INDIVIDUAL INCOME TAXATION

Classification of Individual Income Taxpayers

1) Individuals
a) Citizens
i) Resident citizen
 Filipino citizen residing in the Philippines
ii) Non-resident citizen
 Citizen who establishes the fact of his physical presence abroad with a
definite intention to reside therein
 Filipino citizen staying abroad for a period of at least 183 days
b) Aliens
i) Resident alien
 Residing in the Philippines and is not a citizen thereof
 Without definite intention as to his stay
 For a definite purpose which in its nature would require an extended
stay and makes his home temporarily in the Philippines
ii) Non-resident alien engaged in business
 Alien who stayed in the Philippines for more than 180 days
iii) Non-resident alien NOT engaged in business
 Alien who stayed in the Philippines for 180 days or less.

*Intention will prevail over length of stay

Source of Taxable Tax Base Tax Rates

Income
Within Without
RC   Taxable net income Progressive tax rates
NRC  Taxable net income Progressive tax rates
RA  Taxable net income Progressive tax rates
NRA-ETB  Taxable net income Progressive tax rates
NRA-NETB  Gross income 25%
Special individual
taxpayer:
a. Aliens and Filipinos
employed by RHQs and Gross income 15%
ROHQs

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Tax model for individuals

Compensation income Business / practice of Mixed income

profession

Gross compensation income P Gross income from P Gross compensation income P xx

xx xx Add: Net income from
Less: Personal exemptions xx business / profession business / profession
Taxable compensation income Less: Deductions xx
P xx xx Less: Personal exemptions (xx)
Taxable income Taxable income
P xx P xx

Situs of Income

Types of Income Place of taxation (situs)

Interest Income Debtor’s residence
Royalties Where the intangible is employed
Rent Income Location of the property
Service Income Place where the service is rendered
Domestic corporation:
Within the Philippines
Foreign corporation:
a) Resident foreign corporation –Depends on pre-dominance test:
Dividends  At least 50%, the portion of the dividend corresponding to
the Philippine gross income ratio is earned within
 Less than 50%, the entire dividends received is earned
abroad
b) Non-resident foreign corporation – earned abroad

Real property:
Location of the property

Domestic shares of stock:

Gain on Sale of
Within the Philippines
Properties
Personal property:
Place of Sale

Place of Purchase Place of Sale Income is earned

Within Within Within
Merchandising Within Without Without
Without Within Within
Without Without Without

Production Distribution Income is earned

Manufacturing
Within Within Within

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Without Without Without

Within Without Within and Without
Without Within Within and Without
Mining and Farming Location of mine and farm

Mode of Claiming Deductions from Gross Income

1. Itemized Deductions

Taxpayers list every item of business expense they claim as deductions.

2. Optional Standard Deductions (OSD)

The allowable deduction under OSD is presumed as a percentage of gross sales or
gross receipts for individuals and gross income for corporate taxpayers. Under this type
deduction, there is no need to support every item of expense. However, the taxpayer still
has a responsibility to deduct withholding tax on certain income payments.

EMPLOYED TAXPAYERS: THE SUBSTITUTED FILING OF TAX RETURN

Conditions:
1. The employee received purely compensation income during the year.
2. The employee received the income from only one employer in the PH during the
taxable year.
3. The amount of tax due from the employee at the end of the year equals the amount
of tax withheld by the employer
4. The employee’s spouse also complies with all 3 conditions stated
5. The employer files the annual information return.
6. The employer issues BIR Form No. 2316 to each employee.

Inclusions in gross income subject to regular tax

-items of gross income not subject to final tax or capital gains tax
Additional Notes:
Capital Gains/Losses
-capital gains/losses not subject to CGT is subject to regular tax
Holding period rule

Taxpayer Not more than 1 year More than 1 year

Individual 100% 50%
Corporate 100% 100%

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Dividends from foreign corporation

Dividends from domestic corporations are the only ones subject to final tax. As such, dividends
from foreign corporations (besides liquidating and stock dividend) are subject to regular tax.
Partner’s distributable share in net income of GPP
The net income of a GPP is not taxable since they are merely pass-through entities. However,
the partner’s share in the net income will be subject to regular tax.
Income distribution from taxable estates or trusts
Income from taxable estates or trusts that were not previously subjected to CGT or Final tax
shall be added to the gross income of the recipient.
Reimbursement of expenses
Reimbursement of expenses by the customer or client will be subject to regular tax
Cancellation of debt
Cancellation of debt by a creditor in consideration of service or goods will be subject to regular
tax.

Exclusions from gross income

Exclusions vs. Deductions
Exclusions are not included in the items of gross income reportable in the income tax return
while deductions are initially included but deducted in the latter part of the income tax return.
Items not included in gross income:
1. Proceeds of life insurance
2. Amount received by insured as return of premium
3. Gift, bequest, devise, or descent.
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Income in the Philippines of foreign government or foreign GOCC’s
8. Income of the government and its political subdivisions
9. Prizes and awards exempt from income tax
10. Contribution to GSIS, SSS, PhilHealth, Pag-Ibig, and union dues
11. Contributions to Personal Equity Retirement Account (PERA)
12. PERA investment income and PERA distributions

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13. 13th month pay and other benefits not exceeding P82,000
14. Gains from sale of bonds, debentures or certificates of indebtedness with maturity more
than 5 yrs.
15. Gain from redemption of shares in mutual funds
16. Other exempt income under NIRC and special laws

1.- 2. Proceeds of life insurance and Amounts received by the insured as a return of
premium
These are considered as a return of capital.
3. Gift, bequest, devise, or descent
This is subject to transfer tax. However, income derived after the transfer of the property
is subject to income tax.
4. Compensation for injuries and sickness
Since health is an item of infinite value any amount received to compensate for injuries
and sickness is a return of capital. However, the amount received to compensate for the
loss of salary is subject to income tax.
5. Income exempt under treaty
Treaty agreements override provisions of the revenue tax.
6. Retirement benefits, pensions, gratuities and other benefits
Requisites to avail the retirement benefits exclusion:
a) First time availment of retirement benefit exclusion
b) The employee must have been in service of the employer for 10 cumulative years
c) The retiring employee is at least 50 years of age
d) The employer maintains a reasonable private benefit plan. The plan must also be a
trusteed plan.

Other Benefits:
1. Separation or termination pay
Requisites to avail separation or termination exclusion:
a) Must be due to job-threatening sickness, deaths, or other physical disability; and
b) Must be due to any cause beyond the control of the employee
*doesn’t extend to backwages or illegal deduction paid upon termination and
terminal leave pay or the payment of accumulated unused leave credits.
*the employee or his heirs shall request for a ruling or certificate of exemption
(CTE) from the BIR and shall be filed to the RDO of the employer.

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2. SSS Benefits, retirement gratuities, and other similar benefits from foreign
government agencies and other institutions, private or public received by resident, non-
resident citizen or aliens who come to settle permanently in the Philippines.
3. United States Veteran Administration administered benefits
4. SSS and GSIS benefits

7. Income in the Philippines of foreign government or foreign GOCC’s

Exempt under the exemption doctrine of international comity.
8. Income of the government and its political subdivisions
Generally the government is not taxable because of their public service nature. However
taxation still applies when they engage in income-producing activities which are
commercial or proprietary in nature. This exemption does not extend to GOCC’s.

9. Prizes and awards exempt from income tax

Prizes and awards in recognition of religious, charitable, scientific educational, or civic
achievements if the recipient was selected without any action from his part and if he is
not required to render substantial future service.
Prizes and awards in sports competition granted to athletes sanctioned by their national
sports competition.
10. Contribution to GSIS, SSS, PhilHealth, HDMF, and union dues
The exemption only applies to mandatory monthly contributions
11. Contributions to Personal Equity Retirement Account (PERA)
Besides the exclusion from gross income PERA contributors are also allowed to claim
5% of their PERA contributions as tax credit against any internal revenue taxes
12. PERA investment income and PERA distributions
These are exempt from all types of taxes.
13. 13th month pay and other benefits not exceeding P82,000
Discussed in Compensation income
14. Gains from sale of bonds, debentures or certificates of indebtedness with maturity
more than 5 yrs.
Gain does not include the accrued interest earned from the sale.
15. Gain from redemption of shares in mutual funds
Intended to mitigate double taxation.
16. Other exempt income under the NIRC and Special Laws

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INDIVIDUAL INCOME TAXATION

1) Minimum wage and other benefits of minimum wage earners

2) Income of barangay micro-business enterprises (BMBE) act

To be exempt the total assets must not exceed 3,000,000 (excluding the land where
the entity’s office, plant and equipment are situated).
Though the income of the operations of a BMBE is exempt, their non-operating, passive
and capital gains are subject to their appropriate type of income tax.

3) Income of cooperatives
Cooperatives that only transacts with their members are exempt.
Cooperative that also transact with non-members are also exempt if their
accumulated reserve and undivided savings do not exceed P10,000,000. Otherwise
the amount of surplus allocated for interest on capital is subject to regular income
tax.

The income of any cooperative from non-related sources is fully taxable.

4) Income of non-stock non-profit entities

These are exempt however the income from unrelated sources are taxable.

5) Income of qualified employee trust funds

Conditions:
a) Contributions are made to the trust for the purpose of distributing to the
employees the earnings and principal of the fund accumulated by the trust: and
b) The asset of the fund shall not be used for other purposes other than the
exclusive benefit of the employees.

DEDUCTIONS FROM GROSS INCOME

- Business expenses incurred by a taxpayer engaged in business or engaged in the

practice of profession.

Special considerations
1. Property Repairs and Improvements

If increase Capitalize

 General Rule: Fair value of property

If restored Outright Expense

 Replacement of old or destroyed properties

o Tax basis of old property – Deductible as loss
o Cost of replacement property – Capitalized and subject to depreciation

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2. Property Acquisition – Related Costs (Directly related)

 Capitalized as part of the cost of the property subject to depreciation
3. Security Issue Costs
 Deducted against proceeds of issued securities
4. Manufacturing Expenses
 Capitalized as part of the cost of goods being processed
 Expensed through cost of sales when sold
5. Effect of Accounting Methods
CASH BASIS ACCRUAL BASIS
Cash expenses (PAID) XX Accrued Expenses (PAID or XX
UNPAID)
Amortization of prepayments XX Amortization of prepayments XX
Depreciation of properties XX Depreciation of properties XX
Cash Basis Deductions XX Accrual Basis Deductions XX

6. Treatment of Input VAT

 VAT Taxpayers – claimable as tax credit against output VAT
 Non-VAT Taxpayers – part of costs of the purchase or expense

LOAN (Legitimate, Ordinary, Actual, Necessary)

Matching Principles – only business expenses which

contribute to the generation of income, gain or profits
subject to regular income tax.

General Principles

Related Party Rule – transactions between related parties,

gains are taxable, losses are nondeductible.

Withholding Rule – “No withholding, no deduction”

Nondeductible Expenses

1. Personal, living or family expenses

2. Capital Expenditures
3. Premiums paid on any life insurance policy covering the life of any person financially
interested in any trade or business carried on by the taxpayer, individually or
corporate, when the taxpayer is directly or indirectly a beneficiary under such policy.

Tax Reporting Classification of Deductions

1. Cost of Sales or Cost of Services

 Deducted outright against sales, revenues, receipts or fees
2. REGULAR ALLOWABLE DEDUCTIONS

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Itemized deductions from Gross Income

A. BITE-C2 (w/ limits)

1. Bad Debts
2. Interest Expense
3. Taxes
4. Entertainment, Amusement & Recreation Expense (EAR)
5. Charitable & Other Contributions
6. Contributions to Pension & Trust
B. LDR DO
1. Losses
2. Depreciation
3. Research & Development
4. Depletion
5. Other Ordinary & Necessary Expenses

A.1. Bad Debts

General Rule:

In order to be deductible, it should be written-off and not just estimated.

Other Requisites:

1. Connected with work and not incurred from related parties

2. Taxpayer is under accrual basis
3. Charged off within the taxable year

Subsequent Recovery:

Bad debts that have been recovered that have been deducted, shall be part of
Gross Income in year of recovery and up to the extent of tax benefit of the recovered
bad debts.

Additional Info:

*Capital Losses not deductible as Bad debts

Examples:

1. Bad Debts from personal receivables

2. Securities becoming worthless other than domestic banks & deposits
3. Loss on capital investments of partnerships, joint venture or corporation.

** Change in accounting methods

Bad debts expense sustained under cash basis should not be deducted even if the
taxpayer changed to accrual basis.

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A.2. Interest Expense

General Rule:

Gross Interest Expense – (Gross Interest Income* x Arbitrage Limit**)

Note:

*Interest Income should been subjected to final tax

**As of January 1, 2009, Arbitrage limit is 33%
Requisites:

1. It should be valid – in writing and legally due

2. Should be related to work and not between related parties
3. Paid or incurred

Non-Deductible Interest Expense

1. Personal Loans
2. Imputed Rate
3. Redeemable Preference Shares
4. Discount or Pre-deducted interest

A.3. Taxes

Requisite:

1. Paid or Incurred within the taxable year

Non-Deductible:

1. Income Tax (Regular, Final & Capital Gains)

2. Transfer Tax (Estate & Donor’s Tax)
3. Business Tax, especially VAT
4. Special Assessment
5. Surcharges or Penalties on Delinquent Tax

Special Consideration

Foreign Income Tax Treatment:

1. Deduction, or
2. Tax Credit

BUT not both

How to determine foreign tax credit:

1) If there is only one country: Lower of the country limit and the Foreign Tax
Paid

((Foreign Taxable Income / World Taxable Income) x Philippine Income Tax Due
before Foreign Tax Credit)

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2) If there are two or more countries, lower of the two limits below
a. Total of each country’s creditable tax using the lower of the limit per
country and actual tax paid; and
b. The ratio of the total taxable foreign income to the world taxable income
multiplied to the Philippine income tax due

Basic Formula:

((Foreign Taxable Income / World Taxable Income) x Philippine Income Tax Due
before Foreign Tax Credit)

A.4 Entertainment, Amusement, and Recreation (EAR) Expense

Requisites:

1. Paid / incurred during taxable year

2. Directly related to conduct / operation of business
3. Not contrary to law, morals, good customs, etc.

Ceiling on Deduction

A. Taxpayers engaged in sales of goods / properties - 0.5% of net sales

B. Taxpayers engaged in sales of services - 1% of net revenues
C. Taxpayers engaged in both:
Net Sales / Net Revenue x Actual EAR
Total Net Sales and Net Revenue

A.5 Charitable and Other Contributions

- Made to the government or non-government organizations (NGOs)

Donations to be used exclusively in priority

activities

To foreign institutions in pursuance of, or in

Fully Deductible Compliance with agreements, treaties, or special
laws

To accredited domestic NGOs

Partially Deductible To not priority activities

Non-accredited NGOs

Limit: Based on the taxable income derived from trade, business, or

profession

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Before the deduction of any contributions

o 10% for individuals

o 5% for corporations

A.6 Contributions to Pension Trusts

A. Defined Contribution Plan

o Deductible Expense Amount of contribution paid by employer

B. Defined Benefit Plan

o Deductible Expense Contribution for current service cost
- Fully deductible

Contribution for past service cost

- Amortized over a period of 10 years

B.1. Losses

General Rule

1. Sustained during the taxable year

2. Not compensated by insurance or other indemnity, except any excess of
the tax basis from the insurance.

Other Requisites:

1. Business Loss, not Personal Loss

2. Ordinary Loss, not Capital Loss
3. Actually sustained, not Temporary
4. Filed within 45 days from date of discovery of casualty, robbery, theft or
embezzlement
5. Double deduction not allowed (Deduction to Estate tax or Income Tax, but
not both)

Rules on Restoration/Replacement of Destroyed Properties

1. Total Destruction
 Tax Basis of old property – claimed as a loss
 Entire Replacement Cost – capitalized subject to depreciation
2. Partial Destruction
 Deductible up to the extent of the tax basis of the old property
 Any excess is capitalized subject to depreciation

Additional Info:

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*Ordinary Loss – deductible in full; Capital Loss – deductible to the extent of

Capital Gain
**Losses from wagering transactions/passive activities (e.g. gambling)

Deductible to the extent of wagering/passive gains.

B.2. Depreciation

Special Rules:

1. Life Tenancy
- Deduction shall be computed as if the life tenant were the absolute owner
of the property and shall be allowed to the life tenant.
2. Properties held in trust
- Deduction shall be apportioned between the beneficiaries and the
trustees in accordance with the pertinent provisions of the instrument
creating the trust, or in the absence of such, the basis of the trust income
allowable to each.
3. Depreciation on Revalued Properties
- Depreciation of an asset must be premised on its acquisitions.
4. Depreciation on Passenger Vehicles
a. Purchased with sufficient evidence such as official receipts and other
documents bearing total purchase price including specific motor vehicle
ID.
b. Connected to conduct of work
c. ONLY 1 LAND VEHICLE for land transport for an official and employee
and value should not exceed Php 2, 400, 000
d. No depreciation for yachts, helicopters, airplanes or aircrafts and land
vehicles that exceed the threshold unless the main line of business of
said transports are used in transportations or lease of transportation.

B.3 Research and Development

A. Related to capital accounts capitalized as cost of property and

depreciated

B. Not related to capital accounts either: (at the option of taxpayer)

 Outright Expense
 Deferred Expense – amortized over a
period of 5 years or 60 months and
above

B.4 Depletion

- Periodic return of capital investments in WASTING ASSETS

 Stages of Wasting Activities

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Exploration period Development Period Commercial Production

 Common Rules for Both Mining and Operations
1. Tangible Development Costs
- May include construction of mine-plant roads, buildings, processing
plants and installation of heavy equipment on-site.
- Capitalized and deducted through allowance for depreciation subject to:

Petroleum Directly Used Straight line or Declining

Operation balance method
Useful life: 10 years or
shorter

Not Directly Straight line method

Used Useful life: 5 years

Mining Operations n > 10 years Normal rate of

depreciation

n < 10 years depreciated over any

number
of years between 5 and 10

2. Intangible Exploration and Development Costs

 Petroleum Operations – incidental and necessary costs of drilling or

preparing wells for petroleum production which have no salvage value

 Mining Operations – cost of diamond drilling, tunneling and other

improvements that is not subject to allowance for depreciation

 Tax Treatment:
A. Before commercial production – capitalized as cost of wasting
asset
B. After commencement of commercial production
o Non-producing wells or mines – deducted in the period
paid or incurred
 deductible amount shall not exceed 25% of the net
income from mining operations computed without
the benefit of any tax incentives under existing
laws.
 Actual exploration and development expenditures
minus 25% of the net income from mining shall be
carried forward to the succeeding years until fully
deducted.
o Producing wells or mines – either: (at the option of
taxpayer)

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 Capitalized and amortized using cost depletion

method
 Deducted in the year paid or incurred

Cost Depletion Formula:

Tax basis of Units Extracted

x
Wasting Asset (Units extracted for the year + Estimated Remaining Units)

B.5 Other Ordinary and Necessary Expenses

Requisites:

1. Ordinary and necessary

2. Paid or incurred during the taxable year
3. Directly attributable to the development, management, operation and/or
conduct of the trade, business or exercise of profession.
4. Substantiated with sufficient evidence, such as official receipts or adequate
records

3. SPECIAL DEDUCTIONS (cont. of Tax Reporting Classification of Deductions)

A. Special Expenses under NIRC and special laws

1. Income distribution from a taxable estate or trust

 distributed by administrator (if taxable estate) or trustee (if taxable trust)
 in favor of heirs or beneficiary
 income distributed is included in gross income of the heir/beneficiary
2. Transfer to reserve fund and payments to policies and annuity contracts of insurance
companies
 Required reserve of non-life insurance co. = 40% of gross premium less returns
and cancellations of risks expiring within 1 yr.
 Special deduction:
 net additions required to be made within the year to the reserve fund
 sums, other than dividends, paid within the year on policy and annuity
contracts (deductible in the year actually paid)
 Release of reserve fund is treated as gross income in year of release
3. Dividend distribution of a Real Estate Investment Trust (REIT)
 Special deduction:
 the required distribution of REIT = 90% of its distributable income as
dividends to shareholders

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4. Transfer to reserves funds of taxable cooperatives

 Cooperatives:
 required to maintain reserves for their protection and stability
 exempt from income tax but subject to tax on their income from unrelated
activities
 Special deduction:
 Amount transferred by the cooperative to the reserve fund out of the net
surplus from unrelated activities

5. The Expanded Senior Citizen’s Act of 2003 under RA 9257

 For senior citizens :
Deductions = 20% sales discount granted by certain establishments
 Conditions:
 only the portion of gross sales exclusively used, consumed, or enjoyed by the
senior citizen can be deducted
 gross selling price and sales discount must be separately indicated in the
official receipt or sales invoice by the establishment
 only the actual amount of the discount granted not exceeding 20% of gross
selling price can be deducted, net of VAT, if applicable
 discount can only be deducted for the year the discount is granted
 establishment giving discount is required to keep a separate and accurate
record of sales which the name, TIN, ID, gross sales/receipts, discounts
granted, date of transaction, and invoice number for every sale transaction is
included.

6. Discounts to disabled persons under RA 9442

 For persons with disability:
Deduction = 20% sales discount granted by certain establishments
 Conditions:
 Same with senior citizen

B. Deduction incentives under special laws

1. Additional claimable compensation expense for senior citizen employees

 For private establishments employing senior citizens:
Deduction = 15% of total amount paid as salaries and wages to senior
citizens
 Conditions:
 employment shall continue for at least 6 months

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 annual taxable income of senior citizen is below the poverty level by NEDA
2. Additional claimable compensation expense for persons with disability
 For private establishments employing disabled persons:
Deductions = 25% of total amount paid as salaries and wages to disabled
persons

3. Cost of facilities improvement for disabled persons

 For private entities that improve of modify their physical facilities to provide
reasonable accommodation to those with disability:
Deduction = 50% of direct cost of improvements/modifications
4. Additional training expense under Jewelry Industry Development Act of 1998
 For qualified jewelry enterprise duly registered and accredited with BOI:
Deduction = 50% of expenses incurred in training schemes approved by TESDA
5. Adopt-a-School Act of 1998 (RA 8525)
 For qualified adopting private entity:
Deduction:
o if contributions to the government is in:
 Priority activities – deductible in full
 Non-priority activities – deductible subject to limit
o Additional deduction = 50% of the contribution of the adopting entity for the
“Adopt-a-School Program”
 Valuation of deductions
o Cash assistance = actual amount of cash donated
o Personal property = acquisition cost of assistance
o Consumable goods = acquisition cost or value at the date of donation,
whichever is LOWER
o Services = service value as agreed upon per Memorandum of Agreement
(MOA) or the actual expense incurred, whichever is LOWER
o Real property = fair value (higher of zonal value or assessed value) at the
time of contribution or the depreciated cost, whichever is LOWER
6. Expanded Breastfeeding Promotion Act of 2009 (RA 10028)
 For private health institution who is complying with rooming-in and breast-
feeding practices:
Deduction = up to twice the actual amount incurred

7. Free legal assistance (RA 9999)

 For practicing lawyer or professional partnership:
Deduction = amount that could have been collected for the actual performance
of the actual free services rendered or up to 10% of gross income derived from
the actual performance of the legal profession whichever is LOWER

8. Additional productivity incentive bonus expense (RA 6971)

 For business enterprise adopting a productivity incentive program:

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Deduction = 50% of the total productivity bonuses given to employees under the
program
 For business enterprises providing manpower training and special studies to
rank-and-file employees as accredited by TESDA:
Additional deduction = 50% of the total grant for local trainings and special
studies

4. NET OPERATING LOSS CARRYOVER (NOLCO) (cont. of Tax Reporting Classification of

Deductions)
- amount of net operating loss allowed to be carried over as a deduction against net income
in the following 3 years.
Who can claim?
-All taxpayers subject to tax on taxable income
Requisites for deductibility:
a) Taxpayer must not be exempt from income tax during taxable year when NOLCO was
incurred
b) No substantial* change in ownership of business
*change of at least 75% of either the paid up capital or nominal value of the outstanding
shares
Rules in carryover of NOLCO
a) claimable in FIFO (first-in, first-out) fashion
b) claimable only up to the extent of net income in next 3 years
c) any unused NOLCO at the end of the 3 year period shall expire

NOLCO is computed as follows:

Gross Income subject to regular tax xx

Less: Total deductions excluding
NOLCO and deduction incentives xx
NOLCO xx

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Optional Standard Deduction

Taxpayers who can claim OSD

- All taxpayers who are subject to tax on taxable net income can claim OSD except,
 Non-resident alien engaged in trade or business
 Taxpayers Mandated to used itemized deductions
1. For Individual Taxpayers
a. Exempt individuals under NIRC
b. Those with income subject to special/ preferential tax rates

Percentage of Optional Standard Deductions

A. Individual Taxpayers – 40% of Gross Sales/Revenues/Receipts/Fees
 Selling goods under accrual basis – 40% of gross sales
 Selling services under cash basis – 40% of gross receipts
 Selling services under accrual basis – 40% of revenue
B. Corporate Taxpayers – 40% of Gross Income

Additional Information:

1. Gross Sales – include only sales that contributes to income subject to tax. Sales Return,
Allowances and Discounts are deducted to recorded sales. Tax Concept of “Gross Sales”
is equal to Accounting Concept of “Net Sales”.

2. Gross Receipts – under accrual basis, “gross receipts” means amount earned as gross
revenue during the taxable year.

3. Net Operating Loss Carry Over (NOLCO) – OSD and NOLCO cannot be claimed
simultaneously. NOLCO is an item of deduction while OSD is for all itemized deduction. In
short, NOLCO is included in OSD.

4. Net Capital Loss Carry Over (NCLCO) – NCLCO is deducted against net capital gain,
hence, an item of gross income and not part of deductions. In short, NCLCO not part of
itemized deduction and can still be claimed even if the taxpayer opted for OSD.

When to indicate the option to use OSD?

- For individual taxpayers, the option to use OSD can be indicated only in the annual
income tax return since quarterly income tax returns are mere estimates of gross income.

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INDIVIDUAL INCOME TAXATION

PERSONAL EXEMPTIONS
1. Basic personal exemption
a. RA 9504 - 50,000:
i. Single individual, including separated spouse without a dependent, widow
or widower
ii. Head of the family
iii. Married individual

b. RA 9504 – 20,000:
i. Taxable estates
 Treated as an individual taxpayer and is allowed P20,000 personal
exemption
*An estate under extra-judicial settlement is NOT a taxpayer. The income of
estate is taxable to the heirs

ii. Taxable Trusts

 Irrevocable trust – separate and distinct taxable entity; treated as an
individual taxpayer and is allowed P20,000 personal exemption

*A revocable trust is not a taxpayer it is treated as a pass-through entity

whose income is taxable to the grantor-trustor.

2. Additional personal exemption

For every dependent not exceeding four P25,000

Qualified dependent – legitimate, illegitimate or legally adopted child chiefly

dependent upon and living with the taxpayer.
o Not more than 21 years old
o Unmarried
o Not gainfully employed
o Incapable of self-support because of mental or physical defect
(regardless of age; within 4th degree of consanguinity or affinity to
the taxpayer)

Claimant of additional exemption

Case Claimant
In general Husband
If husband waived his right Wife
One of the spouse is unemployed or The employed or resident spouse within the
non-resident citizen deriving income Philippines shall be automatically entitled
from foreign sources to claimant

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INDIVIDUAL INCOME TAXATION

One of the spouse is deriving from The spouse with income subject to regular
pure passive sources tax shall be the claimant
When legally separated The spouse having custody of the children

*If the taxpayer’s dependent is no longer qualified to be a dependent within the taxable year the
taxpayer may still claim the corresponding exemptions in full as if the change happens at the
close of such year
3. Premium for health and hospitalization insurance (PHHI)
Requisites:
a. Deduction shall not exceed P200/month or P2,400 a year
b. Total family income shall not exceed P250,000
c. Deduction is claimable by the spouse who actually paid the premiums
d. Deduction is allowed to the spouse claiming the additional exemption

RC NRC RA NRA- NRA- Taxable Taxable

ETB NETB estate trust
Basic exemption     *  P20,000 P20,000
Additional exemption       
PHHI       
*subject to reciprocity rule

ALLOWABLE DEDUCTIONS
Compensation Business or practice of
earner profession
Basic personal exemption  
Additional personal exemption  
PHHI  
Itemized deductions or OSD  

Filing of tax returns

Self-employed taxpayers and Quarterly Tax Returns

(BIR Form No. 1701)
Quarterly Tax Returns Deadline
st
1 Quarter April 15 of the same year
2nd Quarter August 15 of the same year
3rd Quarter November 15 of the same year

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INDIVIDUAL INCOME TAXATION
Who shall file Income Tax Return
A resident citizen engaged in trade, business
or practice of profession within and without the
PH
A resident alien, non-resident citizen or non-
resident alien individual engaged in trade,
business or practice of profession within the
PH
A trustee, guardian, executor/administrator of
an estate or any person acting in any fiduciary
capacity for any person where such trust,
estate, minor or person is engaged in trade or
business
An individual engaged in trade or business or
in the exercise of their profession and
receiving compensation income as well
Who are NOT required to file Income Tax
Return
Minimum wage earners
An individual whose gross income does not
exceed his total personal and additional
exemptions
An individual whose gross income does not
exceed P60,000 and the income tax on which
has been correctly withheld
Individuals whose income has been subjected
to final withholding tax such as in the case of:
a. Special alien
b. NRA-NETB
Pure compensation earners qualified under
substituted filing system
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