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INCOME TAXATION
ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE
1. Power and duties of the Bureau of Internal Revenue
The bureau of the Internal Revenue is under the control and supervision of the Department of
Finance and its powers and duties include the assessment and collection of all national internal
revenue taxes, fees and charges; the enforcement of all forfeitures, penalties, and fines; and the
execution of judgments in all cases decided in its favor by the court of tax appeals and the ordinary
courts.
2. Chief officials of the bureau of internal revenue
The bureau of internal revenue is headed by chief known as the commissioner, with 4 assistants
known as deputy commissioners.
3. Powers of the Commissioner
a. Power of the commissioner to interpret tax laws and to decide tax cases
b. Power of the commissioner to obtain information; and to summon and to take testimony of
persons (authority to administer oath)
c. Power of the commissioner to make assessments and prescribed additional requirements for
tax administration to and enforcement
4. Power of the commissioner to make assessments and prescribe additional

requirements for tax administration to and enforcement, includes:
a. Authority to terminate taxable period

The Commissioner may terminate the taxable period when it shall come to his knowledge
that a taxpayer is retiring from business subject to tax, or is intending to leave the
Philippines, or to remove his property therefrom, or to hide or conceal his property, or is
performing any act tending to obstruct the proceedings for the collection of the tax for the
past or current year or to render the same totally or partly ineffective unless such
proceedings are begun immediately. (Sec. 6 [D], NIRC of 1997)
b. Authority to inquire into bank deposit accounts

The Commissioner may inquire into bank deposit accounts of: (1) a decedent to determine
his gross estate; or (2) any taxpayer who has filed an application for compromise of his tax
liability by reason of financial incapacity to pay his tax liability; or (3) a taxpayer who
authorizes him to inquire into the bank deposits. (Sec. 7 [F], NIRC of 1997)
c. Authority to delegate power

The Commissioner may delegate the power vested in him under the Tax Code to any or
such subordinate officials with the rank equivalent to a division chief or higher, subject to
such limitation and restrictions as may be imposed under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
However, the following powers of the Commissioner shall not be delegated:
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1. The power to recommend the promulgation of rules and regulations by the
Secretary of Finance;
2. The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the BIR; (Secretary of Finance, et.al. vs. La Suerte Cigar and
Cigarette Factory, et.al., G.R. No. 166498, June 11, 2009)
3. The power to compromise or abate any tax liability. However, assessments
issued by the regional offices involving basic deficiency taxes of P500,000 or
less, and minor criminal violations, as may be determined by the Secretary of
Finance, upon recommendation of the Commissioner, discovered by regional
and district officials, may be compromised by a regional board; and
4. The power to assign or reassign internal revenue officers to establishments where
article subject to excise tax are produced or kept. (Sec. 7, NIRC of 1997)
d. Authority to compromise the payment of any internal revenue tax

The authority of the Commissioner to compromise encompasses both civil and criminal
liabilities of the taxpayer. The civil compromise is allowed only in cases: (1) where a
reasonable doubt as to the validity of the claim against the taxpayer exists; or (2) when the
financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. All
criminal violations except those involving fraud, can be compromised by the Commissioner
but only prior to filing of the Information with the Court. (Sec. 204 [A], NIRC of 1997)
e. Authority to abate or cancel a tax liability

The Commissioner may abate or cancel a tax liability when: (1) the tax or any portion thereof
appears to be unjustly or excessively assessed; or (2) the administration and collection costs
involved do not justify the collection of the amount due. (Sec. 204 [B], NIRC of 1997)
f. Authority to credit or refund taxes

The Commissioner may credit or refund taxes erroneously or illegally received or penalties
imposed without authority. No credit or refund of taxes or penalties shall be allowed unless
the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty. (Sec. 204 [C], NIRC of 1997; Commissioner of
Internal Revenue vs. Mirant Pagbilao Corp., G.R. No. 146941, August 9, 2007)
g. Authority to prescribe real property values

The Commissioner is authorized to divide the Philippines into different values or areas and
shall, upon consultation with competent appraisers both from the private and public sectors,
determine the fair market value of real properties located in each zone or area. (Sec. 6 [E],
NIRC of 1997) While the law grants to the Commissioner of Internal Revenue the power to
determine zonal values, including the authority to delegate to the Assistant Commissioner of
the Assessment Service the authority to approve and sign the Technical Committee of Real
Property Valuation (TCRPV) resolutions involving requests for revaluation of established
zonal values of real properties, the same is for the purpose of computing internal revenue
taxes. (Capitol Steel Corp. vs. Phividec Industrial Authority, G.R. No. 169453, December 6,
2006)
5. Authority of internal revenue officers to make arrest and seizures (Sec. 15, NIRC of 1997)
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The Commissioner, the Deputy Commissioners, the Revenue Regional Directors, the Revenue District
Officers and other internal revenue officers shall have authority to make arrests and seizures for the violation
of any penal law, rule or regulation administered by the Bureau of Internal Revenue. Any person so arrested
shall be forthwith brought before a court, there to be dealt with according to law.
6. Collection agents (internal revenue taxes)

a. The commissioner of customs and his subordinates with respect to the collection of national internal
revenue taxes on imported goods;
b. The head of the appropriate government office and his subordinates with respect to the collection of
energy tax:
c. Banks duly accredited by the commissioner with respect to receipt of payments of internal revenue
taxes.
7. Issuance and rulings of the bureau of internal revenue

Revenue regulations (RRs) (RMOs) are issuance that provide directives or instructions;
prescribe guidelines; and outline processes, operations, activities, workflows, methods and
procedures necessary in the implementation of stated policies, goals, objectives, plans and
programs of the bureau in all areas of operations, except auditing.
Revenue memorandum rulings (RMRs) are rulings, opinions and interpretations of the
commissioner of internal revenue with respect to the provisions of the tax code and other tax laws,
as applied to a specific set of facts, with or without established precedents, and which the
commissioner may issue from time to time for the purpose of providing taxpayers guidance on the
tax consequence in specific situations. BIR rulings, therefore, cannot contravene duly issued RMRs;
otherwise, the rulings are null and void ab initio.
Revenue memorandum circular (RMCs) are issuance that publish pertinent and applicable
issued by the BIR and other agencies/offices.
Revenue Bulletins (RB) refer to periodic issuances, notice and official announcements of t6he
Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue’s position on
certain specific issues of law or administration in relation to the provisions of the Tax Code, relevant
tax laws and other issuances for the guidance of the public.
BIR Rulings are official position of the bureau to requires raised by taxpayers and other
stakeholders relative to clarification and interpretation of tax laws
Delegations of power
The commissioner may delegate the powers vested in him under the tax code to any or such
subordinate officials with the rank equivalent to a division chief or higher. The following powers of
the commissioner may not be delegated:
a. The power to recommend the promulgation of rules and regulations by the secretary of
finance;
b. The power to issue rulings of first impression or to reverse, revoke or modify any existing
ruling of the bureau;
c. The power to compromise or abate any tax liability: provided, however, that assessment
issued by the regional offices involving basic deficiency taxes of P500,000 or less, and minor
criminal violations, discovered by regional and district officials, may be compromised by a
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regional evaluation board which shall be composed of the regional director as chairman, the
assistant regional director, the heads of the legal, assessment and collection divisions and
the revenue district officer having jurisdiction over the taxpayer, as members;
d. The power to assign or reassign internal revenue officers to establishments where articles
subject to excise tax are produced or kept.
MEANING OF INCOME
Income means all wealth which flows into the taxpayer other than a mere return of capital. Income is a gain
derived from:
a) The use or employment of labor or capital, or both labor and capital; and/or
b) From the sale or other disposition of assets or property (both ordinary and capital)
Income distinguished from Capital
Capital is a fund, income is a flow. Capital is wealth, while income is the service (or fruit) of wealth.
Capital is the tree, income the fruit. (Madrigal v. Rafferty, 38 Phil. 414)
Amounts received as a return of capital are not income.
Classification of Income According to Source
For income tax purposes, the word “source” refers to the activity, or property, or labor that gave rise or
produced the income.
Based on source, income is classified as follows:

1. Income from source within the Philippines;
2. Income from sources without the Philippines; and
3. Income from sources partly within and partly without the Philippines
How to determine Income W ITHIN and Income W ITHOUT
Income Test Source of Income

Interest income Residence of the debtor
Income from services Place of performance
Rent Location of property
Royalty Place of use of intangible
Gain on sale of real property Location of property
Gain on sale of personal property purchased in one Place of sale
country and sold in another
Dividend
A. From Domestic Corp. Income within
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B. From Foreign Corp. (1) Income within, if 50% or more of the gross
income of the foreign corporation for the preceding
three (3) years prior to the declaration of dividend
or for such part of such period as the corporation
has been in existence, was derived from sources
within the Philippines.
(Phil. Gross Income / Total Gross Income) x

Dividend = Income within
(2) Income without, if less than 50% of the gross

income of the foreign corporation for the preceding
three (3) years prior to the declaration of dividend
or for such part of such period as the corporation
has been as the corporation has been in existence,
was derived from sources within the Philippines.
Sale of domestic shares Income within
Sale of foreign shares Income without
Income from transportation and other services Partly within and partly without
rendered partly within and partly without the
Philippines
SITUS OF INCOME
The situs of income is the place of taxation of the income or the country which has jurisdiction to impose the
tax. For income tax purposes, income may be taxed in one or more or all of the following places or
countries –
1. The place where the taxpayer is a citizen;
2. The place where the taxpayer is a resident; and
3. The place where the income is earned or derived.
INCOME TAX SYSTEM OF THE PHILIPPINES

a) Global (Unitary) tax system
Global treatment 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. (TAN v. DEL ROSARIO, JR. 237 SCRA 324)
Some types of taxable income are compounded or grouped together without distinction, and after
deducting expenses and other allowable deductions therefrom, are then subjected to the same set of tax
rate(s). (This is also known as Net Income Tax System)
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For qualified individuals, the total allowable deductions (as well as personal and additional exemptions) are
deducted from the gross income (i.e. sum of all items of taxable income, profit and gain) to arrive at the net
taxable income subject to the graduated income tax rates.
For corporations, the total allowable deductions are deducted from the gross income (i.e. sum of all items of
taxable income, profit and gain) to arrive at the net taxable income subject to the corporate income tax rate.
Net Income taxation, whereby certain deductions are allowed and subtracted from the aggregate of incomes
not subject to final tax, and the tax computed is based on the resulting net income therefrom.
b) Schedular tax system
Schedular approach is a system employed where the income tax treatment varies and made to depend on
the kind or category of taxable income of the taxpayer. (TAN v. DEL ROSARIO, JR. 237 SCRA 324)
Some types of taxable income like passive income and certain capital gains which are classified into different
categories, and are accorded different tax treatments. Each category of income has its own schedule of tax
rates. (This is also known as Gross Income Tax System)
Gross income taxation, whereby a final tax is imposed on the gross amount of specified types of income,
such as interest income, royalty, prizes, dividends, and capital gains
c) Semi-schedular or semi-global tax system
Where the tax system is either (a) global (e.g. taxpayer with compensation income not subject to final
withholding tax or business or professional income or mixed income – compensation and business or
professional income) or (b) schedular (e.g. taxpayer with compensation, capital gains, passive income, or
other income subject to final withholding tax) or (c) both global and schedular may be applied depending on
the nature of the income realized by the taxpayer during the year.
Distinguish “schedular treatment” from “global treatment” as used in income taxation?
Under the schedular tax system, the various types of income (i.e. compensation; business/professional
income) are classified accordingly and are accorded different tax treatments, in accordance with schedules
characterized by graduated tax rates. Since these types of income are treated separately, the allowable
deductions shall likewise vary for each type of income.
On the other hand, under the global tax system, all income received by the taxpayer are grouped together,
without any distinction as to type or nature of the income, and after deducting therefrom expenses and
other allowable deductions, are subjected to tax at a graduated or fixed rate (see TAN VS. DEL ROSARIO
[OCTOBER 3, 1994]).
Types of Taxable Income

“Returnable “ Income Passive Income subject to Capital Gains subject to
(Income to be included in the Final Tax (“FT”) Capital Gains Tax (“CGT”)
Income Tax Return of an
Individual taxpayer)
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a) Compensation income from Earned without any active action Arise from the sale of 2 types of
being an employee on the part of the taxpayer. Ex. capital assets, namely:
b) Income from trade, business, Dividends, interest income on a) Real property in the
or practice or a profession bank deposits Philippines classified as
c) Gain from sale of ordinary capital asset; and
assets b) Shares of domestic
d) Net capital gain from sale of corporations (provided the
“other capital assets” and seller or taxpayer is not a
e) Other taxable income not dealer in securities)
subject to FT or CGT
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Income Tax Return (ITR) Final Tax Final Tax (CGT)
Steps on How to Compute the Tax of an Individual
Step 1: Type of Returnable Income Passive Income Capital Gains

Income
Step 2: Type of Tax Generally, subject to Net Subject to Final Tax Subject to Capital Gains
Liability Income Taxation (FWT) Tax (CGT)
Step 3: Actual Gross Income xxx Passive income x Tax “Capital gains” x CGT
Computation Less: Deductions (xxx) rate rate
Net taxable Income xxx
THEN
Compute Tax (using table)
General Categories of Individual Taxpayers
Definition
1. Resident Under Sec. 1, Art IV of the 1987 Constitution, the following are citizens of the
Citizen Philippines:
a. Those who are citizens at the time of the adoption of the 1987 Constitution; or
b. Those whose fathers and mothers are citizens; or
c. Those born before January 17, 1973 of Filipino mothers, and who elect Philippine
citizenship upon reaching majority age; or
d. Those who are naturalized in accordance with law.
AND
Whose residence is within the Philippines
2. Non-resident a. A citizen of the Philippines who establishes to the satisfaction of the Commissioner
citizen1 the fact of his physical presence abroad with a definite intention to reside therein.
1A non-resident citizen who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall be treated as a
non-resident citizen for the taxable year in which he arrives in the Philippines with respect to his income from sources abroad until the date of his
arrival in the Philippines.
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b. A citizen of the Philippines who leaves the Philippines during the taxable year to
reside abroad, either as an immigrant or for employment on a permanent basis.
c. A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time
during the taxable year.
d. A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines any time during the taxable year to reside permanently in
the Philippines shall likewise be treated as a nonresident citizen for the taxable year
in which he arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines.
e. The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in
the Philippines as the case may be.
Per Revenue Regulation, a citizen of the Philippines who shall have stayed outside
the Philippines for 183 days or more by the end of the year is a nonresident
citizen for that year.
3. OCW a. Citizen working or deriving income from abroad. Must be registered with the
POEA;
b. Seaman who is a citizen and works as a member of the complement of a vessel
engaged exclusively in international trade (Sec. 22 (F))
4. Resident Not a citizen but whose residence is within the Philippines.

Alien - Not a mere transient or sojourner as determined by his intention regarding the
nature and length of stay
5. Non-resident Not citizen, not a resident of the Philippines

alien
a) ETB2 - if stay in the Philippines is for more than 180 days during the year
b) NETB - if stay in the Philippines is for 180 days or less during the year (Sec. 25 (A)(1))
6. Special a) Non-resident alien cinematographic film owner, lessor, or distributor

Individual b) Subcontractor, whether citizen, resident alien, or NRAETB, of service contractors
taxpayers engaged in petroleum operations
c) Filipinos registered with the BOI availing of the Income Tax Holiday (“ITH)
d) PEZA-registered individuals availing of ITH incentive
e) PEZA-registered individuals availing of 5% gross income tax (GIT) incentive
f) Individual registered as Barangay Micro Business Enterprise (BMBE)
7. MWEs Worker, whether in the public or private sector, who is paid not more than the statutory
wage (Sec. 22 (HH))
2 “Trade or business” includes functions of public office, performance of personal services, but does not include performance of service as an employee.
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I. “RETURNABLE” INCOME
Individual Source of Type of Tax Base Tax Rate

Taxpayer Taxable Returnable
Income Income
1. Resident citizen Within and
Compensation Taxable
Without the
Income Compensation Graduated Rates
Philippines
Income
2. Non-resident Within the
citizen Philippines
Gross Income Less
3. OCWs/OFWs Within the Graduate Rates
Deductions
Philippines
Income from
4. Resident Alien Within the OR
Business, Trade, or
Philippines Gross
Practice of
5. Non-resident Sales/Receipts3
Profession 8%
alien ETB Within the Plus Non-operating
Philippines Income
[See Note (a), (b)]
6. Non-resident
Within the
alien NETB Gross Income 25%
Philippines
See Note (c)
Note:
OLD BIR INCOME TAX RATES (USED UNTIL 2017)
INCOME PER YEAR TAX RATE
P10,000 and below 5%
Above P10,000 to P30,000 P500 + 10% of the excess over P10,000
Above P30,000 to P70,000 P2,500 + 15% of the excess over P30,000
Above P500,000 P125,000 + 32% of the excess over P500,000
NEW BIR INCOME TAX RATES, FROM TRAIN TAX REFORM (2018-2022)
TAXABLE INCOME PER YEAR INCOME TAX RATE
3“Gross sales”, for purposes of the 8% income tax, shall be the total sales, net of VAT, and the net of the following deductions: (1) sales returns and
allowances; and (2) discounts determined and granted at the time of sale.
“Gross receipts”, for purposes of the 8% income tax, refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services, and deposits and advance
payments, actually or constructively received during the taxable period for the services performed or to be performed for another person, except for
returnable security deposits. In the case of a VAT taxpayer, this shall exclude the VAT. (RR 8-2018)
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Above P250,000 to P400,000 20% of the excess over P250,000
Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000
Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
NEW BIR INCOME TAX RATES, FROM TRAIN TAX REFORM (2023-ONWARDS)
TAXABLE INCOME PER YEAR INCOME TAX RATE
Above P250,000 to P400,000 15% of the excess over P250,000
Above P800,000 to P2,000,000 P102,500 + 25% of the excess over P800,000
Above P2,000,000 to P8,000,000 P402,500 + 30% of the excess over P2,000,000
Above P8,000,000 P2,202,500 + 35% of the excess over P5,000,000
(a) Purely self-employed individuals or mixed earners can avail of the 8% income tax rate if the gross
sales/receipts from their business/profession plus non-operating income does not exceed the VAT
threshold of P3,000,000.
The 8% tax is in lieu of (1) the graduated rates and (2) the OPT under Section 116 of the Tax Code.
However, this option is not available to the following individual taxpayers:

1. VAT-registered taxpayers;
2. Taxpayer subject to OPT other than the 3% OPT under Section 1164;
3. Partners of general professional partnerships (“GPPs”);
4. Individuals enjoying income tax exemption (e.g. those registered as BMBEs);
5. Taxpayers who fail to signify their intention to avail of the 8% income tax rate in the First (1st) Quarter
Income Tax Return, or in the First (1st) Quarter Percentage Tax Return, or in the initial quarterly return
of the taxable year upon the commencement of a new business or practice of profession (RR 8-
2018).
(b) Net of P250,000 if individual taxpayer is a self-employed individual earning income purely from self-
employment or practice of profession. Mixed income earners are not allowed this P250,000 deduction.
(c) Starting January 1, 2018, the PERSONAL EXEMPTIONS (Basic and Additional) are not
available in computing the taxable net income of individuals, estates, and trusts.
(d) In the case of NRAs not engaged in trade or business (“NRANETBs”) –

1. The 25% tax on gross income is a final tax to be deducted and withheld by the payor of the income
and remitted to the BIR.
2. The payor of the income is constituted by law as a withholding agent.
4Section 116 of the Tax Code provides for the imposition of a 3% percentage tax on the sales/receipts of persons engaged in VAT-taxable transactions,
who are not VAT-registered, and whose annual sales or receipts do not exceed the threshold of P3,000,000.
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3. The NRANETB does not have to file a Philippine income tax return because the tax on the income
received is considered paid, said tax having been deducted by the payor of the income.
7. Special Individual Taxpayers Type of Income Tax Base Tax Rates

a) Non-resident alien cinematographic film Income from film leasing and
Gross
owner, lessor, or distributor distribution within the 25%
Income
Philippines (including royalties)
b) Subcontractor, whether citizen, resident Income derived from contract
alien, or NRAETB, of service contractors with service contractor engaged Gross
8%
engaged in petroleum operations in petroleum operations in the Income
Philippines
c) Filipinos registered with the BOI availing Income from registered
Exempt
of the Income Tax Holiday (“ITH”) activities
d) PEZA-registered individuals availing of Income from registered
Exempt
ITH incentive activities
e) PEZA-registered individuals availing of Income from registered Gross
5%
5% gross income tax (GIT) incentive activities Income
f) Individual registered as a BMBE Income arising purely from its
Exempt
operations as a BMBE
g) MWEs Statutory Minimum Wage
(SMW) including holiday pay,
Exempt
overtime pay, night shift
differential pay, and hazard pay
Aliens employed by Regional or area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs)
of multinational companies; Offshore Banking Units (OBUs); Petroleum Service Contractor and
Subcontractor, by direct veto of President Duterte, ALL employees of RHQs/ROHQs/OBUs, and Petroleum
Service Contractors and Subcontractors SHALL BE SUBJECT TO REGULAR INCOME TAX RATE
under Section 24(A)(2)(a) of the Tax Code, as amended, without prejudice to the application of preferential
tax rates under existing international tax treaties.
UNDER THE OLD LAW: Special rules for aliens (including Filipinos) employed by: regional or area
headquarters and regional operating headquarters of multinational companies; offshore banking units;
petroleum service contractor and subcontractor:
EMPLOYER TAX BASE RATE
a. Regional or area headquarters and regional
Operating headquarters of multinational gross 15%
Companies income
b. Offshore banking units gross 15%

income
c. (foreign service contractor or subcontractor)
Petroleum service contractor and gross
Subcontractor income 15%
Special Individual Taxpayers
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1. BOI-Registered Filipinos Availing of Income Tax Holiday (“ITH”)
All registered individuals shall be granted the ITH incentive to the extent they are engaged in a preferred
area of investment as declared by the Board of Investments (BOI) under E.O. No. 226 (Omnibus
Investments Code).
To qualify for BOI registration, an individual must be engaged or is proposing to engage:

1) in an area of activity listed in the Investment Priorities Plan ("IPP");
2) if not so listed, at least fifty percent (50%) of its production is for export if a Philippine national, or at
least seventy percent (70%) of its production is for export if a foreigner;
3) exporting part of its production under such terms and conditions and/or limited incentives as the
BOI may determine;
4) producing or manufacturing a product which is used as input to an export product;
5) export trading of export products bought by it from one or more export producers;
6) rendering service to domestic and foreign tourists if listed in the IPP;
7) in rendering technical, professional or other services as may be determined by the BOI which are
paid for in foreign currency; or
8) in exporting television or motion pictures and musical recordings made or produced in the
Philippines, either directly or through an export trader (Rule I, Sec. 1(i),IRR of E.O.No.226).
ITH – exemption from income taxes levied by the National Government.
Registered individuals may avail of the ITH to the extent they are engaged in a preferred area of investment
(either pioneer or non-pioneer)
Period of availment shall be as follows:

1. New registered pioneer firms – for 6 years from commercial operations.
2. New registered non-pioneer firms – for 4 years from commercial operations.
3. Expanding firms – for 3 years from commercial operations of the expansion.
In exceptional cases, existing firms undertaking new activities distinct from existing operations may qualify as
new projects subject to the setting up of separate books of account. In such cases, only sales of such
registered products shall be entitled to the ITH exemption.
Export trader and service exporters shall be entitled to the ITH if they will export products and services
which are new exports for the Philippines, or will serve new export markets.
Additional Period of Availment
For new registered firms, the ITH incentive may be extended for an extra year for each of the following
cases, but in no case to exceed the total period of eight (8) years for pioneer registered enterprises.
(1) If the average cost of indigenous raw materials used m the manufacture of the registered product is at
least fifty percent (50%) of the total cost of raw materials for the preceding years prior to the extension
unless the BOI prescribes a higher percentage; or
(2) If the annual or average net foreign exchange savings or earnings (“NFEE") amount to at least
US$500,000.00 during the first three (3) years of operations to be determined by the BOI at the end of such
three-year period.
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2. PEZA-registered enterprises in ECOZONEs
1) Income Tax Holiday (“ITH”) - Individuals registered as ECOZONE (a) Export Enterprises5 or (b) Free
Trade Enterprises6 may choose to avail of this incentive under E.O. No. 226.
Note: PEZA-registered entities enjoying ITH also enjoy the following incentives:
(a) exemption from duties and taxes on importation into the ECOZONE (Rule XV, Sec. 1, IRR of
RA7916);
(b) exemption from payment of the RPT on machineries and equipment they acquire or use in their
production operations, during the first three (3) years of use of such machinery and equipment (Art.
78, E.O. 226); and
(c) exemption from payment of local taxes, licenses, and fees, except the real estate tax (Art. 78,
E.O.226).
2) Five (5%) Final Tax on Gross Income ("5% GIT") - 5% of the gross income7 earned by the business
enterprise within the ECOZONE shall be paid and remitted as follows:
(a) Three percent (3%) to the National Government;
(b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's
office of the municipality or city where the enterprise is located (See. 24, R.A. No. 7916).
The 5% GIT shall be in lieu of all other taxes (national 8 or local 9 ), except for real property taxes on
land owned by an ECOZONE developer/operator.
The 5% GIT shall be available to

(a) Individuals registered as ECOZONE (1) Export Enterprises or (2) Free Trade Enterprises upon expiry
of the ITH if such individual chose to avail of the ITH at the start of its operations; and
(b) Other individuals registered as ECOZONE (1) Developers/Operators 10, (2) Export Enterprises, (3)
Free Trade Enterprises, (4) Domestic Market Enterprises11 , (5) Utilities Enterprises 12, (6) Facilities
Enterprises13, or (7) Tourism Enterprises14.
5 Export enterprise - engages in manufacturing, assembling or processing activity, and resulting in the exportation of 100% of its production, unless a
lower percentage is prescribed by PEZA.
6 Free Trade enterprise - engages in the tax and duty-free importation of goods or merchandise within the restricted or free trade area of an ECOZONE
for immediate transhipment, or for storage, repacking, sorting, mixing, or manipulation, and subsequent exportation unless the PEZA allows the sale
of the same in the Customs Territory.
7 "Gross Income" refers to gross sales or gross revenues derived from business activity within the ECOZONE, net of sales discounts, sales returns and
allowances, and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given
taxable period (Rule I, Sec. 2 (nn), IRR of R.A. No. 7916).
8 National taxes shall mean all internal revenue taxes including: (1) Regular Income Tax; (2) VAT; (3) OPT; (4) DST; (5) Excise Tax; and (6)
Customs duties and import charges.
9Local taxes shall include: (1) Business taxes; (2) Real Property Tax, except on lands owned by an ECOZONE Developer or IT Park/Building
Developer; and (3) Other taxes, fees, and charges imposed by LGUs (BIR Ruling DA-326-07).
10Developer/Operator - develops, operates, and maintains an ECOZONE, and the required infrastructure facilities and utilities such as light and
power systems, water supply and distribution systems, sewerage and drainage systems, pollution control devices, communication facilities, paved road
network, administration building and other facilities as may be required by the PEZA.
11Domestic Market Enterprise - engages in manufacturing, assembling or processing activities resulting in the sale of its finished products (1) in the
Customs Territory, or (2) in the non-restricted or authorized areas within the ECOZO'NE in its entirety or (3) if exporting a portion of its
production, it continually fails to export at least 50% thereof for a period of 3 years without any justifiable reason.
13
Notes:
(a) The exemption from all other taxes under the ITH and 5% GIT regimes not include the following:
1) Withholding taxes at source (expanded withholding tax ("EWT") and Final Withholding Tax (“FWT"))
on income payments by PEZA-registered individuals;
2) Withholding tax on compensation income of employees of PEZA-registered individuals; and
3) Fringe Benefits Tax ("FBT") on fringe benefits given to managerial or supervisory employees of
PEZA-registered individuals.
These taxes are not the taxes of a PEZA-registered entity. Instead, these are taxes of a PEZA-registered
entity’s payees which are withheld and remitted by the PEZA-registered enterprise.
(b) On the other hand, the BIR has ruled that all income payments received from its customers
related to its registered activities, by a PEZA-registered enterprise, whether availing the ITH or 5% GIT
incentive, are exempt from the withholding tax, (BIR Ruling Nos. 422-14, October 23, 2014; DA-(C-020) 091-
10, June 10, 201.0).
(c) Income derived by an individual registered with the PEZA from its registered activities shall be subject
to such treatment as may be specified in its terms of registration, i.e. (a) the ITH where such income shall be
exempt from the regular income tax; or the 5% preferential GIT, if the same has been approved.
However, the following shall be subject to the regular internal revenue taxes (i.e., regular individual income
taxes, final taxes on bank deposits, capital gains taxes, etc.):
(1) Income realized by registered individuals from activities which are not registered;
(2) Income of all other persons and entities which are not registered (i.e. income payments to entities m
the Customs Territory, to shareholders, and to non-registered creditors, etc.)
(3) Income of Service Enterprises or providers (e.g. those providing customs brokerage, transportation,
parcel, janitorial, restaurant, banking, insurance services, etc.) which are required by locator
enterprises but which need not be physically based inside the ECOZONE.
3. Individuals registered as Barangay Micro Business Enterprise (“BMBE”)
A Barangay Micro Business Enterprise or BMBE refers to any business entity or enterprise engaged in the
production, processing, or manufacturing of products or commodities, including agro-processing, trading,
and services15, which activities are barangay-based16 and micro-business17 in nature, and whose total assets
Utilities Enterprise - engages in power generation and distribution, water production and distribution, and telecommunication services within the
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ECOZONE.
13Facilities Enterprise - owner and/or operator of buildings, warehouses, and other structures and facilities leased out to PEZA-registered export
producers and other locators (in the ECOZONE).
14 Tourism Enterprise - engages in the establishment and operation of tourist-oriented accommodations, restaurants operated as an integral part of a
tourism facility (e.g., hotels, resorts, recreational centers), or sports and recreational facilities within the ECOZONE.
15 "Services" shall exclude those rendered by anyone, who is duly licensed by the government after having passed a government licensure examination,
in connection with the exercise of one's profession (e.g. lawyer, doctor, accountant, etc.) (See. 3(a): R.A. No. 9178).
It shall also exclude services rendered by juridical persons such as partnerships or corporations engaged in consultancy, advisory, and similar services
where the performance of such services are essentially carried out through licensed professionals (DOF D.0. 17-04).
14
including those arising from loans but exclusive of the land on which the particular business entity's office,
plant and equipment are situated, shall not be more than Three Million Pesos (P3,000,000.00).
Registration
The Office of the Treasurer of each city or municipality shall register the BMBEs and issue a Certificate of
Authority (CA) to enable the BMBE to avail of the benefits under R.A. No. 9178. Provided, that only one
Certificate of Authority shall be issued for each BMBE and only by the Office of the Treasurer of the city or
municipality that has jurisdiction over the principal place of business of the BMBE.
The LGUs shall issue the CA promptly and free of charge. However, to defray the administrative costs of
registering and monitoring the BMBEs, the LGU may charge a fee not exceeding One Thousand Pesos
(P1,000.00)
Fiscal Incentives
Registered BMBEs can avail of the following incentives:
(1) Income tax exemption from income arising from the operations of the enterprise;
A duly registered BMBE shall be exempt from income tax on income arising purely from its operations as
such BMBE.
Provided, the income tax exemption shall not apply to (a) income subject to final taxes, (b) capital gains
subject to the capital gains tax, and (c) compensation income (d) income from practice of a profession
received directly from clients or from a general professional partnership; and (e) other income not effectively
connected with the operations of the BMBE.
The LGUs are encouraged either to reduce the amount of local taxes, fees and charges imposed or to
exempt the BMBEs from local taxes, fees and charges (Sec. 7, R.A. No. 9178).
(2) Exemption from the coverage of the Minimum Wage Law. BMBE employees will still receive the
same social security and health care benefits as other employees;
16 A business enterprise shall, be considered "barangay-based" if:

i. the majority of its employees are residents of the municipality where its principal place of business is located; or
ii. its principal activity consists in the application/use of a particular skill peculiar to the locality or of raw materials predominantly sourced
from the area; or
iii. its business operations are confined within the territorial jurisdiction of the municipality or LGU in which its principal place of business is
located:
Provided, however, that the enterprise may establish warehouses, buying stations, sales outlets, and booking or administrative offices anywhere in the
Philippines, subject to pertinent rules and registration requirements of the concerned LGUs and other government agencies where such warehouses,
outlets, stations or offices are established.
17 It shall be considered "micro-business in nature and scope” if:

i. its principal activity is primarily for livelihood, or determined by the Small and Medium Enterprises Development (SMED) Council or DTI
as a priority area for development or government assistance;
ii. the enterprise is not branch, subsidiary, division or office of a large scale enterprise; and
iii. its policies and business modus operandi are not determined by a large scale enterprise or by persons who are not owners or employees of
the enterprise (i.e. franchises) (DOF D.O. No. 17-04).
15
(3) Priority to a special credit window set up specifically for the financing requirements of BMBEs; and
(4) Technology transfer, production and management training, and marketing assistance
programs for BMBE beneficiaries.
4. Minimum Wage Earners (“MWEs”)
MWEs shall be exempt from the payment of income tax on their minimum wage. Holiday pay, overtime pay,
night shift differential pay, and hazard pay received by such minimum wage earner shall likewise be
exempted from income tax (Sec. 24 (A) (2))
The SMW shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board ("RTWPB").
The RTWPB of each region shall determine the wage rates in the different regions based on established
criteria and shall be the basis of exemption from income tax for this purpose.
Note: An employee who has 2 or more employers each paying him an SMW, shall remain to be an MWE
exempt from income tax and withholding tax on the
SMW he receives from each employer.
The following Income Payments to MWEs are Taxable:

a) Additional compensation received from his employer, other than the SMW, holiday pay, overtime
pay, hazard pay, and night shift differential pay, such as (a) commissions, (b) honoraria, (c) fringe
benefits, (d) benefits in excess of the allowable statutory amount of “13th month pay and other
benefits" of P90,000; (e) taxable allowances, and (f) other taxable income.
b) Income from the conduct of trade, business, or practice of a profession (except income subject to
final tax), in addition to his compensation income.
Note: The income earned as an MWE is exempt from tax. The other income in (1) and (2) shall be subject to
income tax and to the withholding tax
II. PASSIVE INCOME SUBJECT TO FINAL WITHHOLDING TAX (FWT)
Some types of income, collectively referred to as passive income, like interest income, dividends income,
etc. are subject to final withholding taxes.
Notes:
1. To be subject to the final withholding tax ("FWT"), (a) the income must be taxable by the Philippine
government and (b) the payor must be under the jurisdiction of the BIR.
2. The payor of the income must withhold the tax. In the case of interest income on a bank deposit, the bank
must withhold the tax.
3. The income subject to final WT is not returnable. This means that the interest income in number (2) does
not have to be reported or included in the ITR of the taxpayer.
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TAXATION OF PASSIVE INCOME
(TRAIN LAW)
Passive Income Citizen and RA NRAETB NRANETB

a) Interest from any currency
20% 20%
(usually Peso) bank deposit
b) Yield or monetary benefit from
deposit substitutes, trust funds, 20% 20%
and similar arrangements
c) Royalties 20% 20%
Except royalties on books, 10% 10%

literary works, and musical
compositions
d) Prizes of more than P10,000 20% 20%
Generally, 25% of
Except prizes of P10,000 or less Included in ITR Included in ITR
gross income
e) Winnings 20% 20%
received from all
sources within the
Philippine Charity Sweepstakes Exempt if P10,000 or Exempt
Philippines as
and Lotto winnings less
interest, dividends,
f) Interest from a depositary bank 15% Exempt
rents, salaries,
under the expanded foreign (EXC: NRC –
premiums,
currency deposit system exempt)
annuities,
g) Interest income from long term Exempt Exempt
compensation, etc.
deposit or investment of 5 years
or more
h) Cash or property dividend 10% 20%
received from a domestic
corporation, or regional
operating headquarter of an
MNC
i) Share of an individual partner in 10% 20%
the after-tax net income of a
business partnership, or an
organization, JV, or consortium
taxable as a corporation
Notes:
For Passive Income Until December 2017 (Old Law)
a) Interest from any currency bank deposit 20%
b) Royalties, in general 20%
c) Royalties on books literary works and musical compositions 10%
d) Prizes (except prizes amounting to P 10,000 or less) 20%
Prizes amounting to P10,000 or less shall be subject to rates
under Sec. 24-A (Tax table)
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e) Other winnings (except Philippine Charity Sweepstakes and 20%
Lotto winnings)
f) Interest income received by an individual taxpayer (except a 7½%
nonresident individual) from a depository bank under the
expanded foreign currency deposit system
g) Interest income from long-term deposit or investment Exempt 10%
Cash and/or property dividends actually or constructively
received by an individual from a domestic corporation
1. Deposit substitutes – alternative form of obtaining funds form the public other than deposits.
“Public” means borrowing from 20 or more lenders at any one time. Ex. Banker acceptances, PNs,
repurchase agreements, government debt instruments and securities.
– if the debt instruments is not a deposit substitute, interest income shall not be subject to a final
withholding tax. Instead, the interest income shall be included in the taxpayer’s ITR, and the same
shall be subject to CWT.
2. Long-term deposit or investment certificate – Certificate of time deposit or investment certificates

with a maturity of at least 5 years issued by a bank, and not by a non-bank financial intermediary. The
exemption only covers interest income. Any gain from grading such certificates is not covered by the
exemption.
- NRANETB shall not be exempt

- the LT deposit or investment certificate must be issued by a bank;
- may be in the form of savings, common, or individual trust funds, deposit substitutes, investment
management accounts
- investment must have a maturity of at least 5 years from the time it is held
- investment must be held for at least 5 years for the interest income to be exempt
Pre-termination of investment
If the deposit or investment is pre-terminated before the 5th year, the entire income shall be subject to final
tax to be withheld by the depositary bank from the proceeds of the long-term deposit or investment based
on the holding period of the taxpayer:
4 years to less than 5 years 5%

3 years to less than 4 years 12%
Less than 3 years 20%
Ex. A long-term investment instrument with a maturity of 30 years was bought by Mr. A from a bank. The
instrument was sold successively to other investors. The holding periods of the investors are as follows:
Holding Period FWT Rate

Mr. A (NRC) 3 years 12%
Mr. B (RA) 2 years 20%
Mr. C (NRA ETB) 5 years Exempt
Mr. F (NRA NETB) 5 years 25%
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3. Interest on foreign currency bank deposits
Interest on foreign currency deposit is taxable if received by an individual taxpayer, except a non-resident
individual, who may be a non-resident citizen or a non-resident alien (Sec. 24 (B) (1), NIRC).
An OCW shall be exempt from the 15% final tax on interest income from a foreign currency bank deposit in
the Philippines. However, if the deposit account is jointly in the name of an OCW and another individual
(spouse or dependent), who is a Philippine resident, only 50% of the interest income shall be exempt, while
the other 50% shall be subject to the 15% FWT.
4. Interest income from savings and time deposits of members with their credit
cooperatives – exempt from the 20% FWT.
5. Sec. 25 (A)(2) of the Tax Code which provides for the taxation of passive income of NRAETBs has not
been amended nor repealed by R.A. No. 10963. Consequently, the PCSO and Lotto winnings of an
NRAETB are still exempt from income tax, regardless of the amount.
III. CAPITAL GAINS SUBJECT TO FINAL TAX (also known as “CAPITAL GAINS TAX”)
A. On the Sale of Domestic Shares of Stock
1. Shares of stock in a domestic corporation NOT TRADED in the stock exchange. (TRAIN
LAW)
(a) Tax Base - Net Capital Gain which is the excess of the amount realized on the sale (selling price) over the
basis or adjusted basis of the shares.
Selling price - the total consideration of the sale consisting of the sum of money and/or the fair
market value of property received, if any.
Adjusted basis - the basis of the shares sold plus expenses of sale/disposition
(b) Tax rate on net capital gain: 15%
Under the Old Law, the tax is computed as follows:

Not over P100,000 5%
On any amount in excess of P100,000 10%
(c) Withholding agent - The payor of the income who, in this case, is the BUYER.
(d) Who are subject? All individual taxpayers, except the following:
(1) Dealers in securities. The gains from such sales by dealers shall be included as ordinary income in
19
their income tax returns;
(2) Investors in shares of stock in a mutual fund company.
(3) All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws (Rev. Regs. No. 6-2008).
(4) The sale, barter, or exchange of stock options is treated as a sale, barter, or exchange of shares of
stock not listed on the stock exchange (RMC 79-2014).
2. Shares of stock LISTED AND TRADED through the local stock exchange (Sec. 127(A),
NIRC).
(a) Rate and Base - Six-tenths of one percent (6/10 of 1%) of the gross selling price or gross value in money
of the shares of stock sold.
(b) Withholding agent - The tax must be deducted and withheld by the stockbroker who effected the sale at
the stock exchange.
(c) Who are subject? All individual taxpayers, except the following:
(1) Dealers in securities (Sec. 127 (A), NIRC);
(2) Investors in shares of stock in a mutual fund company;
(3) All other persons, whether natural or juridical, who are specifically exempt from national internal
revenue taxes under existing investment incentives and other special laws (Rev. Regs. No.6-2008).
(4) Sellers of shares of a publicly-listed company which is non-compliant with the mandatory minimum
public ownership ("MPO")18 - subject to the 15% capital gains tax.
(5) Sellers of shares of stock in the stock exchange where the transaction excludes the public by pre-
arranging the sale or pre-determining the buyers. Ex. Block sale - subject to the 15% capital gains
tax.
(d) Kind of tax - Business tax
Notes:
(1) Tax on traded shares - The tax on the sale of shares traded at the stock exchange is not an income
tax, but a percentage tax (stock transaction tax). However, the imposition of a percentage tax on the selling
price of traded shares has the effect of a final tax because any gain on the sale is not returnable.
(2) Effect of Non-Payment of Tax - The sale or exchange cannot be registered in the books of the
corporation unless the receipts of payment of the tax imposed is filed with and recorded by the stock
transfer agent or secretary of the corporation. Any stock transfer agent or secretary of the corporation or the
stockbroker, who caused the registration of transfer of ownership or title on any share of stock in violation of
the aforementioned requirement shall be punished in accordance with the provisions of the Tax Code (Sec.
11, Rev. Regs. No. 6-2008).
(3) Redemption of preferred shares. If redeemed by issuing corporation which Is not contemplating
dissolution, any capital gain or loss of the preferred shareholder from the redemption shall be subject to the
regular income tax.
18MPO – the minimum percentage of outstanding shares held by the public or public float. It also refers to the portion of outstanding shares of the
company which are freely available and tradeable in the market. Currently the MPO is 20%.
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B. On the Sale of Real Property Classified as Capital Assets
1. Transaction subject - Sale, transfer, or other disposition of real property located in the Philippines,
classified as CAPITAL ASSETS, including pacto de retro sales and other forms of conditional sales.
2. Rate and Base of Tax - Six percent (6%) of the gross selling price or current fair market value of the
property, whichever is higher. The fair market value of the property is the higher of zonal value or assessor's
value,
3. Final Tax - The tax to be withheld by the payor (buyer) is a final tax and the capital gain from the sale is
not returnable.
4. Who are Subject? All individual taxpayers.
5. Forced Sale to the State Under Eminent Domain - If the sale is made to the government or any of its
political subdivisions or agencies, or to government-owned or -controller corporations, the taxpayer may
choose either (a) to have the gain included in the ITR and taxed under the graduated rates or the 8% tax
under Section 24(A), or (b) to be subject to the capital gains tax under Section 24(D).
6. Exemption from the Capital Gains Tax:

(a) Sale of raw lands to be used for "socialized housing" projects, or sold under the Community
Mortgage Program (CMP). (R.A. 7279)
(b) Land transfers under the Comprehensive Agrarian Reform Law of 1988.
(c) Sale of principal residence, and subsequent acquisition or construction of another principal
residence:
1) Sale by a natural person (individual) of his principal residence located in the Philippines;
2) The proceeds of the sale must be fully utilized in acquiring or constructing a new principal
residence within 18 calendar months from the date of sale;
3) The historical cost or adjusted basis of the real property sold or disposed shall be carried over to
the new principal residence built or acquired;
4) The taxpayer must notify the Commissioner within 30 days from the date of sale or disposition,
of his intention to avail of the tax exemption;
5) The tax exemption can be availed of only, once every 10 years (Sec. 24(D)(2)).
Proceeds of sale not fully utilized - If the proceeds of the sale are not fully utilized in the
purchase or construction of a new residence in 6(c) above, the portion of the gain presumed to
have been realized on the sale shall be subject to capital gains tax. The following formula is used
to arrive at the taxable portion:
Unutilized Amount x (Higher of GSP or FMV) = Taxable

Gross Selling Price (“GSP”) Portion
Final Tax on Informer's Reward

Informer - person (except a BIR employee, or other public employee, or his relative within the
6 th degree of consanguinity) who gives information that leads to the discovery of frauds or violations of
21
tax laws, which results m the recovery of taxes, or in the conviction of the tax evader, or in a compromise
agreement with the BIR.
Reward = Ten percent (10%) of the revenues, surcharges, or fees recovered and/or fine, or penalty imposed
and collected, or the value of smuggled and confiscated goods, or One Million Pesos (P1,000,000) per case,
whichever is lower.
Tax = 10% of the reward
WITHHOLDING TAX ON INCOME PAYMENTS
Final Withholding Tax (“FWT”)

a) FTs on passive income
b) CGT on sale of domestic shares, and sale of real property classified as capital asset
Creditable Withholding Tax (“CWT”)

a) On compensation income
b) On certain income payments (EWT)
Creditable Withholding Tax System:

a) For the income payment to be subject to the CWT, the following must be complied with:
(1) The income payment must be taxable to the payee; and
(2) The BIR must have jurisdiction over the payor of the income (in most cases, this means that the
income must be sourced within the Philippines).
b) Not all income payments are subject to creditable W T. Only those payments specified or
enumerated in the law or internal revenue regulations are subject to the creditable withholding tax system.
c) The income subject to CWT shall be included in the ITR by the payee of the income. The amount to be
reported by the payee shall be gross of the CWT.
The tax withheld by the payor shall be allowed as a tax credit against the income tax liability of
the payee in the taxable year or quarter in which the income was earned or received.
d) Time of withholding. When an income payment is paid or payable or when it is accrued or recorded
as an expense or asset by the payor, whichever comes first.
e) If the CWT is withheld, the payor cannot use as a deduction in computing the net taxable
income in the ITR.
Types of CWTs
CWT on Compensation CWT on Other Income (Expanded WT)
Who Withholds: Who Withholds:
Employer - Files a Form 1601-C monthly and remits Customer or Client - Files a Form 1601 EQ quarterly
the WT to the BIR. At the end of the year, employer and remits the WT to the BIR. At the end of the
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files a Form 1604 CF, which lists the total WTs on year, customer files a Form 1604-E which lists all the
compensation from all its employees for the taxable WTs withheld from all its vendors or suppliers, for
year. the entire taxable year.
- Shall also submit an Alphalist of Payees which is to - Shall also submit an Alphalist of Payees which is to
be attached to the aforementioned forms. be attached to the aforementioned forms.
Amount of CWT: Amount of CWT:
Depends on the compensation of the employee, and Depends on the nature of the income payment and
on his income tax rate. the CWT rate as provided by law.
Employee: Payee (Vendor or Supplier):
Will receive from his employer at the end of the year Will receive a Form 2307 from the customer or client
a Form 2316 stating his total gross taxable showing the tax withheld from the income payment
compensation income, non-taxable payments made within 20 days from the close of the quarter, or upon
by the employer, and the total taxes withheld by the the request of the payee.
employer.
EXEMPTIONS (Before the TRAIN Law)
EXEMPTIONS
• Arbitrary annual amounts allowed by law to be deducted from gross income to cover the personal,
living, and family expenses of the taxpayer.
Starting January 1, 2018, the exemptions below are not available in computing the
taxable net income of individuals, estates, and trusts.
• Individuals Allowed Personal Exemptions: (1) residents citizens; (2) non-resident citizen; (3)
OCWs; (4) resident aliens; and (5) non-resident alien engaged in trade of business, or the exercise of
profession in the Philippines (“NRAETB”) on the basis of reciprocity.
Note: Personal exemption of NRAETB is the (a) exemption(s) allowed by the foreign country (of
which the alien is a citizen) to non-resident Filipinos, or (b) the exemptions allowed by the
Philippines, whichever is lower.
Processual Presumption – where the foreign law is not proven, the presumption is that the
foreign law is the same as the Philippine law.
• Individuals Not Allowed Personal Exemptions: (1) NRAETB, and there is no reciprocity; (2)
non-resident alien not engaged in trade or business in the Philippines (“NRANETB”)
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Two Kinds of Personal Exemptions
Basic Additional
P50,000 P25,000
a) For single individual For each (a) qualified dependent child, whether
b) For head of the family legitimate of illegitimate, (b) a foster child; and a
c) For each married individual (c) qualified person with disability (PWD).
d) For married individual judicially decreed as
legally separated
Rules: Rules:
1) In case of married individuals where only one of 1) Limit = 4 additional exemptions
the spouses is deriving gross income, only such
spouse shall be allowed the personal exemption 2) In case of married individuals, the additional
(Sec. 35(A), NIRC) exemption may be claimed by only one spouse.
Husband, as a general rule, shall claim the

additional exemption(s).
EXC.: Wife may claim the additional exemptions

in the following cases:
a) Husband waives his right to claim additional
exemptions;
b) Husband has no income;
c) Husband is a non-resident citizen deriving
income from abroad;
d) Wife was awarded custody of her children in
a legal separation case.
3) In cases of legal separation, additional

exemptions may be claimed by the spouse who
has custody of the child or children. Provided,
that the total additional exemptions for both
spouses shall not exceed four (4).
Change of Status Rules
1) If during the taxable year, the taxpayer should have additional dependents, the taxpayer may claim the
corresponding additional exemption in full for such year;
2) If during the taxable year, any of the dependents dies, marries, becomes 21 years old, or becomes
gainfully employed, the taxpayer may still claim the full additional exemptions as if such dependent
died, married became 21 years old, or became gainfully employed at the close of the year;
3) If during the taxable year, the taxpayer dies, he is considered to have died at the close of the year. His
estate may claim his additional exemptions for the taxable year (year of death).
1) Qualified Dependent is a:
a) Legitimate, legally adopted, or illegitimate child
- chiefly dependent upon and living with taxpayer, if such dependent is –
(a) not more than 21 years of age;
(b) unmarried; and
24
(c) not gainfully employed; or
(d) if such dependent, regardless of age, is incapable of self-support because of mental or
physical defect (Sec. 35(B), NIRC)
OR
b) Foster child. Refers to a child placed under foster care. “Foster parent” refer to a person duly
licensed by the DSWD to provide foster care. (RA 10165; RMC 41-2013). A foster child can be
treated as qualified dependent for an additional exemption, provided:
(a) The period of foster care is at least a continuous period of one (1) taxable year; and
(b) Only (1) foster parent can treat the foster child as a dependent for particular taxable
year. As such, no other parent or foster parent can claim the said child as a dependent
for that period.
OR
c) Persons with disability (PWDs) are those suffering from restrictions in performing an activity
in a manner considered normal because of a mental, physical, or sensory impairment, and who
are:
(a) within the 4th civil degree of consanguinity or affinity to the taxpayer, regardless of age
or marital status;
(b) living with the taxpayer;
(c) not gainfully employed, and chiefly dependent upon the taxpayer.
2) Two views on the qualification of Senior Citizens as additional exemptions.

i) CTA view. The Court of Tax Appeals has ruled in CTA Case No. 5280 that senior citizens
(resident citizens at least sixty (60) years of age) shall be treated as dependents for purposes of
qualifying the taxpayer as head of family and for additional exemptions in accordance with RA
7432.
ii) BIR view. The BIR, on the other hand, has taken the position that senior citizens do not qualify
as “dependents’ for purposes of additional exemption. However, the BIR has not been able to
successfully assail and overturn the above CTA decision.
“Chief support” – principal or main support. Must be regular and continuing support. Quantitatively,
chief support means > ½ of the requirements for support.
“Not gainfully employed” – dependent is not engaged or is not engaging in employment or work where
the compensation will remove him from the status of chiefly depending upon the taxpayer.
“Living with the taxpayer” – does not necessarily mean that the taxpayer and the dependent(s) live
under one roof. The character of the separation must be considered. If, without necessity, a sole dependent
of a taxpayer makes his home elsewhere, the taxpayer cannot be considered head of the family.
Exemption allowed to Estates

- If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such
year.
- After the year of death, there shall be allowed an exemption of only Twenty Thousand
(P20,000) Pesos from the income of the estate.
Exemption allowed to Trusts
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- For the purpose of computing its taxable income, there shall be allowed an exemption of
Twenty Thousand (P20,000) Pesos from the income of the trust.
Salient Features of Republic Act R.A. 10963 [The Tax Reform for
Acceleration and Inclusion (TRAIN) Act]:
1) Lower personal income tax (PIT)

2) Simplified estate and donor’s tax
3) Simplified VAT
4) Increased excise tax for petroleum products
5) Increased excise tax for motor vehicles
6) New excise tax on sweetened beverages
INDIVIDUAL INCOME TAX: Adjustments on Personal Income Taxation

A. New Graduated Income Tax Rates
For Compensation Income Earners:
TAXABLE INCOME – means GROSS Compensation LESS non-taxable income/benefits, such as but not
limited to the 13th Month Pay and Other Benefits, de minimis benefits, and employee’s share in the SSS,
GSIS, PHIC, Pag-ibig contributions and union dues.
MINIMUM WAGE EARNERS (MWE) – Exempt based on statutory minimum wage rates. Holiday Pay,
Overtime Pay, Night Shift Differential Pay and Hazard Pay are likewise exempt.
Illustration: Mr. CSO, a minimum wage earner, works for G.O.D., Inc. He is not engaged in business nor
has any other source of income other than his employment. For 2018, Mr. CSO earned a total compensation
income of P135,000
(a) The taxpayer contributed to the SSS, Philhealth, and HDMF amounting to P5,000 and has received
13th month pay of P11,000. His income tax liability will be computed as follows:
Total Compensation Income P 135,000

Less: Mandatory Contributions P 5,000
Non-taxable benefits 11,000 16,000
Taxable Income P 119,000
*Taxpayer is exempt since he is considered a minimum wag earner.
(b) The following year, Mr. CSO 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, and
holiday pay – P15,000. He has the same benefits and contributions as above.
26
Total Compensation Income P 135,000
Add: Overtime, night shift
differential, hazard, and
holiday pay 140,000
P 275,000
Less: Mandatory Contributions P 5,000
Non-taxable benefits 11,000 16,000
Net Taxable Income P 259,000
Tax Due EXEMPT
*Taxpayer is tax exempt as an MWE. 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
exempted from income tax under the law. (RR No. 8-2018)
The new alternative tax scheme (8% tax) for self-employed and professionals.
A.1. Individual earning purely from self-employment/practice of profession.
1. With gross sales/receipts and other non-operating income NOT exceeding

P3,000,000 (new VAT EXEMPT threshold):
Taxpayer has the OPTION to avail of:

a. Graduated rates under Sec. 24 (A)(2)(a), OR
b. 8% tax on gross sales/receipts and other non-operating income in excess of P250,000, in
lieu of graduated income tax rates and percentage tax under Section 116, NIRC
A taxpayer subject to graduated income tax rates is also subject to applicable business tax, if
any.
2. With gross sales/receipts and other non-operating income EXCEEDING P3,000,000

(new VAT EXEMPT threshold):
No option for 8% tax. Computation based on graduated income tax rates. S/he is also subject to
VAT.
A.2. Individual earning BOTH from compensation and from self-employment (business or practice of
profession)
1. Compensation income subject to graduated income tax rates; AND
2. Business/Professional income subject to the following:
a. If gross sales/receipts and other non-operating income DO NOT exceed the VAT threshold,
the individual has the option to be taxed at:
i. Graduated income tax rates, OR

ii. 8% income tax rate on gross sales/receipts and other non-operating income in lieu
of graduated income tax rates and percentage tax under Section 116, NIRC.
27
b. If gross sales/receipts and other non-operating income EXCEED the VAT threshold, the
individual shall be subject to graduated income tax rates.
CORPORATE INCOME TAX: Adjustments on Corporate Income Taxation
PCSO now taxable. PCSO was removed from the list of tax-exempt GOCCs, agencies and
instrumentalities of the government. GSIS, SSS, PHIC and Local Water Districts remain to be tax
exempt.
TRANSFER TAXES: Adjustments on Estate and Gift Taxation
1. The TRAIN Law restructures the estate tax to a low and single rate of 6% based on the NET value of
the estate; Other changes.
a) Removes the graduated rates from 5% to 20%

b) Increases the Standard Deduction from P1,000,000 to P5,000,000; Estates of Non-Resident
Alien not entitled to Standard Deduction in the amount of P500,000
c) Increases the Family Home threshold from P1,000,000 to P10,000,000
d) Removes the deduction of funeral expenses, settlement expenses
e) Filing of Notice of Death not a requirement anymore
f) Deadline of Filing of Estate Tax Return now One (1) year from death of decedent
g) Payment by installment within two (2) years, without civil penalty and interest
h) Bank deposit may not be withdrawn before payment of estate tax, subject to final
withholding tax of 6%
2. The TRAIN law also simplifies the donor’s tax into a single rate of 6% of the net value of the gifts
regardless of the relationship of the donee to the donor.
a) Graduated rates from 2% to 15% for donations to relatives, and 30% for strangers, now
substituted by a uniform rate of 6%
b) An arm’s length transaction without donative intent is now a complete defense against
liability for donor’s tax in case of transfer for insufficient consideration.
VALUE ADDED TAX (VAT)/PERCENTAGE TAX: Revision on VAT and Percentage Tax
1. The TRAIN law withdrew several VAT exemptions, making the tax fairer and simpler. 54 our of 61
special laws with non-essential VAT exemptions had been withdrawn.
2. VAT zero-rating is limited to direct exporters who actually export goods outside of the country.
3. Enhanced VAT refund system will now provide fast and timely cash refunds (not tax credit
certificates) to exporters.
4. VAT threshold increased from P1,919,500 to P3,000,000.
28
5. VAT-exempt taxpayers (with gross sales/receipts not exceeding the threshold will have 3 options:
a) Graduated income tax rates with 40% Optional Standard Deduction (OSD) of 40% of gross
sales/receipts PLUS 3% percentage tax;
b) Graduated income tax rates with itemized deductions PLUS 3% percentage tax; or
c) Flat tax of 8% on gross sales/receipts in lieu of personal income tax and percentage tax.
TAX ON PASSIVE INCOME: Changes in the Tax Treatment of Some Passive Incomes
1. Interest income from depositary bank under the expanded foreign currency deposit system (EFCDS)
– 15% (from 7.5%)
2. Winnings (except Philippine Charity Sweepstakes and Lotto winnings amounting to P10,000 or less) –
20% (total exemption for PSCO and lotto winnings under the old law)
3. Capital gains from sale of shares of stocks not traded in Stock Exchange – 15% (from 5% and 10% of
net capital gain)
Percentage tax on stock transaction in Stock Exchange – 6/10 of 1% (from ½ of 1%)
HOW TO COMPUTE TAXES OF PROFESSIONALS AND SELF-EMPLOYED
Sample Computation: Illustration 1

Ms. Terry operates a convenience store while she offers bookkeeping services to her clients. In 2018, 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 8% income tax rate in her 1st quarter return.
Her income tax liability for the year will be computed as follows:
Gross Sales - Convenience Store P800,000.00
Gross Receipts - Bookkeeping 300,000.00
Total Sales/Receipts P1,100,000.00
Less: Amount allowed as deduction 250,000.00
TAXABLE INCOME P850,000.00
TAX DUE (8% of P850,000.00) P68,000.00
29
CONCLUSIONS:
• The total of gross sales and gross receipts is below the VAT threshold of P3,000,000.00.
• Taxpayer’s source of income is purely from self-employment, thus she is entitled to the amount allowed
as 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 of 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.
Ms. Terry above, 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, the income tax shall be computed as
follows:
Gross Sales/Receipts P 1,100,000.00
Less: Cost of Sales 600,000.00
Gross Income P500,000.00
Less: Operating Expenses 200,000.00
TAXABLE INCOME P300,000.00
TAX DUE: On excess (P300,000 - P250,000) x 20%) P10,000.00
CONCLUSION: Aside from the income tax due above, Ms. Terry is likewise liable to pay business tax.
Mr. Yoso signified his intention to be taxed at 8% income tax rate on gross sales in his 1st Quarter Income
Tax Return. He has no other source of income, His total sales for the first three (3) quarters amounted to
P3,000,000.00 with 4th quarter sales of P3,500,000.00.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(8% Rate) (8% Rate) (8% Rate)
Total Sales P500,000.00 P500,000.00 P2,000,000.00 P3,500,000.00
Less: Cost of Sales 300,000.00 300,000.00 1,200,000.00 1,200,000.00
Gross Income P200,000.00 P200,000.00 P800,000.00 P2,300,000.00
Less: Operating Expenses 120,000.00 120,000.00 480,000.00 720,000.00
TAXABLE INCOME P80,000.00 P80,000.00 P320,000.00 P1,580,000.00
30
Computation of Tax Due:
Total Sales P6,500,000.00
Less: Cost of Sales 3,000,000.00
Gross Income P3,500,000.00
Less: Operating Expenses 1,440,000.00
TAXABLE INCOME P2,060,000.00
INCOME TAX DUE:
Tax Due under Graduated Rates P509,200.00
Less: 8% income tax previously paid (Q1 to Q3)* 220,000.00
ANNUAL INCOME TAX PAYABLE P289,200.00
* Computed as: (P3,000,000.00 – P250,000.00) x 8% = P220,000.00
CONCLUSIONS:
• The gross receipts exceeded the VAT threshold of P3,000,000.00. Taxpayer shall be liable to pay income
tax under graduated rates pursuant to Section 2(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 P250,000.00 granted for purely business
income.
• Taxpayer is likewise liable for business tax(es), 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 taxpayer ceases to be a
non-VAT.
Ms. RSVP is a prominent independent contractor who offers architectural and engineering services. Since her
career flourished, her total gross receipts amounted to P4,250,000.00 for taxable year 2018. Her recorded
cost of service and operating expenses were P2,150,000.00 and P1,000,000.00, respectively.
31
Her income tax liability will be computed as follows:
Gross Receipts P4,250,000.00
Less: Cost of Service 2,150,000.00
Less: Operating Expenses 1,000,000.00
INCOME TAX DUE:
On P800,000.00 P130,000.00
On excess (P1,100,000.00 - P800,000.00) x 30%) 90,000.00
INCOME TAX DUE P220,000.00
CONCLUSION: The gross receipts exceeded the VAT threshold of P3,000,000.00; subject to graduated
income tax rates; liable for business tax – VAT, in addition to income tax.
In 2018, Mr. Swabe owns a nightclub and videoke bar, with gross sales/receipts of P2,500,000.00. 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.
His tax due for 2018 shall be computed as follows:

TAXABLE INCOME FROM BUSINESS:
Gross Receipts P2,500,000.00
Net Income from Operation P900,000.00
32
Add: Non-operating Income 100,000.00
INCOME TAX DUE:
On P800,000.00 P130,000.00
On excess (P1,000,000.00 - P800,000.00) x 30%) 60,000.00
TOTAL INCOME TAX P190,000.00
CONCLUSIONS:
• The taxpayer has no option to avail of the 8% income tax rate on his income from business since his
business income is subject to Other Percentage Tax under Section 125 of the Tax Code, as
amended.
• Aside from income tax, taxpayer is liable to pay the prescribed business tax, which in this case is
percentage tax of 18% on the gross receipts as prescribed under Sec. 125 of the Tax Code, as
amended.
HOW TO COMPUTE TAXES FOR INDIVIDUALS EARNING INCOME BOTH

FROM COMPENSATION AND FROM SELF-EMPLOYMENT
The pertinent item on taxation of individuals with income streams both from compensation and from self-
employment is explained in Section D of the BIR’s Revenue Regulations No. 8-2018, specifically:
Section (D). Individuals Earning Income Both from Compensation and from Self-
Employment (business or practice of profession).
For mixed income earners, the income tax rates applicable are:
1. The compensation income shall be subject to the tax rates prescribed under Section 24(A)(2)(a) of
the Tax Code, as amended; AND
2. The income from business or practice of profession shall be subject to the following:
a. lf the gross sales/receipts and other non-operating income do not exceed the VAT threshold,
the individual has the option to be taxed at:
a.1. Graduated income tax rates prescribed under Section 24(A)(2)(a) of the Tax Code, as
amended; OR
33
a.2. Eight percent (8%) income tax rate based on gross sales/receipts and other non-
operating income in lieu of the graduated income tax rates and percentage tax under
Section 116 of the Tax Code, as amended.
b. If the gross sales/receipts and other non-operating income exceeds the VAT threshold, the
individual shall be subject to the graduated income tax rates prescribed under Section 24(A)(2)(a)
of the Tax Code, as amended.
The provision under Section 24(A)(2)(b) of the Tax Code, as amended, which allows an option of 8%
income tax rate on gross sales/receipts and other non-operating income in excess of P250,000.00 is
available only to purely self-employed individuals and/or professionals.
The P250,000.00 mentioned 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.
Under the said graduated rates, the excess of the P250,000.00 over the actual taxable compensation
income is not deductible against the taxable income from business/practice of profession under the
8% income tax rate option.
The total tax due shall be the sum of:

(1) tax due from compensation, computed using the graduated income tax rates; and
(2) tax due from self-employment/practice of profession, resulting from the multiplication of the 8%
income tax rate with the total of the gross sales / receipts and other non-operating income.
Mixed income earner who opted to be taxed under the graduated income tax rates for income from
business/practice of profession, shall combine the taxable income from both compensation and
business/practice of profession in computing for the total taxable income and consequently, the
income tax due.
Sample BIR Computations: Taxes of Mixed Income Earners

Mr. Madz, a Financial comptroller of JAC 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.
Option 1: Eight Percent (8%) income tax rate on Gross Sales

His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent (8%) income tax
rate on his gross sales for his income from business:
(1) TAX DUE ON COMPENSATION INCOME:
Total compensation income P1,500,000.00
34
Less: Non-taxable 13th month pay and other benefits (max) 90,000.00
Taxable Compensation Income P1,410,000.00
Tax due on Compensation:
On P800,000.00 P130,000.00
On excess (P1,410,000 - P800,000) x 30% 183,000.00
Tax due on Compensation Income P313,000.00
(2) TAX DUE ON BUSINESS INCOME:
Gross Sales P2,400,000.00
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
Tax Due on Business Income P200,000.00
TOTAL INCOME TAX DUE (Compensation and Business) P513,000.00
Option 1 CONCLUSIONS:
• The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the
same is in lieu of the income tax under the graduated income tax rates and the percentage tax
under Section 116 of the Tax Code, as amended.
• The amount of P250,000.00 allowed as a deduction under the law for taxpayers earning solely from
self-employment/practice of profession, is not applicable for mixed-income earner under the 8%
income tax rate option.
• The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income
tax rates applicable to compensation income.
Option 2: NOT Opting for 8% income tax on Gross Sales/Receipts and other non -operating
income
His tax due for 2018 shall be computed as follows if he did not opt for the eight percent (8%) income tax
based on gross sales/receipts and other non-operating income:
35
Less: Non-taxable 13th month pay and other benefits- 90,000.00
max
Add: Taxable Income from Business -
Net Income from Operation P800,000.00
Add: Non-operating Income 100,000.00 900,000.00
Total Taxable Income P2,310,000.00
Tax Due:
On P2,000,000.00 P490,000.00
On excess (P2,310,000 - 2,000,000) x 32% 99,200.00
Total Income Tax P589,200.00
Option 2 CONCLUSIONS:
• The taxable income from both compensation and business shall be combined for purposes of
computing the income tax due if the taxpayer chose to be subject under the graduated income tax
rates.
• In addition to the income tax, Mr. Madz is likewise liable to pay percentage tax of P72,000.00, which
is 3% of P2,400,000.00.
Sample Illustration 1 Continued:

On February 7019, taxpayer tendered his resignation to concentrate on his business. His total compensation
income amounted to P150,000.00, inclusive of benefits of P20,000.00. His business operations for the
taxable year 2019 remains the same. He opted for the eight percent (8%) income tax rate.
(1) TAX DUE ON COMPENSATION INCOME:
36
Total compensation income P150,000.00
Less: Non-taxable benefits 20,000.00
Taxable Compensation Income P130,000.00
Tax Due on Compensation:
On P130,000.00 (not over P250,000.00) P 0.00
Tax due on Compensation Income P 0.00
(2) TAX DUE ON BUSINESS INCOME:
Taxable Business Income P2,500,000.00
Multiplied by income tax rate 8%
Tax Due on Business Income P200,000.00
Total Income Tax Due (Compensation and Business) P200,000.00
• The option of 8% income tax rate is applicable only to taxpayer’s income from business, and the
same is in lieu of the income tax under the graduated income tax rates and the percentage tax
under Section 116 of the Tax Code, as amended.
• The amount of P250,000.00 which is allowed as deduction under the law for taxpayers earning solely
from self-employment/practice of profession, is not applicable for mixed-income earner under the
8% income tax rate option.
• The P250,000.00 mentioned above is already incorporated in the first tier of the graduated income
tax rates applicable to compensation income. The excess of the P250,000.00 over the actual taxable
compensation income is not creditable against the taxable income from business/practice of
profession under the 80% income tax rate option.

Mr. Wayne, an officer of BATS International Corp., earned in 2018 an annual compensation of
P1,200,000.00, inclusive of the 13th month and other benefits in the amount of P120,000.00. Aside from
employment income, he owns a farm, with gross sales of P3,500,000. 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.
His tax due for 2018 shall be computed as follows:
37
Less: Non-taxable 13th month pay and other benefits- 90,000.00

max
Add: Taxable Income from Business -
Net Income from Operations P1,900,000.00
Add: Non-operating Income 100,000.00 2,000,000.00
Total Taxable Income P3,110,000.00
Tax Due:
On P2,000,000.00 P490,000.00
On excess (P3,110,000 - 2,000,000) x 32% 355,200.00
Total Income Tax P845,200.00
CONCLUSION:
The taxpayer has no option to avail of the 8% income tax rate on his income from business since his gross
sales exceed the VAT threshold. However, he is still not subject to business tax since the nature of his
business transactions is VAT exempt.
Source: Bureau of Internal Revenue (BIR www.bir.gov.ph), Department of Finance (DOF www.dof.gov.ph)
Philippines
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INCOME TAXATION

ORGANIZATION AND FUNCTIONS OF THE BUREAU OF INTERNAL REVENUE

1. Power and duties of the Bureau of Internal Revenue

2. Chief officials of the bureau of internal revenue

3. Powers of the Commissioner

4. Power of the commissioner to make assessments and prescribe additional

a. Authority to terminate taxable period

b. Authority to inquire into bank deposit accounts

c. Authority to delegate power

d. Authority to compromise the payment of any internal revenue tax

e. Authority to abate or cancel a tax liability

f. Authority to credit or refund taxes

g. Authority to prescribe real property values

6. Collection agents (internal revenue taxes)

7. Issuance and rulings of the bureau of internal revenue

Income distinguished from Capital

Amounts received as a return of capital are not income.

Classification of Income According to Source

Based on source, income is classified as follows:

How to determine Income W ITHIN and Income W ITHOUT

Income Test Source of Income

(Phil. Gross Income / Total Gross Income) x

(2) Income without, if less than 50% of the gross

INCOME TAX SYSTEM OF THE PHILIPPINES

b) Schedular tax system

c) Semi-schedular or semi-global tax system

Types of Taxable Income

Steps on How to Compute the Tax of an Individual

Step 1: Type of Returnable Income Passive Income Capital Gains

General Categories of Individual Taxpayers

4. Resident Not a citizen but whose residence is within the Philippines.

5. Non-resident Not citizen, not a resident of the Philippines

6. Special a) Non-resident alien cinematographic film owner, lessor, or distributor

Individual Source of Type of Tax Base Tax Rate

P10,000 and below 5%

Above P10,000 to P30,000 P500 + 10% of the excess over P10,000

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

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

Above P140,000 to P250,000 P22,500 + 25% of the excess over P140,000

Above P250,000 to P500,000 P50,000 + 30% of the excess over P250,000

Above P500,000 P125,000 + 32% of the excess over P500,000

Above P250,000 to P400,000 20% of the excess over P250,000

Above P400,000 to P800,000 P30,000 + 25% of the excess over P400,000

Above P800,000 to P2,000,000 P130,000 + 30% of the excess over P800,000

Above P2,000,000 to P8,000,000 P490,000 + 32% of the excess over P2,000,000

Above P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

P250,000 and below 0%

Above P250,000 to P400,000 15% of the excess over P250,000

Above P400,000 to P800,000 P22,500 + 20% of the excess over P400,000

Above P800,000 to P2,000,000 P102,500 + 25% of the excess over P800,000

Above P2,000,000 to P8,000,000 P402,500 + 30% of the excess over P2,000,000

Above P8,000,000 P2,202,500 + 35% of the excess over P5,000,000

However, this option is not available to the following individual taxpayers:

(d) In the case of NRAs not engaged in trade or business (“NRANETBs”) –

7. Special Individual Taxpayers Type of Income Tax Base Tax Rates

b. Offshore banking units gross 15%

Special Individual Taxpayers

To qualify for BOI registration, an individual must be engaged or is proposing to engage:

Period of availment shall be as follows:

Additional Period of Availment

The 5% GIT shall be available to

Customs duties and import charges.