CHAPTER III 1.

COMPENSATION INCOME

TAX ON INDIVIDUALS -All remuneration for services rendered by an employee for his
employer unless specifically excluded under the TAX CODE.

- Includes Salaries, wages, emoluments, honoraria, bonuses,

A. CLASSIFICATION OF INDIVIDUAL TAXPAYERS allowances, fringe benefits, COLA, PERA, housing allowances,
overtime pay,etc.
1. RESIDENT CITIZENS (RC)
a) Basis/Test
2. NON-RESIDENT CITIZEN (NRC)
- MUST BE DERIVED FROM EE-ER relationship
-Citizens of the Philippines who are physically present
abroad for uninterrupted period covering an entire taxable b) Requisites for Taxability
year. NRC means one who establishes to the satisfaction of the
BIR Commissioner the fact of his physical presence abroad i. Personal services actually rendered;
with definite intention to reside therein, either as:
ii. Payment is for such services rendered;
(a) Immigrant;
iii. Payment is reasonable
(b) Employee on a more or less permanent basis;

(c) Contract workers whose contracts of employment are

renewed from time to time within or during the taxable year c) Forms of Compensation

3. RESIDENT ALIEN(RA) i. Cash or in Money- amount of money

4. NON-RESIDENT ALIEN (NRA) ii. Property in kind (DOCTRNE OF CASH

EQUIVALENT)- FMV
-neither citizen nor resident of the Philippines
iii. Price is stipulated - FMV of the compensation
(a) NRA-ETB- comes and stays in the Philippines for an in the absence of contrary evidence
aggregate period of more than 180 days during the calendar
year iv. PN and other evidence of debt

(b) ETB- includes the performance of personal services 1. NOT DISCOUNTED: FACE VALUE;
within the Philippines
2. DISCOUNTED: Year of receipt- discounted
(c) Foreign technician on a job contract for one year value; Maturity Date- difference between
Face Value and FMV

v. Cancellation or forgiveness of indebtedness

5. NON-RESIDENT ALIEN NOT ENGAGED IN TRADE OR made in consideration of debtor’s services
BUSINESS (NRA-NETB) rendered-- amount of debt cancelled

GR. 25% Final tax vi. Premiums paid by employer on the life
insurance policy of the employee whose family,
EXC. 15% special rate if employed by the following: executor, administrator of his estate is the
beneficiary-- amount of the premium paid.
(i) Regional or Area Headquarters of multi-national
corporations; vii. Tax exempt compensation income (Benefits,
privileges, facilities an the like)
(ii) Offshore Banking units established in the
Philippines; 1. CONVENIENCE OF THE EMPLOYER RULE
(iii) Petroleum service contractors or -grants exemption to benefits which are given
sub-contractors for the exclusive benefit or convenience of the
employer

2. DE MINIMIS BENEFITS
B. GENERAL PRINCIPLES:
-refers to facilities or privileges furnished or
Sources of Income Tax Base
offered by an employer to his employees that
RC Within and without Taxable Income are of relatively small value and are offered or
furnished by the employer merely as a means
NRC within Taxable Income of promoting health, goodwill, contentment or
efficiency of his employees.
RA within Taxable Income

NRA-ETB Within Taxable Income

d) Special Rules on Fringe Benefits
NRA-NETB Within Gross Income
- refers to goods, services, or other benefits furnished
or granted by an employer, in cash or in kind, in addition
C. CATEGORIES OF INCOME
 to the basic salaries, to managerial or supervisory
employees.
OVER BUT NOT OVER TAX DUE

P250,000 0%
e) Allowable Deductions from Gross Compensation
Income P250,000 P400,000 20% of the excess over
P250,000
i. Personal exemptions
P400,000 P800,000 P30,000 +25% of the
ii. Premium payments on Health and/or excess over P400,000
Hospitalization Insurance
P800,000 P2,000,000 P130,000 +30% of the
excess over P800,000
2. BUSINESS INCOME DERIVED BY SELF-EMPLOYED P2,000,000 P8,000,000 P490,000 +32% of the
-income derived by self-employed from trade or excess over P2,000,000
business(trading, manufacturing, merchandising, farming,
P8,000,000 P2,410,000+35% of the
and others).
excess over P8,000,000
- Self-employed income consists of the earnings derived by the
individual from the practice of profession or conduct of trade
or business carried on by hi, as a sole proprietor or by a For married individuals, the husband and wife, subject
partnership of which he is a member. to the provision of Section 51(D) hereof, shall compute
separately their individual income tax based on their
respective total taxable income; Provided, that if any income
3. PROFESSIONAL INCOME DERIVED BY PROFESSIONALS cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the
4. PASSIVE INVESTMENT INCOME same shall be divided equally between the spouses for the
purpose of determining their respective taxable income.
- income subject to final withholding tax
Provided, That minimum wage earners as defined in
5. GAINS DERIVED FROM DEALINGS IN PROPERTY Section 22(HH) of this Code shall be exempt from the payment
of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential
Sec 24. Income Tax Rates-- pay and hazard pay received by such minimum wage earners
shall likewise be exempt from income tax.
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.

(1) An income is hereby imposed:
(a) On the taxable income defined in Section 31 of
this Code, other than income subject to tax under Subsections
(B), (C) and (D) of this Section, derived for each taxable year
from all sources within and without the Philippines by every
individual citizen of the Philippines residing therein;
(b) on the taxable income defined in Sec 31 of this
Code, other than income subject to tax under Subsection (B),
(C ) and (D) of this Section, derived for each taxable year from
all sources within the Philippines by an individual citizen of
the Philippines who is residing outside of the Philippines
including overseas contract workers referred to in Subsection
(C ) of Section 23 hereof; and
(c ) On the taxable income defined in Section 31
of this Code, other than income subject to tax under
Subsections (B), (C ) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an
individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals.
-- The tax shall be computed in accordance with and at
the rates established in the following schedule:
1. GRADUATED RATES FOR REGULAR INCOME OF RESIDENT
CITIZENS, NONRESIDENT CITIZENS AND RESIDENT ALIENS
a) RC within and without
b) NRC, including Overseas Contract Workers within
c) RA within
2. INCOME TAX COMPUTATION FOR MARRIED INDIVIDUALS
-The husband and wife shall compute separately their
individual income tax based on their respective total taxable
income.
(1) H and W are legally married under conjugal partnership. H
is working and P is a housewife. Should the income declared
by H be divided into two equal parts to be covered under the
lower bracket of taxes?
NO. The wife only has an inchoate right in the property of her
husband during the life of the conjugal partnership, but not an
absolute right to one-half of the income of the conjugal
partnership. (Madrigal and Paterno v. Rafferty)

“(a) Tax Schedule Effective January 1, 2018 until

December 31, 2022: 3. MINIMUM WAGE EARNERS
 -exempt from income tax Wages

-wage rates determined by the Regional Tripartite Wages

 365days 
MWR Day 12months 
Php
and Productivity Boards. Monthly Rate =

-Holiday pay, overtime pay, nightshift differential pay

and hazard pay earned by the MWE shall be covered by the Semi Monthly Rate = (1/2) Monthly Rate
exemption.
 Php  365Days  1yr 
Day  1yr  52weeks 
Weekly Rate =  MWR

EXCEPT: (Rev Reg No. 10-2008)

(1)Employees who receives/earns additional

compensation such as (d) Required to work everyday including Sundays or rest
days, special days, and regular holidays.
(i)commissions,honoraria, fringe benefits, in excess
of the allowable statutory amount of P82,000, Wages

(ii) taxable allowances,

 392.5days 
MWR Day  12months 
Php
Monthly Rate =
(iii) holiday pay,

(iv) overtime pay,

Semi Monthly Rate = (1/2) Monthly Rate
(v) hazard pay and Weekly Rate =
(vi) nightshift differential pay ARE NOT EXEMPT  MWR Php  392.5Days  1yr 
(2) Minimum Wage under Batas Kasambahay  Day  1yr  52weeks
 

4. EXEMPTION OF SENIOR CITIZENS

3.1 Computation of Wages
- must be guided by the prevailing minimum wage as
reflected in the Latest Matrix of Wage Order and its own policy
on whether employees are:
(a) Not considered paid on Saturdays and Sundays or Rest
days;
- refers to any Filipino Citizen who is a resident of the
Philippines, and who is 60 years old or above.
-Applies to “dual citizens PROVIDED, they prove their
Filipino Citizenship and at least 6 months of residency in the
Philippines

Wages GR. Seniors ARE NOT EXEMPT from paying income taxes

 261days  EXCEPTIONS:
MWR Day 12months 
Php
Monthly Rate =
(1) If the returnable income of Senior Citizen is in the
nature of compensation income but he QUALIFIES as a
Semi Monthly Rate = (1/2) Monthly Rate minimum wage earner under RA 9504;

 Php  261Days  1yr  (2) If the aggregate amount of gross income earned by
Day  1yr  52weeks 
Weekly Rate =  MWR the Senior Citizen does not exceed the amount of his personal
 exemptions, he shall be exempt from income tax and shall not
be required to file an income tax return.

(b) Not considered paid on Saturdays or rest days;

4.1 Exemption from VAT of the Sale to Senior Citizens
Wages
(1) Medicines;
 313days 
Monthly Rate = MWR Day 
Php
(2) Professional fees of attending physicians and licensed
 12months  professional health workers;

Semi Monthly Rate = (1/2) Monthly Rate (3) Medical and Dental services, diagnostics and
laboratory;
 Php  313Days  1yr 
Day  1yr  52weeks 
Weekly Rate =  MWR (4) Actual fare for land transportation, PUB, PUJ, AUV,
 LRTm MRT, PNR;

(5) Actual transportation fare for domestics air transport

services, sea shipping vessels and the like, based on the actual
(c) Considered paid on rest days, special days, and fare and advanced booking;
regular holidays; or
 (6) Utilization of services in hotels, and similar lodging
establishments, restaurants, and recreation centers;
(7) Admission fees to theaters, cinema houses and
concert halls; and
(8) Burial and funeral services for the death of Senior
Citizen.
4.1.1 Invoicing (Rev Reg No. 16-2005)
- if the seller uses a Point of Sale Machine or a Cash Register
Machine in lieu of the regular sales invoice, the machine tape
must properly segregate the exempt sales from the taxable
sales.
Q: Are senior citizens also exempt from payment of
percentage tax on their purchases of goods and services
exempt from VAT?
A. No. R.A 9994 does not include exemption from payment of
percentage taxes.
The exemption does not cover indirect taxes that may be
passed on by the seller to a Senior Citizen Buyer, such as
percentage tax. In such a case, the discount must be on the
total cost of the goods or services charged by the seller
exclusive of the tax.
SEC 24.
B. Rate of Tax on CERTAIN PASSIVE INCOME
(1) Interest, Royalties, Prizes and other Winnings.
Xxx
(2) Cash and/or Property Dividends
1. PASSIVE INCOME OF RESIDENT CITIZENS, NONRESIDENT
CITIZENS, AND RESIDENT ALIENS SUBJECT TO FINAL TAX
The Rates of Tax on Certain Passive Incomes of Citizens
and Resident Aliens are as follows:
(A) A final tax at the rate of 20% is imposed upon
interests, royalties,prizes, and other winnings : (WI-PRY)
i. Amount of INTEREST from any currency bank
deposit;
ii. YIELD or any other monetary benefit from
deposit substitutes from trust funds and
similar arrangements;
iii. ROYALTIES except on books, as well as other
literary works and musical compositions;
iv. PRIZES (except prizes amounting to P10,000 or
less, which shall be treated as taxable income
subject to the graduated rates discussed
above; and
v. Other WINNINGS (Except PCSO and Lotto
Winnings which are exempt from taxes)
Derived from sources within the PH.
(B) A final tax of 10% is imposed on (LBM)
i. Royalties on books;
ii. Royalties on other literary works; and
iii. Royalties on musical compositions.
(C) A final tax at the rate of 15% on:
i. Interest income received by an individual
taxpayer from a depository bank under the
expanded foreign currency deposit system.
(D) Exempt from/ not subject to final tax:
i. PCSO and Lotto winnings amounting to P10,000
or less;
ii. Prizes amounting to P10,000 or less which shall
be treated as taxable income;
iii. Interest income from long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitutes,
investment, management accounts and other
investments evidenced by certificates in such
from prescribed by BSP but should the holder
of the certificate pre-terminate the deposit or
investment before the 5th year, a final tax
shall be imposed on the entire income and
shall be deducted and withheld by the
depository bank from the proceeds of the
long-term deposit or investment certificate
based on the remaining maturity thereof;
a) 4 years to less than 5---- 5%
b) 3 years to less than 4----12%
c) Less than 3 years---------20%
1.1 Interest/ Yield
INTEREST
- is the income derived from an investment on which the
payments reflect the time value of money.
YIELD
-the current return from an investment or expenditure as
a percentage of price of investment or expenditure
1.1.1 DEPOSIT SUBSTITUTE (Sec 22 (Y) of NIRC)
-means an alternative form of obtaining funds from the
public other than deposits, through the issuance, endorsement,
or acceptance of debt instruments for the borrower’s own
account, for the purpose of re-lending or purchasing of
receivables and other obligations, or financing their own
needs or the needs of their agent or dealer.
- In order for an instrument to qualify as a “deposit
substitute”, the borrowing must be made from 20 or more
individual or corporate lenders at any one time.

*** Deposit Substitutes subject to final tax not included in
Gross Income
1.1.2 INTEREST FROM CURRENCY BANK DEPOSITAND YIELD OR
ANY OTHER MONETARY BENEFIT FROM TRUST FUNDS AND
SIMILAR ARRANGEMENTS
1.1.3 INTEREST FROM LONG-TERM DEPOSITS OR INVESTMENT
CERTIFICATES (Sec 22(FF) of NIRC)
- refers 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 5 years, in
the form prescribed by BSP, and issued by banks only to
individuals in denominations of P10,000 and other
denominations as may be prescribed by the BSP.
(1) An instrument with a maturity period of 10 years was held
by Mr. X (A resident citizen for 2 years and was transferred to
MR. Y (a resident alien), who , in turn held it for 8 years. The
FWT due are as follows:
Mr. X --- 2 years 20% FWT
Mr. Y----8 years Exempt
(2) An instrument with maturity period of 10 years was held by
Mr X (a non-resident citizen) for 3 years and transferred it to
Mr. Y (a resident alien). Mr. Y held it for 2 years before
subsequently transferring it to Mr. Z(a resident citizen), who
held it until the day of maturity or for 5 years. The FWT are as
follows:
Mr. X---3 years 12% FWT
Mr. Y---2 years 20% FWT
Mr. Z---5 years Exempt
(3) An instrument with maturity period of 10 years held by Mr.
X (a nonresident alien engaged in trade or business in the
Philippines) for three years and transferred it to Mr. Y(a
resident citizen). Mr Y held it for two years before
subsequently transferring it to Mr. Z (a resident alien), who
preterminated it after 4 years. The FWT are as follows
Mr. X--- 3 years 12% FWT
Mr. Y---2 years 20% FWT
Mr. Z---4 years 5% FWT
1.1.4 INTEREST FROM A DEPOSITORY BANK UNDER THE
EXPANDED FOREIGN CURRENCY DEPOSIT SYSTEM
*** interest income received by resident citizens, resident
aliens, as well as domestic corporations and resident foreign
corporations
*** Any income of non-residents, whether individuals or
corporations, from transactions with depository banks under
the expanded system is exempt from income tax.
1.1.5. INTEREST FROM ALL OTHER INSTRUMENTS
-Except for Deposit substitutes, Debt Instruments that
has been securitised, assigned or participated out,shall be
subject to a Creditable Withholding Tax (CWT) at the rate of
20%
2. ROYALTIES
-compensation for the use of property, usually
copyrighted material or natural resources, expressed as a
percentage of receipts from using the property or as an
account per unit produced.
3. PRIZES AND WINNINGS
PRIZES WINNINGS
- results of efforts -are products of chances and
luck
-a game of chance is that
which depends more on
chance or hazard than on skill
or ability
- Prizes and winnings are taxed as follows:
(a) Prizes exceeding P10,000 and winnings in general are
subject to 20% final withholding tax;
(b) Prizes amounting to P10,000 or less are taxable
income subject to the graduated rates;
(c) PCSO and Lotto Winnings amounting to P10,000 or
less are exempted from tax;
(d) Winnings from horse races are subject to 10% tax;
(e) Winnings from jueteng and other illegal numbers
game are subject to the 20% final tax
(1) Mr. P won P50,000.00 as consolation prize from the
Philippine Times Journal guessing contest as to who will be the
winning candidates in the last national elections. He received
only the amount of P40,000 instead of the full amount because
he was deducted the sum of P10,000 as income tax.Is the
deduction proper?
Ans. Yes. Under the Sec 24 (B), the tax on prizes and winnings
not less than P10,000 is 20% of the gross winnings/prizes.
(2) In the share of the candidates in the proceeds of a
Beauty/Popularity contest where money is the criteria in
choosing the winners, and held in connection with any town or
barangay fiesta celebration or as a form of fund-raising
activity, subject to 20% final tax? MASSACHUSETTS RULE

-distinguishes between a stock dividend and a cash

dividend, and declares that the stock dividend becomes part
Ans. If the proceeds of the winnings shall be subject to 20% of corpus while the cash dividend goes to income.
final tax if the same amounts to more than P10,000 and to the
graduated tax rates if the amount is P10,000 or less.

PENNSYLVANIA RULE

(3) Mr. Q won in a raffle sponsored by the government. Is the -concerned primarily with preserving the “intact” value
prize taxable? of corpus, rather than with considering the type of dividend
declared.
Yes. The fact that the raffle is a government-sponsored
project does not constitute a valid ground to exempt the
recipient of the prize from the 20% final tax.
KENTUCKY RULE

-rejects the character of the dividend as the controlling

4. DIVIDENDS
-are distributions made by a corporation to its
share-holders out of its earnings or profits and payable to its
shareholders whether in money or in other property.
*** previously accumulated profits not declared as dividends
may be subjected to the improperly accumulated earnings tax
if accumulation was done to evade taxation.
factor, and refuses to inquire as to the time that the earnings
covered by the dividend were earned.
(1) A is a stockholder in a large corporation. He dies leaving a
will by the terms of which he gives to B during his lifetime the
“income” from said stock, with further provision that C shall,
at B’s death, become the owner of his share in stock dividend.
Does the stock dividend belong to B as an income, or does it
finally belong to C as a part of his share in the capital or assets
of the corporations, which had been left to him as a remainder
by A?

CASH DIVIDEND
-is a dividend paid in cash to shareholders normally out of
the corporation’s current earnings or accumulated profits.
PROPERTY DIVIDEND
ANS. While there has been some difference of opinion on that
question, it is believed that a great weight of authorities hold
that the stock dividend is capital or assets belonging to C and
not an income belonging to B. Applying the Pennsylvania rule,
Stock dividends in such cases were regarded as capital and not
as income.

-dividend paid out of corporate property instead of cash

or corporate stock.

4.3 CONSENT DIVIDEND AND CONSTRUCTIVE DIVIDEND

SCRIP DIVIDEND

-type of deferred dividend commonly in the form of

promissory note which is redeemable in stock or cash at a
future time.

- subject to tax in the year in which the warrants are

issued.

4.1 STOCK DIVIDENDS

-a dividend payment made in the form of additional

shares, rather than property or a cash payout, usually
expressed as percentage of the number of shares already held
by the shareholder.

- Stock dividends are not subject to tax,but taxable at

the time of sale if the corporation cancels or redeems stock
issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption.

4.2 MASSACHUSETTS PENNSYLVANIA AND KENTUCKY RULES