INCOME TAXATION

What is Income?

Income means all wealth,

which flows into the taxpayer
other than as a mere return of
capital.
Requisites for income to be
taxable:
•Gain or addition to net worth
•Complete dominion
•Not be excluded by law or
treaty
What is Income Tax?
Income Tax is a tax on a person's income,
emoluments, profits arising from property,
practice of profession, conduct of trade or
business or on the pertinent items of gross
income specified in the Tax Code of 1997 (Tax
Code), as amended, less the deductions and/or
personal and additional exemptions, if any,
authorized for such types of income, by the Tax
Code, as amended, or other special laws.
 Types of Income:
GENERAL (Part of GI, subject to 5%-32%) SPECIAL (not part, subject to final tax)

• Compensation income • Interests, royalties, prizes

• Business income and other winnings subject
to final tax (Passive
• Income from profession income)
• Cash and property
dividends, except stock
dividends (Passive Income)
• Capital gains from sale of:
 Real property;
 Unlisted shares of stock;
and
 Listed shares of stock
(OPT)
 Sources of Income:
Item Source
compensation Place of performance
Interest Residence of debtor
Rent , royalty, gain from sale of real Location of property
property
Gain from sale of personal property Place of sale
Gain from sale of shares of stock:
•Domestic corporation •From within the Philippines
•Foreign corporation •From within/without the
Philippines

Dividend income from:

•Domestic corporation •From within the Philippines
•Foreign corporation •From within/without the
Philippines
CLASSIFICATION OF
TAXPAYERS:
 Individuals
citizens aliens
• resident citizens (RC) • resident aliens (RA)
• non-resident citizens • non-resident aliens -
(NRC) engaged in trade or
• OCW* business within the
Phils. (NRAETB)
• non-resident aliens –
not engaged in trade
or business within the
Phils. (NRANETB)
 TAXPAYER TAX BASE TAXABLE ON
INCOME
RC,DC Taxable Within/without
Income the Philippines
RA, NRC, NRA- Within the
ETB, RFC Philippines

GPP, ET It depends on IT.

NRA-NETB, Gross Income Within the
NFC Philippines
CLASSIFICATION OF
TAXPAYERS:
 Corporations
Domestic (DC) Foreign:
•resident foreign corporation
(RFC)
•non-resident foreign
corporation (NRFC)

 Estates
 Trusts
 TYPES OF TAXPAYERS
INDIVIDUALS
Resident Citizen/Alien Nonresident Citizen
• Establishes physical
presence abroad and
intention to reside therein.
• Leaves Philippines during
the taxable year to reside
abroad, as immigrant or for
permanent employment.
• Works and derives income
from abroad and whose
employment requires
physical presence abroad
(not less than 183 days).
• Previously considered as
nonresident and arrives
during the taxable year to
become a permanent
resident.
Nonresident Alien
• Engaged or not in trade
and business in the
Philippine (stay is more
/less than 180 days during
the taxable year).
• Aliens employed by
offshore banking units
and petroleum
contractor/subcontractor.
• Aliens employed by
regional/area
headquarters and regional
operating headquarters of
multinational companies.
TYPES OF TAXPAYERS
CORPORATION
Included: Not included:
• Partnerships; • General professional
• Joint stock companies; partnership;
• Joint accounts; • Joint venture or
• Associations; consortium undertaking
• Insurance companies construction or energy
operation under a
service contract with
the government
TYPES OF TAXPAYERS
ESTATE
• Property, rights, and
obligations of a person which
are not extinguished by his
death and those that accrues
thereto;
• Taxed in the same way as an
individual provided it is
irrevocable and earns income;
and
• What is taxed is the income
not the property.
TRUST
• Arrangement created by
agreement under which title
to property is passed to
another for conservation or
investment with the income
and the corpus/principal
distributed in accordance with
the directions of the creator;
and
• To be taxable as a separate
entity, grantor must have
absolute and irrevocable
given up control and benefit
over the trust.
INCOME TAXATION UNDER NIRC:
• Net Income Tax/Taxable Income:
GI – Deductions - Exemptions
• Gross Income Tax:
All income from whatever source.
• Final Income Tax
On passive income and capital gains
• Fringe benefit tax:
Benefits to managerial and supervisory
employee; Ee is taxed but burden is on Er
INCOME TAXATION UNDER NIRC:
• Capital Gains Tax:
Real property and stocks not traded in stock
market
• Optional Corporate Income Tax
• Minimum Corporate Income Tax: 2% of GI
• Improperly Accumulated Earnings Tax
• Branch Profit Remittance Tax
• Preferential Rates: for special corporations
 Who are required to file the
 ITRs?
As for Individuals
Resident citizens receiving income within/outside
 employees deriving purely compensation income:
o from 2 or more employers, concurrently or successively at anytime during the 
taxable year 
o regardless of the amount, whether from a single or several employers during the 
calendar year, the income tax of which has not been withheld correctly (i.e. tax 
due is not equal to the tax withheld) resulting to collectible/refundable return
 individuals deriving:
o mixed income, i.e., compensation income and income from the conduct of trade 
or business and/or practice of profession
o other non-business, non-professional related income in addition to 
compensation income not otherwise subject to a final tax
o purely compensation income from a single employer, although the income of 
which has been correctly withheld, but whose spouse is not entitled to 
substituted filing
 self-employed individuals receiving income from the conduct of trade or 
business and/or practice of profession 
 marginal income earners
 Who are required to file the
ITRs?
As for Individuals
 Non-resident citizens receiving income from sources within the Philippines
 Aliens, whether resident or not, receiving income from sources within the
Philippines

Corporations no matter how created or organized including partnerships 

 domestic corporations receiving income from within/outside the 
Philippines 
 foreign corporations receiving income from within the Philippines 
 taxable partnerships

Estates and trusts engaged in trade or business

 Who are NOT required to file the
ITRs?
 minimum wage earner
 individual whose GI do not exceed his total personal and addt’l 
exemptions
 individual whose compensation derived from one employer do 
not exceed P 60,000 and the income tax has been correctly 
withheld 
 An individual whose income has been subjected to final 
withholding tax (alien employee as well as Filipino employee 
occupying the same position as that of the alien employee of 
regional headquarters and regional operating headquarters of 
multinational companies, petroleum service contractors and sub-
contractors and offshore-banking units, non-resident aliens not 
engaged in trade or business) 
 Who are NOT required to file the
 ITRs?
are qualified under “substituted filing”. However, it applies only if 
all of the following requirements are present :
 the employee received purely compensation income 
(regardless of amount) during the taxable year 
 the employee received the income from only one employer in 
the Philippines during the taxable year 
 the amount of tax due from the employee at the end of the 
year equals the amount of tax withheld by the employer 
 the employee’s spouse also complies with all 3 conditions 
stated above 
 the employer files the annual information return (BIR Form 
No. 1604-CF) 
 the employer issues BIR Form No. 2316 (Oct 2002 ENCS 
version ) to each employee.
Who are exempt from Income
Tax?
a. Non-resident citizen who:
• establishes to the satisfaction of the Commissioner his physical 
presence abroad with a definite intention to reside therein;
• leaves the Philippines during the taxable year to permanently 
reside abroad, either as an immigrant or for employment;
• works and derives income from abroad and whose 
employment thereat requires him to be physically present 
abroad most of the taxable year;
• has been previously considered as a non-resident citizen and 
who arrives in the Philippines at any time during the year to 
reside permanently in the Philippines will likewise be treated 
as a non-resident citizen during 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 .
 Who are exempt from Income
Tax?
b. Overseas Filipino Worker, including overseas seaman who is 
working and deriving income from abroad as an OFW is 
taxable only on income from sources within the Philippines; 
provided, that a seaman who is a citizen of the Philippines and 
who receives compensation for services rendered abroad as a 
member of the complement of a vessel engaged exclusively in 
international trade will be treated as an OFW.

NOTE: A Filipino employed as Philippine Embassy/Consulate 
service personnel of the Philippine Embassy/consulate is not 
treated as a non-resident citizen, hence his income is taxable.
What is Gross Income?

Gross income means all income

derived from whatever source.
 What comprises Gross
GIIncome?
includes, but is not limited to the following:
•Compensation for services, in whatever form paid,
including not limited to fees, salaries, wages,
commissions, etc.
•Gross income derived from the conduct of trade or
business or the exercise of profession
•Gains derived from dealings in property
•Interest, Rents, Royalties, Dividends, Annuities,
Prizes and winnings, Pensions
•Partner's distributive share from the net income of
the general professional partnerships
Classification of Taxable Income:

 Compensation Income
 Business income/income from profession
 Gains from dealings of property
 Passive income
 Other taxable income
Composition of Gross Compensation
Income:
 Salary, wage or fee
 Commission
 Honoraria
 Allowances
 13th month pay and other benefits
 Holiday, OT, NightDiff, Hazard/Emergency pay
 Separation pay
 Retirement pay
 Sick/Vacation Leave pay
 Fringe Benefits
What are Tax-Exempt
Compensation?
RR No. 10-2008 exempts compensation income
including Holiday, Overtime, NightDiff and Hazard Pay
from:
• Statutory Minimum Wage Earners
• Employees in public sector whose salary do not exceed
the SMW in non-agricultural private sector
However, MWEs receiving other income, except subject
to final withholding tax in addition to compensation
income shall be subject to tax on their entire income.
 Common Types of Allowances
 Cost of Living Allowance (COLA) – not
taxable if given to government officials
and employees.
 Representation and Travel Allowance
(RATA) – shall form part of compensation
income except when under GAA or subject
to liquidation.
 Personnel Economic Relief Allowance
(PERA) – not taxable if received by
government officials and employees
 What is the effective 13th
month pay?
Under Republic Act (RA) No.10653, signed into law in 2015,
gross benefits received by officials and employees of public
and private entities up to a maximum amount of P82,000 are
excluded from the computation of the gross income and
thus, such amounts are exempt from income tax. To
implement RA 10653, the Bureau of Internal Revenue (BIR)
issued Revenue Regulations (RR) 3-2015 statting among
others: “The amount of P82,000 shall apply to the 13th
month pay and other benefits paid or accrued beginning
January 1, 2015.”
 What are exclusions from
GI?
 Life insurance
 Amount received by insured as return of premium
 Gifts, bequests and devises
 Compensation for injuries or sickness
 Income exempt under treaty
 Retirement benefits, pensions, gratuities, etc.
 Miscellaneous items:
• income derived by the government or foreign government
• prizes and awards in sport competition/ met conditions of Tax
Code
• 13th month pay and other benefits
• GSIS, SSS, Medicare and other contributions
• gain from the sale of bonds, debentures or other certificate of
indebtedness/redemption of shares in mutual fund
 Gross Income Formula:
Sale of Goods: Sale of Services:
Gross Sales XXX Gross Sales XXX
Less: Sales Discounts (XXX) Less: Sales Discounts (XXX)
Sales Returns and Allowances (XXX) Sales Returns and Allowances (XXX)
Net Sales XXX Gross Income XXX
Less: Cost of Goods Sold** (XXX)
Gross Income XXX

Cost of Goods Sold**

Trading/Merchandising concern: Manufacturing concern:
Invoice cost Raw materials
Import duties Direct labor
Freight-In Manufacturing overhead
Insurance while in transit Freight-in
Insurance
Other costs to bring RM to the factory
Who are entitled to
Exemptions?
Individuals who are either earning compensation
income, engaged in business or deriving income from
the practice of profession are entitled to personal and
additional exemptions as follows:
Personal Exemptions:
For single individual, each married individual or
judicially decreed as legally separated with no
qualified dependents………………………P 50,000.00
Additional Exemptions:
For each qualified dependent, a P25,000 additional
exemption can be claimed but only up to 4 qualified
dependents
Who can claim additional exemption?
 The husband who is deemed the head of the
family unless he explicitly waives his right in favor
of his wife
 The spouse who has custody of the child or
children in case of legally separated spouses.
Provided, that the total amount of additional
exemptions that may be claimed by both shall not
exceed the maximum additional exemptions
allowed by the Tax Code.
 The individuals considered as Head of the Family
supporting a qualified dependent
Can a benefactor of a senior citizen claim him/her as 
additional dependent in addition to his/her 3 qualified 
dependent children at P 25,000 each?

No, pursuant to Revenue Regulations 2-94, the

benefactor of a senior citizen cannot claim the
additional exemption.
 Exemptions:
RC NRC RA NRA-ETB NRA-NETB
Basic Exemption Yes Yes1 Yes1 Yes2 No
Addt’l Exemption Yes1 Yes1 Yes3 No No

Taxable Income:
Within Yes Yes Yes Yes Yes
Without Yes No No No No

Tax base NI NI NI NI GI

Yes1 - Provided taxpayer has income within the Philippines

Yes2 – Provided principle of reciprocity applies
Yes3 – Provided dependents are living with the taxpayer
Who can claim deduction for the
maximum P2,400 per annum or 200 per
month on health and/or
hospitalization insurance?
 Family gross income yearly should not be
more than P 250,000
 For married individuals, the spouse
claiming the additional exemptions for the
qualified dependents shall be entitled to
this deduction
 In case no dependents, the husband claims
the deduction
Who are entitled to HHIP?

• Resident Citizen
• Non-Resident Citizen
• Resident Alien
What is Taxable Income?
Taxable income means the pertinent
items of gross income specified in the
Tax Code as amended, less the
deductions and/or personal and
additional exemptions, if any,
authorized for such types of income, by
the Tax Code or other special laws.
Computation of Taxable Income:
Purely compensatory Business income
income
Gross Compensation Gross Revenue/Sales
Less: Health/Hospital Less: Cost of Sales
premium payments Gross Income
(P2400 maximum per Less: Allowable
year) Deductions
Exemptions-personal **Exemptions-
and addtl. personal and addtl.
Taxable Income Taxable Income

** for individuals
-ending-