TAX 03 – FUNDAMENTALS OF INCOME TAXATION Corpuz, CPA

CLASSIFICATION OF INDIVIDUAL TAXPAYERS

A. Citizens
- At the time of adoption of the Constitution on February 2, 1987
- Whose fathers or mothers are citizens of the Philippines
- Born before January 17, 1973, of Filipino mothers who elected Filipino citizenship upon reaching the age of majority
- Who are naturalized in accordance with the law

1) Resident Citizens (RC)

- A Filipino citizen residing in the Philippines

2) Non-Resident Citizen (NRC)

- Establishes to the satisfaction of the Commissioner of the fact of his physical presence abroad with a definite intention to reside
therein.
- Leaves the Philippines during the taxable year to reside abroad, either an immigrant or for employment on a permanent basis.
- 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 (≥ 𝟏𝟖𝟑 𝒅𝒂𝒚𝒔).
- Previously considered as nonresident citizen who arrives in the Philippines at any time during the taxable year to reside permanently
in the Philippines (NRC until the date of his arrival in the Philippines).
- OFWs

B. Alien

1) Resident Alien (RA) (≥ 𝟐 𝒚𝒆𝒂𝒓𝒔)

- Present in the Philippines who is not a mere transient or sojourner.
- Who comes to the Philippines for a definite purpose, which, by its nature, would require an extended stay making his home temporarily
in the Philippines.
- With no definite intention to stay.

2) Non-Resident Alien (NRA) (< 𝟐 𝒚𝒆𝒂𝒓𝒔)

a. Non-Resident Alien Engaged in Trade or Business (NRA-ETB) (> 𝟏𝟖𝟎 𝒅𝒂𝒚𝒔)
- Actually engaged in trade or business in the Philippines.
b. Non-Resident Alien Not Engaged in Trade or Business (NRA-NETB) (≤ 𝟏𝟖𝟎 𝒅𝒂𝒚𝒔)
- Who come to the Philippines for a definite purpose which in its nature may be promptly accomplished.

THE GENERAL RULES IN INCOME TAXATION

Taxable on Income Earned

Individual Taxpayers
Within Without
Resident citizen ✓ ✓
Non-resident citizen ✓
Resident alien ✓
Non-resident alien ✓

SITUS OF INCOME

Type of Income Situs

Interest Debtor’s residence
Royalties Where the intangible is employed
Rent income Location of the property
Service income Place where the service is rendered
Gain on sale of real property Location of the property
Gain on sale of domestic shares of stock Presumed earned within the Philippines
Gain on sale of other personal properties Place of sale
Dividend income from DC Presumed earned within the Philippines
Apply pre-dominance test
𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒𝑠
𝐺𝑟𝑜𝑠𝑠 𝐼𝑛𝑐𝑜𝑚𝑒 𝑊𝑜𝑟𝑙𝑑𝑤𝑖𝑑𝑒
Dividend income from RFC
* In 3-year period preceding the year of dividend declaration
At least 50% Within
Less than 50% Entire dividend received is earned abroad
Dividend income from NRFC Earned abroad
Merchandising income Place of sale
Place of production and place of sale
Place of Production Place of Sale Income is Earned
Within Within Within
Production income is earned within,
Manufacturing income Within Without
Distribution income is earned without
Without Without Without
Production income is earned without,
Without Within
Distribution income is earned within
Mining Location of the mine
Farming Location of the farm
TAX 03 – FUNDAMENTALS OF INCOME TAXATION Corpuz, CPA
TAXABILITY OF INCOME TAXPAYERS

Purely Employed Graduated Tax Rate

Purely Self- Gross sales/receipts + non- Graduated Tax Rate OR
≤ 3M
Employed and operating income not subject 8% Income Tax Option in excess of P250,000
Source /
Professionals to FWT > 3M Graduated Tax Rate
Type of
Compensation Graduated Tax Rate
Income
Mixed Income Gross sales/receipts + Graduated Tax Rate OR
Business / Professional ≤ 3M
Earner non-operating income 8% Income Tax Option
Income
not subject to FWT > 3M Graduated Tax Rate

Graduated Tax Rate (Section 24A)

Amount of Income Tax (2018 to 2022) Tax (Beginning 2023)
Not over P250,000 Exempt Exempt
Over P250,000 but not over P400,000 20% of excess over P250,000 15% of excess over P250,000
Over P400,000 but not over P800,000 P30,000 + 25% in excess of P400,000 P22,500 + 20% in excess of P400,000
Over P800,000 but not over P2,000,000 P130,000 + 30% in excess of P800,000 P102,500 + 25% in excess of P800,000
Over P2,000,000 but not over P8,000,000 P490,000 + 32% in excess of P2,000,000 P402,500 + 30% in excess of P2,000,000
Over P8,000,000 P2,410,000 + 35% in excess of P8,000,000 P2,202,500+ 35% in excess of P8,000,000

The Optional 8% Income Tax / Bundled Tax / Best Option

- In lieu of graduated income tax rate and Section 116
o 1% OPT: July 1, 2020 – June 30, 2023
o 3% OPT: July 1, 2023, onwards
- Must be signified in the ITR, otherwise, graduated tax rates is presumed
- Must be made in first quarter return – irrevocable in the taxable year

Requisites to Avail 8% Preferential Tax Rate

1. The gross sales or 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 or receipts were not derived from vat-exempt sales and transactions.
4. The SEP is not subject to Percentage Tax other than Section 116 of the Tax Code, as amended.
5. The SEP signifies his or her intention to elect the 8% income tax.
a. For a new business registrant, upon registration using the BIR Form No. 1901 or on the initial quarterly ITR or quarterly
Percentage Tax Return of the taxable year after the commencement of the business or practice of profession.
b. For existing individual business taxpayer, upon filing the Application for Registration Information Update (BIR Form No. 1905)
at the beginning of the taxable year on the first quarter ITR or quarter Percentage Tax Return.