Kinds of Income Taxpayers

Two Exceptions to the General Rule where the Kind of Taxpayer in the Transaction is not important

1. Where the transaction involves the sale of shares of stocks of a domestic corporation, whether
listed and traded in a local stock exchange, or unlisted or listed but not traded in a local stock
exchange. Transaction is subject to the 1% of stock transaction tax or 5/10% capital gains tax on
net capital gain, whether the seller is an individual, citizen, alien, or a corporation
(domestic/foreign)
2. Where the real property sold is a capital asset located in the Philippines, that is subject to 6%
capital gains tax.

Importance of tax Status of Taxpayer

It is important to know the tax status of a taxpayer for income tax purposes since only resident citizens
and domestic corporations are taxable on their worldwide income, while other types of individual and
corporate taxpayers are taxable only on income derived from sources within the Philippines.

The tax Status of the taxpayer is generally considered in determining his/its income tax liability

Compensation Income, business and professional income, capital gain, passive investment
income, and other income not subject to final tax, the income tax due is a function of the
taxpayers tax status.
For Capital gains subject to final tax, the question as to whether the seller or transferors is a
dealer in securities or dealer in real estate must first be answered and only when the answer to
such question is no that the transaction becomes subject to the final capitals tax at preferential
rate.
With respect to passive investment income subject to final tax, the question on who is the
taxpayer must also be raised, for the tax rate applicable on the income depends on the tax status
of the recipient of the income.

Resident Citizens

Engaged in trade or business or in the exercise of his profession in the Philippines

Not engaged in trade or business or in the exercise of his profession
Engaged in trade or business or in the exercise of his profession and at the same time, he derives
compensation and/or other income.

It is important to determine whether or not a resident citizen is engaged in trade or business or in the
exercise of his profession, since he is entitled to deduct certain deductions from his business and/or
professional income, capital gain not subject to final tax, passive income not subject to final tax and
other income.

No deductions are allowed from his gross compensation income, although personal and additional
exemptions, if any may be deducted therefrom, and from capital gains and passive incomes subject to
final tax at preferential rates.
Non Resident Citizens

Aliens- Present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines
for income tax purposes.

One who comes to the Philippines for a definite purpose, which in its nature may be promptly
accomplished, is a transient.

The fact that a resident alien leaves the Philippines with a re-entry permit proves that he has not
abandoned his residence in this country.

Resident Aliens

A Resident alien is an individual whose residence is within the Philippines and who is not a citizen
thereof. He is taxed in the same manner as a resident citizen, except that only his income from Philippine
sources is taxable in the Philippines.

Non-Resident Aliens

A non resident alien is an individual whose residence is not within the Philippines and who is not a
citizen thereof. It is classified as:

1. Engaged in trade or business in the Philippines

If the aggregate period of his stay in the Philippines is more than 180 days during any
calendar year
He is taxed on his income from sources within the Philippines at a graduated income tax
rate (5% to 32%) while his passive investment income is subject to 20% final tax

2. Not engaged in trade or business in the Philippines.

Aggregated period of stay in the Philippines does not exceed 180 days during any
calendar year.
He is taxed on his compensation income, business por professional income, capital gain,
passive investment income and other income from sources within the Philippines at the
flat rate of 25%

The phrase engaged in trade or business within the Philippines includes the performance of personal
services within the Philippines.

Individuals subject to preferential tax rates

Certain alien individuals who are employed in the Philippines are entitled to the 15% preferential income
tax rate on their gross compensation income from sources within the Philippines.
 1. Regional or area headquarters and regional operating headquarters of multinational companies
in the Philippines
2. Offshore banking units established in the Philippines
3. Foreign service contractor or subcontractor engaged in petroleum operations in the Philippines

Estates and Trust

Taxable estates and trusts are taxed in the same manner and on the same basis as an individual. (entitled
only to personal exemption equivalent to a single individual in the amount of P50,000)

Taxable income of estates and trusts shall include:

1. Income accumulated in truest for the benefit of unborn or unascertained person or persons with
contingent interests, and income accumulated or held for future distribution under the terms of
the will or trusts.
2. Income which is to be distributed currently by the fiduciary to the beneficiaries and income
collected by a guardian of an infant which is to be held or distributed as the court may direct.
3. Income received by estates of deceased persons during the period of administration or
settlement of the estate
4. Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or
accumnulated.

The trust instrument is revocable where at any time the power to revest in the grantor title to any part of
the corpus of the trust is vested:

a. In the grantor, either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of such part of the corpus or the income therefrom
b. In any person not having a substantial adverse interest in the disposition of such part of the
corpus of the income therefrom, the income of such part of the trust.

The taxable income of the estate or trust shall be computed in the same manner and on the same basis
as in the case of an individual.

Co-Ownership

Co-owners in a co-owernership report their share of the income from the property owned in common by
them in their individual tax returns for the year and the co-ownership is not considered as a separate
taxable entity or corporation.

The sharing of profits in a common property does not of itself establish a partnership that is but a
consequence of a joint or common right or interest in the property. There must be:

Clear intent to form a partnership

Existence of a juridical personality different from