations

Corporation - for income tax purposes, shall include partnership, no matter how created or organized , joint s
companies, joint accounts (cuentas en participacion), associations, or insurance companies
- also includes mutual fund companies, regional operating headquarters or Multinational cor
joint accounts

The term corporation does not include:


1. General professional partnerships
2. Joint venture or joint consortium formed for the purpose of undertaking construction projects
3. Joint venture or consortium for engaging in petroleum, coal, geothermal and other energy operatings purs
to an operating or consortium agreements under a service contract with the government

General professional partnership - a partnership formed by persons for the sole purpose of exercising their
common profession, no part of the income of which is derived from eng
in any trade or business

w created or organized , joint stock


ns, or insurance companies
dquarters or Multinational corporation

truction projects
other energy operatings pursuant
government

e purpose of exercising their


me of which is derived from engaging