The Concept of
Income
Why is Income Subject to Tax
Income is regarded as the best measure of taxpayers’ ability
to pay tax. It is an excellent object of taxation in the
allocation of government cost.
Why is Income Subject to Tax
The tax concept of income is simply referred to as
"gross income" under the NIRC. A taxable item of income is
referred to as an "item of gross income" or "inclusion in
gross income".
Gross income simply means taxable income in
layman's term. Under the NIRC however, the term "taxable
income" refers to certain items of gross income less
deductions and personal exemptions allowable by law.
Technically, gross income is broader to pertain to any
income that can be subjected to income tax.
Gross income is broadly defined as any inflow of
wealth to the taxpayer from whatever source, legal or
illegal, that increases net worth. It includes income from
employment, trade, business or exercise of profession,
income from properties, and other sources such as dealings
in properties and other regular or casual transactions.
Income Tax for
Individuals
Definition
Individual Taxpayers are natural persons with income derived from
within the territorial jurisdiction of a taxing authority. Under RA
8424, otherwise known as the National Internal Revenue Code
(NIRC), also known as the Tax Code, as amended, individual
taxpayers are classified as follows:
1. Resident citizens (RC)
2. Nonresident citizens (NRC)
3. Resident aliens (RA)
4. Nonresident aliens (NRA)
• Engaged in Trade (NRAET)
• Nonresident aliens not engaged in a
• Trade or Business (NRANET)
• Alien individuals employed by
• POGOs and/or OGLs
Citizens of the Philippines
Under Sec. 1, Article IV of the Philippine Constitution, the following
are citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the
adoption of the 1987 Philippine Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect
Philippine citizenship upon reaching the age of majority;
4. Those who are naturalized in accordance with law.
Nonresident Citizen (NRC) of the Philippines
Sec. 22(E) of the NIRC describes a nonresident citizen as a citizen who:
1. Establishes, to the satisfaction of the Commissioner of Internal Revenue, the fact of his
physical presence abroad with a definite intention to reside therein;
2. Leaves the Philippines during the taxable year to reside abroad
● As an immigrant; or
● For employment on a permanent basis; or
● For work and derives income from abroad and whose employment thereat requires him to
be physically abroad most of the time during the taxable year.
3. A citizen of the Philippines who shall have stayed outside the Philippines for one hundred
eighty-three days (183) or more by the end of the year (aggregate).
A non-resident citizen who arrives in the Philippines at any time during the taxable year to
reside permanently in the Philippines shall be considered a nonresident citizen for the taxable
year in which he arrives in the Philippines with respect to income derived from sources abroad
until the date of his arrival in the Philippines [Section 22(E)(4) NIRC].
Illustration 1
Pedro, an OFW, returned in the Philippines for good on May
2021.
He shall be classified for 2021 taxable year as follows:
January to April 2021 - nonresident citizen
From May 2021 onwards - resident citizen
NOTE: For taxation purposes, Individual Taxpayers are only
allowed to use calendar year period.
Illustration 2
Ana, a resident citizen, left the Philippines on July 1, 2021 to
reside permanently in U.S. together with her family. She shall
be classified for 2021 taxable year as follows:
January to June 2021 - resident citizen
From July 2021 onwards - nonresident citizen
Overseas Contract Workers(OCW) Overseas Filipino Workers (OFW)
Revenue Regulation 1-2011 defines OCWs as Filipino citizens employed in foreign
countries, commonly referred to as OFWs, who are physically present in a foreign country as a
consequence of their employment thereat. Their salaries and wages are paid by an employer
abroad and are not borne by entities or persons in the Philippines. Hence, OFWs are classified
as nonresident citizens for tax purposes. To be considered as an OCW or OFW, they must be
duly registered as such with the Philippine Overseas Employment Administration (POEA) with
a valid Overseas Employment Certificate (OEC).
Seafarers or seamen are Filipino citizens who receive compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively for
international trade. To be considered as an OCW or OFW, they must be duly registered as such
with the Philippine Overseas Employment Administration (POEA) with a valid Overseas
Employment Certificate (OEC) with Seafarers Identification Record Book (SIRB) or Seaman's
Book issued by the Maritime Industry Authority (MARINA).
For income taxation purposes, OCWs/OFWs are classified as nonresident citizens.
Resident citizen of the Philippines
A Filipino citizen taxpayer not classified as nonresident citizen
is considered a resident citizen for tax purposes.
Alien
An alien is a foreign-born person who is not qualified to acquire Philippine citizenship by birth
or after birth.
Resident aliens
Section 22(F) of the Tax Code defines resident alien as an individual whose residence is within
the Philippines and who is not a citizen thereof. Aliens who are actually present in the
Philippines and who are not mere transients or sojourners are classified as resident aliens.
An alien who lives in the Philippines with no definite intention as to his stay is also a resident
alien. Likewise, an alien who comes to the Philippines for the purpose that requires extended
stay for its accomplishment, so he makes his home temporarily in the Philippines, is a resident,
regardless of his intention to return to his residence abroad.
Non-resident aliens
The term "nonresident alien' under Section 22(G) of the Tax. Code means an
individual whose residence is not in the Philippines and who is not a citizen thereof. They are
aliens who come to the Philippines for a definite purpose, which in its nature may be promptly
accomplished. They are alien who are mere transients or non-residents, hence, classified as
nonresident alien.
Aliens who stayed in the Philippines for an aggregate period of more than 180 days
during the taxable year and/or aliens who have business income in the Philippines are
considered as nonresident aliens engaged in trade or business (NRAET). Under Section 22(S) of
the Tax Code, "Trade or Business“ include performance of the functions of a public office or
performance of personal services in the Philippines (except performance of services by the
taxpayer as an employee). If an alien stay in the Philippines for only 180 days or less, or he is not
deriving business income in the Philippines, he is considered as a nonresident alien not
engaged in trade or business.
A nonresident alien not engaged in trade or business (NRA-NETB) is subject to 25%
income tax based on gross income from all sources within the Philippines (ordinary income or
passive income except for income subject to capital gains tax) as interest, cash and/or property
dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration,
emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and
capital gains.
Determine the correct classification of the taxpayer from the
independent cases provided below:
Case 1:
Allan is a natural born Filipino citizen. His family migrated in U.S. fifteen
(15) years ago. For personal reasons, he decided to return and reside
permanently in the Philippines on March 1, 2022.
Determine the correct classification of the taxpayer from the
independent cases provided below:
Case 1:
Allan is a natural born Filipino citizen. His family migrated in U.S. fifteen
(15) years ago. For personal reasons, he decided to return and reside
permanently in the Philippines on March 1, 2022.
Answer. From Jan. to Feb. 2022: Allan is classified as NRC.
From March 1, 2022 onwards: Allan is classified as RC.
Determine the correct classification of the taxpayer from the
independent cases provided below:
Case 2:
G.I. Joe is an American information technology expert. He was signed by
Doon Telecom, a local telecommunication company, from January to
March of 2022 to improve its wireless services. Due to the anticipated
entry of competitors from other countries, Doon Telecom decided to
extend indefinitely the services of G.l. Joe
Determine the correct classification of the taxpayer from the
independent cases provided below:
Case 2:
G.I. Joe is an American information technology expert. He was signed by
Doon Telecom, a local telecommunication company, from January to
March of 2022 to improve its wireless services. Due to the anticipated
entry of competitors from other countries, Doon Telecom decided to
extend indefinitely the services of G.l. Joe
Answer. He is a resident alien
An alien who comes to the Philippines for the purpose that requires
extended stay for its accomplishment, so he makes his home
temporarily in the Philippines, is a resident, regardless of his intention
to returm to his residence abroad.
Case 3:
Greg Popovich, head coach of the San Antonio Spurs in the NBA is in the
Philippines for a month-long NBA promotional tour. He also expressed
his intention to regularly visit the Philippines.
Answer. Greg Popovich is classified as NRA-NETB
Case 4:
Using the same data in Case 3, assume that Greg Popovich invested in
shares of stocks of various domestic corporations during his recent stay
in the Philippines.
Answer: Greg Popovich is NRA-NETB.
Passive income such as dividend income is not considered as income derived
from trade or business.
Case 5:
Mika "The Iceman" Immonen, a Finnish cue artist and former world
billiard champion is a resident of Finland. He won the world 9-ball
championship in 2005 in the Philippines. He is also the owner of one of
the disco pubs in Malate since then.
Answer. NRA-ETB.
He is engaged in actual conduct of trade or business in the Philippines but
is nonresident.
APPLICABLE INCOME TAXES AND TAX RATES
Generally, there are only three (3) types of income tax, namely; (1) basic income tax or
regular tax, (2) final withholding tax (FWT) on certain passive incomes, and (3) capital gains tax
(CGT). The applicable taxes for individuals depend on several factors such as but not limited to:
○
○
○
Classification of the taxpayer
Source of income
Type of income
Classification of the taxpayer
It is important to properly classify individual taxpayers
because resident citizens are taxable on their income derived
from sources within and without the Philippines while other
taxpayers are taxable only on their income derived from
Philippine sources. Moreover, individual taxpayers classified as
nonresident aliens not engaged in trade or business
(NRANETB) are taxable based on their "gross income" while
others are taxable based on "net income"
Source of Income
It is important to know the source of income for
tax purposes (income derived from within or without the
Philippines) because as resident citizens are taxable
based on their worldwide income while others are
taxable only on their income derived from sources within
the Philippines.
Source of Income
Tax Payer
Tax Base
Source of Taxable
Income
RC
Net Income
Within and Without
NRC, RA, NRA-ETB
Net Income
Within Only
NRA-NETB
Gross Income
Within Only
Source of Income
For income taxation purposes OFWs are classified
as nonresident citizens. Hence, income earned by an
OFW, as defined in RR 1-2011 that is earned out of the
country is exempted from Philippine income tax.
However, the earnings of an OFW from a business
venture or any other property in the Philippines are
subject to income tax in the Philippines.
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case A: The taxpayer is a resident citizen
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case A: The taxpayer is a resident citizen
Answer: P3,500,000
Gross business income, Philippines
Gross business income, Canada
Gross business income, Singapore
Business expenses, Philippines
Business expenses, Canada
Business expenses, Singapore
Taxable income
P5,000,000
2,000,000
1,000,000
(3,000,000)
(1,000,000)
(500,000)
3,500,000
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case B: The taxpayer is a Non resident citizen
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case B: The taxpayer is a Non resident citizen
Answer: P2,000,000
Gross business income, Philippines
Business expenses, Philippines
Taxable income
P5,000,000
(3,000,000)
2,000,000
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case C: The taxpayer is a Resident Alien
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case C: The taxpayer is a Resident Alien
Answer: P2,000,000
Gross business income, Philippines
Business expenses, Philippines
Taxable income
P5,000,000
(3,000,000)
2,000,000
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case D: The taxpayer is a Non resident alien engaged in trade or business
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case D: The taxpayer is a Non resident alien engaged in trade or business
Answer: P2,000,000
Gross business income, Philippines
Business expenses, Philippines
Taxable income
P5,000,000
(3,000,000)
2,000,000
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case E: The taxpayer is a Non resident alien not engaged in trade or
business
Illustration
An individual taxpayer provided the following information for 2022:
Gross business income, Philippines
P5,000,000
Gross business income, Canada
2,000,000
Gross business income, Singapore
1,000,000
Business expenses, Philippines
3,000,000
Business expenses, Canada
1,000,000
Business expenses, Singapore
500,000
Determine the taxable income assuming:
Case E: The taxpayer is a Non resident alien not engaged in trade or
business
Answer: P5,000,000
Types of Income
Types of Income
For income taxation purposes, the three (3) types of incomes
subject to income tax are as follows:
●
●
●
Ordinary or regular income
Passive income derived from Philippine sources; and
Capital gains subject to capital gains tax
Ordinary or regular income refers to income such as
compensation income (salaries or wages), business income, income
from practice of profession, income from sale and/or dealings of
property and miscellaneous income and passive income other than
those subject to final taxes and capital gains tax of the Tax Code, as
amended. Regular incomes are subject to graduated tax table (also
known as basic or normal tax) as provided for under Section 24(A) of
the Tax Code, as amended.
Passive incomes subject to Final Withholding Taxes (FWT) are
certain passive incomes from sources within the Philippines as
enumerated under Sections 24(B) and 25(A)(2) of the Tax Code, as
amended. These passive incomes are not subject to graduated tax rate
or basic tax but to specific FWT rates.
The Specific passive income derived from Philippine sources
that are subject to final withholding taxes are as follows:
○ Interest Income
○ Dividend Income
○ Royalties
○ Prizes and
○ Other Winnings
Income from sale of Capital Assets subject to capital gains
tax(CGT):
1.
2.
Capital Gains from sale of shares of stocks of
a domestic
corporation not traded in the local stock exchange. (sec 24 (c) NIRC)
Capital Gains from sale of real property in the Philippines (sec 24 (d)
NIRC)
Amount of Net Taxable Income
Rate
Over
But Not Over
-
P 250,000.00
0%
P 250,000.00
P 400,000.00
15 % in excess of 250,000.00
P 400,000.00
P 800,000.00
22,500 + 20% In excess of 400,000.00
P 800,000.00
P 2,000,000.00
102,500 + 25% In excess of 800,000.00
P 2,000,000.00
P 8,000,000.00
402,500 + 30% In excess of 2,000,000.00
P 8,000,000.00
And Above
2,202,500 + 35% In excess of 8,000,000.00
Illustration
PURELY COMPENSATION INCOME EARNER (from salaries or wages):
1) Determine the income tax due assuming the "taxable compensation
income" for 2023 taxable year is P240,000
Answer: PO; tax exempt based on the graduated tax rate
2) Determine the income due assuming the "taxable compensation
income" for 2023 taxable year is P300,000
Answer: P7,500
Tax on
First P250,000
In excess of P250,000; (P50,000 × 15%)
Tax Due, 2023
0.00
7,500.00
7,500.00
Illustration
PURELY COMPENSATION INCOME EARNER (from salaries or wages):
1) Determine the income tax due assuming the "taxable compensation
income" for 2023 taxable year is P240,000
Answer: PO; tax exempt based on the graduated tax rate
2) Determine the income due assuming the “net taxable compensation
income" for 2023 taxable year is P 1,850,000.00
Answer: P 365,000.00
Tax on
First P 800,000
In excess of P800,000; (P1,050,000 × 25%)
Tax Due, 2023
102,500
262,500
365,000
Self Employed and
Professionals
Self Employed
Self-Employed is defined under RA10963 (TRAIN Law) as "a sole
proprietor or an independent contractor who reports income earned
from sole employment. S/he controls who he/she works for, how the
work is done and when it is done. It includes professionals whose
income is derived purely from the practice of profession and not under
an employer - employee relationship"
Professionals
Professional is defined as a "person formally certified by a
professional body belonging to a specific profession by virtue of having
completed a required course of studies and/or practice, whose
competence can usually be measured against an established set of
standards. It also refers to a person who engages in some art or sport
for money, as a means of livelihood, rather than as a hobby. It includes
but is not limited to professional entertainers, professional athletes,
directors,
producers,
insurance
agents,
insurance
adjusters,
management and technical consultants, bookkeeping agents, and
other recipients of professional, promotional and talent fees"
Self Employed and Professionals
Income derived from self-employment is considered income
derived from the conduct of trade or business, hence, classified as
regular or ordinary income. As such, it is subject to the graduated tax
rate. However, unlike compensation income or salaries/wages where it
is only subject to basic tax, income derived from the conduct of trade
or business such as that of SEP is generally subject to two types of
taxes, the income tax (using the graduated tax rate) and business tax
(generally either 12% Vat or Percentage tax of 1% or 3%, as the case may
be, unless exempt under the law). Business taxes are discussed in a
separate Tax subject "Transfer and Business Taxation"
8% Preferential Tax Rate for SelfEmployed and Professionals (SEP)
Beginning 2018 or upon the effectivity of RA 10963 [Tax Reform
for Acceleration and Inclusion Law (TRAIN Law)], regular income of SEP
amounting to more than P250,000 in a taxable year but with a gross
sales/receipts and other non-operating income not exceeding the vat
threshold of P3,000,000 SHALL HAVE THE OPTION to avail of 8% tax on
gross sales/receipts and other non-operating income in excess of
P250,000 IN LIEU of the graduated income tax rate and business tax
under Section 116 of the Tax Code, as amended.
REQUISITES TO AVAIL the 8% Preferential Tax Rate
In order to avail the 8% preferential tax, the SEP shall satisfy all the following conditions:
1. The gross sales/receipts and other non-operating income does not exceed the vat threshold
of P3,000,000;
2. The SEP shall be non-vat registered;
3. The gross sales/receipts were not derived from vat-exempt sales and transactions;
4. The SEP is not subject to Percentage Tax other than under Section 116 of the Tax Code, as
amended; and
5. The SEP signifies his/her intention to elect the 8% income tax.
PURELY SEP
An individual taxpayer is considered purely SEP if s/he is not earning income from employment (there is no
income arising from employer-employee relationship).
Election of 8% Preferential Tax is irrevocable during the year
RR 8-2018 provides that unless the taxpayer signifies in his/her 1st Quarter return of
the taxable year the intention to elect the 8% income tax, s/he shall be considered as having
availed of the graduated rates under Section 24(A) of the Tax Code, as amended, and such
election shall be irrevocable for the taxable year.
Illustration
CASE A: PURELY SEP whose gross sales/receipts and other nonoperating income does not exceed the VAT threshold of R3,000,000.
1) Determine the income tax due in 2024 assuming the gross
sales/receipts and other non-operating income was P240,000
Answer: PO;
exempt from income tax
Illustration
2) Using the data below, determine the income tax due:
Gross sales
Cost of sales
Operating expenses
Net income
P2,800,000
(1,500,000)
(750.000)
P550,000
Answer: P52,500 using graduated rate
Tax on
First P400,000 income
In excess of P400.000 income
(P150,000 x 20%)
Income Tax Due, 2024
Note
OPT 2024 2,800,000 x 3% = P 84,000
P22,500
30,000
₽52,500
Illustration
3) Using the data below, determine the income tax due Assume the
Sep opted to avail 8% Preferential Tax :
Gross sales
Cost of sales
Operating expenses
Net income
P2,800,000
(1,500,000)
(750.000)
P550,000
Answer: P204,000.00 using graduated rate
(2,800,000-250,000) x 8% = P204,000
Illustration
Case B) Using the data below, determine the income tax due
Assume the Sep opted to avail Graduated Tax Rate:
Gross sales
Cost of sales
Operating expenses
Net income
P5,000,000
(2,250,000)
(1,250.000)
P 1,550,000
Answer: P277,500.00 using graduated rate
First P800,000 income
In excess of P800.000 income
(P700,000 x 25%)
Income Tax Due, 2024
Note
VAT 5,000,000 x 12% = P 600,000
P102,500
175,000
₽ 277,500
Illustration
CASE PURELY SEP using 8% tax rate but whose gross sales/receipts and other nonoperating income EXCEEDs the VAT threshold of P3,000,000 during 2023 taxable
year.
Pedro signified his intention to be taxed at 8% income tax rate on gross sales in his
1st quarter income tax return. However, his gross sales during the taxable year
exceeded the vat threshold of P3M as provided in his "quarterly" records as follows:
Q1
Q2
Q3
Q4
Sales
500,000
500,000
2,000,000
3,500,000
Cost of Sales
(300,000)
(300,000)
(1,200,000)
(1,200,000)
Gross Income
200,000
200,000
800,000
2,300,000
Operating
Expense
(120,000)
(120,000)
(480,000)
(720,000)
Net Taxable
Income
80,000
80,000
320,000
1,580,000
Question: How much is Pedro’s Income Tax Payable in 2023?
Solution
Answer: P200,500
Solution:
Sales (total for the year)
Cost of sales (total for the year)
Gross Income (total for the year)
Operating expenses (total for the year)
Net taxable income for year
6,500,000
(3,000,000)
3,500,000
(1,440,000)
2,060,000
Income Tax Due using 2023 graduated rate
First 2M
In Excess of 2M @ 30%
Income Tax due for 2023
402,500
18,000
420,500
Less Quarterly Payments based
on 8% rate (3M-250k)
Income Tax Payable
(220,000)
200,500
SEP’s Gross Sales/Receipts exceeded the VAT threshold during the year
RR 8-2018 provides that, if at any time during a given taxable year, a taxpayer's gross sales
and/or receipts exceeded the VAT Threshold of P3,000,000.00, s/he shall automatically be
subjected to the graduated rates under Section 24(A)(2)(a) of the Tax Code, as amended, with
the following rules/guidelines:
●
●
●
●
●
The taxpayer shall be allowed an income tax credit of quarterly payments initially made
under the 8% income tax option.
Taxpayer is likewise liable for business tax(es), in addition to income tax.
For this purpose, the taxpayer is required to update his registration from non-vat to vat
taxpayer, within the 30 days from the close of the month the vat threshold was breached.
Percentage tax under Sec. 116 shall still be imposed from the beginning of the year until
taxpayer is liable to vat. The Percentage tax pursuant to Section 116 of the Tax Code, as
amended, shall be imposed on the first P3,000,000.00. The excess of the threshold shall be
subject to VAT. Thus, for this purpose, vat shall be imposed prospectively.
Percentage tax due on the P3,000,000.00 shall be collected without penalty, if timely paid
on the due date immediately following the month the threshold was breached.