Individual Income Taxation

Basic Features Of Individual Income Taxation

1. Individual income taxation adopts the scheduler system of taxation.

Schedular system taxation is a system, which classifies income and imposes different tax rates, depending on
the kind of category of the taxpayer’s taxable income.

Characteristics Of Schedular System Taxation

a. Accords different tax treatment on the income of individual taxpayer.
b. Classifies income.

2. Tax rates are progressive in character.

3. Individual income taxation is a modified gross income as regards compensation income earner, where only
premium payments on health and or hospitalization insurance are allowed as deduction from gross
compensation income, as well as personal and additional exceptions.
4. Adopts the pay as you file system.
5. Under certain cases, the pay as you earn system is employed, as in the case of income subject to withholding
tax.

Classification Of Individual Income Tax Payers

1. Resident Filipino Citizens

a. Those are citizens of the Philippines at the time of adoption of the 1987 constitution.
b. Those whose father’s our mothers are citizens of the Philippines.
c. Those born before January 17, 1973 of Filipino mothers who upon reaching the age of majority elected
Philippine citizenship.
d. Those who are naturalized in accordance with the law.

2. Nonresident Citizens Of The Philippines

a. One who establishes to the satisfaction of the Commissioner Of Internal Revenue
b. A Filipino citizen who has been previously considered as a nonresident citizen, and who arrives in the
Philippines at any time during the taxable year to reside there in permanently show also be considered a
nonresident citizen for the taxable year.

3. Resident Aliens
a. Aliens present in the Philippines who are not Transient or sojourners
b. Aliens, who live in the Philippines and have no definite intention as to the time of return to their
country.
c. Aliens Who come to the Philippines and whose extended stay may be necessary to accomplish the
purpose of their coming
d. Aliens, who have acquired residence in the Philippines retained their status as such until they
abandoned the same, and depart from the Philippines.

4. Nonresident Aliens
a. Those engaged in trade or business in the Philippines.
b. Those not engaged in trade or business in the Philippines, which include nonresident aliens who stay in
the Philippines is less than 180 days.
c. Aliens employed by offshore banking units.
d. Aliens employed by Petroleum contractors and subcontractors.
Section 24 A of RA 8424

Applicable only to income of resident citizens from all sources, and the income from the Philippines of non resident
citizens, resident and nonresident aliens engaged in trade or business in the Philippines.

Over Not Over Income Tax

P10,000 5%

P10,000 P30,000 P500 + 10% of excess over P10,000

P30,000 P70,000 P2,500 + 15% of excess over P30,000

P70,000 P140,000 P8,500 + 20% of excess over P70,000

P140,000 P250,000 P22,000 + 25% of excess over P140,000

P250,000 P500,000 P50,000 + 30% of excess over P250,000

P500,000 P125,000 + 34% of excess over P500,000

Passive Income is subject to final tax and not included in the computation of gross income for purposes of
determining income tax.

Rate Of Tax On Certain Passive Income

Section 24 B of RA 8424

1. Interests, royalties, prizes and other winnings. Final tax at the rate of 20% shall be imposed upon:
a. Interests from any current bank deposit.
b. Royalties, except royalties and books and other literary works and musical compositions which are
subject to final tax of 10%
c. Prizes, except for prizes. Amounted to p 10,000 or less.
d. Other winnings from sources within the Philippines, except Philippine Charity Sweepstakes and Lotto
winnings which are exempt.

2. A final tax of 10% shall be imposed upon:

a. Cash and or property dividends received by an individual from a domestic corporation or joint stock
company, insurance or mutual fund companies and regional operating headquarters of multinational
companies.
b. Share of an individual in the distributable net income after tax of a partnership.
c. Share of an individual in the net income tax of association, joint account, joint venture or consortium
taxable as a corporation of which he is a member, or co-venturer.

Section 24 C of RA 8424

3. Capital gains from sale from a barter, exchange, or other disposition of shares of stock

Not over P100,000 5%

In excess of P100,000 10%

Section 24 D of RA 8424

4. Capital gains room sale, exchange or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de recto sales, conditional sales by individuals, estates and trust. The tax shall
be 6% or gross selling price or current fair market value, whichever is higher.
Tax On Nonresident Alien Individuals

1. Nonresident alien individuals engaged in trade or business in the Philippines shall be subject to 5%-32% tax
under section into a of RA 8424.
2. Nonresident alien individuals not engaged in trade or business in the Philippines are subject to 25% On gross
income derived from all sources within the Philippines.

On capital gains from sale of shares of stock in any domestic Corporation, the following tax rate is applicable:
5% On capital gain not exceeding P100,000
10% On capital gain exceeding P100,000

On capital gain from the sale of real property – 6% of gross selling price or fair market value, whichever is
higher is imposed.

3. Nonresident alien individuals employed by regional or area headquarters and regional operating
headquarters of multinational companies are subject to tax of 15% of gross income.
4. Nonresident alien individuals employed by offshore banking units are subject what happens equal to 15% of
the gross income.

Personal Exemptions

Personal exemptions are arbitrary amount allowed to be deducted from gross or net income for personal, family
living expenses of the taxpayer.

Kinds of Personal Exemption

1. Personal exemption proper is the amount of exception allowed on account of the civil status of the tax
payer.
Personal exemptions allowable to individual taxpayer shall be:
a) P20,000 for a single individual or married individual who is legally separated without any qualified
dependents
b) P25,000 for the head of the family which includes an unmarried, or a married individual who is legally
separated with qualified dependents
c) P32,000 for each married individual who derives gross income

2. Additional exemptions are amounts further allowed to the taxpayer by reason of this qualified dependent
children. The additional exemption is P8,000 for each dependent child for a maximum of 4 dependents.

Head of the family is an unmarried or legally separated man or woman with qualified dependents, consisting
of one or both parents, or one or more brothers or sisters or, one or more legitimate, illegitimate or legally
adopted children, with the following qualifications:

Qualifications Children Bro / Sis Parents

1. Not over 21 years old xx xx
2. Unmarried xx xx xx
3. not gainfully employed xx xx
4. Incapable of self-support because of mental or physical
xx xx
defect, although above 21
5. Residing with taxpayer xx xx xx
6. Depended on taxpayer for cheap support xx xx xx

A senior citizen may also qualify as a dependent of a head of the family, if he is a benefactor of the said
senior citizen.

Under RA 7432, a senior citizen is defined as a resident citizen of the Philippines was at least 60 years of age,
including one who has retired from both government office and private enterprise, and has an annual
income not exceeding P60,000.
Rules On Change Of Status

1. The death of the taxpayer during the taxable year shall not affect the amount of personal and additional
exemption to his estate can claim, as if he died at the end of such year.

2. If the taxpayer got married are should have additional dependents during the taxable year, he may claim the
corresponding personal exemptions in full for such year.

3. If the spouse should die or any of the dependents become 21 years of age, or become gainfully employed
during the taxable year, the taxpayer may still claim the same exemptions as if the spouse died, or the
dependent children become 21 years old, or become gainfully employed at the close of such year.

 Schedular System Taxation – a system, which classifies income and imposes different tax rates,
depending on the kind of category of the taxpayer’s taxable income.
 Compensation - something, typically money, awarded to someone as a recompense for loss, injury, or
suffering.
 Pacto de Recto Sales - refers to the sale wherein the seller has the right to repurchase the subject
matter or the property being sold.
 Arbitrary - based on random choice or personal whim, rather than any reason or system.
 Exemption - not having to obey a rule or do something that other people have to do.
 Venture - a new activity, usually in business, that involves risk or uncertainty.
 Consortium - an association, typically of several business companies.