Income Tax is defined as a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on the person’s income, emoluments, profits, and the like. It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year. Income tax is generally classified as an excise tax. It is not levied upon persons, property, funds, or profits but upon the right of a person to receive income or profits.
Philippine Income Tax
Features of the Philippine Income Tax Law
Direct Tax. Income tax is payable by the person to whom it is imposed. Its payment or liability cannot be shifted or passed to another.
Progressive. The tax rate increases as the tax base increases. It is founded on the "ability to pay" principle and is consistent with Sec. 28, Art. VI, 1987 Constitution
Comprehensive. The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship principle, the residence principle, and the source principle. Any of the three principles is enough to justify the imposition of income tax on the income of a resident citizen and a domestic corporation that are taxed on a worldwide income
Semi-Schedular or Semi-Global Tax System. The Philippines follows the semi-schedular or semi-global system of income taxation, although certain passive investment incomes and capital gains from the sale of capital assets (namely: (a) shares of stock of domestic corporations, and (b) real property) are subject to final taxes at preferential tax rates. There are different types of income tax systems.
National Tax. Income tax is collected by the national government.
General Tax. Income Tax is levied without specific purpose, and thus, may form part of the national budget for general purposes.
Criteria for Imposing Philippine Income Tax
The Philippines adopted the following criteria in the imposition of income tax:
- Citizenship
- Residence
- Source
Hence, subject to the general principles of taxation, the Philippines may collect income tax from all Filipinos and from any person who resides in or derives income from sources within the Philippines.
Those who are required to pay taxes are called taxpayers. There are also several types of taxes that these taxpayers may pay.
Income Tax System
Income tax systems are the Global Tax System, Schedular Tax System, and Semi-schedular or Semi-global Tax System.
Global Tax System. Global Tax System is a system where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer.
It did not matter whether the income received by the taxpayer is classified as compensation income, business or professional income, passive investment income, capital gain, or other income. All items of gross income and allowable deductions, if any, are reported in one income tax return, and one set of tax rates are applied on the tax base.
Schedular Tax System. Schedular Tax System is a system where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer.
Different types of incomes are subject to different sets of graduated or flat income tax rates. The applicable tax rate(s) will depend on the classification of the taxable income and the basis could be gross income or net income. Separate income tax returns (or other types of return applicable) are filed by the recipient of income for the particular types of income received.
Semi-Schedular. Under Semi-schedular or Semi-global Tax System, all compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income, and after deducting the sum of allowable deductions, the taxable income is subjected to one set of graduated tax rates or normal corporate income tax. With respect to such income, the computation is global. For those other types of income not mentioned above, they remain subject to different sets of tax rates and are covered by different returns.
Individual Income Taxation
Individual taxpayers are subject to the following income tax:
- Graduated income tax rates (applicable to Taxation on Compensation Income and Taxation of Business Income)
- Optional gross income tax of 8%
- Final income tax on certain passive income
- Capital gains tax (6% on real property and 15% on shares not traded through the local stock exchange)
- Gross income tax rate of 25% for NRANETB
- Gross income tax rate of 15% for special aliens (vetoed under TRAIN)
- Fringe benefit tax rates of 35% and 25%
|
Section
24, NIRC |
A |
B |
C/D |
|
Taxpayer/Tax base (subject to the situs of taxation) |
Basic (Regular, Ordinary, Net) Income Tax |
Final Income Tax |
Capital Gains Tax |
|
RC, NRC, RA, NRETB |
|||
|
Pure Compensation Income Earner |
A1. 20-35% on Compensation Income (without deductions) |
10% or 20% final tax on certain passive income |
15% (shares of stocks) or 6% (real property) |
|
Professional/ Business Income Earner |
A2. 20-35% on Taxable Income or 8% Optional Gross Income Tax |
||
|
Mixed-Income Earner |
A1 + A2 |
||
|
NRAETB |
|
|
|
|
Gross
Income |
25% on Gross Income |
25% on Gross Income |
15% (shares of stocks) or 6% (real property) |
Gross income. The total income of a taxpayer subject to tax. It includes the gains, profits, and income derived from whatever source, whether legal or illegal.
It does not include income excluded by law, or which are exempt from income tax.
Taxable income. The term ‘taxable income’ means the pertinent items of gross income specified in Tax Code, less deductions, if any, authorized for such types of income by the Tax Code or other special laws."
It is synonymous with the term “net income.”
Net income. Means gross income less statutory deductions and exemptions.
Income taxation may also be categorized into
Net Income Taxation where gross income is adjusted with certain deductions and/or exemptions and the tax is computed based on the resulting net income or taxable income.
Gross Income Taxation where no deductions and/or exemptions are considered, hence, the tax is computed based on the gross or the aggregate amount earned.
Final Income Taxation, which similar to Gross Income Taxation where no deductions and/or exemptions are considered, however, it is subject to withholding of final tax if the following requisites are present:
- Derived from sources within
- Passive income
- Specifically provided in the NIRC
- Not exempted
- Not an exclusion
Taxation on Compensation Income
As a rule, every form of compensation is taxable regardless of how it is earned, by whom it is paid, the label by which it is designated, the basis upon which it is determined, or the form in which it is received.
Tax Rate
The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as amended. Optional gross income tax of 8% does not apply to compensation income.
The tax shall be computed in accordance with and at the rates established in the following schedule:
(a) Tax schedule effective January 1, 2018 until December 31, 2022.
(b) Effective January 1, 2023, the new tax rates are as follows:
Tax Base
The graduated income tax rate is applied to taxable compensation income.
Taxable income for compensation earners is the gross compensation income less non-taxable income/benefits such as but not limited to the 13th-month pay and other benefits (not exceeding P90,000), de minimis benefits, and employee’s share in the SSS, GSIS, PHIC, Pag-ibig contributions and union dues.
No allowable deductions are considered in the computation of taxable income for compensation earners. Only exclusions (particularly, miscellaneous items under exclusions from gross income) are removed from the total compensation received by the employee.
In the computation of taxable income, include only the income which the taxpayer is subject to income tax in relation to the general principles of income taxation.
Compensation Income of Resident Citizen
A resident citizen is taxable on income derived from sources within and without. When the employee leaves the Philippines, the rule on taxation applicable to a non-resident citizen will apply.
For example, Mr. A, a resident citizen, earned his annual gross compensation income of P700,000, inclusive of the following:
overtime pay — P80,000.00,
night shift differential — P30,000.00,
hazard pay — P15,000.00, and
holiday pay — P15,000.00,
13th month and other benefits – P25,000.00,
mandatory contributions (SSS, Pag-Ibig, Phil-health, etc.) – P9,000,
non-taxable benefits – P16,000.
During the taxable year, he spent P200,000 on transportation and travel from his home to office and vice versa.
Compute his income tax liability.
Answer: P92,500
1. Compute taxable compensation income
= Gross compensation income - nontaxable income/benefits
= Gross compensation income – 13th month pay and other benefits not exceeding 90,000 – mandatory contributions – other non-taxable benefits
= P700,000 - 25,000 - 9,000 - 16,000
= P650,000
2. Compute the income tax due
| Computation | Tax Due | |
First | P400,000 | See bracket over P400,000 but not over P800,000 | P30,000 |
Next | 215,000 | (P615,000 – 400,000) x 25% | 62,500 |
Total | P615,000 | Income Tax Due | P92,500 |
Minimum Wage Earner
Statutory Minimum Wage
Minimum Wage Earners shall be exempt from the payment of income tax based on their statutory minimum wage rates.
MCQ: Mr. C, a minimum wage earner, works for G Corp. He is not engaged in business nor has any other source of income other than his employment. For 2017, Mr. C earned a total compensation income of P135,000. Employer’s contribution to the SSS, Philhealth, and HDMF amount to P5,000. He received 13th-month pay of P11,000. How much is his income tax due?
a. P0
b. P10,000
c. P30,000
d. P5,000
Answer: a. P0
Mr. C is exempt since he is considered a minimum income earner.
Overtime Pay and Other Exempt Income
The statutory minimum wage, as well as the holiday pay, overtime pay, night shift differential pay, and hazard pay received by such MWE, are specifically likewise exempted from income tax under the law.
MCQ: The following year, Mr. C, a minimum wage earner, earned, aside from his basic wage, additional pay of P140,000 which consists of the overtime pay – P80,000, night shift differential – P30,000, hazard pay – P15,000. He contributed to the SSS, Philhealth, and HDMF amounting to P5,000 and has received 13th-month pay of P11,000. How much is his income tax liability?
a. P0
b. P10,000
c. P30,000
d. P5,000
Answer: a. P0
Taxable Compensation Income
Additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the mandatory non-taxable amount of P90,000, taxable allowances, and other taxable income given to an MWE by the employer other than those which are expressly exempt from income tax, however, shall be subject to withholding tax using the revised withholding tax table.
In case he has other sources of income (e.g. business income), such income shall be subject to income taxation of business income.
Compensation Income of Non-Resident Citizen
A non-resident citizen/OCW is taxable on income derived from sources within. He or she is not subject to income tax on any income derived from sources abroad.
A non-resident citizen who visits the Philippines for a vacation remains to be a non-resident citizen. His compensation income from work abroad is not taxable in the Philippines even if he is in the Philippines since his stay is temporary.
However, if he returns with the intent to permanently reside in the Philippines, he becomes a resident citizen the day after his arrival in the Philippines.
Ms. C is an OFW. She is working in China as a COVID-19 Vaccine specialist. She earns a compensation income of P5,000,000 per year. How much is her income tax due to the Philippine Government?
Answer: P0
A non-resident citizen/OCW is not taxable on income earned abroad.
Compensation Income of Resident Alien
Resident Alien is taxed in the same manner as a non-resident citizen and non-resident alien engaged in trade or business.
Multiple Choice Question
Ms. D is a Malaysian. She went to the Philippines as a manager of a BPO company. Moreover, she has a business in her home country. As a manager in the Philippines, she earns a taxable compensation income of P6 million per year. Her business in Malaysia earned P3 million equivalent. How much is her income tax liability to the Philippine Government?
a. P1,770,000
b. P460,000
c. P2,760,000
d. P700,000
Answer: a. P1,770,000
1. Determine the taxable compensation income
A resident alien is taxable on income derived from within only. As such, Ms. Z is taxable only on her compensation income of P6 million, which is derived from the Philippines.
2. Compute the income tax due
| Computation | Tax Due | |
First | P2,000,000 | See bracket over P2,000,000 but not over P8,000,000 | P490,000 |
Next | 4,000,000 | (P6,000,000 – 2,000,000) x 32% | 1,280,000 |
Total | P6,000,000 | Income Tax Due | P1,770,000 |
Taxation on Non-Resident Alien Individual
Non-Resident Alien Engaged in Trade or Business Within the Philippines. In general, the income tax rates applicable to this taxpayer shall be the rates imposed on individual citizens and a resident alien individual on the taxable income derived within the Philippines.
Non-Resident Alien Not Engaged in Trade or Business Within the Philippines. A final tax of 25% upon the entire income received from all sources within the Philippines by this taxpayer such 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 income, and capital gains.
Special Aliens shall be subject to regular income tax rate under Sec. 24(A)(2)(a) of the Tax Code, as amended.
Compensation Income
Mr. E, a nonresident alien was seconded to HHH Inc., a domestic corporation in Makati, for three months. During his stay, he earned P250,000. How much is his income tax liability?
a. P0
b. P20,000
c. P62,500
d. PP70,000
Answer: c. P62,500
= gross compensation income x 25%
= 250,000 x 25%
= 62,500
Professional/Business Income
Mr. N, a non-resident alien not engaged in trade or business, earned P500,000 gross income from business within the Philippines and incurred P300,000 operating expenses. He also earned P500,000 from China. Compute his income tax liability.
a. P85,000
b. P125,000
c. P175,000
d. P200,000
Answer: b, P125,000
= business income x 25%
= P500,000 x 25%
= P125,000
Special Aliens
The preferential income tax rate shall no longer be applicable without prejudice to the application of preferential tax rates under existing international treaties if warranted.
All concerned employees of the regional or area headquarters and regional operating headquarters of multinational companies, offshore banking units, and petroleum service contractors and subcontractors shall be subject to the regular income tax rate under Section 24(A)(2)(a), NIRC, as amended.
This is in accordance with the veto message of the President.
Ms. CCF, an alien employed in MCUD Corporation that is Petroleum Service Contractor, received a compensation income of P5 million for 2020, inclusive of P400,000 13th-month pay and other benefits. How much is the income tax due?
a. P0
b. P1,421,200
c. P750,000
d. P1,450,000
Answer: b. P1,421,200
1. Determine the taxable compensation income
= compensation income – nontaxale benefits 13th month pay and other benefits (max)
= P5,000,000 – 90,000
= P4,910,000
2. Compute the income tax due
| Computation | Tax Due | |
First | P2,000,000 | See bracket over P2,000,000 but not over P8,000,000 | P490,000 |
Next | 2,910,000 | (P4,910,000 – 2,000,000) x 32% | 931,200 |
Total | P4,910,000 | Income Tax Due | P1,421,200 |
Substituted Filing
SECTION. 51-A. Substituted Filing of Income Tax Returns by Employees Receiving Purely Compensation Income. Individual taxpayers receiving purely compensation income, regardless of amount, from only one employer in the Philippines for the calendar year, the income tax of which has been withheld correctly by the said employer (tax due equals tax withheld) shall not be required to file an annual income tax return. The certificate of withholding filed by the respective employers, duly stamped ‘received’ by the BIR, shall be tantamount to the substituted filing of income tax returns by said employees.
Applicable to individual taxpayers:
- receiving purely compensation income, regardless of amount
- from only one employer in the Philippines for the calendar year, and
- the income tax of which has been withheld correctly by the employer.
The certificate of withholding (BIR Form No. 2316) filed by their respective employers, duly stamped ‘received’ by the BIR, shall be tantamount to the substituted filing of income tax returns by the employee.
Taxation of Business Income
Resident Citizen, Non-Resident Citizen, Resident Alien, Non-Resident Alien Engaged in Trade or Business
Generally, the income of self-employed individuals (i.e., Single Proprietors, Professionals, and Mixed-Income Earners) is subject to the graduated income tax rates.
He or she may also opt to use the optional gross income tax of 8% if his/her gross receipts do not exceed P3 million.
|
Tax
Base |
Tax
Rate |
|
|
Graduated Income Tax |
Taxable Income |
0-35% |
|
Optional
Gross Income Tax (in lieu of) |
Gross
Sales/Receipts and other non-operating income |
8% |
Income Tax Rate of 8%
Individuals (except nonresident alien not engaged in a trade or business) earning income purely from self-employment and/or practice of profession whose gross sales/receipts and other non-operating income does not exceed the VAT threshold (P3,000,000) shall have the option to avail of
- Graduated income tax rates
- 8% tax on gross sales or receipts and other non-operating income in excess of P250,000 in lieu of the graduated income tax rates under Section 24(A) and the percentage tax under Section 116 all under the Tax Code, as amended.
For example, Ms. E operates a convenience store while she offers bookkeeping services to her clients. In 2020, her gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. She already signified her intention to be taxed at an 8% income tax rate in her 1st quarter return.
a. P68,000
b. P50,000
c. P220,000
d. P88,000
Answer: a. P68,000
1. Compute the gross sales/receipts
= Gross Sales, Convenience Store + Gross Receipts, Bookkeeping
= P800,000 + P300,000
= P1,100,000
2. Compute the income tax due
= (Gross sales/receipts - P250,000) x 8%
= (1,100,000 - 250,000) x 8%
= 850,000 x 8%
= P68,000
The total gross sales and gross receipts are below the VAT threshold of P3,000,000.00.
The Taxpayer's source of income is purely from self-employment, thus she is entitled to the amount allowed as a deduction of P250,000.00 under Sec. 24 (A) (2) (b) of the Tax Code, as amended.
Income tax imposed herein is based on the total gross sales and gross receipts.
Income tax payment is in lieu of the graduated income tax rates under subsection (A) hereof and percentage tax due, by express provision of law.
Pointers for the Optional Gross Income Tax of 8%
The taxpayer should remember certain pointers in availing the optional gross income tax of 8%. Self-employed and professionals who are qualified and have availed of the 8% IT rate are:
- Required to file quarterly and annual income tax returns without submission of the financial statement;
- Not required to file a quarterly percentage tax return;
- Required to signify the intention to avail the 8% IT rate every taxable year; and
- Maintain books of accounts and issue receipts/invoices.
Requisites to Avail the 8%
- Individuals (i.e., single proprietors, professionals, and mixed-income earners) earning from self-employment/business and/or practice of the profession;
- Taxpayers whose gross sales/receipts and other non-operating income did not exceed P3M during the taxable year;
- Must be registered and subjected only to percentage tax or is exempt from VAT/other percentages; and
- Must have signified the intention to elect the 8% thru any of those enumerated under Sec. II(7) of this RMO (under item g below).
Availment of 8%
The availment of the 8% income tax rate option is required to be signified every taxable year. Otherwise, the taxpayer shall be considered as having availed of the graduated rates.
When 8% is unavailable?
- Purely compensation income earners;
- When the taxpayer failed to signify his intention to elect 8%;
- VAT-registered taxpayers, regardless of the amount of gross sales/receipts and other non-operating income;
- Taxpayers exempt from VAT or other percentage taxes whose gross sales/receipts and other non-operating income exceeded P3M during the taxable year;
- Taxpayers subject to Other Percentage Taxes under Title V of the Tax Code, as amended;
- Partners of a General Professional Partnership (share in distributable net income); and
- Individuals enjoying Income Tax exemption (e.g., Barangay Micro Business Enterprises).
Breach of VAT Threshold
A taxpayer shall automatically be subject to the graduated rates under Section (24)(A)(2), as amended, even if the flat 8% income tax rate option is initially selected when taxpayer’s gross sales/receipts and other non-operating income exceed the VAT Threshold during the taxable year.
In such a case, his income tax shall be computed under the graduated income tax rates and shall be allowed as a tax credit for the previous quarter/s income tax payments under the 8% income tax rate option.
He is also subject to applicable business tax if any.
For example, Ms. P is a prominent independent contractor who offers architectural and engineering services. Since her career flourished, her total gross receipts amounted to P4,250,000 for the taxable year 2020. Her recorded cost of service and operating expenses were P2,150,000 and P1,000,000, respectively. Compute her income tax liability.
a. P220,000
b. P230,000
c. P90,000
d. P330,000
Answer: a. P220,000
1. Compute the taxable income
= Gross Sales/Receipts - Cost of Sales - Operating Expenses
= P4,250,000 - 2,150,000 - 1,000,000
= 1,100,000
2. Compute the income tax due
| Computation | Tax Due | |
First | P800,000 | See bracket over P800,000 but not over P2,000,000 | P130,000 |
Next | 300,000 | (P1,100,000 – 800,000) x 30% | 90,000 |
Total | P1,000,000 | Income Tax Due | P220,000 |
She cannot avail the 8% optional gross income tax because her gross receipts exceeded the VAT threshold of P3,000,000. She is then subject to graduated income tax rates. She is also liable to pay Value Added Tax in addition to income tax.
Mr. J signified his intention to be taxed at 8% income tax rate on gross sales in his Q1 Income Tax Return. He has no other source of income. His total sales for the first three quarters amounted to P3,000,000 with Q4 sales of P3,500,000.
Q1 | Q2 | Q3 | Q4 | |
8% | 8% | 8% | ||
Total Sales | P500,000 | P500,000 | P2,000,000 | P3,500,000 |
Cost of Sales | 300,000 | 300,000 | 1,200,000 | 1,200,00 |
Gross Income | P200,000 | P200,000 | P800,000 | P2,300,000 |
OPEX | 120,000 | 120,000 | 480,000 | 720,000 |
Taxable Income | P80,000 | P80,000 | P320,000 | P1,580,000 |
How much is the income tax payable?
a. P289,200
b. P509,000
c. P490,000
d. P140,000
Answer: a. P289,200
1. Compute the taxable income for the year
= Gross Sales/Receipts - Cost of Sales - Operating Expenses
= 6,500,000 - 3,000,000 - 1,440,000
= 2,060,000
2. Compute the income tax due
| Computation | Tax Due | |
First | P2,000,000 | See bracket over P2,000,000 but not over P8,000,000 | P490,000 |
Next | 60,000 | (P2,060,000 – 2,000,000) x 32% | 19,200 |
Total | P2,060,000 | Income Tax Due | P509,200 |
3. Compute the income tax payment for the previous quarters using the 8% income tax rate
= (gross sales/receipts - 250,000) x 8%
= (3,000,000 - 250,000) x 8%
= 2,750,000 x 8%
= 220,000
4. Compute the income tax payable
= Income tax due - previous quarters payment
= P509,000 - 220,000
= P289,200
The gross receipt exceeds the VAT threshold of P3,000,000. The taxpayer shall be liable to pay income tax under graduated rates pursuant to Section (A)(2)(a) of the Tax Code, as amended.
Taxpayer shall be allowed an income tax credit of quarterly payments initially made under the 8% income tax option computed net of the allowable deduction of P250,000 granted for purely business income.
The taxpayer is likewise liable for business tax, in addition to income tax. For this purpose, the taxpayer is required to update his registration from non-VAT to VAT taxpayer. Percentage tax pursuant to Section 116 of the Tax Code, as amended, shall be imposed from the beginning of the year until taxpayer is liable to VAT. VAT shall be imposed prospectively.
Percentage tax due on the non-VAT portion of the sales/receipts shall be collected without penalty if timely paid on the due date immediately following the month/quarter when the taxpayer ceases to be a non-VAT.
Such election shall be irrevocable, and no amendment of option shall be made for the said taxable year.
Subject to Other Percentage Tax
The option to be taxed at an 8% income tax rate is not available to a VAT-registered taxpayer, regardless of the amount of gross sales/receipt, and to a taxpayer who is subject to Other Percentage Taxes under Title V of the Tax Code, as amended, except those subject under Section 116 of the same Title.
Multiple Choice Question
Mr. X owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000. His cost of sales and operating expenses are P1,000,000 and P600,000, respectively, and with a non-operating income of P100,000. How much is the income tax due?
a. P190,000
b. P130,000
c. P60,000
d. P180,000
Answer: a. P190,000
1. Compute the taxable income
= gross receipts - cost of service - operating expense + nonoperating income
= 2,500,000 - 1,000,000 - 600,000 + 100,000
= 1,000,000
2. Compute the income tax due
| Computation | Tax Due | |
First | P800,000 | See bracket over P800,000 but not over P2,000,000 | P130,000 |
Next | 200,000 | (P1,000,000 – 800,000) x 30% | 60,000 |
Total | P1,000,000 | Income Tax Due | P190,000 |
Failure to Signify 8% Income Tax Rate
Unless the taxpayer signifies the intention to elect the 8% income tax rate in the 1st Quarter Percentage and/or Income Tax return, or on the initial quarter return of the taxable year after the commencement of a new business/practice of the profession, the taxpayer shall be considered as having availed of the graduated rates under Section (A)(2)(a) of the Tax COde, as amended. Such election shall be irrevocable and no amendment of option shall be made for the said taxable year.
Ms. E operates a convenience store while she offers bookkeeping services to her clients. In 2020, her gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. Assuming Ms. E failed to signify her intention to be taxed at 8% income tax rate on gross sales in her initial Quarterly Income Tax Return, and she incurred cost of sales and operating expenses amounting to P600,000.00 and P200,000.00, respectively, or a total of P800,000.00. Compute the income tax due.
a. P10,000
b. P5,000
c. P8,000
d. P7,500
Answer: a. P10,000
1. Compute the taxable income
= Gross Sales/Receipts - Cost of Sales - Operating Expenses
= P1,100,000 - 600,000 - 200,000
= P300,000
2. Compute the income tax due
| Computation | Tax Due | |
First | P250,000 | See bracket over P250,000 but not over P400,000 | P0 |
Next | 50,000 | (P300,000 – 250000) x 20% | 10,000 |
Total | P300,000 | Income Tax Due | P10,000 |
Non-Resident Alien
Non-Resident Alien Not Engaged in Trade or Business is subject to 25% on Gross Income.
Taxation on Mixed-Income
An individual earning compensation income from employment and income from business, practice of profession, and/or other sources aside from employment.
Compensation Income | · Shall be subject to graduated tax rates |
Income from Business or Practice of Profession | · Graduated Income Tax Rates; or · 8% income tax rate based on gross sales/receipts and other non-operating income (in excess of P250,000) in lieu of the graduated income tax rates and percentage tax |
The P250,000 exemption is not applicable to mixed-income earners since it is already incorporated in the first tier of the graduated income tax rates applicable to compensation income.
Graduated Income Tax Rates + 8% Income Tax | Graduated Income Tax Rates in Both Types of Income |
Total tax due shall be the sum of
| Mixed income earner who opted to be taxed under the graduated income tax rates for income from business/practice of profession, shall combined the taxable income from both compensation and business/practice of profession in computing for the total taxable income and consequently, the income tax due. |
Illustration: Mr. M, a Financial Comptroller of J Company, earned annual compensation in 2018 of P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of mandatory contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with gross sales of P2,400,000. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with non-operating income of P100,000.00. Compute his income tax liability if he opted to be taxed at 8% on his income from business.
1. Compute taxable compensation income
= total compensation - non-taxable 13th month pay and other benefits
= 1,500,000 - 90,000
= 1,410,000
2. Compute Income Tax Due on Compensation
First | P800,00 | See bracket over P800,000 but not over P2,000,000 | P130,000 |
Next | 610,000 | (P1,410,000 – 800,000) x 30% | 183,000 |
Total | P1,410,000 | Income Tax Due | P313,000 |
3. Compute Income Tax Due on Business Income
= (gross sales + nonoperating income) x 8%
= (2,500,000 - 250,000) x 8%
= P200,000
4. Total Income Tax Due
= income tax due on compensation + income tax due on business income
= 313,000 + 200,000
= 513,000
The option of 8% income tax rate is applicable only to taxpayer’s income from a business, and the same is in lieu of the income tax under the graduated income tax rates and the percentage under Section 116 of the Tax Code, as amended.
The amount of P250,000 allowed as deduction under the law for taxpayers earning solely from self-employed/practice of the profession is not applicable to mixed-income earners under the 8% income tax rate option. The same is deemed incorporated in the first tier of the graduated income tax rates applicable to compensation income.
Illustration: Assuming Mr. M did not opt for the 8% income tax based on gross sales/receipts and other non-operating income. Compute his income tax liability.
1. Compute Total Taxable Income
= taxable compensation income + taxable bsiness income
= taxable compensation income + gross sales - cost of sales - operating expense + nonoperating income
= 1,410,000 + (2,400,000 - 1,000,000 - 600,000 - 100,000)
= 1,410,000 + 900,000
= 2,310,000
2. Compute Income Tax Due
First | P2,000,00 | See bracket over P2,000,000 but not over P8,000,000 | P490,000 |
Next | 310,000 | (P2,310,000 – 2,000,000) x 32% | 99,200 |
Total | P2,310,000 | Income Tax Due | P589,200 |
The taxable income from both compensation and business shall be combined for purposes of computing the income tax due if the taxpayer chose to use graduated income tax rates.
In addition to the income tax, Mr. M is likewise liable to pay a percentage tax of P72,000, which is 3% of P2,400,000
Taxation of Fringe Benefits
Fringe Benefit
Any goods, service, or other benefit furnished or granted in cash or in-kind by an employer to an employee. Includes but not limited to
- Housing
- Expense Account
- Vehicle of any kind
- Household personnel, such as maid, driver, and others
- Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted
- Membership fees, dues, and other expenses borne by the employer for the employee in social and athletic clubs and similar organizations
- Expenses for foreign travel
- Holiday and vacation expenses
- Educational assistance to the employee or his dependents; and
- Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows
Taxation on fringe benefits depends on the types of employees.
The following fringe benefits are not subject to fringe benefits tax:
- Fringe benefits which are authorized and exempted from tax under special laws;
- Contributions of the employer for the benefit of the employee to retirement, insurance, and hospitalization benefit plans;
- Benefits that are given to the rank and file employees, whether granted under a collective bargaining agreement or not;
- De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
- If the grant of fringe benefits to the employee is required by the nature of, or necessary to the trade, business, or profession of the employer;
- If the grant of the fringe benefit is for the convenience of the employer.
The fringe benefits of rank and file employees are treated as part of compensation income subject to basic income tax and withholding tax on compensation
Fringe Benefits Tax
The Fringe Benefits Tax shall be imposed on the grossed-up monetary value of fringe benefits furnished or granted to an employee (except rank and file employees) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business, or profession of the employer, or when the fringe benefit is for the convenience of or advantage of the employer).
Fringe Benefit Tax = Monetary Value / (1 - FBT Rate) x FBT Rate
The fringe benefits tax (FBT) is a final tax on the employee’s income to be withheld by the employer. The withholding and remittance of FBT shall be made on a calendar quarterly basis.
Note that are certain fringe benefits that are not subject to fringe benefits tax
Grossed-up Monetary Value
The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable tax rates for individual taxpayers.
The grossed-up monetary value represents
- the whole amount of income realized by the employee which includes the net amount of money or net monetary value of the property that has been received; and
- the amount of fringe benefits tax due from the employee which has been withheld and paid by the employer for and on behalf of his employee.
Fringe Benefits Tax Rate
Resident Citizen
For a resident citizen, nonresident citizen, resident alien, a nonresident alien engaged in trade or business, and special aliens, the rate of the fringe benefits tax shall be 35%. Accordingly, the divisor shall be 65% [100% - tax rate of 35%].
Illustration: MRU Company (a domestic employer/company) granted Ms. MHLCO (a Filipino branch manager-employee), in addition to her basic salaries, P5,000 cash per quarter for her personal membership fees at Country Golf Club. How much is the Fringe Benefits Tax?
a. P2,692.31
b. P7,692.31
c. P5,000
d. P1,666.67
Answer: a. P2,692.31
The fringe benefits tax shall be computed as follows:
1. Determine the applicable fringe benefits tax and the corresponding divisors to compute the grossed-up monetary value:
Since the taxpayer is a resident citizen, the applicable rate is 35%. Accordingly, the divisor is 65% (100% - 35%)
2. Compute the grossed-up monetary value
= Monetary value of fringe benefit / 65%
= P5,000 / 65%
= P7,692.31
3. Compute the Fringe benefits tax
= Grossed-up Monetary Value x 35%
= = P7,692.31 x 35%
= P2,692.31
Non-Resident Alien Not Engaged in Trade or Business
For a nonresident alien not engaged in trade or business, the rate of the fringe benefits tax shall be 25%. Accordingly, the divisor shall be 75% [100% - tax rate of 25%].
Illustration: Assuming the employee is a non-resident alien individual not engaged in trade or business within the Philippines, how much is the Fringe Benefits Tax?
1. Determine the applicable fringe benefits tax and the corresponding divisors to compute the grossed-up monetary value:
Since the taxpayer is a non-resident alien individual not engaged in trade or business, the applicable rate is 25%. Accordingly, the divisor is 75% (100% - 25%)
2. Compute the grossed-up monetary value
= Monetary value of fringe benefit / 75%
= P5,000 / 75%
= P6,666.67
3. Compute the Fringe benefits tax
= Grossed-up Monetary Value x 35%
= P6,666.67 x 25%
= P1,666.67
Housing Privilege
Non-Taxable Housing Privilege
Housing privilege of military officials of the Armed Forces of the Philippines (AFP) consisting of officials of the Philippine Army, Philippine Navy, and Philippine Air Force shall not be treated as a taxable fringe benefit in accordance with the existing doctrine that the State shall provide its soldiers with necessary quarters which are within or accessible from the military camps so that they can be readily on-call to meet the exigencies of their military service.
A housing unit situated inside or adjacent to the premise of a business factory shall not be considered as a taxable fringe benefit. A housing unit is considered adjacent to the premise if it is located within 50 meters from the perimeter of the business premises.
Temporary housing of an employee who stays in a housing unit for three months or less shall not be considered as a taxable fringe benefit.
Monetary Valuation
|
Monetary
Valuation |
|
|
Lease
of Residential Property for the residential use of employees |
50% of
lease payments |
|
Assignment
of residential property owned by employer for use of employees |
5%
(Fair Market Value or Zonal Value, whichever is higher) x 50% |
|
Purchase
of residential property in installment basis for the use of the employee
|
5% x
acquisition cost exclusive of interest x 50% |
|
Purchase
of residential property and ownership is transferred in the name of the
employee |
FMV or
ZV, whichever is higher |
Lease of Residential Property
X Corp. assigned Mr. Y to manage its branch office in Oriental Mindoro. The company provided for the residential house of the manager paying a monthly rental of P75,000. How much is the monthly fringe benefits tax thereon?
a. P57,692.31
b. P14,423.08
c. P37,500
d. P20,192.31
Answer: d. P20,192.31
1. Compute the monetary benefit
= lease payments x 50%
= 75,000 x 50%
= 37,500
2. Compute the grossed-up monetary value
= monetary value / 65%
= 37,500 / 65%
= 57,692.31
3. Compute the fringe benefit tax
= grossed-up monetary value x 35%
= 57,692.31 x 35%
= 20,192.31
Assignment of Residential Property
F Corp. furnished and granted the use of its Maui condominium to its Executive Vice-President. The fair market value of the property is P5,000,000 while the acquisition cost is P3,500,000. How much is the fringe benefits tax?
a. P67,307.69
b. P192,307.69
c. P125,000
d. P48,076.92
Answer: a. P67,307.69
1. Compute the monetary value
= 5% x Fair Market Value or Zonal Value, whichever is higher x 50%
= 5% x P5,000,000 x 50%
= 125,000
2. Compute the grossed-up monetary value
= monetary value / 65%
= 125,000 / 65%
= 192,307.69
3. Compute the fringe benefit tax
= grossed-up monetary value x 35%
= 192,307.69 x 35%
= 67,307.69
Expense Account
In general, expenses incurred by the employee but which are paid by his employer shall be treated as a taxable fringe benefit, except when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable tot he employee.
Expenses paid for by the employees but reimbursed by his employer shall be treated as taxable benefits except only when the expenditures are duly receipted for and in the name of the employer and the expenditures do not partake the nature of a personal expense attributable to the said employee.
Personal expenses of the employee (like purchases of groceries for the personal consumption of the employee and his family members) paid for or reimbursed by the employer to the employee shall be treated as taxable fringe benefits of the employee whether or not the same are duly receipted for in the name of the employer.
Representation and transportation allowances which are fixed in amounts and are regularly received by the employees as part of their monthly compensation income shall not be treated as taxable fringe benefits but the same shall be considered as taxable compensation income subject to the tax imposed under Section 24 of the Code.
Vehicle of any kind
If the employer purchases the motor vehicle in the name of the employee, the value of the benefit is the acquisition cost thereof. The monetary value of the fringe benefit shall be the entire value of the benefit, regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer.
If the employer provides the employee with cash for the purchase of a motor vehicle, the ownership of which is placed in the name of the employee, the value of the benefits shall be the amount of cash received by the employee. The monetary value of the fringe benefit shall be the entire value of the benefit regardless of whether the motor vehicle is used by the employee partly for his personal purpose and partly for the benefit of his employer unless the same was subjected to a withholding tax as compensation income under RR No. 2-98.
|
Monetary
Valuation |
|
|
Purchased
in the name of the employee |
Acquisition
cost |
|
Cash is
given to an employee to purchase in his own name |
Cash
received by the employee |
|
Purchase
on installment, in the name of the employee |
Acquisition
cost exclusive of interest |
|
Employee
shoulders part of the purchase price, ownership in the name of the employee |
Amount
shouldered by the employer |
|
Employer
owns and maintains a fleet of motor vehicles for use of the business and of
employees |
Acquisition
cost/5 x 50% |
|
Employer
leases and maintains a fleet for the use of the business and of employees |
50% of
rental payment |
For example, M Corp. owns a fleet of motor vehicles. In 2020, one of the cars which was acquired at a cost of P400,000 was allowed as a service vehicle by one of its Officials. During the year, its book value amounted to P375,000. How much was the fringe benefits tax due thereon?
a. P40,000
b. P61,538.46
c. P21,538.46
d. P80,000
Answer: c. P21,538.46
1. Compute the monetary value
= Acquisition cost / 5 x 50%
= P400,000 / 5 x 50%
= 40,000
2. Compute the grossed-up monetary value
= Monetary value / 65%
= 40,000 / 65%
= 61,538.46
3. Compute the Fringe Benefit Tax
= grossed-up monetary value x 35%
= 61,538.46 x 35%
= 21,538.46
Household Expenses
Expenses of the employee which are borne by the employer for household personnel, such as salaries of household help, personal driver of the employee, or other similar personal expenses (like payment for homeowners association dues, garbage dues, etc.) shall be treated as fringe benefits.
Which of the following household expenses of the employee borne by the employer shall not be treated as a taxable fringe benefit?
a. Salaries of the household help
b. Salaries of the personal driver
c. Payment for homeowners association dues, garbage dues
d. None of the choices
Answer: d. None of the choices
Interest on Loan
If the employer lends money to his employee free of interest or at a rate lower than 12%, such interest foregone or the difference of the interest assumed by the employee and the rate of 12% shall be treated as a taxable fringe benefit.
The benchmark interest rate of twelve percent (12%) shall remain in effect until revised by subsequent regulation.
This regulation shall apply to installment payments or loans with an interest rate lower than 12% starting January 01, 1998.
For example, Mr. G, a supervisory employee of MWCI borrowed P350,000 from the company payable in one year through salary deduction. If the corporation is charging 4% interest per annum on the loan, how much is the fringe benefits tax expense?
a. P43,076.92
b. P15,076.92
c. P42,000
d. P28,000
Answer: b. P15,076.92
1. Compute the interest at benchmark rate
= Principal amount x 12%
= 350,000 x 12%
= 42,000
2. Compute the actual interest payment
= Principal amount x 4%
= 350,000 x 4%
= 14,000
3. Determine the value of the benefit
= interest at benchmark – actual interest payment
= 42,000 – 14,000
= 28,000
4. Compute the grossed-up monetary value
= value of the benefit / 65%
= 28,000 / 65%
= 43,076.92
5. Compute the fringe benefit tax
= grossed-up monetary value x 35%
= 43,076.92 x 35%
= 15,076.92
Membership Fees
Membership fees, dues, and other expenses borne by the employer for his employee, in social and athletic clubs or other similar organizations shall be treated as taxable fringe benefits in full.
One of the following is a taxable benefit:
a. De minimis benefits
b. Fringe benefits necessary to the trade, business, or profession or for the convenience or advantage of the employer.
c. Membership fees, dues, and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations.
d. Monetized value of vacation and sick leave credits paid to government officials and employees
Answer: d
Expenses for Foreign Travel
Reasonable business expenses which are paid for by the employer for the foreign travel of his employee for the purpose of attending business meetings or conventions shall not be treated as taxable fringe benefits. In this instance, inland travel expenses (such as food, beverages, local transportation) except lodging cost in a hotel (or similar establishments) amounting to an average of US$300 or less per day, shall not be subject to fringe benefits tax. The expenses should be supported by documents proving the actual occurrences of the meetings or conventions. The cost of economy and business class airplane tickets shall not be subject to a fringe benefits tax. However, thirty percent of the cost of the first-class airplane ticket shall be subject to a fringe benefits tax.
In the absence of documentary evidence that the employee's travel abroad was in connection with business meetings or conventions, the entire cost of the ticket, including the cost of hotel accommodations and other expenses incident thereto shouldered by the employer, shall be treated as a taxable fringe benefit. The business meetings shall be evidenced by official invitations/communications from the host organization or entity abroad. Otherwise, the entire cost thereof shouldered by the employer shall be treated as taxable fringe benefits of the employee.
Traveling expenses that are paid by the employer for the travel of the family members of the employee shall be treated as taxable fringe benefits of the employee.
|
Not
Subject to Fringe Benefit Tax |
Subject
to Fringe Benefit Tax |
|
Reasonable
business expenses paid for by the employer for the foreign travel of his
employee for the purpose of attending business meetings or conventions |
Traveling
expenses which are paid by the employer for the travel of the family members
of the employee |
|
Inland
travel expenses (food, beverages, local transportation) except lodging cost
in a hotel amounting to an average of US$300 or less per day |
In the
absence of documentary evidence showing that the travel was in connection
with business meetings or conventions |
|
Cost of
Economy and Business class airplane ticket |
30% of
the cost of a first-class airplane ticket |
Holiday and Vacation Expenses
Holiday and vacation expenses of the employee borne by his employer shall be treated as taxable fringe benefits.
In May 2021, a non-stock, non-profit university provided a 3-day vacation trip to Boracay Island to the university’s Executive Vice President. The total expenses incurred by the school was P200,000. How much is the Fringe Benefits Tax?
a. P107,692.31
b. P307,692.31
c. P70,000
d. P76,923.08
Answer: a. P107,692.31
= P200,000 / 65% x 35%
= 307,692.31 x 35%
= 107,692.31
Educational Assistance
- The cost of the educational assistance to the employee which is borne by the employer shall be treated as a taxable fringe benefit.
- The cost of educational assistance extended by the employer to the dependents of an employee shall be treated as taxable fringe benefits of the employee.
A scholarship grant to the employee by the employer shall not be treated as a taxable fringe benefit if
- The education or study involved is direct with the employer’s trade, business, or profession and
- There is a written contract between them that the employee is under obligation to remain in the employ of the employer for a period of time that they have mutually agreed.
- The educational assistance extended to dependents was provided through a competitive scheme under the scholarship program of the company
Life or Health Insurance
The cost of life or health insurance and other non-life insurance premiums borne by the employer for his employee shall be treated as a taxable fringe benefit, except the following:
- contributions of the employer for the benefit of the employee, pursuant to the provisions of existing law, such as under the Social Security System (SSS) or under the Government Service Insurance Systems (GSIS) or similar contributions arising from the provisions of any other existing law; and
- the cost of premiums borne by the employer for the group insurance of his employees.
Taxation of Passive Income
Passive Income could be subject to final tax, basic income tax, or exempt from income tax.
Final tax is the term used to describe the tax on earnings that been subjected to complete tax payment at the source.
Requisites on Imposition of Final Tax
- Derived from sources within
- Passive income
- Specifically provided in the NIRC
- Not exempted
- Not an exclusion
Here are the passive incomes that could be subject to final tax.
- Interest income
- Royalty fees
- Prizes and other winnings
- Dividend income
- Informer's Reward
Taxation of Interest Income
Unless exempted by law, interest income received by the taxpayer, whether or not usurious, is subject to income tax.
Final Income Tax | Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements |
Basic (Net) Income Tax | Interest earned abroad by a resident citizen, those engaged in trade or business of lending, financing, or extending credits that earn interest eventually regarded as their profit. |
25% on gross income | Interest earned by nonresident alien not engaged in trade or business |
Exempt from Tax | (1) Interest on long-term deposit; (2) Interest on EFCDS by nonresidents; (3) Interest received by a non-resident citizen, resident alien, nonresident alien engaged in a trade or business and non-resident alien not engaged in trade or business abroad |
Final Tax on Interest Income
Individuals
Interest from any currency bank deposit, yield, or any other monetary benefit from deposit substitutes, trust funds, and similar arrangements is subject to a final tax at the rate of 20% if received by a resident citizen, non-resident citizen, or resident alien.
If received by a non-resident alien not engaged in a trade, the final tax is 25%.
Interest under the expanded foreign currency deposit system is subject to a final at the rate of 15% if received by a resident citizen or resident alien; exempt if received by non-resident individuals.
Corporation
Interest from any currency bank deposit, yield, or any other monetary benefit from deposit substitutes, trust funds, and similar arrangements is subject to a final tax at the rate of 20% if received by a domestic corporation or a resident foreign corporation.
If received by a non-resident foreign corporation, the final tax is 25% effective January 1, 2021. Before January 1, 2021, a non-resident foreign corporation is subject to 30%.
Interest under the expanded foreign currency deposit system is subject to a final at the rate of 15% if received by a domestic corporation or a resident foreign corporation upon the effectivity of the CREATE (April 11, 2021). Before the effectivity of the CREATE, a resident foreign corporation is subject to 7.5% final tax on interest under the expanded foreign currency deposit system.
Passive Income | RC, NRC, RA, DC, RFC | NRAETB | NRANETB, NRFC |
Interest from any currency bank deposit, yield, or any other monetary benefit from deposit substitutes, trust funds, and similar arrangements | 20% | 20% | 25% |
15% (NRC, Exempt) | Exempt | Exempt |
Multiple Choice Question
If the gross amount is given in the problem
Mr. A earned P100,000 interest income from BDO. How much is the final income tax due on the interest?
a. P20,000
b. P25,000
c. P30,000
d. P15,000
Answer: a. P20,000
Multiply the gross amount by the final tax rate
= interest income x 20%
= P100,000 x 20%
= P20,000
The tax base is the gross amount, which includes the amount received by the payee and the final tax withheld by the payor.
If the net amount is given in the problem
When Mr. N checked his bank statement, he noticed that he received P80,000 interest income from BPI as shown on the net amount added to his account. How much is the final tax withheld by the bank from such interest income?
a. P20,000
b. P25,000
c. P30,000
d. P15,000
Answer: a. P20,000
1. Compute the gross amount of the interest
= interest income x 20%
= interest received / (1-20%) x 20%
= P80,000/80% x 20%
2. Compute the final tax
= P100,000 x 20%
= P20,000
If the problem provides interest income, net of final tax, remember to compute the gross amount by dividing the net amount by 80% or applicable divisor.
Interest on Long-Term Deposit
The interest income shall be exempt from income tax if the interest is earned on long-term deposit or investment certificates (LTDIC) issued by banks (e.g., savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments, which have a maturity of 5 years or more).
This exemption applies only to individual taxpayers.
Passive Income | RC, NRC, and RA | NRAETB | NRANETB |
On long-term deposit or investment certificates (LTDIC) in banks (e.g., savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments, which have maturity of 5 years or more) | Exempt | Exempt | 25% |
LTDIC
The term 'long-term deposit or investment certificates' shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP.
Pretermination Subject to Final Tax
Should LTDIC holder pre-terminate LTDIC before the 5th year, a final tax shall be imposed on the entire income based on the remaining maturity.
- Four years to less than five years: 5%
- Three years to less than four years: 12%
- Less than three years: 20%
Passive Income | RC, NRC, and RA | NRAETB | NRANETB |
If pre-terminated before the 5th year, a final tax shall be imposed on the entire income | |||
4 years to less than 5 years | 5% | 5% | 25% |
3 years to less than 4 years | 12% | 12% | 25% |
less than 3 years | 20% | 20% | 25% |
Multiple Choice Question
B invested P5,000,000 on long-term time deposits and earns 10% per year with a maturity of 6 years. After 3 years and a half, B needed the money. He pre-terminated the investments and received P5,500,000 plus interest. How much is his income tax liability arising from this investment?
a. P270,000
b. P300,000
c. P120,000
d. P150,000
Answer: a. P270,000
1. Compute the gain on retirement
= retirement price - cost of investment
= 5,500,000 - 5,000,000
= 500,000
2. Compute the total interest for 3.5 years
= principal x interest rate x years
= 5,000,000 x 10% x 3.5
= 1,750,000
3. Compute the total income
= gain on retirement + interest income
= 500,000 + 1,750,000
= 2,250,000
4. Compute the final tax
= total income x applicable rate
= 2,250,000 x 12%
= P270,000
Interest Income under EFCDS
Interest under the expanded foreign currency deposit system is subject to a 15% final tax if earned by resident individuals (resident citizens and resident aliens) and domestic corporations.
It is subject to 7.5% (15% under the CREATE) if earned by resident foreign corporations.
Non-resident taxpayers are exempt from final tax on interest under the expanded foreign currency deposit system.
Expanded Foreign Currency Deposit Unit
Expanded Foreign Currency Deposit Unit shall refer to a unit of a local bank or of a local branch of a foreign bank authorized by the BSP to engage in foreign currency-denominated transactions, pursuant to the provisions of Republic Act No. 6426, as amended.
Treatment of Joint Accounts under Expanded Foreign Currency Deposit
If a bank account is jointly in the name of a non-resident citizen such as an overseas contract worker, or Filipino seaman, and his/her spouse or dependent who is a resident in the Philippines, how should the Final Tax be computed?
50% of the interest income from such bank deposit shall be treated as exempt while the other 50% shall be subject to FWT of 15%
Taxation of Royalties
Final Income Tax | (1) Royalties, in general, are subject to 20% final tax; (2) Royalties on books as well as other literary works and musical compositions received by a resident citizen, non-resident citizen, resident alien, non-resident alien engaged in trade or business are subject to 10% final tax. |
Basic (Net) Income Tax | (1) When an entity is engaged in the business of developing intellectual property and selling it on a regular basis, the gain derived therefrom is considered as active business income, subject to basic income tax; (2) Royalties earned abroad by a resident citizen |
25% on gross income | Royalties earned by nonresident alien not engaged in a trade or business and nonresident foreign corporation (under CREATE) |
Exempt from Tax | Royalties expressly provided for by special laws, royalties received by nonresident citizens, resident alien, nonresident alien engaged in a trade or business and non-resident alien not engaged in trade or business abroad |
Mr. H writes various novels, then usually sells his copyright over these novels to another person. On one occasion, Mr. H sold one of his novels to J Corp. for P10,000,000. How much is the final tax from this transaction?
a. P0
b. P1,000,000
c. P2,500,000
d. P1,500,000
Answer: a. P0
The above transaction falls under business income since Mr. H. usually sale his intellectual property as provided in the problem.
Taxation of Prizes and Winnings
Prizes exceeding P10,000; PCSO and lotto winning exceeding P10,000 received by RC, NRC, RA, NRAETB (under CREATE) | |
Basic (Net) Income Tax | (1) Prizes amounting to P10,000 and below are subject to regular income tax; (2) Prizes received by a resident citizen abroad are subject to regular income tax; (3) All prizes and winnings received by a corporation shall be subject to regular income tax. |
25% on gross income | Prizes received by non-resident alien not engaged in trade or business |
Exempt from Income Tax | (1) PCSO and lotto winnings not exceeding P10,000 received by RC, NRC, and RA, |
| Exclusion from Gross Income (Miscellaneous) | (4) Prizes and awards primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements; (5) awards in sports competition |
Final Tax on Prizes and Winnings
Prizes exceeding 10,000 and other winnings (regardless of the amount) are subject to 20% final tax. If received by non-resident aliens not engaged in a trade or business, the applicable rate is 25%.
Passive Income | RC, NRC, and RA | NRAETB | NRANETB |
Prizes exceeding 10,000 | 20% | 20% | 25% |
Prizes 10,000 and below | Sec. 24(A) | Sec. 24(A) | 25% |
Other winnings (except PCSO and Lotto winning not exceeding P10,000) | 20% | 20% | 25% |
PCSO and Lotto winnings not exceeding P10,000 | Exempt | Exempt | 25% |
PCSO and Lotto winnings exceeding P10,000 | 20% | Exempt (20% under CREATE) | 25% |
Prizes and Winnings not Subject to Final Tax
- Prizes amounting to P10,000 or less (subject to Regular Income Tax);
- PCSO and Lotto Winnings not exceeding P10,000 received by RC, NRC, RA, NRAETB (Exempt);
- PSCO and Lotto Winnings received by NRAETB are tax-exempt regardless of the amount (prior to the CREATE);
- Prizes and awards primarily made in recognition primarily of religious, charitable, scientific, educational, artistic, literary, or civic achievement;
- Prizes and awards in sports competitions.
Taxation of Dividends
Final Income Tax | (1) Cash/property dividends from domestic corporation, (2) share in distributable net income after a tax of a partnership (other than GPP) |
Basic (Net) Income Tax | (1) Dividends received abroad by a resident citizen, (2) capital gains from liquidating dividends, (3) share in the net income of a GPP, (4) dividends derived from sources without, (5) dividends from foreign corporations. |
25% on gross income | Dividends received by non-resident alien not engaged in trade or business |
Exempt from Tax | Dividends received by nonresident citizens, resident alien, nonresident alien engaged in trade or business, and non-resident alien not engaged in trade or business abroad |
Dividends Subject to Final Tax
Cash and/or property dividends actually or constructively received from
- Domestic corporation
- Joint-stock company
- Insurance or mutual fund companies
- Regional operation headquarters of multinational companies
- Partnership (other than a GPP)
- Association,
- Joint Account,
- Joint Venture or Consortium
Passive Income | RC, NRC, and RA | NRAETB | NRANETB |
Cash/Property from a Domestic Corporation, etc. | 10% | 20% | 25% |
Share of an individual in the distributable net income after tax of a PARTNERSHIP (other than a general professional partnership) | 10% | 20% | 25% |
Liquidating Dividend
Liquidating dividends are treated as returns of the investor’s cost of investment.
Liquidating dividends are returns of capital, hence, not subject to income tax. But when the amount received in liquidation exceeds the initial amount of capital invested, the excess is treated as income, which is subject to regular tax rates.
Dividends from Foreign Corporation
Dividends received from foreign corporations and gains realized from the sale of foreign shares by both individual resident citizens and domestic corporations are subject to regular income tax, i.e. graduated income tax for individuals and regular corporate income tax of 30% for domestic corporations.
Net Income of a Business Partnership
A business partnership is considered a corporation for taxation purposes. Its net income available for distribution is taxable as dividends. Moreover, the taxable income of a partnership shall be deemed to have been actually or constructively received by the partners.
Hence, such net income of a taxable partnership shall be subject to final tax even if not actually distributed to the partners.
Illustration: Z is a business partner in XYZ Partnership, which is engaged in trading business. The three partners divide the profit equally. In 2020, the partnership earned P9,000,000, but instead of distributing the income to partners, it invested the amount into a 7-year deposit substitute issued by banks. How much is the final income tax attributable to the share of Partner Z in 2020?
a. P300,000
b. P900,000
c. P600,000
d. P250,000
1. Compute Z's share in the net income of the partnership
= partnership's net income / 3
= 9,000,000 / 3
= 3,000,000
2. Compute the final tax attributable to Z's share
= 3,000,000 x 10%
= 300,000
Taxation of Capital Gains
There are three kinds of capital gains for purposes of taxation:
- Capital Gain on the Sale of Shares of Stock of a Domestic Corporation not listed and traded through a local stock exchange
- Capital gains on the Sale of Real Property located in the Philippines
- Other capital gains (subject to regular income tax)
Only the first two are subject to capital gains tax. Other capital gains are subject to regular income tax.
Passive Income | RC, NRC, and RA | NRAETB | NRANETB |
Capital gains from sale of shares of stock of a Philippine corporation not traded in the stock exchange. | 15% | 15% | 15% |
Capital gains from sale of real property situated in the Philippines | 6% | 6% | 6% |
Capital Gains on Sale of Shares Not Traded Through PSE
Final Tax of 15% is imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange, or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. This shall apply to both listed and unlisted shares not traded through the Local Stock Exchange.
All individuals are subject to a capital gains tax of 15%. Under CREATE, all corporations are subject to a capital gains tax of 15%.
All publicly-listed companies that fail to meet the MPO after the lapse of the grace period shall be subject to a capital gains tax of 15%.
Illustration: Mr. K purchased 1,000 unlisted shares of P Corp. amounting to P1,500,000. After 6 months, he sold these shares at P2,500,000. Compute the income tax liability.
1. Compute the Net Capital Gain
= selling price - cost of the shares
= 2,500,000 - 1,500,000
= 1,000,000
2. Compute the Capital Gains Tax
= 1,000,000 x 15%
= 150,000
Persons Liable
- Individual taxpayer, whether citizen or alien;
- Corporate taxpayer, whether domestic or foreign; and
- Other taxpayers not falling under (a) and (b) above, such as estate, trust, trust funds, and pension funds, among others.
Persons not Liable
- Dealer in securities, regularly engaged in the buying and selling of securities
- An entity exempts from the payment of income tax under existing investment incentives and other special laws
- An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control
- A government entity or government-owned or controlled corporation selling real property
- If the disposition of the real property is gratuitous in nature
- Where the disposition is pursuant to the CARP law
Net Capital Gain
"Net Capital Gains" means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. [Sec 2(o) of RR 6-2008]
Gains or losses from the sale are determined by deducting the seller’s cost basis for the shares sold or disposed of plus expenses of sale/disposition, if any, from the amount of consideration contracted to be paid.
Portion subject to Donor’s Tax
Under current rules, the selling price cannot be lower than the fair market value of the shares sold. Otherwise, the difference may be subject to the donor’s tax under certain circumstances.
Fair Market Value of Shares
Common shares | the book value of common shares on the latest available financial statements duly certified by an independent Certified Public Accountant prior to the date of sale but not earlier than the immediately preceding year. Adjusted net asset method is no longer applicable. |
Preferred shares | liquidation value, which is equal to the redemption price of the shares as of the balance sheet date nearest to the transaction date, including any premium and cumulative preferred dividends in arrears. |
In case there are both common and preferred shares, the book value per common share is computed by deducting the liquidation value of the preferred shares from the total equity of the corporation. |
Sale of Real Property Held as Capital Asset
Sale of real properties located in the Philippines classified as capital assets (except certain transactions) are subject to capital gains tax of 6% based on whichever is the higher of
- gross selling price or
- fair market value
For purposes of computing any internal revenue tax, the fair market value of the property shall be, whichever is the higher of
- The fair market value as determined by the Commissioner
- The fair market value as shown in the schedule of values of the Provincial and City Assessors
The tax base is not the actual gain, but the presumed gain on the sale of real property. All individuals are subject to capital gains tax on the sale of real property classified as a capital asset.
Persons Liable and Transactions Affected:
- Individual taxpayers, estates, and trusts
- Sale or exchange or other disposition of real property considered as capital assets.
- Includes "pacto de retro sale" and other conditional sales.
- Domestic Corporation for sale or exchange or disposition of lands and/or building which are not actually used in business and are treated as a capital asset.
Effect of Non-Payment
No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner of his duly authorized representative has certified that such transfer has been reported, and the capital gains tax imposed, if any, has been paid.
Capital Gains Tax Even if Sold at Loss
The capital gains tax imposed on sale of real property is still payable despite the fact that the property is sold at a loss because the tax is based on the gross selling price.
Disposition to Government
In case of dispositions of real property made by individuals to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations, the individual has the option to be taxed under
- Section 24(A), basic income tax
- Section 24(D)(1), capital gains tax at 6%
Sale of Real Property Exempt from Capital Gains Tax
Full Exemption
When all of the following requisites are present, the individual taxpayer shall be exempt from income tax:
- Sale or disposition of principal residence by natural persons
- The proceeds which are fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of sale or dispositions
- Historical cost or adjusted basis of real property sold or disposed of shall be carried over to the new principal residence built or acquired
- The Commissioner shall have been duly notified by the taxpayer within 30 days from the date of sale or disposition through a prescribed return or his intention to avail of the tax exemption
- The said tax exemption can only be availed of once every ten years
Illustration: On August 15, 2020, Mr. C sold a 500 sqm. Residential house for P3,000,000. The house was acquired in 2002 for P2,000,000. On the date of sale, the fair market value of the house as shown in the real property declaration was P2,500,000 and the assessed value amounted to P2,200,000. The zonal value was P7,000 per sqm. If the proceeds were utilized in acquiring a new principal residence, how much is the capital gains tax?
a. P0
b. P210,000
c. P90,000
d. P115,000
Answer: a. P0
The capital gains tax is P0 since the subject of the sale is a residential house, which is presumably the principal place of residence by the individual taxpayer. Moreover, the proceeds are fully utilized in acquiring a new principal residence.
Partial Exemption
If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax.
Illustration: Ms. J sold her principal residence for P5,000,000 when its fair market value was P6,000,000. The house was purchased five years ago for P3,000,000. Out of the proceeds of P5,000,000, Janet utilized the P4,000,000 for the purchase of a new residential house. The capital gains tax on the sale is
a. P900,000
b. P60,000
c. P360,000
d. P72,000
Answer: d. P72,000
1. Compute the taxable portion
= unutilized amount / gross selling price x GSP or FMV, whichever is higher
= 1,000,000 / 5,000,000 x 6,000,000
= 1,200,000
If the selling price is higher than the fair market value, the unutilized portion is considered to be the taxable portion.
2. Compute the capital gains tax
= taxable portion x 6%
= 1,200,000 x 6%
= P72,000
Alternatively,
= 1/5 x P6,000,000 x 6%
= P72,000
